<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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UBS AG
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
SWITZERLAND 6021 98-0186363
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C>
ROBERT C. DINERSTEIN, ESQ.
BAHNHOFSTRASSE 45, ZURICH, UBS AG
SWITZERLAND, 011 41-1-234 11 11 AND 299 PARK AVENUE
AESCHENVORSTADT 1, BASEL, NEW YORK, NEW YORK 10171
SWITZERLAND, 011 41-61-288 20 20 (212) 821-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, NUMBER,
INCLUDING AREA CODE, OF INCLUDING AREA CODE, OF AGENT FOR SERVICE)
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
COPIES TO:
H. RODGIN COHEN, ESQ. PETER S. WILSON, ESQ.
REBECCA J. SIMMONS, ESQ. CRAVATH, SWAINE & MOORE
SULLIVAN & CROMWELL WORLDWIDE PLAZA
125 BROAD STREET 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10019
(212) 558-4000 212-474-1000
</TABLE>
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Approximate Date of Commencement of Proposed Sale to the Public: As promptly
as practicable after the effective date of this Registration Statement and after
the conditions to the consummation of the offering described herein have been
satisfied or waived.
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(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. [ ]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE PRICE(2) FEE(3)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ordinary Shares, par value of CHF 10
each................................. 45,232,592 Not Applicable $6,345,710,809.25 $1,675,268
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</TABLE>
(1) Based on (i)(a) 148,630,453 shares of common stock, par value $1.00 per
share, of Paine Webber Group Inc. ("PaineWebber") outstanding as of 18
September 2000, (b) 32,048,680 shares of PaineWebber common stock issuable
upon exercise of stock options to purchase shares of PaineWebber common
stock through the date the merger is expected to be consummated, and (c)
1,931,250 shares of PaineWebber common stock issuable upon conversion of
outstanding PaineWebber convertible debt, (ii) an exchange ratio of 0.4954
of a UBS Ordinary Share for each share of PaineWebber common stock pursuant
to the merger described herein and (iii) the exchange and cancelation of 50%
of such outstanding shares of PaineWebber common stock, and all of such
issuable shares of PaineWebber common stock, for UBS ordinary shares at such
exchange ratio.
(2) Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act and solely
for the purpose of calculating the registration fee, the proposed maximum
aggregate offering price is equal to the aggregate market value of the
approximate number of shares of PaineWebber common stock to be converted
into the right to receive UBS Ordinary Shares in the merger (calculated as
set forth in note (1) above) based upon a market value of $69.50 per share
of PaineWebber common stock, the average of the high and low sale prices per
share of PaineWebber common stock on the New York Stock Exchange Composite
Tape on September 20, 2000.
(3) Calculated by multiplying the proposed maximum aggregate offering price for
all securities by .000264.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
Letterhead address
Letterhead company name
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
Dear PaineWebber Stockholder:
You are cordially invited to attend a special meeting of the stockholders
of Paine Webber Group Inc. to be held at 10:00 a.m., on 23 October 2000, at the
PaineWebber Building, 1000 Harbor Boulevard, Weehawken, New Jersey 07087. At the
special meeting, you will be asked to consider and vote upon a proposal to adopt
a merger agreement that sets forth the terms of a merger of PaineWebber and a
subsidiary of UBS AG.
Under the merger agreement, you will have the right to elect to receive
either $73.50 in cash or 0.4954 of an ordinary share of UBS AG stock for each
share of PaineWebber common stock that you hold. The UBS ordinary shares are
traded on the New York Stock Exchange under the symbol "UBS.N," on the SWX Swiss
Stock Exchange under the symbol "UBSNZn.S," and on the Tokyo Stock Exchange
under the symbol "UBS.T." The percentage of shares of PaineWebber common stock
that will be convertible into the right to receive UBS AG stock is fixed at 50%.
Therefore, your election may be adjusted on a pro rata basis so that, in the
aggregate, 50% of the shares of PaineWebber common stock is converted into the
right to receive UBS AG stock, and 50% of the shares of PaineWebber common stock
is converted into the right to receive cash. As a result, you may receive part
stock and part cash, no matter which you elect.
We said that the 1990s was the decade of the individual and that this
decade is the decade of the global individual, as investors around the world
increasingly seek quality advice about global investment opportunities. The
boards of directors of UBS and PaineWebber believe that combining the two
companies' businesses will result in an enterprise with a stronger global
position and will create significant opportunities for growth. PaineWebber is
proud of its century-long position as a household brand name in financial
services in the U.S., and we are excited about the prospects of the combined
company for the future.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
AGREEMENT IS ADVISABLE AND IN THE BEST INTERESTS OF PAINEWEBBER AND ITS
STOCKHOLDERS, HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE
BEST INTERESTS OF, THE STOCKHOLDERS OF PAINEWEBBER, HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION OF
THE MERGER AGREEMENT.
This event presents an important decision for you as a PaineWebber
stockholder. We therefore encourage you to read carefully the accompanying
document, which provides detailed information about the proposed merger and
includes a copy of the merger agreement as an appendix.
The merger cannot be completed unless we obtain the approval of a majority
of PaineWebber's stockholders. YOUR VOTE IS VERY IMPORTANT. Whether or not you
plan to attend the special meeting, please take the time to vote by completing
and mailing the enclosed proxy card to us or vote your shares online or by
telephone according to the instructions on the proxy card. Failure to vote, or
to
<PAGE> 3
instruct your broker how to vote any shares held for you in your broker's name,
will have the same effect as a vote against adoption of the merger agreement.
Sincerely,
Donald B Marron
Donald B. Marron
Chairman of the Board,
Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE UBS AG ORDINARY SHARES TO BE
ISSUED IN THE MERGER OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DOCUMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
For a discussion of significant risk factors that should be considered by
you before voting at the special meeting, see "Risk Factors" beginning on page
19.
This document is dated 21 September 2000, and is first being mailed to
PaineWebber's stockholders on or about 22 September 2000.
<PAGE> 4
Paine Webber Group Inc.
Notice of Special Meeting of Stockholders
21 September 2000
To the Stockholders of Paine Webber Group Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Paine Webber Group Inc. ("PaineWebber") will be held on 23 October
2000, at 10:00 a.m., at the PaineWebber Building, 1000 Harbor Boulevard,
Weehawken, New Jersey 07087, to consider and vote upon the following matters:
(1) A proposal to adopt the Agreement and Plan of Merger, dated as of 12
July 2000, by and among Paine Webber Group Inc., UBS AG and UBS
Americas Inc., a wholly owned subsidiary of UBS AG, a copy of which is
attached as Appendix A to the document that accompanies this notice.
(2) The transaction of such other business as may properly come before the
Special Meeting or any adjournment thereof.
Holders of PaineWebber common stock of record at the close of business on
14 September 2000 are entitled to notice of and to vote at the Special Meeting
and any adjournment thereof.
After careful consideration, the PaineWebber board of directors has
unanimously determined that the merger agreement is advisable and in the best
interests of PaineWebber and its stockholders, has unanimously determined that
the merger is fair to, and in the best interests of, the stockholders of
PaineWebber, has unanimously approved the merger agreement and unanimously
recommends that PaineWebber stockholders vote "FOR" the adoption of the merger
agreement.
By order of the Board of Directors,
Theodore A. Levine
Secretary
1285 Avenue of the Americas
New York, New York 10019
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE
SPECIAL MEETING, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY OR VOTE YOUR SHARES ONLINE OR BY TELEPHONE ACCORDING TO THE
INSTRUCTIONS ON THE PROXY CARD. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY
WITHDRAW YOUR PROXY AND VOTE IN PERSON.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 5
RISK FACTORS................................................ 19
THE SPECIAL MEETING......................................... 21
General................................................... 21
Record Date and Voting.................................... 21
Proxies; Revocation....................................... 21
Required Vote............................................. 22
Adjournments or Postponements............................. 22
THE MERGER.................................................. 23
Background of the Merger.................................. 23
PaineWebber's Reasons for the Merger...................... 25
Recommendation of PaineWebber's Board of Directors........ 28
Opinion of PaineWebber's Financial Advisors............... 28
UBS's Reasons for the Merger.............................. 34
UBS Shareholders Meeting.................................. 35
REQUIRED REGULATORY APPROVALS............................... 36
Antitrust................................................. 36
Insurance Regulations..................................... 36
Banking Regulations....................................... 36
Broker-Dealer Regulations................................. 37
Other Applications and Notices............................ 37
TAXATION.................................................... 38
The Merger -- Swiss Taxation.............................. 38
The Merger -- United States Federal Income Taxation....... 39
Ownership of UBS Ordinary Shares -- Swiss Taxation........ 40
Ownership of UBS Ordinary Shares -- United States Federal
Income Taxation........................................ 41
Additional United States Federal Income Tax
Considerations......................................... 42
ACCOUNTING TREATMENT........................................ 43
INTERESTS OF CERTAIN PERSONS IN THE MERGER.................. 43
Employment Agreements..................................... 44
Security Ownership of Certain Beneficial Owners and
Management............................................. 49
THE MERGER AGREEMENT........................................ 52
The Merger................................................ 52
Effective Time of the Merger.............................. 52
UBS's Right to Revise the Structure of the Merger......... 52
Consideration to be Received in the Merger................ 52
Exchange Procedures....................................... 53
Representations and Warranties............................ 54
Conduct of Business Pending the Merger.................... 55
No Solicitation of Acquisition Proposals.................. 56
Stock Options and Other Employee Benefits................. 57
Indemnification; Directors' and Officers' Insurance....... 59
Additional Covenants...................................... 59
Conditions to Consummation of the Merger.................. 60
Termination and the Effects of Termination................ 62
Fee If the Merger Agreement is Terminated................. 63
</TABLE>
i
<PAGE> 6
<TABLE>
<S> <C>
Expenses.................................................. 63
Amendment and Waiver...................................... 63
Stockholder Voting Agreements............................. 63
DISSENTERS' RIGHTS OF APPRAISAL............................. 65
DESCRIPTION OF UBS ORDINARY SHARES.......................... 68
Registration.............................................. 68
Dividends................................................. 68
Voting Rights............................................. 68
Liquidation Rights........................................ 69
Preemptive Rights......................................... 70
Classification of the Board of Directors.................. 70
Shareholders' Meetings.................................... 70
Transfer of UBS Ordinary Shares........................... 70
Certificates.............................................. 71
Notices................................................... 71
COMPARISON OF RIGHTS OF PAINEWEBBER STOCKHOLDERS AND UBS
SHAREHOLDERS.............................................. 72
Voting Rights............................................. 72
Shareholder Proposals and Shareholder Nominations of
Directors.............................................. 72
Sources and Payment of Dividends.......................... 73
Rights of Purchase and Redemption......................... 73
Appraisal Rights.......................................... 74
Preemptive Rights......................................... 74
Amendment of Governing Instruments........................ 75
Preferred Stock........................................... 76
Annual or General Meetings................................ 76
Special Meetings.......................................... 76
Notice.................................................... 76
Proxy Statements and Reports.............................. 77
Shareholders' Votes on Certain Transactions............... 77
Rights of Inspection...................................... 78
Standard of Conduct for Directors......................... 78
Classification of the Board of Directors.................. 78
Removal of Directors...................................... 79
Vacancies on the Board of Directors....................... 79
Liability of Directors and Officers....................... 79
Indemnification of Directors and Officers................. 80
Shareholders' Suits....................................... 81
Limitations on Enforceability of Civil Liabilities Under
U.S. Federal Securities Laws........................... 81
"Short Swing" Profits..................................... 81
Certain Provisions Relating to Share Acquisitions......... 82
Anti-Takeover Measures.................................... 82
Disclosure of Interests in Shares......................... 83
THE COMPANIES............................................... 84
Paine Webber Group Inc.................................... 84
Description of Business................................ 84
Description of Property................................ 84
Further Information About PaineWebber.................. 84
</TABLE>
ii
<PAGE> 7
<TABLE>
<S> <C>
UBS AG.................................................... 84
Description of Business................................ 84
Description of Property................................ 116
Legal Proceedings...................................... 116
Exchange Controls and Other Limitations Affecting
Security Holders...................................... 117
Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 122
Quantitative and Qualitative Disclosure About Market
Risk.................................................. 191
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION............................................... 192
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION....... 215
EXPERTS..................................................... 216
VALIDITY OF UBS ORDINARY SHARES............................. 216
STOCKHOLDER PROPOSALS AND OTHER MATTERS..................... 216
TABLE OF CONTENTS TO FINANCIAL STATEMENTS OF UBS............ F-i
</TABLE>
Appendix A: Agreement and Plan of Merger, dated as of 12 July 2000, by and
among Paine Webber Group Inc., UBS AG and Neptune Merger
Subsidiary, Inc.
Appendix B: Opinion of Goldman, Sachs & Co.
Appendix C: Section 262 of the Delaware General Corporation Law
iii
<PAGE> 8
THIS DOCUMENT INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT PAINEWEBBER FROM DOCUMENTS FILED WITH THE SEC THAT ARE NOT INCLUDED IN OR
DELIVERED WITH THIS DOCUMENT. PAINEWEBBER WILL PROVIDE YOU WITH COPIES OF THIS
INFORMATION, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST TO:
PAINE WEBBER GROUP INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
ATTENTION: GERALDINE BANYAI
TELEPHONE NUMBER: (212) 713-3224
IN ORDER TO RECEIVE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE
PAINEWEBBER SPECIAL MEETING, YOU SHOULD MAKE YOUR REQUEST NO LATER THAN 13
OCTOBER 2000.
IN ADDITION, IF YOU HAVE QUESTIONS ABOUT THE MERGER YOU MAY CONTACT:
INNISFREE M&A INCORPORATED
501 MADISON AVENUE, 20TH FLOOR
NEW YORK, NEW YORK 10022
TOLL FREE: (877) 750-9501
SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 18.
iv
<PAGE> 9
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE UBS AND PAINEWEBBER PROPOSING THE MERGER?
A: The merger will combine PaineWebber, one of the top U.S. private client
securities firms, with UBS, a premier global financial services institution. The
board of directors of PaineWebber believes that the merger will benefit you
because the merger offers you an attractive premium over the trading price of
PaineWebber common stock prior to the announcement of the merger. In addition,
the boards of directors of UBS and PaineWebber believe that combining the two
companies' businesses will result in an enterprise with a stronger global
position and will create significant opportunities for growth.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: You will have an opportunity to make a choice about what you prefer to
receive in the merger. You will have the right to elect to receive either:
- 0.4954 of an ordinary share of UBS for each share of PaineWebber common
stock; or
- $73.50 in cash for each share of PaineWebber common stock.
You will not, however, be assured of receiving either all UBS ordinary shares or
all cash notwithstanding your choice.
Q: HOW DO I ELECT THE FORM OF PAYMENT I PREFER?
A: If your shares are held in registered form, you will receive in a separate
mailing an election form and letter of transmittal, each of which you should
read carefully. You must return your completed and executed election form, as
described in the instructions contained in the election form and letter of
transmittal, to elect the merger consideration that you will receive. DO NOT
SEND YOUR ELECTION FORM OR YOUR STOCK CERTIFICATES WITH YOUR PROXY.
IN ORDER TO BE CONSIDERED VALID, YOUR ELECTION FORM MUST BE RECEIVED BY THE
EXCHANGE AGENT BY 5:00 P.M., NEW YORK CITY TIME, ON THE BUSINESS DAY THAT IS TWO
TRADING DAYS PRIOR TO THE CLOSING DATE OF THE MERGER. UBS will publicly announce
the election deadline as soon as practicable and, in any case, no less than five
trading days prior to the closing date. If your shares are held in a brokerage
or other custodial account, you will receive instructions from the entity where
your shares are so held, advising you of the procedures for making your election
and delivering your shares.
Q: CAN I MAKE ONE ELECTION FOR SOME OF MY SHARES AND ANOTHER ELECTION FOR THE
REST?
A: No. You may not elect to receive a combination of cash and UBS ordinary
shares. You may only do one of the following:
- elect to receive UBS ordinary shares for all of the shares of PaineWebber
common stock that you hold in an account;
- elect to receive cash for all of the shares of PaineWebber common stock
that you hold in an account; or
- make no election for all of the PaineWebber common shares that you hold
in an account.
If you make no election, your shares, and all other shares for which no election
is made, will be converted in whatever manner is necessary to ensure that the
amount of PaineWebber common stock converted into UBS ordinary shares equals, as
nearly as practicable, 50% of the outstanding shares of PaineWebber common stock
immediately before the time the merger becomes effective.
Q: WILL I RECEIVE THE FORM OF PAYMENT THAT I CHOOSE?
A: Not necessarily. The merger agreement provides that the percentage of shares
of PaineWebber common stock that will be converted into UBS ordinary shares is
fixed at 50%. Therefore, all of the PaineWebber stockholders' elections,
including yours, may be adjusted on a pro rata basis so that, in the aggregate,
50% of the PaineWebber common stock is converted into the right to receive UBS
ordinary shares and 50% of the PaineWebber common stock is converted into the
right to receive cash.
For example, if holders of 75% of the shares of PaineWebber common stock have
chosen to receive UBS ordinary shares and holders of 25% of
1
<PAGE> 10
the shares of PaineWebber common stock have chosen to receive cash, then:
- if you chose to receive UBS ordinary shares, you would receive UBS
ordinary shares in exchange for 2/3 of your shares of PaineWebber common
stock and cash in exchange for 1/3 of your shares of PaineWebber common
stock; and
- if you chose to receive cash, you would receive cash in exchange for all
of your shares of PaineWebber common stock.
On the other hand, if holders of 75% of the shares of PaineWebber common stock
have chosen to receive cash and holders of 25% of the shares of PaineWebber
common stock have chosen to receive UBS ordinary shares, then:
- if you chose to receive UBS ordinary shares, you would receive UBS
ordinary shares in exchange for all of your shares of PaineWebber common
stock; and
- if you chose to receive cash, you would receive cash in exchange for 2/3
of your shares of PaineWebber common stock and UBS ordinary shares in
exchange for 1/3 of your shares of PaineWebber common stock.
If holders of 100% of the shares of PaineWebber common stock have chosen to
receive all cash or all UBS ordinary shares, then each holder would receive cash
in exchange for 50% of that holder's shares of PaineWebber common stock and UBS
ordinary shares in exchange for 50% of that holder's shares of PaineWebber
common stock.
Q: HOW SHOULD I SEND IN MY STOCK CERTIFICATES?
A: If your shares are held in registered form and you make an election of
consideration by returning a completed election form, you must send in your
PaineWebber common stock certificates with your completed election form and
letter of transmittal to the exchange agent. If you do not make an election,
then you must keep your stock certificates until after the closing, when you
will receive a letter of transmittal describing how you may exchange your
certificates for merger consideration. DO NOT SEND YOUR STOCK CERTIFICATES OR
ELECTION FORM WITH YOUR PROXY CARD. If your shares are held in a brokerage or
other custodial account, you will receive instructions from the entity where
your shares are so held, advising you of the procedures for making your election
and delivering your shares.
Q: WHAT PREMIUM TO THE PRICE OF PAINEWEBBER'S COMMON STOCK IS IMPLIED BY THE
MERGER CONSIDERATION?
A: Based on the closing price of the UBS ordinary shares on 11 July 2000, the
merger consideration represented a premium of approximately 47% over the last
closing price per share of PaineWebber common stock on 11 July 2000, the last
trading day before the day on which the merger was publicly announced, and a
premium of approximately 63.3% over the closing price of PaineWebber's shares as
of 7 July 2000, the last trading day of the week prior to the announcement of
the merger.
Q: WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A: We expect to complete the merger in the fourth quarter of 2000. Because the
merger is subject to stockholder and governmental approvals, as well as other
conditions, we cannot predict the exact timing of its completion.
Q: WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO
PAINEWEBBER'S STOCKHOLDERS?
A: The merger will qualify as a "reorganization" under United States federal
income tax laws. As a result, United States holders of PaineWebber common stock
generally will not recognize any gain or loss under U.S. federal income tax laws
with respect to UBS ordinary shares received in exchange for their shares of
PaineWebber common stock and will recognize gain (but not loss) only to the
extent of any cash received. However, a United States stockholder that receives
only cash in the merger will recognize gain (or loss) to the extent that the
cash received exceeds (or is less than) its tax basis in the surrendered shares
of PaineWebber common stock. Cash received for fractional UBS ordinary shares is
treated separately as though the United States stockholder had first received
the fractional UBS ordinary share and then exchanged the deemed-received
fractional UBS ordinary share for cash. For a more detailed description of the
tax consequences of the merger please see "Taxation" beginning on page 38.
2
<PAGE> 11
Q: WHY AM I RECEIVING THIS DOCUMENT AND PROXY CARD?
A: You are receiving this document and proxy card because you own shares of
PaineWebber common stock. This document describes a proposal to adopt the merger
agreement on which PaineWebber would like you, as a stockholder, to vote. It
also gives you information about PaineWebber and UBS and other background
information so that you can make an informed decision.
When you cast your vote using the proxy card or by submitting your proxy online
or by telephone, you also appoint Donald B. Marron, Regina A. Dolan and Theodore
A. Levine as your representatives, or proxies, at the meeting. They will vote
your shares at the meeting as you have instructed them on the proxy card or when
submitting your proxy online or by telephone. Accordingly, if you send in your
proxy card or submit your proxy online or by telephone, your shares will be
voted whether or not you attend the special meeting. Even if you plan to attend
the meeting, it is a good idea to cast your vote in advance of the meeting in
case your plans change.
The board of directors of PaineWebber knows of no other business to be presented
at the meeting. If any matters other than the adoption of the merger agreement
are properly presented for consideration at the meeting, Donald B. Marron,
Regina A. Dolan and Theodore A. Levine, as your proxies, will vote, or otherwise
act, on your behalf in accordance with their judgment on such matters.
Q: WHO CAN VOTE?
A: Holders of PaineWebber common stock of record as of the close of business on
the record date, which is 14 September 2000, are entitled to vote at the
meeting. Beneficial owners as of the record date will receive instructions from
their bank, broker, or other nominee describing how to vote their shares.
Q: HOW DOES MY BOARD OF DIRECTORS RECOMMEND THAT I VOTE ON THE PROPOSALS?
A: The PaineWebber board of directors unanimously recommends that you vote
"FOR" the adoption of the merger agreement.
Q: WHAT DO I NEED TO DO NOW?
A: VOTING: After you have carefully read this document, indicate on your proxy
card how you want to vote. Sign, date and mail the proxy card in the enclosed
prepaid return envelope as soon as possible, so that your shares may be
represented and voted at the special meeting.
You may also vote your shares online or by telephone according to the
instructions on the proxy card.
You should return your proxy card or vote online or by telephone whether or not
you plan to attend the meeting. If you attend the meeting, you may revoke your
proxy at any time before it is voted and vote in person if you wish.
ELECTION: To make an election as to the form of consideration you would like to
receive, you must send in your completed election form to the exchange agent by
5:00 p.m., New York City time, on the business day that is two trading days
prior to the closing date of the merger. UBS will publicly announce the election
deadline as soon as practicable and, in any case, no less than five trading days
prior to the closing date.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted. To do
so, send a later dated, signed proxy card to PaineWebber's Assistant Secretary
at 1285 Avenue of the Americas, New York, New York 10019 or vote online or by
telephone before the meeting, or attend the meeting in person and vote. For a
description of voting procedures, see "The Special Meeting -- Proxies;
Revocation" beginning on page 21.
Q: WHAT DOES IT MEAN IF I GET MORE THAN ONE PROXY CARD?
A: It means you have multiple accounts at the transfer agent and/or with
brokers. Please sign and return all proxy cards or vote all your shares online
or by telephone to ensure that all your shares are voted.
Q: WHAT HAPPENS IF I DO NOT INDICATE MY PREFERENCE FOR OR AGAINST ADOPTION OF
THE MERGER AGREEMENT?
A: If you submit a proxy without specifying the manner in which you would like
your shares to be
3
<PAGE> 12
voted, your shares will be voted "FOR" adoption of the merger agreement.
Q: WHAT HAPPENS IF I DO NOT VOTE AT ALL?
A: If you do not submit your proxy or instruct your broker to vote your shares,
and you do not vote in person at the stockholders' meeting, the effect will be
the same as if you voted "AGAINST" the adoption of the merger agreement.
If your shares are held in street name, your broker will leave your shares
unvoted unless you provide instructions on how to vote. You should follow the
directions provided by your broker regarding how to instruct your broker to vote
your shares. This ensures that your shares will be voted at the meeting.
An abstention, unreturned proxy or share not voted because your broker lacks the
authority to vote that share will have the same effect as a vote "AGAINST"
adoption of the merger agreement.
Q: WHO SHOULD I CALL WITH QUESTIONS?
A: If you have further questions, you may contact:
Richard Feder
Paine Webber Group Inc.
1285 Avenue of the Americas
New York, New York 10019
(212) 713-6142
You may also contact our proxy solicitor:
Innisfree M&A Incorporated
501 Madison Avenue, 20th Floor
New York, New York 10022
(877) 750-9501
4
<PAGE> 13
SUMMARY
The following is only a summary of material information contained in this
document. To understand this proposal fully, you must review all the information
in this document, along with the appendices and the information incorporated by
reference. A copy of the merger agreement is attached as Appendix A to this
document and is incorporated by reference into this document. You should refer
to the merger agreement for a complete statement of the terms of the merger.
THE COMPANIES (PAGE 84)
Paine Webber Group Inc.
1285 Avenue of the Americas
New York, New York 10019
(212) 713-2000
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 approximately 385 offices worldwide. PaineWebber offers a wide
variety of products and services, consisting of those of a full service
broker-dealer primarily to 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. Shares of PaineWebber common stock are
listed and principally traded on the New York Stock Exchange under the symbol
"PWJ." When we refer to "PaineWebber" in this document, we are referring to
Paine Webber Group Inc. and its subsidiaries taken as a whole, unless the
context requires otherwise.
<TABLE>
<S> <C> <C>
UBS AG
Bahnhofstrasse 45 and Aeschenvorstadt 1
Zurich, Switzerland Basel, Switzerland
011 41-1-234 11 11 011 41-61-288 20 20
</TABLE>
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 provides its clients with a broad range of products and
services, including wealth management services, investment funds, corporate
advisory and 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. UBS ordinary shares
are listed on the New York Stock Exchange under the symbol "UBS.N," on the SWX
Swiss Exchange under the symbol "UBSNZn.S" and on the Tokyo Stock Exchange under
the symbol "UBS.T." When we refer to "UBS" or the "Group" in this document, we
are referring to UBS AG and its subsidiaries taken as a whole, unless the
context requires otherwise.
UBS Americas Inc.
Bahnhofstrasse 45
Zurich, Switzerland
011 41-1-234 11 11
UBS Americas Inc. is a direct, wholly owned subsidiary of UBS AG formed by
UBS AG to effect the merger. UBS Americas Inc. does not have any significant
assets or liabilities and will not engage in any activities other than those
related to completing the merger. When it was formed, and when it signed the
merger agreement and all other agreements relating to the merger, UBS Americas
Inc. was named Neptune Merger Subsidiary, Inc.
THE SPECIAL MEETING (PAGE 21)
General (page 21)
PaineWebber will hold a special meeting of stockholders on 23 October 2000,
at 10:00 a.m., at the PaineWebber Building, 1000 Harbor Boulevard, Weehawken,
New Jersey 07087. At the meeting, PaineWebber stockholders will be asked to
adopt the merger agreement.
5
<PAGE> 14
Record Date and Voting (page 21)
Each share of PaineWebber common stock outstanding as of 14 September 2000
entitles the holder to one vote on any matter to be considered at the special
meeting. The presence, in person or by proxy, of a majority of the outstanding
shares of PaineWebber common stock is required for a quorum for the transaction
of business at the special meeting.
Proxies; Revocation (page 21)
If you vote your shares of PaineWebber common stock by signing a proxy,
your shares will be voted at the special meeting as you indicate on your proxy
card. If no instructions are indicated on your signed proxy card, your shares of
PaineWebber common stock will be voted "FOR" adoption of the merger agreement.
If you vote your shares of PaineWebber common stock through the internet or by
telephone, your shares will be voted at the special meeting as you instruct. If
your shares are held in street name, you should follow the directions provided
by your broker regarding how to instruct your broker to vote your shares. An
abstention, unreturned proxy or share not voted because your broker lacks the
authority to vote that share will have the same effect as a vote "AGAINST"
adoption of the merger agreement.
You may revoke your proxy at any time before the vote at the special
meeting by submitting a written revocation to the Secretary of PaineWebber at
1285 Avenue of the Americas, New York, New York 10019, or by submitting a new
proxy, in either case, dated after the date of the proxy that is being revoked.
In addition, a proxy may also be revoked by voting in person at the special
meeting. Simply attending the special meeting without voting will not revoke
your proxy.
Required Vote (page 22)
The affirmative vote of the holders of a majority of the outstanding shares
of PaineWebber common stock entitled to vote at the special meeting is necessary
for the adoption of the merger agreement. UBS has entered into stockholder
voting agreements with PaineWebber stockholders who together beneficially own
and have voting control over approximately 30% of the shares of PaineWebber
common stock. Under these agreements, these shareholders have agreed to vote all
their shares of PaineWebber common stock in favor of the merger.
As of 15 September 2000, the directors and executive officers of
PaineWebber owned, in the aggregate, 6,716,515 shares of PaineWebber common
stock, or less than 5% of the shares of PaineWebber common stock outstanding on
that date.
THE MERGER (PAGE 23)
Structure and Consideration
In the merger, PaineWebber will merge with and into UBS Americas Inc. Under
the merger agreement, PaineWebber stockholders will have the right to elect to
receive either $73.50 in cash or 0.4954 of a UBS ordinary share for each share
of PaineWebber common stock that they hold. The percentage of shares of
PaineWebber common stock that will be convertible into the right to receive UBS
ordinary shares is fixed at 50%. Therefore, the elections of all the holders of
PaineWebber common stock, including yours, may be adjusted on a pro rata basis
so that, in the aggregate, 50% of the shares of PaineWebber common stock is
converted into the right to receive UBS ordinary shares, and 50% of the shares
of PaineWebber common stock is converted into the right to receive cash. In the
merger, UBS will, in accordance with these procedures for election and
proration:
- issue to PaineWebber stockholders ordinary shares of UBS; these shares
had a value of approximately $5.4 billion based on the closing price of a
UBS ordinary share on the New York Stock Exchange Composite Tape on 11
July 2000, which was the last trading day before the public announcement
of the merger, and approximately $5.0 billion based on the closing price
of a UBS ordinary share on the New York Stock Exchange Composite Tape on
20 September 2000, the last trading day before the printing of this
document; and
- pay to PaineWebber stockholders approximately $5.4 billion in cash.
Recommendation of PaineWebber's Board of
Directors (page 28)
After careful consideration, the PaineWebber board of directors has
unanimously determined
6
<PAGE> 15
that the merger agreement is advisable and in the best interests of PaineWebber
and its stockholders, has unanimously determined that the merger is fair to, and
in the best interests of, the stockholders of PaineWebber, has unanimously
approved the merger agreement and unanimously recommends that PaineWebber
stockholders vote "FOR" the adoption of the merger agreement.
Opinion of PaineWebber's Financial Advisors (page 28)
On 11 July 2000, at the meeting of PaineWebber's board of directors,
Goldman, Sachs & Co. delivered to PaineWebber's board of directors its oral
opinion, which was subsequently confirmed in a written opinion dated 12 July
2000, that, as of that date and based upon and subject to the matters set forth
in the opinion and such other matters as Goldman Sachs considered relevant, the
consideration to be received for the shares of PaineWebber common stock in the
merger, in the aggregate, was fair, from a financial point of view, to the
holders of PaineWebber common stock.
A COPY OF THE GOLDMAN SACHS OPINION IS ATTACHED AS APPENDIX B TO THIS
DOCUMENT. YOU SHOULD READ THE OPINION IN ITS ENTIRETY FOR INFORMATION ABOUT THE
ASSUMPTIONS MADE, AND MATTERS CONSIDERED, BY GOLDMAN SACHS IN RENDERING ITS
OPINION.
Completion of the Merger
We expect to complete the merger in the fourth quarter of 2000. Because the
merger is subject to stockholder and governmental approvals, as well as other
conditions, we cannot predict the exact timing of its completion.
Conditions to Consummation of the Merger (page 60)
UBS and PaineWebber are obligated to complete the merger only if several
conditions are satisfied or waived. Some of these conditions include:
- obtaining the approval of the stockholders of PaineWebber for the
adoption of the merger agreement;
- obtaining the approval of the shareholders of UBS for the authorization
of the UBS ordinary shares to be issued in connection with the merger and
pursuant to PaineWebber stock options and stock-based awards, which was
obtained on 7 September 2000, satisfying this condition;
- obtaining all approvals of, and making all filings with, and applications
or notifications to, governmental authorities, other than those that
would not, if they were not obtained, reasonably be expected to have a
detrimental impact on relations with governmental authorities;
- all applicable waiting periods having expired;
- no governmental authority enacting or issuing any statute, rule,
injunction or other order which restrains, enjoins or otherwise prohibits
the consummation of the merger;
- the registration statement on Form F-4, of which this document is a part,
becoming effective, which has occurred, and remaining effective;
- the SWX Swiss Exchange and the New York Stock Exchange authorizing the
listing of the UBS ordinary shares to be issued in connection with the
merger and pursuant to PaineWebber stock options and stock-based awards,
subject to official notice of issuance by the New York Stock Exchange;
- the representations and warranties of UBS and PaineWebber being true and
correct as of the date of the merger agreement and as of the date of
closing;
- UBS and PaineWebber performing in all material respects all of their
respective obligations required by the merger agreement at or prior to
the closing date; and
- UBS and PaineWebber having received a tax opinion from their respective
legal advisors.
Termination of the Merger Agreement (page 62)
The merger agreement may be terminated and the merger may be abandoned at
any time before the effective time of the merger:
- by the mutual consent of UBS, UBS Americas Inc. and PaineWebber;
7
<PAGE> 16
- by UBS and UBS Americas Inc., or by PaineWebber, in the event of an
uncured breach by the other party of any representation, warranty,
covenant or agreement contained in the merger agreement, if the breach
would cause the specified conditions to the merger not to be satisfied or
would be reasonably likely to prevent, materially delay or materially
impair the ability of any of the parties to consummate the merger;
- by UBS or PaineWebber if UBS and PaineWebber do not complete the merger
on or before 31 December 2000, unless either party elects to extend the
termination date to 31 March 2001 if any banking or insurance regulatory
approval still needs to be obtained;
- by UBS or PaineWebber, if the approval of any governmental authority
required for consummation of the merger is denied by final nonappealable
action of a governmental authority;
- by UBS or PaineWebber, if PaineWebber's stockholders fail to approve the
merger or if UBS's shareholders had failed to authorize the increase in
share capital to provide for the UBS ordinary shares to be issued by UBS
in the merger;
- by UBS, if, at any time before the special meeting, PaineWebber's board
of directors fails to recommend stockholder approval of the merger
agreement, withdraws its recommendation or modifies or changes its
recommendation in a manner adverse to the interests of UBS; or
- by UBS, if PaineWebber or its board of directors recommends that the
PaineWebber stockholders approve any acquisition proposal other than the
merger.
Fee If the Merger Agreement is Terminated (page 63)
PaineWebber must pay to UBS a cash termination fee of $370,000,000 if
either company terminates the merger agreement:
- because the merger has not occurred by 31 December 2000 or because the
required vote of the PaineWebber stockholders is not obtained to adopt
the merger agreement;
- before the time of the termination or before the special meeting, an
acquisition proposal other than the proposal contemplated in the merger
agreement is made to PaineWebber or its stockholders or has been made
publicly known; and
- concurrently with the termination or within fifteen months after the
termination, either
- PaineWebber enters into an agreement to engage in another
acquisition transaction or another acquisition transaction occurs;
or
- the board of directors of PaineWebber authorizes, recommends or
approves another acquisition transaction or publicly announces an
intention to authorize, recommend or approve another acquisition
transaction.
PaineWebber also must pay a cash termination fee of $370,000,000 if UBS
terminates the merger agreement because PaineWebber recommends another
acquisition proposal to its stockholders.
If UBS terminates the merger agreement because PaineWebber's board of
directors does not recommend that PaineWebber's stockholders adopt the merger
agreement, withdraws its recommendation or modifies or changes its
recommendation in a manner adverse to the interests of UBS, then
- PaineWebber must pay to UBS a cash termination fee of $125,000,000; and
- if concurrently with such termination or within fifteen months after such
termination PaineWebber or its board of directors acts on another
acquisition transaction as described above, then PaineWebber must pay to
UBS an additional $245,000,000.
In no event will the termination fees payable under the merger agreement
exceed $370,000,000 in the aggregate.
Interests of Certain Persons in the Merger (page 43)
When you consider the recommendation of the PaineWebber board of directors
that you vote
8
<PAGE> 17
in favor of adoption of the merger agreement, you
should keep in mind that a number of executive officers and members of the board
have interests in the merger that are in addition to your interests as a
stockholder. Their additional interests arise primarily in connection with their
continued employment following the consummation of the merger and the
compensation they will receive in connection with that employment.
Required Regulatory Approvals (page 36)
Transactions such as the merger are reviewed by the United States
Department of Justice and the United States Federal Trade Commission to
determine whether they comply with applicable antitrust laws. Under the
provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the related rules and regulations, the merger may not be completed
until applicable waiting-period requirements have been satisfied. UBS and
PaineWebber each filed notification reports with the Department of Justice and
Federal Trade Commission under the Hart-Scott-Rodino Act on 28 July 2000. The
waiting period under the Hart-Scott-Rodino Act was terminated on 10 August 2000,
indicating that neither agency presently has significant antitrust concerns
regarding the merger.
The completion of the merger is also subject to the approvals of and/or
notices to, and the expiration of applicable waiting periods required by, the
insurance department of California and the banking regulators of New Jersey,
Tennessee, Puerto Rico, Utah and the United Kingdom. UBS has filed applications
for approval of the merger with these regulators. Notices and filings must also
be made, and waiting periods must elapse, with a number of other insurance and
banking regulators, state broker-dealer regulators, and securities and other
exchanges and self-regulatory agencies.
Although we believe that we will be able to obtain these regulatory
approvals, we cannot be certain whether these approvals will be obtained within
the period of time contemplated by the merger agreement or on conditions that
would not be detrimental to the combined company, or at all.
Dissenters' Rights of Appraisal (page 65)
Under Section 262 of the Delaware General Corporation Law, if you do not
vote your outstanding shares of PaineWebber common stock in favor of adoption of
the merger agreement, you will be entitled to dissent and elect to have the
"fair value" of your shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if any, judicially determined by the Delaware Court of Chancery and
paid to you in cash.
If you consider seeking appraisal, you should be aware that the fair value
of your shares as determined under Section 262 could be more than, the same as
or less than the $73.50 per share cash payment or the 0.4954 of a UBS ordinary
share you would be entitled to elect to receive under the merger agreement if
you did not seek appraisal of your shares.
Accounting Treatment (page 43)
The merger will be accounted for by use of the purchase method of
accounting, in accordance with International Accounting Standards. This means
that UBS will record the excess of the purchase price of PaineWebber over the
fair value of PaineWebber's identifiable assets, including intangible assets and
liabilities, as goodwill.
Stockholder Voting Agreements (page 63)
As a condition and inducement to UBS's entering into the merger agreement,
on 12 July 2000, UBS entered into stockholder voting agreements with the
following stockholders of PaineWebber:
- General Electric Company and its subsidiaries that are stockholders of
PaineWebber;
- The Yasuda Mutual Life Insurance Company;
- Donald B. Marron, the Chairman of the Board and Chief Executive Officer
of Paine Webber Group Inc. and PaineWebber Incorporated; and
- Joseph J. Grano, Jr., the President of PaineWebber Incorporated.
These stockholders, who together beneficially own and have voting control over
approximately 30% of
9
<PAGE> 18
the shares of PaineWebber common stock, have agreed to vote for the adoption of
the merger agreement at the PaineWebber special meeting.
Limitations on Enforcement of U.S. Laws Against UBS AG, its Management and
Others
UBS AG is a Swiss bank. Many of UBS's directors and executive officers,
including all of the persons who signed the registration statement on Form F-4,
of which this document is a part, and some of the experts named in this
document, are resident outside the United States, and a substantial portion of
UBS's assets and all or a substantial portion of the assets of such persons are
located outside the United States. As a result, it may be difficult for you to
effect service of process within the United States upon such persons to enforce
against them judgments of the courts of the United States predicated upon, among
other things, the civil liability provisions of the federal securities laws of
the United States. In addition, it may be difficult for you to enforce, in
original actions brought in courts in jurisdictions located outside the United
States, among other things, civil liabilities predicated upon such securities
laws.
We have been advised by Baer & Karrer, Swiss counsel to UBS AG, that the
United States and Switzerland do not currently have a treaty providing for
reciprocal recognition of and enforcement of judgments in civil and commercial
matters. Therefore, the recognition and enforcement of a judgment of the courts
of the United States in Switzerland is governed by the principles laid out in
the Swiss Federal Act on Private International Law. This statute provides that a
judgment rendered by a non-Swiss court may be enforced in Switzerland only if
(i) the foreign court had jurisdiction (pursuant to the Swiss Federal Act on
Private International Law), (ii) the judgment of such foreign court has become
final and non-appealable, (iii) the judgment of such foreign court does not
contravene Swiss public policy, and (iv) the court procedures and the service of
documents leading to the judgment was in compliance with the principles of due
process of law.
10
<PAGE> 19
COMPARATIVE MARKET PRICE DATA
The table below presents the New York Stock Exchange closing market prices
for UBS ordinary shares and shares of PaineWebber common stock as reported on
DowJones Interactive. These prices are presented on two dates:
- 11 July 2000, the last trading day before the public announcement of the
signing of the merger agreement; and
- 20 September 2000, the latest practicable date before the printing of
this document.
The table also presents implied equivalent per share values for shares of
PaineWebber common stock by multiplying the price per UBS ordinary share as
traded on the New York Stock Exchange on the two dates by the exchange ratio of
0.4954.
<TABLE>
<CAPTION>
UBS PAINEWEBBER SHARE PRICE EQUIVALENT (UBS
ORDINARY COMMON STOCK ORDINARY SHARE PER SHARE OF
SHARE PRICE SHARE PRICE PAINEWEBBER COMMON STOCK)
----------- ------------ ----------------------------
<S> <C> <C> <C>
11 July 2000................................ $148.75 $49.94 $73.69
20 September 2000........................... $137.00 $69.25 $67.87
</TABLE>
PAINEWEBBER STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
THE UBS ORDINARY SHARES AND SHARES OF PAINEWEBBER COMMON STOCK BEFORE MAKING A
DECISION WITH RESPECT TO THE MERGER AND BEFORE MAKING AN ELECTION.
COMPARATIVE PER SHARE DATA
The following tables present unaudited historical and pro forma per share
data that reflect the completion of the merger based upon the historical
financial statements of UBS and PaineWebber. The pro forma data are not
indicative of the results of future operations or the actual results that would
have occurred had the merger been consummated at the beginning of the periods
presented. You should read the data presented below together with the historical
consolidated financial statements, including the related notes, of UBS that are
included elsewhere in this document and the historical consolidated financial
statements, including the related notes, of PaineWebber that are incorporated by
reference into this document.
11
<PAGE> 20
The first and second columns in the tables below present historical per
share amounts for UBS and PaineWebber. The fifth column presents pro forma
equivalent data based on the number of UBS ordinary shares to be issued in the
merger. Solely for your convenience, the pro forma and pro forma equivalent
amounts in the fourth and fifth columns have been translated into U.S. dollars
at the noon buying rate on 15 September 2000.
<TABLE>
<CAPTION>
SIX MONTHS ENDED 30 JUNE 2000
--------------------------------------------------------------------------
PRO FORMA
EQUIVALENT
PER SHARE OF
PAINEWEBBER
COMMON STOCK
PAINEWEBBER (UBS PRO FORMA
UBS HISTORICAL PER UBS ORDINARY
HISTORICAL PER SHARE OF UBS PRO FORMA SHARE DATA
PER UBS PAINEWEBBER PER UBS MULTIPLIED BY
ORDINARY SHARE COMMON STOCK ORDINARY SHARE 0.4954)
-------------- ------------ -------------- ----------------
CHF US$ CHF US$ US$
<S> <C> <C> <C> <C> <C>
Amounts under International
Accounting Standards:
Income
Basic................... 10.91 2.00 9.15 5.14 2.55
Diluted................. 10.79 1.90 9.03 5.07 2.51
Dividends.................. N/A(1) 0.24 0.13 0.07 0.03
Book value................. 81.44 21.47 94.73 53.19 26.35
Amounts under U.S. GAAP:
Income
Basic................... 5.19 2.09 4.04 2.27 1.12
Diluted................. 5.13 1.98 3.99 2.24 1.11
Dividends.................. N/A(1) 0.24 0.13 0.07 0.03
Book value................. 130.15 21.74 138.82 77.95 38.62
</TABLE>
---------------
(1) Dividends are declared and paid in the year subsequent to the reporting
period.
CURRENCIES AND EXCHANGE RATES
The table below sets forth, for the periods and dates indicated,
information concerning the noon buying rate for the Swiss franc, expressed in
U.S. 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.
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER HIGH LOW AVERAGE RATE(1) AT PERIOD END
---------------------- ------- ------ --------------- -------------
(US$ PER 1 CHF)
<S> <C> <C> <C> <C> <C>
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 15 September)........ 0.6861 0.5596 0.6206 0.5615
</TABLE>
---------------
(1) The average of the noon buying rates on the last business day of each full
month during the relevant period.
12
<PAGE> 21
SELECTED HISTORICAL FINANCIAL DATA
UBS
The selected consolidated financial data set forth below at 31 December
1999, 1998 and 1997 and for each of the years ended 31 December 1999, 1998 and
1997 have been derived from UBS's consolidated financial statements and the
related notes. These consolidated financial statements have been audited by ATAG
Ernst & Young, UBS's independent auditors. This financial data should be read
together with the consolidated financial statements and related notes for each
of the years ended 31 December 1999, 1998 and 1997 included elsewhere in this
document.
The selected consolidated financial data set forth below at 30 June 2000
and for the six months ended 30 June 2000 have been derived from UBS's unaudited
consolidated financial statements and the related notes. These financial data
should be read together with the unaudited consolidated financial statements and
related notes for the six months ended 30 June 2000 included elsewhere in this
document.
UBS's consolidated results of operations are prepared in accordance with
International Accounting Standards or "IAS," which differ 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.
SELECTED HISTORICAL FINANCIAL DATA FOR UBS
INTERNATIONAL ACCOUNTING STANDARDS DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED 31 DECEMBER
SIX MONTHS ENDED -------------------------------------------
30 JUNE 2000 1999 1998 1997
----------------- ------------------- -------- ----------
US$(1) CHF US$(2) CHF
------- ------- -------- --------------------------------
(UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net interest income.................... 2,647 4,326 3,716 5,909 5,018 6,936
Credit loss (expense)/recovery......... 51 83 (601) (956) (951) (1,278)
Net fee and commission income.......... 4,795 7,835 7,929 12,607 12,626 12,234
Net trading income..................... 3,469 5,669 4,855 7,719 3,313 5,491
Total income........................... 11,357 18,557 17,877 28,425 22,247 24,880
Operating profit/(loss) before tax and
minority interest.................... 3,403 5,560 4,964 7,893 3,871 (756)
Net profit/(loss)...................... 2,612 4,268 3,870 6,153 2,972 (667)
PER UBS ORDINARY SHARE
Basic earnings......................... 6.68 10.91 9.56 15.20 7.33 (1.59)
Diluted earnings....................... 6.60 10.79 9.48 15.07 7.20 (1.59)
Cash dividends declared(3)............. N/A N/A N/A 5.50 5.00 N/A
Cash dividends declared (US$)(3)(4).... N/A N/A 3.31 3.31 3.31 N/A
FINANCIAL CONDITION
Total assets........................... 579,135 946,307 565,338 898,888 861,282 1,086,414
Long-term debt......................... 32,430 52,990 35,429 56,332 50,783 54,284
Total shareholders' equity............. 19,508 31,876 19,250 30,608 28,794 30,927
Total capitalization................... 51,938 84,866 54,679 86,940 79,577 85,211
</TABLE>
---------------
(1) 30 June 2000 Swiss franc amounts have been translated into U.S. dollars at
the exchange rate of one U.S.$=CHF 1.634, the noon buying rate in New York
City on 30 June 2000.
13
<PAGE> 22
(2) 31 December 1999 Swiss franc amounts have been translated into U.S. dollars
at the exchange rate of one US$=CHF 1.59, the noon buying rate in New York
City on 31 December 1999, except dividends as described in Note (4) below.
(3) Dividends are declared and paid in the year subsequent to the reporting
period. Prior to the 1998 merger of Union Bank of Switzerland and Swiss Bank
Corporation, each of these entities paid dividends in accordance with its
own dividend policies. Dividends for 1997 and prior years, reflected at
actual historical amounts, were paid by Union Bank of Switzerland on its
bearer shares and registered shares and by Swiss Bank Corporation, as
follows:
<TABLE>
<CAPTION>
UNION BANK OF SWITZERLAND SWISS BANK
BEARER SHARES REGISTERED SHARES CORPORATION SHARES
----------------- ----------------- -------------------
CHF US$(4) CHF US$(4) CHF US$(4)
----- ------ ----- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
1994............................ 32.00 28.20 6.40 5.64 8.00 6.67
1995............................ 32.00 26.25 6.40 5.25 8.00 6.29
1996............................ 32.00 21.85 6.40 4.37 10.00 6.61
1997............................ 50.00 33.65 10.00 6.73 12.00 8.01
</TABLE>
(4) Dividend payment amounts have been translated to U.S. dollars at an exchange
rate equal to the noon buying rate in New York City on the date of payment.
U.S. GAAP DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
AS OF AND FOR THE ENDED 31 DECEMBER
SIX MONTHS ENDED -----------------------------
30 JUNE 2000 1999 1998
------------------ ------------------ -------
US$(1) CHF US$(2) CHF
------- ------- ------- ------------------
(UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net interest income...................... 2,601 4,250 3,613 5,744 3,363
Credit loss (expense)/recovery........... 51 83 (601) (956) (787)
Net fee and commission income............ 4,795 7,835 7,929 12,607 8,925
Net trading income....................... 2,692 4,399 4,512 7,174 455
Total income............................. 10,548 17,236 17,453 27,751 12,681
Operating profit/(loss) before tax and
minority interest...................... 1,989 3,250 2,767 4,400 (5,008)
Net profit/(loss)........................ 1,242 2,029 1,784 2,837 (3,665)
PER UBS ORDINARY SHARE
Basic earnings........................... 3.18 5.19 4.41 7.01 (8.84)
Diluted earnings......................... 3.14 5.13 4.37 6.95 (8.84)
FINANCIAL CONDITION
Total assets............................. 606,035 990,261 579,390 921,230 940,286
Long-term debt........................... 32,509 53,120 35,251 56,049 50,445
Total shareholder's equity............... 31,179 50,946 32,599 51,833 54,761
Total capitalization..................... 63,688 104,066 67,850 107,882 105,206
</TABLE>
---------------
(1) 30 June 2000 Swiss franc amounts have been translated into U.S. dollars at
the exchange rate of one US$=CHF 1.634, the noon buying rate in New York
City on 30 June 2000.
(2) 31 December 1999 Swiss franc amounts have been translated into U.S. dollars
at the exchange rate of one US$=CHF 1.59, the noon buying rate in New York
City on 31 December 1999, except dividends as described in Note (4) above.
14
<PAGE> 23
PAINEWEBBER
The selected consolidated financial data set forth below at 31 December
1999, 1998, 1997, 1996 and 1995 and for each of the years ended 31 December
1999, 1998, 1997, 1996 and 1995 have been derived from PaineWebber's
consolidated financial statements and the related notes. These consolidated
financial statements have been audited by Ernst & Young LLP, PaineWebber's
independent auditors. This financial data should be read together with the
consolidated financial statements and related notes for each of the years ended
31 December 1999, 1998, 1997, 1996 and 1995.
The selected consolidated financial data set forth below at 30 June 2000
and for the six months ended 30 June 2000 have been derived from PaineWebber's
unaudited condensed consolidated financial statements and the related notes.
These financial data should be read together with the unaudited condensed
consolidated financial statements and related notes for the six months ended 30
June 2000, which are incorporated by reference in this document.
PaineWebber's consolidated financial statements are prepared in accordance
with United States generally accepted accounting principles, or U.S. GAAP.
SELECTED HISTORICAL FINANCIAL DATA FOR PAINEWEBBER
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED 31 DECEMBER
SIX MONTHS ENDED ------------------------------------------------
30 JUNE 2000(1) 1999 1998 1997 1996 1995(2)
----------------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN MILLIONS OF DOLLARS EXCEPT, PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total revenues........................... $ 4,722 $ 7,823 $ 7,250 $ 6,657 $ 5,706 $ 5,320
Net revenues (including net interest).... $ 3,008 $ 5,290 $ 4,405 $ 4,112 $ 3,735 $ 3,350
Income before taxes and minority
interest............................... $ 502 $ 1,035 $ 715 $ 673 $ 560 $ 103
Net income............................... $ 304 $ 629 $ 434 $ 415 $ 364 $ 81
PER COMMON SHARE(3)
Basic earnings........................... $ 2.09 $ 3.77(4) $ 2.91 $ 2.84 $ 2.55 $ 0.37
Diluted earnings......................... $ 1.98 $ 3.56(4) $ 2.72 $ 2.56 $ 2.24 $ 0.35
Dividends declared....................... $ 0.24 $ 0.44 $ 0.44 $ 0.41 $ 0.32 $ 0.32
Book value............................... $ 21.74 $ 20.04 $ 16.76 $ 13.80 $ 12.19 $ 10.41
FINANCIAL CONDITION
Total assets............................. $66,403 $61,612 $54,176 $57,065 $52,514 $45,671
Long-term borrowings and preferred
securities............................. $ 5,603 $ 5,618 $ 4,839 $ 3,980 $ 3,164 $ 2,623
Stockholders' equity..................... $ 3,191 $ 2,917 $ 2,439 $ 1,931 $ 1,731 $ 1,552
Total capitalization..................... $ 8,794 $ 8,535 $ 7,278 $ 5,911 $ 4,895 $ 4,175
</TABLE>
---------------
(1) The results for the six months ended 30 June 2000 include J.C. Bradford
merger-related costs of $30.0 million, $18.8 million after taxes.
(2) The 1995 results include after-tax charges of $146 million ($230 million
before income taxes) related to the resolution of the issues arising from
PaineWebber's sale of public proprietary limited partnerships.
(3) All per share data reflect a three-for-two PaineWebber common stock split in
November 1997.
(4) Reflects the effect of the unamortized discount of $59.9 million charged to
stockholders' equity resulting from the redemption of preferred stock by
PaineWebber on 16 December 1999.
15
<PAGE> 24
SELECTED PRO FORMA FINANCIAL DATA FOR UBS AND PAINEWEBBER
The following pro forma consolidated balance sheet and income statement as
of and for the six months ended 30 June 2000 is derived from the unaudited
consolidated financial statements of UBS for the period then ended and
PaineWebber's unaudited condensed consolidated financial statements for the same
period, as adjusted to IAS and translated into Swiss francs, after giving effect
to the pro forma adjustments described in the notes to the UBS and PaineWebber
unaudited pro forma consolidated balance sheet and income statement. These
adjustments have been determined as if the merger took place on 1 January 1999,
the first day of the earliest period presented in the UBS and PaineWebber
unaudited pro forma consolidated financial information. This information has
been prepared from, and should be read together with, the unaudited consolidated
financial statements and related notes of UBS, which are included in this
document, and the unaudited consolidated financial statements and related notes
of PaineWebber, which are incorporated by reference from PaineWebber's Quarterly
Report on Form 10-Q for the quarter ended 30 June 2000 into this document. These
statements have been prepared in accordance with IAS.
INTERNATIONAL ACCOUNTING STANDARDS DATA
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999
-------------------- ----------------
US$(1) CHF US$(1) CHF
------- --------- ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
OPERATING RESULTS
Net interest income................................. 2,796 4,569 3,720 6,079
Credit loss (expense)/recovery...................... (51) (83) 585 956
Net fee and commission income....................... 6,850 11,194 10,788 17,631
Net trading income.................................. 3,948 6,453 5,726 9,357
Total income........................................ 14,120 23,077 21,731 35,514
Operating profit before tax and minority interest... 3,353 5,480 4,662 7,619
Net profit.......................................... 2,430 3,972 3,312 5,412
PER UBS ORDINARY SHARE
Basic earnings...................................... 5.60 9.15 7.40 12.10
Diluted earnings.................................... 5.52 9.03 7.32 11.97
FINANCIAL CONDITION
Total assets........................................ 653,854 1,068,588 N/A N/A
Long-term debt...................................... 37,839 61,840 N/A N/A
Total shareholder's equity.......................... 25,163 41,123 N/A N/A
Total capitalization................................ 63,002 102,963 N/A N/A
</TABLE>
---------------
(1) 30 June 2000 and 31 December 1999 Swiss franc amounts have been translated
into U.S. dollars at the exchange rate of one U.S.$=CHF 1.634, the noon
buying rate in New York City on 30 June 2000.
16
<PAGE> 25
U.S. GAAP DATA
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999
-------------------- ----------------
US$(1) CHF US$(1) CHF
------- --------- ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
OPERATING RESULTS
Net interest income................................. 2,765 4,520 3,725 6,087
Credit loss expense (recovery)...................... (51) (83) 585 956
Net fee and commission income....................... 6,918 11,306 10,857 17,744
Net trading income.................................. 3,190 5,213 5,411 8,842
Total income........................................ 13,417 21,925 21,512 35,156
Operating profit before tax and minority interest... 1,986 3,244 2,652 4,334
Net profit.......................................... 1,073 1,754 1,373 2,244
PER UBS ORDINARY SHARE
Basic earnings per share............................ 2.47 4.04 2.90 4.74
Diluted earnings per share.......................... 2.44 3.99 2.87 4.69
FINANCIAL CONDITION DATA
Total assets........................................ 681,553 1,113,861 N/A N/A
Long-term debt...................................... 37,524 61,326 N/A N/A
Total shareholder's equity.......................... 36,873 60,260 N/A N/A
Total capitalization................................ 74,397 121,586 N/A N/A
</TABLE>
---------------
(1) 30 June 2000 and 31 December 1999 Swiss franc amounts have been translated
into U.S. dollars at the exchange rate of one US$=CHF 1.634, the noon buying
rate in New York City on 30 June 2000.
17
<PAGE> 26
WHERE YOU CAN FIND MORE INFORMATION
UBS files periodic reports and other information with the Securities and
Exchange Commission, and PaineWebber files periodic reports, proxy statements,
and other information with the Securities and Exchange Commission. You may read
and copy any document that either company 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. PaineWebber's SEC filings, and some of UBS's SEC filings, are
also available to the public over the internet at the SEC's web site
(www.sec.gov).
PaineWebber "incorporates by reference" into this document the information
in documents it files with the SEC, which means that PaineWebber can disclose
important business and financial information about itself to you by referring
you to those documents. The information incorporated by reference is an
important part of this document, and information that PaineWebber files
subsequently with the SEC will automatically update this document and may modify
or supersede earlier information that is incorporated by reference. PaineWebber
incorporates by reference the documents listed below and any filings it makes
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934 after the filing of this document and before the meeting of
PaineWebber's stockholders:
- Annual Report on Form 10-K for the fiscal year ended 31 December 1999,
including information incorporated by reference into that report from
PaineWebber's 1999 Annual Report to Stockholders and portions of its
definitive proxy statement for PaineWebber's 2000 Annual Meeting of
Stockholders;
- Quarterly Reports on Form 10-Q for the quarters ended 31 March 2000 and
30 June 2000; and
- Current Reports on Form 8-K filed on 14 July 2000, 17 July 2000 and 30
August 2000, as amended by Current Report on Form 8-K/A filed on 14
September 2000.
Each company supplied all information contained and/or incorporated by
reference in this document relating to that company and its subsidiaries.
You may request a copy of any of PaineWebber's SEC filings, other than an
exhibit to a filing unless the exhibit is specifically incorporated by reference
into the filing, at no cost by contacting PaineWebber orally or in writing at:
Paine Webber Group Inc.
1285 Avenue of the Americas
New York, New York 10019
Attention: Geraldine Banyai
(212) 713-3224
In order to obtain timely delivery, you must request copies of
PaineWebber's SEC filings no later than 13 October 2000.
If you have questions about the merger, you may also contact:
Innisfree M&A Incorporated
501 Madison Avenue, 20th Floor
New York, New York 10022
Toll free: (877) 750-9501
You should rely only on the information contained or incorporated by
reference into this document to decide how to vote on the merger. No one has
been authorized to provide you with information that is different from what is
contained in, or incorporated by reference into, this document. This document is
dated 21 September 2000. You should not assume that the information contained
in, or incorporated by reference into, this document is accurate as of any date
other than that date, and neither the mailing of this document nor the issuance
of UBS ordinary shares in the merger will create any implication to the
contrary.
18
<PAGE> 27
RISK FACTORS
AN INVESTMENT IN UBS ORDINARY SHARES INVOLVES A NUMBER OF RISKS, SOME OF
WHICH, INCLUDING MARKET, LIQUIDITY, CREDIT, OPERATIONAL, LEGAL AND REGULATORY
RISKS, COULD BE SUBSTANTIAL AND ARE INHERENT IN UBS'S BUSINESSES. IN ADDITION,
YOUR ELECTION IN THE MERGER ALSO INVOLVES CERTAIN RISKS. YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER WITH THE OTHER
INFORMATION IN THIS DOCUMENT, IN CONSIDERING THE PROPOSED MERGER BETWEEN UBS AND
PAINEWEBBER AND YOUR ELECTION TO RECEIVE CASH OR UBS ORDINARY SHARES IN THE
PROPOSED MERGER.
UBS's businesses are affected by market fluctuations and economic
conditions. 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 other countries can also affect UBS's results of operations and financial
position by affecting the demand for UBS's products and services, the credit
quality of UBS's borrowers and counterparties and the values of UBS's assets and
liabilities. 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.
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 may have an
effect on UBS's earnings. 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 currency risk is explained
below under "The Companies -- UBS AG -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asset and Liability
Management -- Currency Management." In addition, changes in exchange rates can
affect UBS's businesses earnings. For example, the establishment of the euro
during 1999 has had 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 are present in UBS's businesses. UBS's businesses are
dependent on their 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. A
further discussion of UBS's risk management and control is included under "The
Companies -- UBS AG -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Management."
The success of the PaineWebber merger is dependent upon UBS's ability to
integrate PaineWebber into its businesses. Although UBS believes that the
PaineWebber transaction will enhance the competitive position and business
prospects of UBS, there can be no assurance that these benefits will be
realized, or that the combination of UBS and PaineWebber will be more successful
than both these companies would have been if they had remained independent.
19
<PAGE> 28
Holding shares of a foreign issuer such as UBS has certain tax and other
implications. Transactions in shares of a foreign issuer have tax implications
that do not exist when investing in shares of a domestic issuer. For example,
dividends paid by UBS to a holder of UBS ordinary shares are subject to Swiss
federal withholding tax at a rate of 35%. A U.S. holder that qualifies for
relief under a tax treaty between the United States and Switzerland may apply
for a return of the withholding tax in excess of a rate of 15%. In addition, a
holder of UBS ordinary shares must comply with certain formalities in order to
exercise the voting rights related to those shares. For more information
regarding the tax and other implications of holding UBS ordinary shares, see
"Taxation -- Ownership of UBS Ordinary Shares -- Swiss Taxation" and
"Description of UBS Ordinary Shares."
The changing trading price of the UBS ordinary shares makes the value of
the merger consideration you will receive uncertain. Holders of PaineWebber
common stock will have the right to elect to receive either $73.50 in cash or
0.4954 of a UBS ordinary share for each share of PaineWebber common stock that
they hold. However, the percentage of shares of PaineWebber common stock that
will be convertible into the right to receive UBS stock is fixed at 50%.
Therefore, the elections of the holders, including yours, may be adjusted on a
pro rata basis so that, in the aggregate, 50% of the shares of PaineWebber
common stock is converted into the right to receive UBS ordinary shares and 50%
of the PaineWebber common stock is converted into the right to receive cash. As
a result, you may receive part stock and part cash, no matter which election you
make. The value of the share consideration paid by UBS may be less than or
greater than $73.50 per share of PaineWebber common stock depending on the
market value of UBS ordinary shares at the time of payment. Thus, the value
received by a PaineWebber stockholder in the merger may be less than or greater
than $73.50 per share of PaineWebber common stock, even if the PaineWebber
stockholder has elected to receive all cash. PaineWebber stockholders should
carefully consider this proration in making their elections to receive cash or
UBS ordinary shares.
20
<PAGE> 29
THE SPECIAL MEETING
GENERAL
This document is being furnished to PaineWebber stockholders as part of the
solicitation of proxies by the PaineWebber board of directors for use at the
special meeting to be held on 23 October 2000, starting at 10:00 a.m., at the
PaineWebber Building, 1000 Harbor Boulevard, Weehawken, New Jersey 07087. The
purpose of the special meeting is for the holders of PaineWebber common stock to
consider and vote upon a proposal to adopt the Agreement and Plan of Merger,
dated as of 12 July 2000, by and among Paine Webber Group Inc., UBS AG and UBS
Americas Inc. (formerly Neptune Merger Subsidiary, Inc.) a wholly owned
subsidiary of UBS AG. A copy of the merger agreement is attached to this
document as Appendix A. This document and the enclosed form of proxy are first
being mailed to PaineWebber stockholders on or about 22 September 2000.
RECORD DATE AND VOTING
As of the close of business on 14 September 2000, there were outstanding
148,547,199 shares of PaineWebber common stock, par value $1.00 per share,
excluding treasury shares. Each share of PaineWebber common stock outstanding as
of the close of business on 14 September 2000 entitles the holder to one vote on
any matter to be considered at the special meeting.
The presence, in person or by proxy, of a majority of the outstanding
shares of PaineWebber common stock is required for a quorum for the transaction
of business at the special meeting. Abstentions and broker non-votes are counted
for purposes of determining the presence or absence of a quorum.
Any shares of PaineWebber common stock held in treasury by PaineWebber or
by any of its subsidiaries are not considered to be outstanding for purposes of
determining a quorum.
PROXIES; REVOCATION
If you vote your shares of PaineWebber common stock by signing a proxy,
your shares will be voted at the special meeting as you indicate on your proxy
card. If no instructions are indicated on your signed proxy card, your shares of
PaineWebber common stock will be voted "FOR" adoption of the merger agreement.
If you vote your shares of PaineWebber common stock through the internet or by
telephone, your shares will be voted at the special meeting as you instruct. If
your shares are held in street name, you should follow the directions provided
by your broker regarding how to instruct your broker to vote your shares.
You may revoke your proxy at any time before the vote at the special
meeting by submitting a written revocation to the Secretary of PaineWebber at
1285 Avenue of the Americas, New York, New York 10019, or by submitting a new
proxy, in either case, dated after the date of the proxy that is being revoked.
In addition, a proxy may also be revoked by voting in person at the special
meeting. Simply attending the special meeting without voting will not revoke
your proxy.
Your board of directors is not currently aware of any other business to be
brought before the special meeting. If, however, other matters are properly
brought before the special meeting or there is a proposal for an adjournment or
postponement of the special meeting, the individuals appointed as proxies will
have discretionary authority to vote the shares represented by duly executed
proxies in accordance with their discretion and judgment.
The solicitation of proxies will occur primarily by mail but may include
telephone or oral communications by regular employees of PaineWebber and
PaineWebber's major operating subsidiaries, PaineWebber Incorporated and
Mitchell Hutchins Asset Management Inc., acting without special compensation.
PaineWebber also will request that persons and entities holding shares that are
registered in their own names or in the names of their nominees but that are
beneficially owned by others send proxy materials to, and obtain proxies from,
those beneficial owners. All expenses involved in the solicitation of proxies by
the PaineWebber board of directors will be paid by PaineWebber and will include
reimbursement
21
<PAGE> 30
of brokerage firms and others for expenses in forwarding proxy solicitation
material to the beneficial owners of shares of PaineWebber common stock.
PaineWebber has retained Innisfree M&A Incorporated to assist it in the
solicitation of proxies, using the means referred to above, at an anticipated
cost of $75,000, plus reimbursement of out-of-pocket expenses.
REQUIRED VOTE
The affirmative vote of the holders of a majority of outstanding shares of
PaineWebber common stock entitled to vote at the special meeting is necessary
for the adoption of the merger agreement.
As of 15 September 2000, the directors and executive officers of
PaineWebber owned, in the aggregate, 6,716,515 shares of PaineWebber common
stock, or less than 5% of the shares of PaineWebber common stock outstanding on
that date. Donald B. Marron and Joseph J. Grano, Jr., along with PaineWebber's
two largest stockholders, General Electric Company and its subsidiaries that
hold PaineWebber common stock and The Yasuda Mutual Life Insurance Company, have
entered into voting agreements with UBS AG, described under "The Merger
Agreement -- Stockholder Voting Agreements," obligating themselves to vote "FOR"
the adoption of the merger agreement. These stockholders together beneficially
own and have voting control over approximately 30% of the shares of PaineWebber
common stock.
Under the rules of the New York Stock Exchange, brokers who hold shares in
street name for customers have the authority to vote on "routine" proposals when
they have not received instructions from beneficial owners. Under the rules of
the New York Stock Exchange, brokers are precluded from exercising their voting
discretion with respect to the approval of non-routine matters such as adoption
of the merger agreement and, as a result, absent specific instructions from the
beneficial owner of such shares, brokers are not empowered to vote those shares
with respect to the approval of non-routine proposals (i.e., "broker
non-votes"). Abstentions and properly executed broker non-votes will be treated
as shares that are present and entitled to vote at the special meeting for
purposes of determining whether a quorum exists and will have the same effect as
votes against adoption of the merger agreement.
ADJOURNMENTS OR POSTPONEMENTS
Although it is not expected, the special meeting may be adjourned or
postponed for the purpose of soliciting additional proxies. Any adjournment or
postponement may be made without notice, including by an announcement made at
the special meeting, with the approval of the holders of a majority of the
voting power represented by the outstanding shares of PaineWebber common stock
present in person or represented by proxy at the special meeting, whether or not
a quorum exists. Any signed proxies received by PaineWebber will be voted in
favor of an adjournment or postponement in these circumstances unless a written
note on the proxy by the stockholder directs otherwise. Any adjournment or
postponement of the special meeting for the purpose of soliciting additional
proxies will allow PaineWebber stockholders who have already sent in their
proxies to revoke them at any time before they are used.
22
<PAGE> 31
THE MERGER
BACKGROUND OF THE MERGER
In late 1999, in light of the complementary nature of UBS's and
PaineWebber's operations, executives at UBS began assessing the strategic
rationale of a possible business combination. At that time, however, UBS was
considering a number of different strategic alternatives and made no decision to
pursue a business combination with PaineWebber.
At a two day strategy seminar over 11 April to 12 April 2000, the UBS group
executive board discussed the advantages and disadvantages of a wide range of
potential strategic options for UBS. One of the decisions resulting from this
seminar was the decision that UBS should initiate contact with PaineWebber to
explore the possibility of a business combination.
On 5 May and 12 May 2000, Mr. Arnold and other UBS executives had telephone
conversations with UBS's financial advisors, Wasserstein Perella & Co., to
discuss a possible transaction with PaineWebber. This was followed by a meeting
among Marcel Ospel, the Chief Executive Officer of UBS, Mr. Arnold, Wasserstein
Perella and UBS's legal advisors, Sullivan & Cromwell, in New York on 15 May
2000 to plan for a meeting with Donald B. Marron, the Chairman of the Board of
Directors and Chief Executive Officer of PaineWebber.
On 15 May 2000, Messrs. Marron and Ospel met in New York. The subject of
closer business co-operation between UBS and PaineWebber was discussed, albeit
on a conceptual basis. No firm agreements were discussed and both parties agreed
to talk again.
In the weeks following the 15 May meeting, Mr. Marron and Mr. Ospel spoke
via telephone on several occasions. Mr. Ospel informed Mr. Marron during the
course of these conversations that he was interested in moving forward the
discussion of a possible business combination between UBS and PaineWebber. Mr.
Ospel also suggested another meeting in New York between representatives of
PaineWebber and Mr. Ospel and Markus Granziol, the Chief Executive Officer of
UBS Warburg, at which UBS and PaineWebber would discuss their respective
businesses.
On 13 June 2000, Messrs. Ospel and Granziol met with Messrs. Marron and
Grano, together with Regina A. Dolan, Senior Vice President and Chief
Administrative Officer of PaineWebber, and Mark Vassallo, a Managing Director of
PaineWebber Incorporated, at PaineWebber's offices in New York. The parties
discussed various aspects of their respective companies. These discussions,
although positive, were inconclusive and did not result in a combination
proposal. Both sides agreed to perform more work internally to aid further
discussions. That evening Mr. Marron had dinner with Mr. Ospel.
Following the 13 June 2000 meetings, UBS executives, Wasserstein Perella
and Sullivan & Cromwell participated in discussions and meetings with
PaineWebber executives, PaineWebber's financial advisors, The Blackstone Group
L.P., and PaineWebber's legal advisors, Cravath, Swaine & Moore.
On 20 June 2000, at the request of Mr. Marron, Peter G. Peterson of
Blackstone met with Mr. Ospel in Basel, Switzerland, at which meeting they
discussed UBS's interest in PaineWebber. Mr. Marron met with Mr. Ospel in New
York on 26 June 2000. At this meeting, Mr. Ospel disclosed that he was
considering offering a price for PaineWebber in the range of $71 to $72 per
share. The parties discussed the possible strategic benefits of combining the
operations of PaineWebber and UBS Warburg. Key items were left unresolved,
including the price per share to be offered, the form of consideration, an
exchange ratio and issues concerning retention and incentive payments.
Mr. Marron, Ms. Dolan and Mr. Vassallo met with Mr. Granziol the following
morning, at the request of Mr. Granziol. There were further meetings on the
afternoon of 27 June 2000 involving Mr. Marron, Ms. Dolan and Mr. Vassallo and
Mr. Ospel, Mr. Granziol and Pierre de Weck, the head of UBS Capital. At this
meeting, Mr. Ospel discussed a price for PaineWebber of up to $73 per share.
After these meetings, Goldman, Sachs & Co. was retained as a financial advisor
to PaineWebber and asked to develop a valuation and a list of strategic partners
for PaineWebber for comparative purposes.
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<PAGE> 32
On 28 June 2000, the UBS group executive board met to review the
discussions held to date with PaineWebber and to agree on actions going forward.
The UBS group executive board supported a request by UBS Warburg to continue
exploratory discussions with PaineWebber and to enter into due diligence and
further negotiations.
On 30 June 2000, UBS and PaineWebber entered into a confidentiality
agreement.
On 3 July 2000, the UBS board of directors ratified the decision taken by
the group executive board and gave approval to proceed to negotiations and,
should they be successful, for an offer to be made to PaineWebber.
Beginning on 5 July 2000 and continuing through 8 July 2000, a series of
meetings and telephone conversations occurred among representatives of UBS and
PaineWebber and their respective financial and legal advisors regarding the
general terms of a business combination between UBS and PaineWebber and the
process for completing such a transaction. On 9 July 2000, Sullivan & Cromwell
delivered to Cravath a draft merger agreement. Representatives of UBS and
PaineWebber and their respective legal advisors and accountants engaged in
reciprocal due diligence starting on 9 July 2000 and continuing through the
morning of 11 July 2000. There were a series of meetings and conference calls on
10 July and 11 July 2000 among representatives of UBS and PaineWebber and their
respective financial and legal advisors regarding the terms of the proposed
merger agreement, the voting agreements and related matters.
On the evening of 11 July 2000, the PaineWebber board of directors met to
consider the terms of the proposed merger agreement, the voting agreements and
related matters. At this meeting, Mr. Marron described in detail the discussions
leading to the proposed merger under consideration. Representatives of Cravath
discussed with the directors their fiduciary duties under Delaware law in
connection with consideration of the proposed merger agreement and stockholder
voting agreements. Members of PaineWebber's management discussed with the
directors the strategic rationale for the proposed transaction with UBS and the
results of their due diligence investigation. PaineWebber's financial advisors
made a joint presentation to the directors regarding their financial analysis of
the proposed merger and their financial analysis of comparable and alternative
transactions. Goldman Sachs provided its oral opinion to the PaineWebber board
of directors to the effect that, as of 11 July 2000, subject to various
considerations and exceptions, the consideration to be received by PaineWebber
stockholders, under the terms of the proposed merger agreement, in the
aggregate, was fair, from a financial point of view, to such stockholders. This
opinion was subsequently confirmed in a written opinion dated 12 July 2000. The
terms and conditions of the merger agreement, the stockholder voting agreements
and related agreements were reviewed in detail for the PaineWebber board of
directors by representatives of Cravath. Upon the conclusion of its
deliberations based on the reasons and considerations listed below in
"-- PaineWebber's Reasons for the Merger," the PaineWebber board of directors
unanimously voted to approve the terms of the merger agreement, the stockholder
voting agreements and the related agreements, the execution and delivery of the
merger agreement and related agreements substantially on the terms described and
the transactions contemplated by the merger agreement and the related
agreements, determined that the merger is fair to, and in the best interests of,
PaineWebber and its stockholders, and resolved to recommend that PaineWebber
stockholders vote "FOR" the adoption of the merger agreement. Thereafter, the
legal advisors to UBS and PaineWebber negotiated the final terms of the merger
agreement, which was executed on 12 July 2000. Also on 12 July 2000, each of
General Electric and its subsidiaries that hold PaineWebber common stock and The
Yasuda Mutual Life Insurance Company, PaineWebber's two largest stockholders,
and Messrs. Marron and Grano, which parties own in the aggregate approximately
30% of the outstanding shares of PaineWebber common stock, entered into
stockholder voting agreements with UBS to vote in favor of adoption of the
merger agreement. The execution of the merger agreement and the stockholder
voting agreements was announced by UBS and PaineWebber in a joint press release
on the morning of 12 July 2000.
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<PAGE> 33
PAINEWEBBER'S REASONS FOR THE MERGER
In reaching its decision to approve the merger agreement and the
transactions contemplated by the merger agreement and to recommend that
PaineWebber's stockholders vote "FOR" adoption of the merger agreement, the
PaineWebber board of directors consulted with senior management and
PaineWebber's financial and legal advisors and considered a number of factors
with respect to the merger.
- Merger Consideration. The PaineWebber board of directors considered the
relationship of the merger consideration to the historical market prices
for shares of PaineWebber common stock, including the fact that recent
market prices are at their highest level in over ten years and that the
merger consideration represents a substantial premium over these recent
market prices. In particular, the board noted that the $73.50 per common
share cash consideration to be paid to PaineWebber stockholders electing
to receive cash in exchange for their PaineWebber common stock, subject
to the proration provisions of the merger agreement, represents a premium
of approximately 47% over the closing price of the PaineWebber common
stock on 11 July 2000, the last trading day prior to the announcement of
the merger, and represents a premium of 63.3% over the closing price of
the PaineWebber common stock on 7 July 2000, the last trading day of the
week ending prior to the announcement of the merger.
- Advice From PaineWebber's Financial Advisors. The PaineWebber board of
directors considered the detailed financial and comparative analyses and
presentations made by The Blackstone Group and Goldman Sachs,
PaineWebber's financial advisors, with respect to the merger and the
consideration offered to the holders of PaineWebber common stock in the
merger, which are discussed further below under "-- Opinion of
PaineWebber's Financial Advisors," and Goldman Sachs' oral opinion,
subsequently confirmed in writing, to the effect that, as of the date of
its opinion, the merger consideration to be received by the holders of
PaineWebber common stock, in the aggregate, was fair, from a financial
point of view, to the holders of PaineWebber common stock. The full text
of this opinion is attached to this document as Appendix B.
- The Combined Company. The PaineWebber board of directors considered the
current and prospective competitive environment for financial
institutions generally and the trend toward globalization and
consolidation in the financial institutions industry. The board believed
that a combination of UBS, with its premium content and global reach, and
PaineWebber, with its high net worth private client franchise in the
U.S., would create an even stronger global competitor in the financial
institutions industry and a global leader in asset accumulation,
particularly in the high net worth segment. In addition, the board of
directors believed that PaineWebber would better serve its private
clients through affiliation with a global banking company, such as UBS,
by providing such services as global equity research, direct access to
public and private equity offerings across the world's securities
markets, global trading capabilities and access to derivatives and
structured products. The board of directors also considered that the
merger presents an opportunity for synergies derived from both revenue
enhancement and cost savings in connection with the integration of the
two companies, noting, however, that widespread employee layoffs are not
anticipated in connection with the merger.
- Review of Prospects and Alternative of Remaining Independent. The
PaineWebber board of directors considered PaineWebber's financial
condition, results of operations and business and earnings prospects,
including its prospects if it were to remain independent, and the
increasing costs of competing effectively with major global financial
institutions, including with respect to possible acquisitions.
- Uncertain Availability of Alternative Transactions. The PaineWebber
board of directors considered that, while PaineWebber has been contacted
from time to time in the past by third parties expressing an interest in
a possible transaction with PaineWebber, based on analyses and
presentations by its financial advisors, any third party proposals would
not likely offer consideration per share and other terms more favorable
to PaineWebber's stockholders than those offered by UBS.
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<PAGE> 34
- Certain Terms of the Merger Agreement Relating to Alternative
Transactions. In evaluating the consideration that potential third party
acquirers may be willing to pay for PaineWebber's common stock, the board
of directors noted the fact that PaineWebber did not conduct an auction
process. The board of directors also considered, however, the detrimental
effects that an auction could have on PaineWebber, including disruption
to its financial advisor network and possible organizational instability
that could depress the value of the PaineWebber common stock or its value
to any purchaser. In addition, the board of directors determined that the
following terms of the merger agreement mitigate the possible negative
effects of not conducting such an auction:
- those that permit the board of directors to provide information to,
and engage in discussions or negotiations with, a third party that
makes an unsolicited proposal that has a reasonable probability of
resulting in a superior proposal;
- those that permit the board of directors to withdraw its
recommendation that the stockholders vote in favor of adopting the
merger agreement if, in its good faith judgment, such withdrawal is
necessary to discharge the board's duties under applicable law; and
- those that permit the board of directors to recommend a superior
proposal to the stockholders.
The PaineWebber board of directors also considered the following terms of
the merger agreement:
- those that permit UBS to terminate the merger agreement if the board
of directors withdraws its recommendation or recommends a superior
proposal;
- those that permit UBS to amend the merger agreement, including to
restructure the merger, in response to a competing offer; and
- those that require that PaineWebber pay a termination fee to UBS if
the merger agreement is terminated under some circumstances.
The board of directors noted that the termination payment provisions of
the merger agreement could have the effect of discouraging alternative
proposals for a business combination with PaineWebber. On balance,
however, the board of directors determined that the amount of the fee
that PaineWebber may be obligated to pay, and the circumstances under
which it may be payable, are typical for transactions of this size and
type, are not likely to discourage such proposals and were a necessary
aspect of assuring UBS's entry into the merger agreement.
- Voting Agreements. The PaineWebber board of directors considered:
- the stockholder voting agreements pursuant to which some of
PaineWebber's stockholders, who own, in the aggregate, approximately
30% of the outstanding shares of PaineWebber common stock, have agreed
to vote for the adoption of the merger agreement and to retain all
shares of PaineWebber common stock held by them and not grant to any
third party the right to vote those shares; and
- the provisions of the merger agreement that require PaineWebber to
hold a meeting at which PaineWebber stockholders will consider the
adoption of the merger agreement even if PaineWebber's board of
directors withdraws its recommendation or recommends a superior
proposal.
The board of directors noted that such voting agreements and provisions
of the merger agreement could have the effect of discouraging alternative
proposals for a business combination with PaineWebber. However, the board
of directors also noted that such voting agreements and provisions of the
merger agreement were a necessary aspect of assuring UBS's entry into the
merger agreement. After considering the advice of its advisors, including
the advice of an independent proxy soliciting firm, the board of
directors determined that such voting agreements and provisions of the
merger agreement were not likely to preclude a superior alternative
proposal for a business combination with PaineWebber.
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<PAGE> 35
- Stockholders' Ability to Elect Stock Consideration. The board of
directors considered the ability of PaineWebber's stockholders to elect
to receive UBS ordinary shares in connection with the merger and,
thereby, to participate in the potential future growth and profitability
of the combined company. The board of directors also considered the fact
that the merger agreement does not provide for adjustment of this
consideration if the price of UBS ordinary shares changes and that,
accordingly, the value of such consideration could fluctuate based on the
performance of UBS ordinary shares prior to the closing. However, the
board of directors believed that the risk that stockholders that elect to
receive UBS ordinary shares will not be protected against declines in the
price of these shares prior to closing would be offset by their ability
to participate fully in any appreciation in the value of UBS ordinary
shares during this time. The board of directors further noted that
approximately 50% of the transaction value, based on the closing price of
UBS ordinary shares on 11 July 2000, is represented by the $73.50 per
share cash component of the merger consideration, which is fixed. In
addition, the board of directors considered the expectation of the
parties that the share component of the merger consideration will
generally be tax-free for PaineWebber's stockholders.
- Sales of UBS Ordinary Shares Following the Consummation of the
Merger. The board of directors considered the limits, whether legal,
contractual or otherwise, that may be placed on some stockholders with
respect to the holding of shares in foreign private issuers, such as UBS,
and the impact that these limits may have on the trading price of UBS
ordinary shares following the closing. However, the board of directors
also considered UBS's willingness to continue its share repurchase
program, following the announcement of the merger, to provide liquidity
and promote stability in the market for UBS ordinary shares. It should be
noted, however, for legal reasons UBS will not carry out its repurchase
program during the proxy solicitation and cash election periods relating
to the merger.
- Limited Closing Conditions. The board of directors considered the
limited nature of the closing conditions included in the merger
agreement, including regulatory consents and requisite approvals of UBS's
and PaineWebber's respective stockholders. In that regard, the board of
directors considered the likelihood that the merger would be approved by
requisite regulatory authorities.
- Dissenters' Rights. The board of directors noted that dissenters'
appraisal rights may be exercised pursuant to the terms of the merger
agreement in accordance with relevant provisions of Delaware law.
- Employee Compensation and Benefits. The board of directors considered
the provisions of the merger agreement and other employment arrangements
that protect the benefits, compensation, employment, severance and
termination plans or other arrangements afforded to our employees,
including our executive officers. The board also considered the terms of
the employment arrangement with Mr. Marron, including the provisions
regarding a private equity investment fund. See "Interests of Certain
Persons in the Merger -- Employment Agreements -- The Private Equity
Investment Fund." The board of directors also considered the agreement of
PaineWebber and UBS that PaineWebber will offer to enter into a retention
program with its employees, particularly financial advisors, providing
for retention payments in an aggregate amount estimated at $875 million.
The foregoing discussion of the information and factors considered by the
PaineWebber board of directors in making its decision is not exhaustive, but
includes all the material factors considered by the PaineWebber board of
directors. In view of the variety of material factors considered in connection
with its evaluation of the merger, the PaineWebber board of directors did not
find it practicable to, and did not, quantify or otherwise assign relative or
specific weight to any of these factors, and individual directors may have given
different weights to different factors.
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<PAGE> 36
RECOMMENDATION OF PAINEWEBBER'S BOARD OF DIRECTORS
After careful consideration, the PaineWebber board of directors has
unanimously determined that the merger agreement is advisable and in the best
interests of PaineWebber and its stockholders, has unanimously determined that
the merger is fair to, and in the best interests of, the stockholders of
PaineWebber, has unanimously approved the merger agreement and unanimously
recommends that PaineWebber stockholders vote "FOR" the adoption of the merger
agreement.
OPINION OF PAINEWEBBER'S FINANCIAL ADVISORS
OPINION OF GOLDMAN SACHS
On 11 July 2000, at the meeting of PaineWebber's board of directors,
Goldman Sachs delivered to PaineWebber's board of directors its oral opinion
that, as of that date and based upon and subject to the matters set forth in the
opinion and such other matters as Goldman Sachs considered relevant, the
consideration to be received for the shares of PaineWebber common stock in the
merger, in the aggregate, was fair, from a financial point of view, to the
holders of PaineWebber common stock. The oral opinion of Goldman Sachs was
subsequently confirmed in a written opinion dated 12 July 2000.
A COPY OF THE GOLDMAN SACHS OPINION IS ATTACHED AS APPENDIX B TO THIS
DOCUMENT. YOU SHOULD READ THE OPINION IN ITS ENTIRETY FOR INFORMATION ABOUT THE
ASSUMPTIONS MADE, AND MATTERS CONSIDERED, BY GOLDMAN SACHS IN RENDERING ITS
OPINION.
You should consider the following when reading the discussion of the
opinion of Goldman Sachs in this document:
- Goldman Sachs' advisory services and opinion were provided to
PaineWebber's board of directors for the information and assistance of
PaineWebber's board of directors in connection with its consideration of
the merger and was directed only to the fairness, from a financial point
of view, to the holders of PaineWebber common stock of the consideration
to be received for the shares of PaineWebber common stock in the merger;
and
- Goldman Sachs' opinion does not constitute a recommendation as to how
holders of PaineWebber common stock should vote with respect to the
merger or the form of consideration any holder should elect to receive in
the merger.
Although Goldman Sachs evaluated the fairness, from a financial point of
view, to the holders of PaineWebber common stock of the consideration to be
received for the shares of PaineWebber common stock in the merger, the
consideration itself was determined by PaineWebber and UBS through arm's-length
negotiations. PaineWebber did not provide specific instructions to, or place any
limitations on, Goldman Sachs with respect to the procedures to be followed or
factors to be considered by Goldman Sachs in performing its analyses or
providing its opinion.
In connection with its opinion, Goldman Sachs reviewed, among other things:
- the merger agreement;
- annual reports to stockholders and annual reports on Form 10-K of
PaineWebber and annual reports to shareholders of UBS for the five fiscal
years ended 31 December 1999;
- the registration statement on Form 20-F UBS filed on 9 May 2000;
- certain interim reports to stockholders of PaineWebber and UBS and
quarterly reports on Form 10-Q of PaineWebber; and
- certain internal financial analyses and forecasts for PaineWebber and UBS
prepared by their respective managements, including certain cost savings
and operating synergies projected by the management of UBS to result from
the merger.
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<PAGE> 37
Goldman Sachs also held discussions with members of the managements of
PaineWebber and UBS regarding the strategic rationale for, and the potential
benefits of, the merger and the past and current business operations, financial
condition and future prospects of their respective companies.
In addition, Goldman Sachs:
- reviewed the reported price and trading activity for the shares of
PaineWebber common stock and the UBS ordinary shares;
- compared certain financial and stock market information for PaineWebber
and UBS with similar information for certain other public companies;
- reviewed the financial terms of certain recent business combinations in
the broker-dealer industry specifically and in other industries
generally; and
- performed certain other studies and analyses that Goldman Sachs
considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed such accuracy and
completeness for purposes of rendering its opinion. Goldman Sachs did not make
an independent evaluation or appraisal of the assets and liabilities of
PaineWebber or UBS or any of their respective subsidiaries, including any
derivative or off balance sheet assets or liabilities of PaineWebber or UBS or
any of their respective subsidiaries, and Goldman Sachs was not furnished with
any such evaluation or appraisal. Goldman Sachs is not expert in the valuation
of loan portfolios for purposes of assessing the adequacy of the related
allowances for losses and has assumed that these allowances for UBS are adequate
to cover all such losses. In addition, Goldman Sachs was not requested to
solicit, and did not solicit, interest from other parties with respect to an
acquisition of or other business combination with PaineWebber. Goldman Sachs
also assumed that all material governmental, regulatory or other consents and
approvals necessary for the consummation of the transaction contemplated by the
merger agreement will be obtained without any adverse effect on PaineWebber, on
UBS or on the contemplated benefits of the merger.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses described below or of the summary set forth above,
without considering the analyses as a whole, could create an incomplete view of
the processes underlying the opinion of Goldman Sachs. In arriving at its
opinion, Goldman Sachs considered the results of all the analyses described
below and did not attribute any particular weight to any factor or analysis
considered by it; rather, Goldman Sachs made its determination as to fairness on
the basis of its experience and professional judgment after considering the
results of all the analyses. No company used in the following analyses as a
comparison is directly comparable to PaineWebber or UBS.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs is
familiar with PaineWebber, having provided certain investment banking services
to PaineWebber from time to time, including having acted as PaineWebber's
financial advisor in connection with PaineWebber's acquisition of J.C. Bradford
& Co., LLC in June 2000, having acted as co-manager in PaineWebber's offering of
$525 million of 6.38% Notes due 2004 in May 1999, having acted as co-manager in
PWG Capital Trust II's $175 million offering of 8.30% Trust Preferred Securities
in March 1997, having acted as co-manager in PWG Capital Trust I's $175 million
offering of 8.08% Trust Preferred Securities in December 1996 and having acted
as its financial advisor in connection with, and having participated in certain
of the negotiations leading to, the merger agreement. Goldman Sachs also has
provided certain investment banking services to UBS from time to time and may
provide investment banking services to UBS in the future. Goldman Sachs provides
a full range of financial advisory and securities services and, in the course of
its normal trading activities, does from time to time effect transactions in and
hold securities, including derivative securities, of PaineWebber and/or UBS for
its own account and for the accounts of customers.
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<PAGE> 38
SUMMARY OF ANALYSES BY BLACKSTONE AND GOLDMAN SACHS
At the meeting of PaineWebber's board of directors on 11 July 2000,
Blackstone and Goldman Sachs made a joint presentation to the board of
directors. The following is a summary of the material financial analyses in the
joint presentation to PaineWebber's board of directors. The following
quantitative information, to the extent it is based on market data, is based on
market data as it existed at or about 7 July 2000 and is not necessarily
indicative of current market conditions. You should understand that the order of
analyses and the results derived from these analyses described below do not
represent the relative importance or weight given to these analyses by
Blackstone and Goldman Sachs. The summary of the financial analyses includes
information presented in tabular format. In order to understand fully the
financial analyses used by Blackstone and Goldman Sachs, these tables must be
read together with the text of each summary. The tables alone do not describe
completely the financial analyses.
Historical Trading Values Analysis
Blackstone and Goldman Sachs reviewed certain historical stock price and
price-to-earnings multiple information for PaineWebber common stock. Blackstone
and Goldman Sachs compared PaineWebber common stock and PaineWebber's
price-to-earnings multiple on a weekly basis from 4 July 1997 through 7 July
2000 with the following:
- the S&P 500 index;
- a large and mid-size capitalization broker-dealer index; and
- a small capitalization broker-dealer index.
Selected Companies Analysis
Blackstone and Goldman Sachs reviewed and compared certain financial
information for PaineWebber to corresponding financial information, ratios and
public market multiples for the following six large and mid-size capitalization,
publicly traded broker-dealers:
- Morgan Stanley Dean Witter & Co.;
- Merrill Lynch & Co., Inc.;
- Goldman, Sachs & Co.;
- Lehman Brothers Holdings Inc.;
- Bear, Stearns & Co. Incorporated; and
- Donaldson, Lufkin & Jenrette Inc.
Blackstone and Goldman Sachs also conducted this review and comparison with
respect to nine small capitalization, publicly traded broker-dealers.
The selected companies were chosen because they are publicly traded
broker-dealer companies with operations that, for purposes of analysis, may be
considered similar to PaineWebber. Blackstone and Goldman Sachs calculated and
compared various financial information, multiples and ratios, including:
- closing share price on 7 July 2000 as a percentage of 52-week high share
price;
- estimated 2000 and 2001 price to Institutional Brokers Estimate System
estimated earnings ratios;
- Institutional Brokers Estimate System five-year growth rate estimates;
- ratio of 2001 estimated price to earnings ratio to Institutional Brokers
Estimate System's five-year growth rate estimate;
- ratio of share price to book value;
- ratio of assets to equity;
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<PAGE> 39
- ratio of compensation to pre-tax income and compensation;
- return on average assets for latest 12 months; and
- return on average equity for latest 12 months.
The results of these analyses are summarized as follows:
<TABLE>
<CAPTION>
SELECTED LARGE AND MID-SIZE
CAPITALIZATION SELECTED SMALL-CAPITALIZATION
BROKER-DEALER COMPANIES BROKER/DEALERS
----------------------------- -----------------------------
RATIO/MULTIPLE PAINEWEBBER RANGE MEDIAN MEAN RANGE MEDIAN MEAN
-------------- ----------- ----------- ------- ----- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
7 July 2000 Stock Price as
a Percentage of 52-Week
High..................... 86% 64%-99% N/A N/A 41%-100% N/A N/A
Estimated 2000 Price/
Earnings Ratio........... 11.0x 7.5x-18.1x 12.5x 12.7x 7.6x-43.4x 9.5x 14.3x
Estimated 2001 Price/
Earnings Ratio........... 9.6x 6.7x-17.1x 11.9x 12.1x 6.9x-29.5x 9.3x 12.2x
Institutional Brokers
Estimate System Estimated
Five-Year Growth Rate.... 10.5% 11.8%-13.5% 12.8% 12.7% 10.0%-25.0% 11.5% 12.8%
Estimated 2001 Price/
Earnings Ratio to
Estimated Five-Year
Growth Rate.............. 0.9x 0.5x-1.3x 0.9x 1.0x 0.5x-1.6x 0.9x 0.9x
Share Price/Book Ratio..... 2.15x 1.58x-5.99x 2.96x 3.24x 1.24x-4.46x 1.87x 2.04x
Assets/Equity Ratio........ 20.8x 23.5x-42.3x 29.1x 30.8x 1.4x-14.5x 7.0x 7.1x
Compensation/Pre-Tax Income
and Compensation......... 75.3% 52.7%-76.5% 69.9% 67.6% 74.0%-88.6% 80.6% 81.1%
Return on Average Assets
for Last 12 Months....... 1.06% 0.42%-1.45% 0.82% 0.86% 0.93%-8.68% 2.78% 3.53%
Return on Average Equity
for Last 12 Months....... 22.8% 18.4%-33.6% 24.7% 25.2% 12.5%-25.6% 18.2% 18.5%
</TABLE>
Discounted Cash Flow Analysis
Blackstone and Goldman Sachs performed a discounted cash flow analysis of
the projected distributable cash flows of PaineWebber for the period of 30 June
2000 through 2005 using the terminal value method. The following assumptions
were used to generate the cash flow projections:
- PaineWebber management projections for the last six months of 2000 and
for the year 2001;
- Institutional Brokers Estimate System estimated long-term growth rate of
10.5%; and
- a constant capital structure with a 5.0% ratio of equity to assets.
In calculating a range of implied equity value for PaineWebber on a per
share basis, Blackstone and Goldman Sachs used two different terminal value
methodologies: one based on multiples of estimated 2006 net income and one based
on multiples of estimated year-end 2005 book value. In both cases, the discount
rates ranged from 11.0% to 16.0%.
The terminal value methodology based on net income used multiples that
ranged from 9.0x to 17.0x. This analysis resulted in implied per share values
for PaineWebber common stock that ranged from $40.09 to $78.24.
The terminal value methodology based on book value used multiples that
ranged from 2.0x to 3.5x. This analysis resulted in implied per share values for
PaineWebber common stock that ranged from $39.91 to $73.18.
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Analysis of Transaction Price
Blackstone and Goldman Sachs reviewed the premium and financial multiples
and other information implied in the transaction price, on the assumption that
each share of PaineWebber common stock will be exchanged for a consideration
equivalent to $73.50. On this assumption, Blackstone and Goldman Sachs
calculated an implied transaction premium of 63.3% over the closing price of
PaineWebber common stock on 7 July 2000 and an aggregate fully diluted equity
consideration in the merger of $12.399 billion.
The ratios obtained through this analysis are as follows:
<TABLE>
<CAPTION>
MULTIPLES
---------
<S> <C>
Aggregate Consideration as a Multiple of Net Revenues:
Latest 12 Months Ending 31 March 2000..................... 2.0x
First Half of 2000 Annualized............................. 2.1
PaineWebber Management Projections for 2001............... 1.6
Aggregate Consideration as a Multiple of Net Income:
Latest 12 Months Ending 31 March 2000..................... 22.3x
PaineWebber Management Projections for 2000............... 20.3
PaineWebber Management Projections for 2001............... 17.2
Institutional Brokers Estimate System Estimates for
2000................................................... 19.7
Institutional Brokers Estimate System Estimates for
2001................................................... 17.1
P/E Multiple/Growth Rate:
PaineWebber Management Projection for 2001................ 1.6x
Institutional Brokers Estimate System Estimated Long-Term
Growth Rate for 2001................................... 1.6
Aggregate Consideration as a Multiple of Equity (30 June
2000 PaineWebber Management Estimate):
U.S. GAAP Book Value...................................... 3.9x
Tangible Book Value....................................... 4.9
Premium to Net Revenues:
Latest 12 Months Ending 31 March 2000..................... 1.6x
First Half of 2000 Annualized............................. 1.6
PaineWebber Management Projections for 2001............... 1.3
</TABLE>
Selected Transactions Analysis
Blackstone and Goldman Sachs analyzed certain information relating to six
transactions since 1997 involving the acquisition of broker-dealers where the
acquirer was a non-commercial bank and eighteen transactions where the acquirer
was a commercial bank.
Blackstone's and Goldman Sachs' analyses of the selected transactions
compared the following to the results for the proposed merger, both excluding
and including as part of the total value of the merger retention program for key
employees of PaineWebber, particularly financial advisors, providing for
retention payments estimated at $875 million:
- premium over market price five business days prior to announcement;
- aggregate consideration as a multiple of latest twelve-months revenues;
- aggregate consideration as a multiple of latest twelve-months net income;
- aggregate consideration as a multiple of projected revenues and net
income for the year following the year of announcement of the
transaction, without synergies;
- aggregate consideration as a multiple of projected revenues and net
income for the year following the year of announcement of the
transaction, with estimated synergies;
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- aggregate consideration as a multiple of the book value; and
- estimated retention pool as a percentage of the latest twelve-months
revenues.
Other Factors and Analyses
In its presentation to PaineWebber's board of directors, Blackstone and
Goldman Sachs reviewed other factors and analyses, including:
- published research analyst views and comments regarding UBS;
- an analysis of the UBS ordinary share price compared to a composite of
selected European banks on a weekly basis from 4 July 1997 through 7 July
2000;
- an analysis of the one year forward Institutional Brokers Estimate System
estimated price to earnings ratio of UBS compared to a composite of
selected European banks on a daily basis from 7 July 1999 through 7 July
2000; and
- an analysis of PaineWebber's stockholder base.
Blackstone and Goldman Sachs prepared these analyses solely for the
purposes of advising PaineWebber's board of directors, and they do not purport
to be appraisals, nor do they necessarily reflect the prices at which businesses
or securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by these analyses. Because
these analyses are inherently subject to uncertainty and are based upon numerous
factors or events beyond the control of the parties or their respective
advisors, none of PaineWebber, UBS, Goldman Sachs or Blackstone assumes
responsibility if future results are materially different from those forecasted.
As described above, the opinion of Goldman Sachs to the PaineWebber board of
directors was one of many factors taken into consideration by the PaineWebber
board in making its determination to approve the merger agreement. The foregoing
summary does not purport to be a complete description of the analyses performed
by Blackstone and Goldman Sachs.
PaineWebber retained Blackstone because of its experience and expertise.
Blackstone has an internationally recognized merger and acquisition advisory
business. Blackstone, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions. Blackstone is familiar with PaineWebber, having
provided certain investment banking services to PaineWebber from time to time
and having acted as its financial advisor in connection with the merger.
Pursuant to a letter agreement dated 11 July 2000, PaineWebber engaged
Blackstone to act as its financial advisor with respect to a possible
transaction involving a merger or sale of substantially all of the shares or
assets of PaineWebber. Pursuant to the terms of the letter, PaineWebber has
agreed to pay Blackstone a success fee of $20,000,000 payable upon the
consummation of the merger. In addition, PaineWebber has agreed to reimburse
Blackstone for its reasonable out-of-pocket expenses, including fees and
disbursements of Blackstone's attorneys, and to indemnify Blackstone and certain
related persons against certain liabilities that may arise out of its
engagement.
Pursuant to a letter agreement dated 11 July 2000, PaineWebber engaged
Goldman Sachs to act as its exclusive financial advisor in connection with the
possible sale of all or a majority of PaineWebber, except that PaineWebber has
engaged Blackstone in connection with the transaction pursuant to the letter
agreement described above. Pursuant to the terms of this letter agreement, if
the merger is consummated, PaineWebber will pay Goldman Sachs a transaction fee
of $20,000,000. In addition, PaineWebber has agreed to reimburse Goldman Sachs
periodically, upon request, and upon consummation of the merger or upon
termination of its services pursuant to the letter agreement, for its reasonable
out-of-pocket expenses, including the fees and disbursements of Goldman Sachs'
attorneys, plus any sales, use or similar taxes, including additions to those
taxes, if any arising in connection with any matter referred to in the letter
agreement. PaineWebber has also agreed to indemnify Goldman Sachs and certain
related persons against certain liabilities in connection with its engagement,
including liabilities under the federal securities laws.
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UBS'S REASONS FOR THE MERGER
At its meeting on 3 July 2000, the UBS board of directors approved the
merger and authorized UBS management to negotiate and enter into the merger
agreement. In the course of making its decision to approve the merger, the UBS
board of directors consulted with UBS's management, as well as its financial
advisors, Wasserstein Perella and UBS Warburg, and outside legal counsel, and
considered a number of factors. The material factors considered are summarized
below.
- The consistency of the merger with UBS's established strategic and
financial goals.
- The strategic goals included:
- enhancing UBS's position as the world's leading provider of wealth
management services in the United States; and
- increasing UBS's market share of investment banking services by
obtaining increased distribution.
- The financial goals included:
- achieving a 15-20% return on equity on a yearly basis;
- maintaining continued double-digit growth of cash earnings per
share on a yearly basis;
- maintaining a low cost to income ratio; and
- generating a net increase in assets under management.
The UBS board of directors determined that the merger was fully consistent
with these goals. In making this determination, the UBS board of directors also
considered the following:
- The U.S. is the biggest and fastest growing wealth management market in
the world, and PaineWebber's 2.7 million U.S. affluent clients offer an
opportunity to leverage UBS's premium content.
- PaineWebber has targeted affluent clients successfully; it has the
highest average account size of any major U.S. broker, almost 40% higher
than the nearest competitor, and has increased its share of the U.S.
affluent market over the last decade. Its market share of U.S. household
liquid financial assets has more than doubled since 1990.
- Over the last five years, PaineWebber has delivered consistent, strong
growth in client assets, profits and market share, with record profits
every year and an earnings per share compound annual growth rate of 32%.
- The merger is expected to be accretive to cash earnings per share for UBS
beginning in 2001.
- The prices paid in recent comparable transactions.
- Synergies resulting from the merger are estimated at $425 million per
year pre-tax and are expected to be fully achieved by 2002; approximately
55% of the synergies are expected to be derived from revenue enhancements
and 45% from cost savings.
- Restructuring costs associated with the merger are expected to be $400
million, mainly relating to the integration of U.S. operations.
- Senior management of PaineWebber will be retained following the merger,
and employment contracts and an incentive plan comprised of stock and
cash will be set aside for key PaineWebber professionals to be paid out
over the next three years.
- General Electric and several of its subsidiaries and The Yasuda Mutual
Life Insurance Company, PaineWebber's two largest stockholders, which
together own approximately 30% of the outstanding PaineWebber shares,
would enter into agreements with UBS to vote in favor of adoption of the
merger agreement.
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- The merger would require UBS's shareholders to approve the issuance of
the UBS ordinary shares that will be issued in the merger (which was
accomplished on 7 September 2000).
- The merger will require approval by PaineWebber's stockholders and
various regulatory bodies.
In view of the wide variety of factors considered by the UBS board of
directors in connection with its evaluation of the merger, the board of
directors did not consider it practical to, and did not attempt to, quantify,
rank or otherwise assign relative or specific weights to the specific factors
described above, and individual members of the board of directors may have given
different weights to different factors.
UBS SHAREHOLDERS MEETING
On 7 September 2000, UBS convened an extraordinary general meeting of its
shareholders at which the shareholders approved an increase in share capital to
permit the issuance of UBS ordinary shares in exchange for shares of PaineWebber
common stock in the merger and pursuant to PaineWebber stock options and stock
based awards. The shareholders also approved the board of directors' proposal
that on 5 October 2000 UBS shareholders of record as of 2 October 2000 be paid a
partial dividend of CHF 4.50 for the first nine months of the year 2000.
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REQUIRED REGULATORY APPROVALS
The consummation of the merger is subject to a number of regulatory
approvals that are described below. While UBS has no reason to believe that it
will not be able to obtain these regulatory approvals in a timely manner and
without the imposition of burdensome conditions, it cannot be certain that these
approvals will be obtained within the period of time contemplated by the merger
agreement or on conditions that would not be detrimental to the combined company
or at all.
ANTITRUST
Transactions such as the merger are reviewed by the United States
Department of Justice and the United States Federal Trade Commission to
determine whether they comply with applicable antitrust laws. Under the
provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the related rules and regulations, the merger may not be completed
until applicable waiting-period requirements have been satisfied. UBS and
PaineWebber each filed notification reports with the Department of Justice and
Federal Trade Commission under the Hart-Scott-Rodino Act on 28 July 2000. The
waiting period under the Hart-Scott-Rodino Act was terminated on 10 August 2000,
indicating that neither agency presently has significant antitrust concerns
regarding the merger.
The Department of Justice and the Federal Trade Commission frequently
scrutinize the legality under the antitrust laws of transactions such as the
merger. At any time before or after the merger, the Department of Justice or the
Federal Trade Commission could take such action under the antitrust laws as it
deems necessary or desirable in the public interest, including seeking to enjoin
the merger or seeking divestiture of substantial assets of UBS or PaineWebber or
their subsidiaries. Private parties and state attorneys general may also bring
an action under the antitrust laws under certain circumstances. There can be no
assurance that a challenge to the merger on antitrust grounds will not be made
or, if such a challenge is made, of the result.
INSURANCE REGULATIONS
The insurance laws and regulations of U.S. jurisdictions generally require
that, before a party acquires control of an insurance company doing business in
such a jurisdiction by acquiring or merging with the holding company of the
insurance company, the acquiror must obtain the prior approval of, or file a
notice with, the jurisdiction. The acquiror generally must also satisfy waiting
periods.
Because PaineWebber operates a California insurance company, the completion
of the merger is subject to the approval of the insurance department of
California. An application for this approval has been submitted.
BANKING REGULATIONS
PaineWebber operates a New Jersey trust company, a Tennessee trust company,
a Puerto Rican trust company, and owns a dormant Utah industrial loan bank.
Accordingly, the banking regulators of New Jersey, Tennessee, Puerto Rico and
Utah must each approve the merger. Applications have been submitted to each of
these regulators to obtain the required approvals.
PaineWebber also currently operates an Article XII investment company, a
limited-purpose banking organization in the State of New York. PaineWebber
intends to liquidate this company before the merger is completed. On 1 September
2000, PaineWebber obtained a court order declaring the business of this company
closed, directing this company to wind up its affairs and to take appropriate
steps to complete its liquidation, and ordering publication of notice of its
dissolution. Notice was published in the New York Times (National Edition) on 6
September 2000, requiring the submission of claims against this company on or
before 1 October 2000. If PaineWebber does not complete the liquidation of this
company before the merger, or otherwise dispose of its interest in this company,
UBS would have to obtain the approval of the New York bank regulatory
authorities before acquiring control of PaineWebber.
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BROKER-DEALER REGULATIONS
Because PaineWebber owns several registered broker-dealers, UBS and
PaineWebber must make certain filings with, or give notifications to, a number
of U.S. federal, state and foreign governmental and self-regulatory agencies,
and securities and other exchanges, before the merger is completed.
OTHER APPLICATIONS AND NOTICES
UBS and PaineWebber conduct operations in a number of jurisdictions where
other regulatory filings or approvals may be required or advisable in connection
with the completion of the merger, including the United Kingdom, in which
PaineWebber currently operates a bank. UBS and PaineWebber are currently in the
process of reviewing whether other filings or approvals may be required or
desirable in other jurisdictions. UBS and PaineWebber have no reason to believe
that any of these requirements cannot be satisfied within the time period
contemplated by the merger agreement, but they may not complete some of these
filings or obtain some of these approvals, which may not, as a matter of
practice, be required to be obtained prior to the effectiveness of a merger
transaction, prior to the effective time of the merger.
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TAXATION
The following discussion sets forth the material United States federal
income and Swiss tax consequences of the merger and of the ownership of UBS
ordinary shares by a holder that holds PaineWebber common stock, and will hold
UBS ordinary shares, as capital assets. This discussion represents the views of
Sullivan & Cromwell, counsel to UBS, and Cravath, Swaine & Moore, counsel to
PaineWebber, insofar as it relates to the U.S. federal income tax consequences
of the merger. This discussion also represents the views of Sullivan & Cromwell
insofar as it relates to the U.S. federal income tax consequences associated
with owning the UBS ordinary shares received in the merger. In addition, this
discussion represents the views of Baer & Karrer, counsel to UBS, as to matters
of Swiss tax law.
This discussion does not address the tax consequences to holders of
PaineWebber common stock or UBS ordinary shares in particular circumstances,
such as tax-exempt entities, certain insurance companies, broker-dealers,
traders in securities that elect to mark to market, holders liable for
alternative minimum tax, holders that actually or constructively own 10% or more
of the voting stock of UBS AG, holders that hold PaineWebber common stock or UBS
ordinary shares as part of a straddle or a hedging or conversion transaction or
holders whose functional currency is not the U.S. dollar. This discussion also
does not apply to holders who acquired their PaineWebber common stock or UBS
ordinary shares, as applicable, pursuant to the exercise of employee stock
options or otherwise as compensation or through a tax-qualified retirement plan.
This discussion is based on the tax laws of Switzerland and the United States,
including the Internal Revenue Code of 1986, as amended, its legislative
history, existing and proposed regulations under the Internal Revenue Code,
published rulings and court decisions, as in effect on the date of this
document, as well as the Convention Between the United States of America and
Switzerland, which we call the "Treaty," all of which are subject to change or
change in interpretation, possibly with retroactive effect.
For purposes of this discussion, a "U.S. holder" is any beneficial owner of
PaineWebber common stock or UBS ordinary shares that is
- a citizen or resident of the United States,
- a corporation or other entity taxable as a corporation organized under
the laws of the United States or any political subdivision of the United
States,
- an estate the income of which is subject to United States federal income
tax without regard to its source, or
- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust.
For purposes of this discussion, an "eligible PaineWebber stockholder" is
any beneficial owner of PaineWebber common stock that will not be a "five
percent transferee stockholder" as defined in United States Treasury Regulation
Section 1.367(a)-3(c)(5)(ii) or who enters into a five-year gain recognition
agreement in the form provided in United States Treasury Regulation Section
1.367(a)-8(b). A five percent transferee stockholder is a person that holds
PaineWebber common stock and that will immediately after the merger hold at
least five percent of the outstanding shares of UBS AG capital stock by vote or
by value.
The discussion does not generally address any aspects of United States
taxation other than federal income taxation or any aspects of Swiss taxation
other than income and capital taxation. Holders are urged to consult their tax
advisors regarding the United States federal, state and local and the Swiss and
other tax consequences of owning and disposing of PaineWebber common stock and
UBS ordinary shares.
THE MERGER -- SWISS TAXATION
There are no Swiss tax consequences as a result of the merger to holders of
PaineWebber common stock that are not residents of Switzerland for Swiss income
tax purposes or otherwise subject to a limited
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tax liability by virtue of maintaining a permanent establishment in Switzerland.
Any Swiss stamp duties potentially becoming due in connection with the merger
will be the obligation of, and borne by, UBS.
THE MERGER -- UNITED STATES FEDERAL INCOME TAXATION
In the opinion of Cravath, Swaine & Moore, counsel to PaineWebber, and
Sullivan & Cromwell, counsel to UBS:
- the merger will qualify as a "reorganization" under Section 368(a) of the
Internal Revenue Code,
- UBS, Neptune Merger Subsidiary and PaineWebber will each be a "party" to
such reorganization under Section 368(b) of the Internal Revenue Code,
- UBS will, as to each eligible PaineWebber stockholder, be treated as a
corporation under Section 367(a) of the Internal Revenue Code, and
- an eligible PaineWebber stockholder will not recognize gain or loss for
United States federal income tax purposes in connection with the receipt
of UBS ordinary shares exchanged for PaineWebber common stock pursuant to
the merger, except with respect to cash received in lieu of fractional
UBS ordinary shares.
The following material United States federal income tax consequences result
from the foregoing:
U.S. HOLDERS
Eligible PaineWebber Stockholders Who Receive Only UBS Ordinary Shares
An eligible PaineWebber stockholder that receives only UBS ordinary shares
in the merger will not recognize gain or loss with respect to the receipt of UBS
ordinary shares, except in respect of cash received for fractional shares, as
described below. The basis for United States federal income tax purposes in the
UBS ordinary shares that an eligible PaineWebber stockholder receives in the
merger will be the same as such stockholder's basis in the surrendered
PaineWebber common stock. An eligible PaineWebber stockholder will include in
its holding period of the UBS ordinary shares its holding period of the
surrendered PaineWebber common stock.
Eligible PaineWebber Stockholders Who Receive Only Cash
An eligible PaineWebber stockholder that receives only cash in the merger
generally will recognize capital gain to the extent the amount of cash received
in the merger exceeds such stockholder's basis in PaineWebber common stock, or
loss to the extent such stockholder's basis in PaineWebber common stock exceeds
the amount of cash received in exchange for PaineWebber common stock.
Eligible PaineWebber Stockholders Who Receive UBS Ordinary Shares and Cash
An eligible PaineWebber stockholder that receives both UBS ordinary shares
and cash in the merger, without regard to any cash received in lieu of
fractional UBS ordinary shares, will recognize any gain (but not loss) realized
but only to the extent of cash received in the merger. An eligible PaineWebber
stockholder who owns different blocks of PaineWebber common stock, each with a
different tax basis, must compute gain or loss separately for each block of such
stock. Any loss realized on one block of PaineWebber common stock may not be
netted against gain realized on another block of such stock. The basis for
United States federal income tax purposes in the UBS ordinary shares that an
eligible PaineWebber stockholder receives in the merger will be the same as such
stockholder's basis in the surrendered PaineWebber common stock, decreased by
the amount of cash received in the merger and increased by the amount of gain
recognized in the merger. An eligible PaineWebber stockholder will include in
its holding period of the UBS ordinary shares its holding period of the
surrendered PaineWebber common stock. Cash received in lieu of fractional UBS
ordinary shares is treated separately, as discussed below.
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Cash Received in Lieu of Fractional UBS Ordinary Shares
An eligible PaineWebber stockholder that receives cash in lieu of a
fractional UBS ordinary share will be treated as first having received a
fractional UBS ordinary share and then having exchanged the fractional UBS
ordinary share for cash. An eligible PaineWebber stockholder will recognize gain
(or loss) to the extent the cash received in lieu of a fractional UBS ordinary
share exceeds (or is less than) its basis in the deemed-received fractional UBS
ordinary share, taking into account the adjustment in the basis, if any,
resulting from the receipt of cash other than for fractional UBS ordinary shares
as described above.
Character of Gain or Loss
Generally, gain or loss recognized with respect to PaineWebber common stock
surrendered in the merger will be capital gain or loss. Capital gain of a
noncorporate U.S. holder will generally be subject to a maximum rate of 20%
where the PaineWebber common stock was held for more than one year, while the
deduction of any capital loss is subject to limitations. The gain or loss will
generally be income or loss from sources within the United States for foreign
tax credit limitation purposes. U.S. holders that own a significant amount of
UBS AG capital stock after the merger (e.g., more than 1% of the outstanding
capital stock of UBS AG) should consult their own tax advisors as to whether any
gain recognized will be treated as capital gain or ordinary income.
NON-U.S. HOLDERS
A non-U.S. holder is not subject to United States federal income tax on
gain or loss recognized with respect to the merger unless the gain is
"effectively connected" with that non-U.S. holder's conduct of a trade or
business in the United States, and the gain is attributable to a permanent
establishment maintained in the United States if that is required by an
applicable income tax treaty as a condition for subjecting that non-U.S. holder
to United States taxation on a net income basis, or that non-U.S. holder is an
individual present in the United States for at least 183 days in the taxable
year of the merger and certain other conditions are met. In either of those
cases the non-U.S. holder will be treated like a U.S. holder with respect to the
recognition of gains or losses, as described above. A corporate non-U.S. holder
may also, under certain circumstances, be subject to an additional branch
profits tax at a 30% rate, or at a lower rate if that corporate non-U.S. holder
is eligible for the benefits of an income tax treaty providing for a lower rate,
with respect to gains that are "effectively connected" with its conduct of a
trade of business in the United States.
Holders of PaineWebber common stock are subject to backup withholding and
information reporting as described below under "-- Additional United States
Federal Income Tax Considerations -- Information Reporting and Backup
Withholding."
OWNERSHIP OF UBS ORDINARY SHARES -- SWISS TAXATION
DIVIDENDS AND DISTRIBUTIONS
Dividends paid and similar cash or in-kind distributions made by UBS to a
holder of UBS ordinary shares (including dividends on liquidation proceeds and
stock dividends) are subject to a Swiss federal withholding tax at a rate of
35%. The withholding tax must be withheld from the gross distribution, and be
paid to the Swiss Federal Tax Administration.
A U.S. holder that qualifies for Treaty benefits may apply for a refund of
the withholding tax withheld in excess of the 15% Treaty rate. The claim for
refund must be filed with the Swiss Federal Tax Administration, Eigerstrasse 65,
3003 Berne, Switzerland. The form used for obtaining a refund is Swiss Tax Form
82 (82C for companies; 82E for other entities; 82I for individuals), which may
be obtained from any Swiss Consulate General in the United States or from the
Swiss Federal Tax Administration at the address above. The form must be filled
out in triplicate with each copy duly completed and signed before a notary
public in the United States. The form must be accompanied by evidence of the
deduction of withholding tax withheld at the source.
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TRANSFERS OF UBS ORDINARY SHARES
The sale of UBS ordinary shares, whether by Swiss resident or non-resident
holders (including U.S. holders), may be subject to a Swiss securities transfer
stamp duty of up to 0.15% calculated on the sale proceeds if it occurs through
or with a Swiss bank or other Swiss securities dealer as defined in the Swiss
Federal Stamp Tax Act. In addition to the stamp duty, the sale of UBS ordinary
shares by or through a member of the SWX Swiss Exchange may be subject to a
stock exchange levy.
Capital gains realized by a U.S. holder upon the sale of UBS ordinary
shares are not subject to Swiss income or gains taxes, unless such U.S. holder
holds such shares as business assets of a Swiss business operation qualifying as
a permanent establishment for the purposes of the Treaty. In the latter case,
gains are taxed at ordinary Swiss individual or corporate income tax rates, as
the case may be, and losses are deductible for purposes of Swiss income taxes.
OWNERSHIP OF UBS ORDINARY SHARES -- UNITED STATES FEDERAL INCOME TAXATION
DIVIDENDS AND DISTRIBUTIONS
U.S. Holders
Subject to the passive foreign investment company rules discussed below,
U.S. holders will include in gross income the gross amount of any dividend paid,
before reduction for Swiss withholding taxes, by UBS out of its current or
accumulated earnings and profits, as determined for United States federal income
tax purposes, as ordinary income when the dividend is actually or constructively
received by the U.S. holder. Dividends will be income from sources outside the
United States for foreign tax credit limitation purposes, but generally will be
"passive income" or "financial services income," which are treated separately
from other types of income for foreign tax credit limitation purposes. The
dividend will not be eligible for the dividends-received deduction generally
allowed to United States corporations in respect of dividends received from
other United States corporations. The amount of the dividend distribution
included in income of a U.S. holder will be the U.S. dollar value of the Swiss
franc payments made, determined at the spot Swiss franc/U.S. dollar rate on the
date such dividend distribution is included in the income of the U.S. holder,
regardless of whether the payment is in fact converted into U.S. dollars.
Generally, any gain or loss resulting from currency exchange fluctuations during
the period from the date the dividend distribution is included in income to the
date such dividend distribution is converted into U.S. dollars will be treated
as ordinary income or loss. Such gain or loss will generally be income from
sources within the United States for foreign tax credit limitation purposes.
Distributions in excess of current and accumulated earnings and profits, as
determined for United States federal income tax purposes, will be treated as a
return of capital to the extent of the U.S. holder's basis in its UBS ordinary
shares and thereafter as capital gain.
Subject to certain limitations, the Swiss tax withheld in accordance with
the Treaty and paid over to Switzerland will be creditable against the U.S.
holder's United States federal income tax liability. To the extent a refund of
the tax withheld is available to a U.S. holder under the laws of Switzerland or
under the Treaty, the amount of tax withheld that is refundable will not be
eligible for credit against the U.S. holder's United States federal income tax
liability, whether or not the refund is actually obtained.
Non-U.S. Holders
A non-U.S. holder is not subject to United States federal income tax with
respect to dividends paid on UBS ordinary shares unless the dividends are
"effectively connected" with that non-U.S. holder's conduct of a trade or
business in the United States, and attributable to a permanent establishment
maintained in the United States if that is required by an applicable income tax
treaty as a condition for subjecting that non-U.S. holder to United States
taxation on a net income basis, or that non-U.S. holder is an individual present
in the United States for at least 183 days in the taxable year of the dividend
distribution and certain other conditions are met. In such cases, a non-U.S.
holder will be taxed in the same manner as a U.S. holder. A corporate non-U.S.
holder may also, under certain circumstances, be subject to an additional branch
profits tax at a 30% rate, or at a lower rate if that corporate non-U.S.
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holder is eligible for the benefits of an income tax treaty providing for a
lower rate, with respect to dividends that are "effectively connected" with its
conduct of a trade or business in the United States.
TRANSFERS OF UBS ORDINARY SHARES
U.S. Holders
Subject to the passive foreign investment company rules discussed below, a
U.S. holder that sells or otherwise disposes of UBS ordinary shares generally
will recognize capital gain or loss for United States federal income tax
purposes equal to the difference between the U.S. dollar value of the amount
realized and the tax basis, determined in U.S. dollars, in the UBS ordinary
shares. Capital gain of a noncorporate U.S. holder is generally taxed at a
maximum rate of 20% if the UBS ordinary shares were held for more than one year.
The gain or loss will generally be income or loss from sources within the United
States for foreign tax credit limitation purposes.
Non-U.S. Holders
A non-U.S. holder will not be subject to United States federal income tax
on gain recognized on the sale or other disposition of UBS ordinary shares
unless the gain is "effectively connected" with the non-U.S. holder's conduct of
a trade or business in the United States, and the gain is attributable to a
permanent establishment maintained in the United States if that is required by
an applicable income tax treaty as a condition for subjecting that non-U.S.
holder to United States taxation on a net income basis, or the non-U.S. holder
is an individual and present in the United States for at least 183 days in the
taxable year of the sale and certain other conditions are met. In such cases, a
non-U.S. holder will be taxed in the same manner as a U.S. holder. A corporate
non-U.S. holder may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate, or at a lower rate if eligible
for the benefits of an income tax treaty that provides for a lower rate, on
"effectively connected" gains recognized.
ADDITIONAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
PASSIVE FOREIGN INVESTMENT COMPANY RULES
UBS believes that UBS ordinary shares should not be treated as stock of a
passive foreign investment company for United States federal income tax
purposes, but this conclusion is a factual determination made annually and thus
may be subject to change. In general, UBS will be a passive foreign investment
company with respect to a U.S. holder if, for any taxable year in which the U.S.
holder held UBS ordinary shares, either at least 75% of the gross income of UBS
for the taxable year is passive income or at least 50% of the value, determined
on the basis of a quarterly average, of UBS's assets is attributable to assets
that produce or are held for the production of passive income. If UBS were to be
treated as a passive foreign investment company, then unless a U.S. holder makes
a mark-to-market election, gain realized on the sale or other disposition of UBS
ordinary shares would in general not be treated as capital gain. Instead, a U.S.
holder would be treated as if the holder had realized such gain and certain
"excess distributions" ratably over the holder's holding period for the shares
and would be taxed at the highest tax rate in effect for each such year to which
the gain was allocated, together with an interest charge in respect of the tax
attributable to each such year.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, gains with respect to cash received in the merger, and certain
other payments as described below, will be subject to information reporting
requirements and backup withholding tax at the rate of 31% for a non-corporate
United States person that:
- fails to provide an accurate taxpayer identification number,
- is notified by the Internal Revenue Service regarding a failure to report
all interest or dividends required to be shown on its federal income tax
returns, or
42
<PAGE> 51
- in certain circumstances, fails to comply with applicable certification
requirements.
Persons that are not United States persons may be required to establish
their exemption from information reporting and backup withholding by certifying
their status on Internal Revenue Service Form W-8.
If a holder of UBS ordinary shares sells UBS ordinary shares to or through
a United States office of a broker, the payment of the proceeds is subject to
both United States backup withholding and information reporting unless the
holder certifies that it is not a United States person, under penalties of
perjury, or otherwise establishes an exemption. If a holder sells UBS ordinary
shares outside the United States through a non-U.S. office of a non-U.S. broker,
and the sales proceeds are paid to the holder outside the United States, then
United States backup withholding and information reporting requirements
generally will not apply to that payment. However, United States information
reporting, but not backup withholding, will apply to a payment of sales
proceeds, even if that payment is made outside the United States, if UBS
ordinary shares are sold through a non-U.S. office of a broker that:
- is a United States person,
- derives 50% or more of its gross income for a specified three-year period
from the conduct of a trade or business in the United States,
- is a "controlled foreign corporation" as to the United States, or
- with respect to payments made after 31 December 2000, is a foreign
partnership, if at any time during its tax year:
- one or more of its partners are U.S. persons, as defined in U.S.
Treasury regulations, who in the aggregate hold more than 50% of the
income or capital interest in the partnership, or
- at any time during its tax year the foreign partnership is engaged
in a United States trade or business,
unless the broker has documentary evidence in its records that the selling
holder of UBS ordinary shares is a non-U.S. person, and does not have actual
knowledge that such seller is a U.S. person, or such seller otherwise
establishes an exemption.
A refund of any amounts withheld under the backup withholding rules that
exceeds the income tax liability of a holder of PaineWebber common stock or of
UBS ordinary shares, as applicable, may be obtained by filing a refund claim
with the Internal Revenue Service.
ACCOUNTING TREATMENT
The merger will be accounted for by use of the purchase method of
accounting, in accordance with International Accounting Standards. This means
that UBS will record the excess of the purchase price of PaineWebber over the
fair value of PaineWebber's identifiable assets, including intangible assets,
and liabilities, as goodwill.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When you consider the recommendation of the PaineWebber board of directors
that you vote in favor of adoption of the merger agreement, you should keep in
mind that a number of executive officers and members of the PaineWebber board
have interests in the merger that are in addition to your interests as a
stockholder. Their additional interests arise primarily in connection with the
arrangements relating to their continued employment following the consummation
of the merger.
43
<PAGE> 52
EMPLOYMENT AGREEMENTS
As of 12 July 2000, UBS and PaineWebber entered into employment agreements
with the following PaineWebber executives:
- Donald B. Marron, Chairman of the Board and Chief Executive Officer of
Paine Webber Group Inc. and PaineWebber Incorporated;
- Joseph J. Grano, Jr., President of PaineWebber Incorporated;
- Steven P. Baum, Executive Vice President, Director of Capital Markets of
PaineWebber Incorporated;
- Regina A. Dolan, Senior Vice President, Chief Administrative Officer of
Paine Webber Group Inc. and Executive Vice President, Chief
Administrative Officer of PaineWebber Incorporated;
- Robert H. Silver, Executive Vice President of PaineWebber Incorporated;
and
- Mark B. Sutton, Executive Vice President and President, Private Client
Group, of PaineWebber Incorporated.
The employment agreements will generally become effective in substantial
part upon the completion of the merger. Following the completion of the merger,
each executive will hold the positions set forth opposite his or her name below:
<TABLE>
<CAPTION>
EXECUTIVE POSITION(S)
--------- -----------
<S> <C>
Donald B. Marron..................... Chairman of UBS America, Chairman of the Board of
PaineWebber Incorporated, Chief Executive Officer of
the Private Equity Group and Senior Advisor to the
Chief Executive Officer of UBS AG
Joseph J. Grano, Jr.................. President and Chief Executive Officer of PaineWebber
Incorporated and President and Chief Executive
Officer of the Global Private Client Group
Steven P. Baum....................... Director of Global Real Estate of UBS Warburg LLC
Regina A. Dolan...................... Executive Vice President of PaineWebber Incorporated,
Chief Administrative Officer of the Global Private
Client Group and Director of the Transaction Services
Division
Robert H. Silver..................... Executive Vice President and Director of Operations,
Systems and Services of the Global Private Client
Group
Mark B. Sutton....................... Executive Vice President and President, U.S. Private
Client Group of PaineWebber Incorporated
</TABLE>
COMPENSATION
Each employment agreement provides that the executive will be employed,
beginning from the completion of the merger, for a period of three years. During
the terms of their respective employment agreements, each executive will receive
an annual base salary, which will be subject to annual review for
44
<PAGE> 53
increase but not decrease, and a minimum bonus for each fiscal year during the
term of employment as set forth below:
<TABLE>
<CAPTION>
EXECUTIVE BASE SALARY ANNUAL BONUS
--------- ----------- ------------
<S> <C> <C>
Donald B. Marron........................................... $2,000,000 $ 18,000,000(1)
Joseph J. Grano, Jr. ...................................... $ 750,000 $ 9,500,000(2)
Steven P. Baum............................................. $ 500,000 $ 5,500,000(3)
Regina A. Dolan............................................ $ 500,000 $ 3,000,000(4)
Robert H. Silver........................................... $ 500,000 $ 2,500,000(5)
Mark B. Sutton............................................. $ 500,000 $ 5,500,000(6)
</TABLE>
---------------
(1) Represents a minimum annual bonus, payable in cash. The Chief Executive
Officer of UBS AG may, in his discretion, increase the amount of Mr.
Marron's bonus.
(2) Represents a minimum annual bonus, payable 25% in restricted UBS ordinary
shares and 75% in cash. The Chief Executive Officer of UBS Warburg may, in
his discretion, increase Mr. Grano's bonus. Any bonus amount in excess of
the minimum bonus will be awarded 50% in restricted UBS ordinary shares and
50% in cash. The restricted UBS ordinary shares will vest 1/3 on each of the
first three anniversaries of the grant date.
(3) Represents a minimum annual bonus, payable 25% in restricted UBS ordinary
shares and 75% in cash. Mr. Baum's target bonus is $7,000,000, and he may
receive up to $8,500,000, or a larger amount, if the Director of Global Real
Estate of UBS Warburg LLC in his discretion, so determines. Any bonus amount
in excess of the minimum bonus will be awarded 50% in restricted UBS
ordinary shares and 50% in cash. The restricted UBS ordinary shares will
vest 1/3 on each of the first three anniversaries of the grant date.
(4) Represents a minimum annual bonus, payable 25% in restricted UBS ordinary
shares and 75% in cash. Ms. Dolan's target bonus is $3,500,000, and she may
receive up to $4,500,000, or a larger amount, if the President of the Global
Private Client Group and the Chief Operating Officer of UBS Warburg North
America, in their discretion, so determine. Any bonus amount in excess of
the minimum bonus will be awarded 50% in restricted UBS ordinary shares and
50% in cash. The restricted UBS ordinary shares will vest 1/3 on each of the
first three anniversaries of the grant date.
(5) Represents a minimum annual bonus, payable 25% in restricted UBS ordinary
shares and 75% in cash. Mr. Silver's target bonus is $3,500,000, and he may
receive up to $4,500,000, or a larger amount, if the President of
PaineWebber Incorporated, in his discretion, so determines. Any bonus amount
in excess of the minimum bonus will be awarded 50% in restricted UBS
ordinary shares and 50% in cash. The restricted UBS ordinary shares will
vest 1/3 on each of the first three anniversaries of the grant date.
(6) Represents a minimum annual bonus, payable 25% in restricted UBS ordinary
shares and 75% in cash. Mr. Sutton's target bonus is $7,000,000, and he may
receive up to $8,500,000, or a larger amount, if the President of
PaineWebber Incorporated, in his discretion, so determines. Any bonus amount
in excess of the minimum bonus will be awarded 50% in restricted UBS
ordinary shares and 50% in cash. The restricted UBS ordinary shares will
vest 1/3 on each of the first three anniversaries of the grant date.
45
<PAGE> 54
Each executive other than Mr. Marron will be awarded a retention award as
set forth below:
<TABLE>
<CAPTION>
EXECUTIVE RETENTION AWARD
--------- ---------------
<S> <C>
Joseph J. Grano, Jr. ....................................... $30,000,000(1)
Steven P. Baum.............................................. $13,000,000(1)
Regina A. Dolan............................................. $10,000,000(2)
Robert H. Silver............................................ $ 9,000,000(1)
Mark B. Sutton.............................................. $13,000,000(1)
</TABLE>
---------------
(1) This retention award will be awarded 50% in UBS ordinary shares and 50% in
cash and will vest 1/3 on each of the first three anniversaries of the
completion of the merger.
(2) This retention award will be awarded 50% in UBS ordinary shares and 50% in
cash and will vest 50% on each of the first two anniversaries of the
completion of the merger.
In addition, upon termination of employment for any reason, Mr. Marron will
receive a pension benefit in the form of an annuity for life with annual
payments of $5,000,000. Upon Mr. Marron's death, his surviving spouse will be
paid an annuity for her life with annual payments of $3,750,000. Mr. Marron may
elect to receive the pension benefit in the form of a lump-sum payment. The
pension benefit will be fully vested and the actuarial present value of such
benefit will be transferred to a rabbi trust for the benefit of Mr. Marron on
the completion of the merger. Mr. Marron will also have an ownership interest in
a new investment fund in which UBS will invest no less than $500,000,000 and may
control a management company that may be engaged to manage certain other assets.
See "-- The Private Equity Investment Fund" and "-- Management Contract Option."
BENEFITS
The employment agreements provide that during their respective terms of
employment, the executives will be eligible to participate in all executive
compensation plans and arrangements in which senior executives of PaineWebber
Incorporated or Paine Webber Group Inc. are eligible to participate and in all
events will be entitled to participate in a leveraged employee partnership for
calendar year 2000 consistent with past partnership investment opportunities at
PaineWebber and in all other leveraged employee partnership and other employee
investment opportunities made available to PaineWebber Incorporated or Paine
Webber Group Inc. executives or salaried employees generally. The executives
will also be entitled to participate in all employee benefit programs of
PaineWebber Incorporated or Paine Webber Group Inc. made available to
PaineWebber Incorporated or Paine Webber Group Inc. executives or salaried
employees generally. In addition, the executives will be entitled to
reimbursement of business expenses, including legal fees incurred in connection
with the employment agreements, in accordance with policies and procedures
established by UBS, PaineWebber Incorporated or Paine Webber Group Inc., as the
case may be, and office space and secretarial, administrative and executive
assistance and services and other executive benefits, in each case substantially
in accordance with the terms and provisions of such arrangements that were in
effect and applicable immediately prior to the merger.
TERMINATION
Each employment agreement provides that, upon termination of the executive
for cause, as defined in the employment agreement, the executive will be
entitled to receive accrued base salary and awarded but unpaid annual bonus
amounts, any deferred salary and bonus amounts and reimbursement for business
expenses, and such other rights to compensation and benefits as may be provided
in applicable plans and programs of Paine Webber Group Inc. and PaineWebber
Incorporated. In addition to these amounts, Mr. Marron will be entitled to
receive a pro rata portion of his minimum annual bonus for the year of
termination of employment and to receive the pension benefit.
If the executive's employment is terminated without cause by PaineWebber
Incorporated or for good reason, as defined in the employment agreement, by the
executive, the executive will receive accrued base
46
<PAGE> 55
salary and awarded but unpaid annual bonus amounts, any deferred salary and
bonus amounts and reimbursement for business expenses, and such other rights to
compensation and benefits as may be provided in applicable plans and programs of
Paine Webber Group Inc. and PaineWebber Incorporated. In addition, Ms. Dolan and
Messrs. Baum, Silver and Sutton will receive a lump sum payment equal to their
respective base salaries and minimum bonuses for the remainder of the term, but
not less than two times such annual base salary and minimum bonus, a pro rata
portion of their respective minimum bonuses for the year of termination of
employment, full vesting and payment of their respective retention awards,
immediate vesting of any previously granted but not yet vested incentives,
including stock options that remain exercisable in accordance with their terms,
reimbursement for business expenses and continuation of welfare benefits,
including health, dental and life insurance, for two years. Messrs. Marron and
Grano will receive a lump sum payment equal to three times their respective base
salaries and minimum bonuses, a pro rata portion of their respective minimum
bonuses for the year of termination of employment, immediate vesting of any
previously granted but not yet vested incentives, including stock options that
remain exercisable in accordance with their terms, reimbursement for business
expenses and continuation of welfare benefits, including health, dental and life
insurance, for three years. In addition, Mr. Marron will receive the pension
benefit described above, and Mr. Grano will receive full vesting and payment of
his retention award. Furthermore, if Mr. Marron leaves his position to enter
full-time government service, he will receive the benefits that he would have
received had he been terminated without cause or resigned for good reason,
except that he will receive only 50% of the amount of both the lump sum
severance payment and pro rata minimum bonus for the year of termination.
In addition, upon the termination of Mr. Marron's employment, PaineWebber
Incorporated shall provide, at its expense, certain benefits to Mr. Marron for a
period of ten years, including the following. Upon termination for any reason
other than death or cause, he shall be provided the use of a full-time car and
driver, a suitable office in midtown Manhattan, and an executive assistant, with
salary and benefits no less than those in effect from time to time for the
comparable level position at PaineWebber Incorporated, in each case comparable
to those provided to him immediately prior to the merger, and the use of
corporate aircraft on a limited basis comparable to that made available
immediately prior to termination of employment. Upon termination for any reason
other than cause, Mr. Marron and his family shall be provided with continued
coverage for ten years under the terms of the medical or disability plans and
programs of PaineWebber Incorporated as applicable immediately prior to the
merger, to be offset by any coverage otherwise required to be provided during a
concurrent period of time as a result of a termination of his employment without
cause or for good reason.
The employment agreements further provide that if an excise tax under
Section 4999 of the Internal Revenue Code is imposed on any executive, the
executive will receive an additional amount so that the executive will be placed
in the same after-tax position he or she would have been in had no excise tax
been imposed.
NON-COMPETITION, NON-SOLICITATION, CONFIDENTIALITY AND NON-DISPARAGEMENT
PROVISIONS
Pursuant to the employment agreements, each executive has agreed that:
- from the date that the merger is completed through the first anniversary
of the executive's termination of employment, or the six-month
anniversary in the case of a termination by the employer without cause or
a termination by the executive for good reason (the "Restricted Term"),
the executive will not become involved in the retail brokerage business,
or, in the case of Mr. Baum, real estate business comparable to that in
which he was involved during his employment, whether as an employee,
consultant, director, partner, shareholder or otherwise, in any country
in which UBS or any of its subsidiaries or affiliates is actively engaged
in the retail brokerage business, or, in the case of Mr. Baum, the real
estate business, on the date that the merger is completed;
- during the Restricted Term, the executive will not solicit any customer
of UBS or any of its subsidiaries or affiliates for any retail brokerage
business, or, in the case of Mr. Baum, the real estate business, or
solicit any person, other than any secretary or administrative or
executive assistant who reported directly to the executive immediately
before the merger, who is or was
47
<PAGE> 56
employed by UBS or any of its subsidiaries or affiliates within 180 days
of the solicitation, to terminate his or her employment with, to accept
employment with anyone other than, or to interfere with the business of,
UBS or any of its affiliates or subsidiaries.
In addition, each executive has agreed that, both during and after the
Restricted Term, the executive will not:
- subject to limited exceptions, disclose any confidential information
relating to UBS or any of its subsidiaries or affiliates;
- intentionally make any public statement or publicly release any
information that disparages or defames UBS, any of its subsidiaries or
affiliates or any of its directors or officers; or
- intentionally cause or encourage any other person to make any
disparaging or defamatory public statement, or publicly release any
disparaging or defamatory information, in respect of UBS, any of its
subsidiaries or affiliates or any of its directors or officers.
Furthermore, UBS and its subsidiaries and affiliates have also agreed not
to, and to use their best efforts to cause their respective directors and senior
executives not to, intentionally make, or intentionally cause or encourage the
making of, any public statement, or publicly release any information, that
disparages or defames any of the executives' reputations.
INDEMNIFICATION AND INSURANCE
The employment agreements provide that each executive will be indemnified
by UBS AG, Paine Webber Group Inc. and PaineWebber Incorporated to the fullest
extent legally permitted by the organizational documents and board resolutions
of each of the respective companies or, if greater, under Delaware law, in the
case of Paine Webber Group Inc. and PaineWebber Incorporated, or under Swiss
law, in the case of UBS AG, so long as such greater indemnification does not
contravene the by-laws of the relevant companies. The employment agreements
further provide that, during the executives' respective terms of employment and
for six years thereafter, UBS, PaineWebber Incorporated and Paine Webber Group
Inc. will maintain directors' and officers' liability insurance policies that
provide coverage to the executives that is no less than the aggregate coverage
provided immediately prior to the merger and the terms of which may not be
altered or amended so as to be, in the aggregate, materially less favorable to
the executives than those in effect under any policy maintained by PaineWebber
Incorporated or Paine Webber Group Inc. providing coverage to the executive
immediately before the merger.
MANAGEMENT CONTRACT OPTION
PaineWebber has a portfolio of private equity and other investments,
including interests in employee partnerships. Among his responsibilities, Mr.
Marron will manage the division overseeing the management and liquidation of
these investments. At UBS's request, UBS has the option to transfer this
division's activities, including all personnel and expenses, pursuant to a
management contract, to an independent management company to be controlled by
Mr. Marron. If the applicable employee limited partners do not approve the
transfer of the management of some or all of the employee partnership assets to
the management company, such assets will not be transferred.
If UBS exercises this option, the assets to be transferred will be valued
at fair market value. As of 30 April 2000, the investments, together with the
assets of the employee partnerships, were valued at approximately $1.3 billion.
The management company will be entitled to an annual management fee equal
to 1% of the assets under management. In addition, with respect to certain of
the investments, each time an asset is disposed of, the management company will
be entitled to an incentive fee equal to 10% of the profits obtained from the
asset disposition that remain after UBS has received an amount equal to the fair
market value of that asset at the time of transfer to the management company,
plus an 8% annualized return on that value, plus recovery of any losses or
write-offs on prior asset dispositions. As of 30 April 2000, the investments to
which the incentive fee would apply were valued at approximately $775 million.
It is currently anticipated that these investments will be liquidated within
five years.
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<PAGE> 57
THE PRIVATE EQUITY INVESTMENT FUND
Pursuant to a letter agreement entered into as of 12 July 2000, UBS and Mr.
Marron have agreed to form an investment fund for the purpose of seeking capital
appreciation through direct private equity and equity-related investments,
including investments in leveraged acquisitions, build-ups, recapitalizations,
restructurings, management buyouts, pre-public offering opportunities and growth
equity transactions. The parties have agreed that this private equity investment
fund will be structured on market terms that are standard for funds of this
nature. The fund will be organized, pursuant to a limited partnership agreement,
as a Delaware limited partnership. The sole general partner of the fund will be
a Delaware limited partnership or limited liability company that initially will
be controlled by Mr. Marron. The aggregate capital commitments to the fund will
be at least $525 million, including a commitment by the general partner and its
affiliates of 5% of the total commitments by others, up to a maximum of $30
million, and a commitment by UBS of $500 million.
UBS has agreed that the fund will pay to the general partner or one of its
affiliates an annual management fee as follows:
- for the period ending five years after the initial closing of the sale
of limited partnership interests in the fund, which is expected to
occur in the fourth quarter of 2000, a fee equal to 1.5% of total
capital commitments; and
- thereafter, a fee equal to 0.75% of capital contributions that remain
invested in portfolio companies.
In general, the fund will distribute all amounts received by the
partnership upon the sale, exchange or refinancing of an investment or portion
of an investment for cash or marketable securities, and all income from
investments, in each case net of specified partnership expenses and reserves for
such expenses, to the limited partners and the general partner pro rata in
proportion to each of their respective capital contributions with respect to
that investment. However, each limited partner's share of these amounts will be
distributed to the general partner if the limited partner has received:
- distributions generated by the investment equal to the sum of the
limited partner's capital contribution applied to that investment,
plus specified unrecouped fees, expenses and losses or writedowns on
other investments; and
- cumulative distributions of income from investments and proceeds from
investments that have been disposed of, minus total capital
contributions with respect to those investments, certain writedowns
and specified fees and expenses with respect to the limited partner,
equal to an 8% per annum return on the limited partner's capital
contributions applied to investments that have been disposed of.
Under these circumstances, the general partner will receive a portion of
the limited partner's share of amounts generated by investments that have been
disposed of equal to 20% of specified profits of the fund. Thereafter, the
limited partner will receive 80% of its share of these amounts, and the general
partner will receive 20% of the limited partner's share of these amounts.
The fund's term will expire 10 years from the initial closing of the sale
of limited partnership interests in the fund, subject to certain extension
rights on the part of the general partner.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of 14 September 2000, which is the record date for the special meeting,
PaineWebber held of record for approximately 14,848 of its customers, including
officers and directors of PaineWebber, 15,101,122 shares of PaineWebber common
stock, constituting approximately 10.2% of the then outstanding shares of
PaineWebber common stock.
49
<PAGE> 58
The following table sets forth certain information regarding each person or
group known to PaineWebber to own beneficially more than 5% of any class of
PaineWebber's voting stock as of 15 September 2000.*
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
-------------- ----------------------------- -------------------- ----------
<S> <C> <C> <C>
Common Stock General Electric Company 31,523,600(1) 21.2%
260 Long Ridge Road
Stamford, Connecticut 06927
The Yasuda Mutual Life 11,258,022(2) 7.6%
Insurance Company
9-1, Nishishinjuku
1-chome, Shinjuku-ku
Tokyo 169-92 Japan
</TABLE>
---------------
(1) As of 15 September 2000, General Electric Capital Corporation, an indirect
subsidiary of General Electric Company, owned 8,273,600 shares of
PaineWebber common stock and GECS Holdings, Inc., an indirect subsidiary of
General Electric Company, owned 23,250,000 shares of PaineWebber common
stock. An Amended and Restated Stockholder Agreement, dated 6 August 1997,
contains certain limitations on the ability of General Electric Capital
Corporation and GECS Holdings, Inc., to vote, sell or otherwise dispose of
their shares. Pursuant to the stockholder voting agreement described under
"The Merger Agreement -- Stockholder Voting Agreements," General Electric
Capital Corporation and GECS Holdings, Inc. have agreed to vote all their
shares of PaineWebber common stock "FOR" the adoption of the merger
agreement. The stockholder voting agreement also contains limitations on the
ability of General Electric Capital Corporation and GECS Holdings, Inc., to
sell or otherwise dispose of their shares of PaineWebber common stock.
(2) An Amended Investment Agreement, dated as of 3 November 1992, contains
certain limitations on the ability of The Yasuda Mutual Life Insurance
Company to vote, sell or otherwise dispose of its shares of PaineWebber
common stock. Pursuant to the stockholder voting agreement described under
"The Merger Agreement -- Stockholder Voting Agreements," The Yasuda Mutual
Life Insurance Company has agreed to vote all of its shares of PaineWebber
common stock "FOR" the adoption of the merger agreement. The stockholder
voting agreement also contains limitations on the ability of The Yasuda
Mutual Life Insurance Company to sell or otherwise dispose of its shares of
PaineWebber common stock.
---------------
*The table above does not include 10,527,077 shares of PaineWebber common stock
(7.1% of the outstanding shares of PaineWebber common stock) held, as of 15
September 2000, by a trustee under PaineWebber's 401(k) Plus Plan for the
benefit of PaineWebber's employees.
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<PAGE> 59
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of 15 September 2000, the amount of
PaineWebber common stock beneficially owned by each of its directors, the
executive officers of PaineWebber identified in PaineWebber's 4 May 2000 annual
meeting proxy statement as the five most highly compensated executive officers
of PaineWebber for 1999 and all present directors and executive officers of
PaineWebber as a group:
<TABLE>
<CAPTION>
SHARES OF
PAINEWEBBER
COMMON STOCK
NAME OWNED BENEFICIALLY(1)(2)
---- ------------------------
<S> <C>
Steven P. Baum(3)(4)........................................ 490,934
E. Garrett Bewkes, Jr.(3)................................... 60,716
Reto Braun(3)............................................... 47,704
Regina A. Dolan(3)(4)....................................... 393,906
Frank P. Doyle(3)........................................... 49,567
Joseph J. Grano, Jr.(3)(4)(5)............................... 968,530
James W. Kinnear(3)......................................... 42,565
Naoshi Kiyono............................................... 2,324
Robert M. Loeffler(3)....................................... 32,581
Donald B. Marron(2)(3)(4)(5)................................ 2,629,058
Edward Randall, III(2)(3)................................... 504,717
Henry Rosovsky(3)........................................... 22,336
Ken-ichi Sekiguchi.......................................... 2,324
Mark B. Sutton(3)(4)........................................ 576,817
John R. Torell III(3)....................................... 30,420
Total....................................................... 5,854,499
All present directors and executive officers as a group (19
persons).................................................. 6,716,515
</TABLE>
---------------
(1) No director or executive officer directly owns 1% or more of PaineWebber
common stock, except Mr. Marron who owns 1.8%. All present directors and
executive officers as a group, 19 persons, beneficially own 4.5%.
(2) Shares shown for directors and named executive officers include an aggregate
of 579,015 shares of PaineWebber common stock as to which direct beneficial
ownership is disclaimed. Of such shares, members of Mr. Marron's family
beneficially own 402,240 shares (400,000 of which are held by three trusts
for the benefit of certain members of Mr. Marron's family, of which Mr.
Marron is a co-trustee) and members of Mr. Randall's family beneficially own
176,775 shares.
(3) Shares shown for directors and named executive officers include an aggregate
of 3,470,750 shares of PaineWebber common stock covered by options presently
exercisable or becoming exercisable within sixty days. The number held by
these individuals is as follows: Mr. Marron 1,443,750, Mr. Baum 414,750, Mr.
Bewkes 22,500, Mr. Braun 22,500, Ms. Dolan 336,000, Mr. Doyle 22,500, Mr.
Grano 711,000, Mr. Kinnear 22,500, Mr. Loeffler 15,000, Mr. Randall 22,500,
Mr. Rosovsky 15,500, Mr. Sutton 399,750, and Mr. Torell 22,500.
(4) Shares shown for directors and named executive officers and the aggregate
for all present directors and executive officers as a group include shares
as to which they are vested held by a trust under PaineWebber's 401(k) Plus
Plan, including the following directors and named executive officers: Mr.
Marron 39,304, Mr. Baum 347, Ms. Dolan 2,082, Mr. Grano 1,389, and Mr.
Sutton 347.
(5) Pursuant to the stockholder voting agreements described under "The Merger
Agreement -- Stockholder Voting Agreements," Mr. Grano and Mr. Marron have
agreed to vote their shares of PaineWebber common stock subject to such
voting agreements "FOR" the adoption of the merger agreement. The
stockholder voting agreements also contain limitations on the ability of Mr.
Grano and Mr. Marron to sell or otherwise dispose of their shares of
PaineWebber common stock.
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THE MERGER AGREEMENT
This section describes the material terms of the merger agreement. The
following description of the merger agreement is not complete and you should
read the merger agreement, and the other information that is incorporated by
reference in this document, carefully and in its entirety for a more complete
understanding of the merger. The complete text of the merger agreement is
attached to this document as Appendix A and is incorporated by reference into
this document.
THE MERGER
PaineWebber will merge with and into UBS Americas Inc., a Delaware
corporation and a direct, wholly owned subsidiary of UBS AG. UBS Americas Inc.
was created solely for the purposes of the merger and has no assets or
operations of its own. When it was formed, and when it signed the merger
agreement and all other agreements relating to the merger, UBS Americas Inc. was
named Neptune Merger Subsidiary, Inc.
EFFECTIVE TIME OF THE MERGER
The merger will become effective when UBS and PaineWebber file a
certificate of merger with the Secretary of State of the State of Delaware or at
a later time as specified in the certificate of merger. The closing of the
merger will take place on a date that is not later than the third business day
after the conditions contained in the merger agreement have been satisfied or
waived or on another date agreed upon by UBS and PaineWebber.
UBS'S RIGHT TO REVISE THE STRUCTURE OF THE MERGER
UBS may elect to restructure the merger:
- so that PaineWebber is merged into a wholly owned subsidiary of UBS other
than UBS Americas Inc.; or
- following the making of an acquisition proposal by a third party as
discussed below, to provide for an exchange offer for PaineWebber common
stock, which would be followed by an unconditional merger, if, among
other things, the PaineWebber board of directors determines in good faith
that this restructuring would not adversely affect PaineWebber or its
stockholders in any way in which they would not have been adversely
affected had the restructuring not been effected.
UBS may not restructure the merger as set forth above if the restructuring
would:
- change adversely the treatment of holders of PaineWebber options;
- impede receipt of the governmental and regulatory consents required for
consummation of the merger;
- impede the consummation of the transactions contemplated by the merger
agreement; or
- adversely affect the ability of counsel for PaineWebber or UBS to provide
the tax opinions required by the merger agreement.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the time the merger becomes effective, the outstanding shares of
PaineWebber common stock will be, subject to the adjustments and limitations
described below, converted at the election of the holders of the PaineWebber
common stock into:
- $73.50 in cash for each share of PaineWebber common stock; or
- 0.4954 of a UBS ordinary share for each share of PaineWebber common
stock.
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Holders of PaineWebber common stock will receive cash for any fractional
interest in a UBS ordinary share.
The merger has been structured, and adjustments to PaineWebber stockholder
elections will be made, so that the number of shares of PaineWebber common stock
to be converted into UBS ordinary shares will equal 50% of the outstanding
shares of PaineWebber common stock immediately prior to the time the merger
becomes effective.
If holders of more than 50% of the outstanding shares of PaineWebber common
stock elect to receive UBS ordinary shares, the exchange agent will allocate,
pro rata to the holders making this election in accordance with the number of
shares of PaineWebber common stock that they hold, a sufficient number of shares
of PaineWebber common stock to be converted into $73.50 per share instead of UBS
ordinary shares so that the number of shares of PaineWebber common stock that
the holders initially elected to convert into UBS ordinary shares less the
number of shares of PaineWebber common stock so designated to be converted
instead into cash equals, as nearly as practicable, 50% of the outstanding
shares of PaineWebber common stock immediately prior to the time the merger
becomes effective.
If holders of less than 50% of the outstanding shares of PaineWebber common
stock elect to receive UBS ordinary shares, the exchange agent will allocate,
pro rata to the holders making cash elections in accordance with the number of
shares of PaineWebber common stock that they hold, a sufficient number of shares
of PaineWebber common stock to be converted into UBS ordinary shares instead of
cash so that the number of shares of PaineWebber common stock that the holders
initially elected to convert into UBS ordinary shares plus the number of shares
of PaineWebber common stock so designated to be converted instead into UBS
ordinary shares equals, as nearly as practicable, 50% of the outstanding shares
of PaineWebber common stock immediately prior to the time the merger becomes
effective.
Shares of PaineWebber common stock with respect to which the holders have
not made an election will be converted in whatever manner is necessary to ensure
that the amount of PaineWebber common stock converted into UBS ordinary shares
equals, as nearly as practicable, 50% of the outstanding shares of PaineWebber
common stock immediately prior to the time the merger becomes effective.
UBS may, at its option, increase the fraction of a UBS ordinary share into
which each share of PaineWebber common stock may be converted to the extent that
such an increase is necessary to enable the merger to qualify as a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code.
EXCHANGE PROCEDURES
UBS will mail to the PaineWebber stockholders whose shares of PaineWebber
common stock are held in registered form an election form and letter of
transmittal. In order to be effective, the election form must be properly
completed, signed and 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 on which the merger becomes effective. UBS will publicly announce
the election deadline as soon as practicable and, in any case, no less than five
trading days prior to the closing date. The election form must be accompanied by
all PaineWebber common stock certificates as to which the election is made. Any
shares of PaineWebber common stock for which the record holder has not properly
submitted an election form as of the election deadline will be deemed to be
shares as to which no election was made. PaineWebber stockholders whose shares
are held in brokerage or other custodial accounts will receive instructions from
the entity that holds their shares, advising them of the procedures for making
an election and delivering shares.
UBS will establish reasonable procedures for the delivery of shares of
PaineWebber common stock that are held in book-entry form.
Any election may be revoked by the stockholder only by written notice
received by the exchange agent prior to the election deadline or, if required by
law, at any time after the election deadline but prior to the closing date.
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UBS will instruct its exchange agent to deliver the merger consideration to
PaineWebber stockholders after the effective time of the merger in accordance
with procedures in the merger agreement. Holders that receive UBS ordinary
shares in the merger will be entitled to dividends and other distributions on,
and to vote, those UBS ordinary shares only when they become entitled, in
accordance with the terms set forth above and in the merger agreement, to
receive certificates representing UBS ordinary shares.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains a number of customary representations and
warranties made by UBS and PaineWebber with respect to themselves and their
respective subsidiaries. PaineWebber has made representations and warranties
regarding, among other things:
- its due organization, good standing and qualification;
- its capital structure;
- its subsidiaries;
- its corporate authority and action;
- its governmental filings, reports, SEC documents and financials
statements;
- the absence of undisclosed liabilities;
- the absence of certain changes or events;
- litigation and regulatory action;
- its compliance with laws and registrations with appropriate authorities;
- its use of brokers or finders;
- its compensation and benefit plans;
- its labor relations;
- its tax matters;
- its proprietary rights;
- its investment advisory activities;
- the opinion of Goldman Sachs;
- certain of its contracts; and
- its derivatives.
UBS has made representations and warranties regarding, among other things:
- its due organization, good standing and authority;
- its capital structure and the shares to be issued in the merger;
- its corporate authority and action;
- its governmental filings, reports, SEC documents and financial
statements;
- the absence of undisclosed liabilities;
- the absence of certain changes or events;
- litigation and regulatory action;
- its compliance with laws;
- matters under the Investment Company Act;
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- the availability of funds;
- the interim operations of UBS Americas Inc.; and
- tax matters.
CONDUCT OF BUSINESS PENDING THE MERGER
During the period from the signing of the merger agreement until the merger
becomes effective, PaineWebber has agreed, subject to the exceptions specified
in the merger agreement and plans disclosed to UBS in connection with the merger
agreement, that PaineWebber and each of its subsidiaries, among other things:
- will carry on its business in the ordinary and usual course and, to the
extent consistent with that obligation, will use reasonable efforts to
preserve its business organizations and assets and maintain its rights,
franchises and existing relations with clients, customers, suppliers,
employees and business associates;
- will not, and will not enter into an agreement to, issue, sell or
otherwise permit to become outstanding, or authorize the creation of, any
additional shares of capital stock of PaineWebber or any of its
subsidiaries, nor will it permit any additional shares of its capital
stock to become subject to new grants of rights, options or similar
stock-based rights, other than pursuant to PaineWebber's Equity Plus Plan
or with respect to employees other than officers and directors, in the
ordinary course of business consistent with past practice;
- will not declare, set aside for payment, or pay any dividend or other
distribution on the capital stock of PaineWebber or any of its
subsidiaries, other than dividends or distributions from wholly owned
subsidiaries of PaineWebber to PaineWebber or another of its wholly owned
subsidiaries, regular quarterly cash dividends on common stock at a rate
not to exceed $0.12 per share per quarter, and dividends required under
PaineWebber's preferred trust securities;
- will not adjust, split, combine, redeem, reclassify, purchase or
otherwise acquire any shares of PaineWebber capital stock;
- will not enter into, amend, modify or renew any employment, consulting,
severance or similar contract except as specified in the merger
agreement;
- will not increase the salary, wages or other benefits of employees except
as specified in the merger agreement;
- will not enter into, establish, adopt or amend in any material respect,
except as otherwise required and contemplated by the merger agreement,
any benefit plan in respect of any director, officer or employee of
PaineWebber or any of its subsidiaries;
- will not sell, transfer, mortgage, encumber or otherwise dispose of or
discontinue any of its assets businesses or properties having a value in
excess of $15 million individually or $50 million in the aggregate,
except in the ordinary course of business consistent with past practice;
- will not acquire assets, business or properties valued in excess of $15
million individually or $50 million in the aggregate, except in the
ordinary course of business consistent with past practice;
- will not amend the corporate governance documents of Paine Webber Group
Inc. or any of its subsidiaries;
- will not implement or adopt any change in accounting principles or
material accounting practices except as may be required by a change in
U.S. GAAP;
- will not enter into, amend or terminate certain material contracts (other
than relating to employee matters) that would require a public filing
with the SEC, except in the ordinary course of business consistent with
past practice;
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- will not settle any material claim, except those involving solely money
damages and meeting the other conditions set out in the merger agreement;
- will not incur debt other than in the ordinary course of business
consistent with past practice;
- will not knowingly take any action that is reasonably likely to result in
any of PaineWebber's representations or warranties being untrue such that
a condition to the merger would not be satisfied;
- will not knowingly engage in a new line of business or acquire assets not
currently held by PaineWebber or its subsidiaries that would not be
permissible for a United States financial holding company or would
subject UBS or PaineWebber or any of their respective subsidiaries to
regulation by a government entity that does not presently regulate them
or whose regulation is materially different from regulations that are
currently applicable to UBS;
- will not take or fail to take any action that would reasonably prevent
the merger agreement from qualifying for its anticipated tax treatment;
and
- will not agree, commit to or enter into any agreement to take any of the
actions discussed above.
In addition, during the period from the signing of the merger agreement
until the merger becomes effective, UBS has agreed, subject to exceptions
specified in the merger agreement and plans disclosed to PaineWebber in
connection with the merger agreement, that UBS and each of its subsidiaries,
among other things:
- will carry on its business in the ordinary and usual course and, to the
extent consistent with that obligation, will use its 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;
- will not declare, set aside for payment, or pay any dividend or other
distribution on, or in respect of, any UBS ordinary shares other than
regular periodic cash dividends and distributions, except that UBS may in
2000 declare and pay a cash dividend for a nine-month period and, after
the closing date, declare and pay a dividend with respect to the
remaining three-month period;
- will not amend the corporate governance documents of UBS or UBS Americas
Inc. in a manner that would either impede or delay the merger or would
adversely affect the rights of a holder of UBS ordinary shares;
- will not enter into an agreement to acquire all or substantially all of
the capital stock or assets of any other person or business if such
transaction could reasonably be expected to materially delay or impede
the consummation of the merger;
- will not knowingly take any action reasonably likely to result in any of
UBS's representations and warranties being untrue such that a condition
to the merger would not be satisfied;
- will not take or fail to take any action that would reasonably prevent
the merger agreement from qualifying for its anticipated tax treatment;
and
- will not agree, commit to or enter into any agreement to take any of the
actions discussed above.
NO SOLICITATION OF ACQUISITION PROPOSALS
PaineWebber has agreed that neither it nor any of its officers, directors,
agents, advisors or affiliates will 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
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proposal other than that contemplated by the merger agreement. However,
PaineWebber and its board of directors have the right to:
- make any disclosure to its stockholders if, in the good faith judgment of
its board of directors, failure to do so would be inconsistent with its
obligations under applicable law;
- provide information to, or engage in such discussions or negotiations
with, any person who has made a bona fide written acquisition proposal,
received after 12 July 2000, that did not result from the breach of
PaineWebber's obligations not to solicit or engage in discussions or
negotiations with respect to an acquisition proposal except as
contemplated in the merger agreement, if the acquisition proposal has a
reasonable probability of resulting in a superior proposal or is a
superior proposal and the board has determined in good faith that
providing such information or engaging in such negotiations or
discussions is required under Delaware law and PaineWebber has received a
confidentiality agreement from the person making the proposal;
- recommend an acquisition proposal to its stockholders, and withdraw its
favorable recommendation of the merger, if the acquisition proposal is a
superior proposal and the board has determined in good faith that making
such a recommendation is required under Delaware law and PaineWebber has
received a confidentiality agreement from the person making the superior
proposal; and
- withdraw its favorable recommendation to stockholders if such action is
required for the board to discharge its obligations under applicable law.
A superior proposal is an acquisition proposal by a third party on terms
that PaineWebber's board of directors determines in its good faith judgment,
after consultation with its financial advisors, to be more favorable to
PaineWebber's stockholders than the merger and the other transactions
contemplated by the merger agreement. In making this determination, the board
must consider the likelihood of consummation of the third-party transaction on
the terms set forth in the third-party proposal, taking into account all legal,
financial, regulatory and other aspects of such proposal and any other relevant
factors permitted under applicable law. The PaineWebber board must also notify
UBS that, absent action on the part of UBS, it would consider the third-party
acquisition proposal to be a superior proposal and must give UBS at least five
business days to respond to the third-party acquisition proposal. The
PaineWebber board must then consider any amendment or modification to the merger
agreement proposed by UBS in response to this proposal in determining whether it
is a superior proposal.
PaineWebber has also agreed to:
- terminate any activities, discussions or negotiations with any parties
regarding acquisition proposals conducted prior to the date the merger
agreement was signed; and
- notify UBS promptly of receipt of any acquisition proposal and its
material terms.
STOCK OPTIONS AND OTHER EMPLOYEE BENEFITS
UBS has agreed that following the merger it will assume various obligations
under PaineWebber's stock plans and employee benefits plans.
STOCK OPTIONS AND OTHER STOCK PLANS
At the effective time of the merger, each then-outstanding option to
acquire shares of PaineWebber common stock, whether vested or unvested, will be
converted into the right to acquire a number of UBS ordinary shares equal to the
product, rounded to the nearest whole share, of:
- the number of shares of PaineWebber common stock subject to the option,
and
- the exchange ratio of 0.4954,
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at a per share exercise price, rounded down to the nearest whole cent, equal to:
- the aggregate exercise price for all the shares of PaineWebber common
stock purchasable pursuant to the option, divided by
- the number of UBS ordinary shares deemed purchasable under the option in
accordance with the adjustment described above.
At the effective time of the merger, each right to acquire or receive
shares of PaineWebber common stock, or to receive benefits measured by the value
of a number of shares of PaineWebber common stock, that may be held, payable or
reserved for issuance under PaineWebber's stock plans and other compensation and
benefit plans, other than options, will 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 UBS ordinary shares equal to the number of shares of PaineWebber
common stock subject to such PaineWebber stock-based award immediately prior to
the effective time of the merger, multiplied by the exchange ratio of 0.4954.
OTHER EMPLOYEE BENEFITS
PaineWebber and UBS have agreed that after completion of the merger:
- UBS and UBS Americas Inc. will honor PaineWebber's compensation and
benefit plans and all of PaineWebber'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 the merger agreement;
- for at least one year, UBS will provide current and former PaineWebber
employees with benefits under employee benefit plans, programs, policies
or arrangements, other than stock options or other plans involving the
issuance of securities of PaineWebber or UBS, that in the aggregate are
no less favorable than those provided by PaineWebber to such employees or
former employees immediately prior to the merger;
- each employee will be credited, for all purposes, with his or her years
of service with PaineWebber and its subsidiaries before the merger, to
the same extent as the employee was entitled, before the merger, to
credit for such service under any similar PaineWebber compensation and
benefit plan, except for purposes of benefit accrual under defined
benefit pension plans;
- UBS will, and will cause its subsidiaries to, waive any pre-existing
condition limitation under any welfare benefit plan maintained by UBS 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 PaineWebber
welfare benefit plans immediately prior to the merger, and UBS will
provide each employee with credit for any co-payments and deductibles
incurred prior to the merger for the calendar year in which the merger
occurs, in satisfying any applicable deductible or out-of-pocket
requirements under any welfare plans that the employees participate in
after the merger; and
- UBS and its subsidiaries will provide severance compensation benefits to
employees who are involuntarily terminated during the six-month period
following the merger in amounts determined in accordance with the merger
agreement, and otherwise payable in accordance with UBS's severance plan
as in effect as of the date of the merger agreement. Employees who are
involuntarily terminated during the six-month period following the merger
will be deemed to meet all eligibility requirements to receive severance
benefits pursuant to the UBS severance plan.
As soon as practicable following the date of the merger agreement,
PaineWebber will offer to enter into a retention program with key employees of
PaineWebber, particularly financial advisors, as determined and approved by UBS
in consultation with PaineWebber. In no event will any amount be payable under
any such agreement prior to the merger. UBS agreed that the aggregate amount of
retention payments payable pursuant to this program, including retention
payments to be paid consistent with the terms of the employment agreements to be
entered into as contemplated by the merger agreement, will be $875 million.
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However, the actual amount paid pursuant to this program may be greater or less
than $875 million, depending on the actual numbers of employees who remain with
PaineWebber and UBS after the merger.
YEAR 2000 BONUSES
- Accrual. Until the merger, PaineWebber will be permitted to continue to
accrue its annual bonuses for employees in respect of the portion of
PaineWebber's 2000 fiscal year elapsed through the merger in accordance
with past practice, and to allocate these bonuses to employees consistent
with past practice. In addition, during the period from the time of the
merger through 31 December 2000, UBS will accrue bonuses for these
employees in respect of this stub period consistent with PaineWebber's
past practice and allocate and communicate these bonuses to employees
consistent with PaineWebber's past practice.
- Payment. UBS will pay 2000 fiscal year bonuses in cash to employees no
later than 9 February 2001. An employee must be employed with PaineWebber
or its subsidiaries on the payment date to be eligible to receive his or
her fiscal year 2000 bonus, except that any employee who is involuntarily
terminated prior to the date on which he or she would have received the
fiscal year 2000 bonus will receive his or her fiscal year 2000 bonus on
the date that the fiscal year 2000 bonuses are paid. In addition, UBS
will cause the stub period bonuses to be paid no later than 9 February
2001.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
After the merger, UBS will indemnify and hold harmless the individuals who
prior to the merger were directors or officers of PaineWebber or any of its
subsidiaries as follows:
- UBS will indemnify against all costs arising from or relating to or
otherwise in respect of any actual or threatened claim or action arising
out of matters existing before or at the effective time of the merger to
the fullest extent permitted under applicable law.
- However, UBS will not be required to indemnify any individual who acted
in bad faith and not in a manner that the individual believed to be in
the best interests of PaineWebber.
UBS will, for a period of six years after the merger becomes effective,
provide directors' and officer's liability insurance that will reimburse present
and former officers and directors of PaineWebber or its subsidiaries for claims
against them arising from events that occurred before the effective time of the
merger, in coverage and amounts that are no less than, and on terms that are no
less advantageous in any material respect than, that provided by PaineWebber.
ADDITIONAL COVENANTS
The merger agreement contains additional covenants regarding the conduct of
the parties prior to the merger, some of which are described below.
REASONABLE BEST EFFORTS
Subject to the terms of the merger agreement, each of PaineWebber and UBS
will use its reasonable best efforts in good faith, to take, or cause to take,
all actions, and to do, or cause others to do, all things necessary, proper or
desirable, or advisable under applicable laws, so as to permit consummation of
the merger as promptly as practicable. Each will cooperate fully with the other
to that end.
STOCKHOLDER MEETINGS
- PaineWebber will, as promptly as practicable after the registration
statement on Form F-4, of which this document is a part, has been
declared effective by the SEC, take all action necessary to convene a
special meeting of the holders of PaineWebber's common stock at which the
holders of PaineWebber's common stock will consider the adoption of the
merger agreement, even if the
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board makes no recommendation with respect to this proposal or recommends
that the stockholders reject this proposal.
- The board of directors of PaineWebber will recommend to its stockholders
the adoption of the merger agreement and will use its best reasonable
efforts, subject to the terms of the merger agreement and applicable law,
to solicit such adoption, subject to the right of the board to withdraw
its recommendation under certain circumstances.
In addition, UBS agreed that it would take all action necessary to convene
an extraordinary general meeting of UBS's shareholders at which a resolution
would be proposed to consider the approval of an increase in UBS's authorized
capital for the UBS ordinary shares to be issued in the merger and pursuant to
PaineWebber's stock options and stock-based awards. This meeting was convened,
and the UBS shareholders approved the proposal, on 7 September 2000.
REGULATORY APPLICATIONS; CONSENTS
- PaineWebber, UBS and their respective subsidiaries will 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 the merger agreement as promptly as reasonably
practicable.
DIVIDENDS
- PaineWebber will coordinate with UBS the declaration and setting of
record dates and payment dates of dividends on shares of PaineWebber
common stock so that holders of shares of PaineWebber common stock do
not:
- receive dividends on both shares of PaineWebber common stock and UBS
ordinary shares received in the merger in respect of any calendar
quarter; or
- fail to receive a dividend on either shares of PaineWebber common
stock or UBS ordinary shares received in the merger in respect of any
calendar quarter.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of the parties to the merger agreement are subject to the
fulfillment or waiver of various conditions as described in this section.
CONDITIONS TO UBS'S AND PAINEWEBBER'S OBLIGATIONS
UBS and PaineWebber are obligated to complete the merger only if each of
the following conditions is satisfied or waived:
- The merger agreement must be adopted by the holders of a majority of the
shares of PaineWebber common stock entitled to vote at the special
meeting, and an increase in the ordinary share capital of UBS must be
approved by the affirmative vote of not less than two-thirds of the UBS
ordinary shares, and an absolute majority of the par value of the UBS
shares, represented at the UBS extraordinary general meeting of
shareholders. The necessary approval of the UBS shareholders was obtained
on 7 September 2000.
- 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 must have been obtained or
made and must be in full force and effect and all waiting periods
required by law must have expired other than those that, if they were not
obtained or made or if they had not expired, would not reasonably be
expected to have a detrimental impact on relations with governmental
authorities. No governmental or regulatory consent will be deemed
obtained or made if it is subject to any condition or restriction the
effect of which, together with any other such
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conditions or restrictions, would be reasonably likely to have a material
adverse effect on the surviving corporation in the merger or UBS after
the merger.
- No governmental authority may have enacted or issued any statute, rule,
injunction or other order that restrains or prohibits the consummation of
the merger and the related transactions.
- The Form F-4 registration statement, of which this document is a part,
must have become effective prior to the mailing of the PaineWebber proxy
statement to its shareholders and there must be no stop order in effect
suspending the effectiveness of the Form F-4. The Form F-4 registration
statement is currently effective.
- The SWX Swiss Exchange must have granted permission for the listing of
the UBS ordinary shares to be issued in the merger and pursuant to
PaineWebber stock options and stock-based awards, and such permission
must not have been withdrawn prior to the effective time of the merger.
- The New York Stock Exchange must have authorized the UBS ordinary shares
to be issued in the merger and pursuant to PaineWebber stock options and
stock-based awards for listing on the New York Stock Exchange, subject to
official notice of issuance.
CONDITIONS TO OBLIGATIONS OF PAINEWEBBER
PaineWebber will be obligated to complete the merger only if each of the
following conditions is satisfied or waived:
- The representations and warranties of UBS must be true and correct as of
the date of the merger agreement and as of the date of closing, and
PaineWebber must have received a certificate to that effect, dated the
closing date, signed by a senior executive officer on behalf of UBS.
- UBS and UBS Americas Inc. must have performed all obligations required by
the merger agreement at or prior to the closing date, and PaineWebber
must have received a certificate to that effect, dated the closing date,
signed by a senior executive officer on behalf of UBS.
- PaineWebber must receive the opinion of Cravath, Swaine & Moore, counsel
to PaineWebber, dated the closing date, to the effect that the merger
will be treated for U.S. federal income tax purposes as a
"reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code, and the related rules and regulations, and that each party
to the merger agreement will be a party to the reorganization within the
meaning of Section 368(b) of the Internal Revenue Code, and the related
rules and regulations, UBS will be treated as a corporation within the
meaning of Section 367(a) of the Internal Revenue Code, and the related
rules and regulations, as to each eligible PaineWebber stockholder, as
defined under "Taxation" above, and an eligible PaineWebber stockholder,
as defined under "Taxation" above, will not recognize taxable gain in
connection with the receipt of UBS ordinary shares exchanged for
PaineWebber common stock pursuant to the merger, except with respect to
cash received in lieu of fractional UBS ordinary shares.
CONDITIONS TO THE OBLIGATION OF UBS
UBS will be obligated to complete the merger only if each of the following
conditions is satisfied or waived:
- The representations and warranties of PaineWebber must be true and
correct as of the date of the merger agreement and as of the date of
closing, and UBS must have received a certificate to that effect, dated
the closing date, signed by PaineWebber's Chief Executive Officer and
Chief Financial Officer on behalf of PaineWebber.
- PaineWebber must have performed in all material respects all obligations
required by the merger agreement at or prior to the closing date, and UBS
must have received a certificate to that effect, dated the closing date,
signed by PaineWebber's Chief Executive Officer and Chief Financial
Officer on behalf of PaineWebber.
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- UBS must receive the opinion of Sullivan & Cromwell, counsel to UBS,
dated the closing date, to the effect that the merger will qualify as a
"reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code, and the related rules and regulations, and that each party
to the merger agreement will be a party to the reorganization within the
meaning of Section 368(b) of the Internal Revenue Code, and the related
rules and regulations.
TERMINATION AND THE EFFECTS OF TERMINATION
The merger agreement may be terminated under the circumstances described in
this section. In some cases this may require PaineWebber to pay a termination
fee which is described in the next section.
TERMINATION BY UBS OR PAINEWEBBER
The merger agreement may be terminated and the merger may be abandoned at
any time prior to the effective time of the merger:
- by the mutual consent of UBS, UBS Americas Inc. and PaineWebber
- by UBS or PaineWebber, in the event of:
- a breach by the other party of any representation, warranty, covenant
or agreement contained in the merger agreement, 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
- which breach, individually or in the aggregate with other such
breaches, would cause a condition of the merger agreement not to be
satisfied or is reasonably likely to prevent, materially delay or
materially impair the ability of the parties to consummate the merger;
- by UBS or PaineWebber, if UBS and PaineWebber do not complete the merger
on or before 31 December 2000, unless either party elects to extend the
termination date to 31 March 2001 if any banking or insurance regulatory
approval still needs to be obtained;
- by UBS or PaineWebber, if the approval of any governmental authority
required for consummation of the merger has been denied by final
nonappealable action of the governmental authority, as further discussed
in the merger agreement; or
- by UBS or PaineWebber, if
- PaineWebber's stockholders failed to approve the merger; or
- UBS's shareholders failed to approve the increase in share capital to
provide for the UBS ordinary shares to be issued in the merger and
pursuant to PaineWebber's stock options and stock-based awards.
TERMINATION BY UBS
UBS may unilaterally terminate the merger agreement at any time prior to
the effective time of the merger under the following circumstances:
- if at any time prior to the special meeting, PaineWebber's board of
directors fails to recommend stockholder approval of the merger
agreement, withdraws its recommendation or modifies or changes its
recommendation in a manner adverse to the interests of UBS; or
- if PaineWebber or its board of directors recommends that the PaineWebber
stockholders approve any acquisition proposal other than the merger.
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FEE IF THE MERGER AGREEMENT IS TERMINATED
PaineWebber must pay to UBS a cash termination fee of $370,000,000 if
either company terminates the merger agreement:
- because the merger has not occurred by 31 December 2000 or because the
required vote of the PaineWebber stockholders is not obtained to adopt
the merger agreement;
- prior to the time of the termination or prior to the special meeting, an
acquisition proposal other than that contemplated in the merger agreement
is made to PaineWebber or its stockholders or is made publicly known; and
- concurrently with such termination or within fifteen months after such
termination, either
- PaineWebber enters into an agreement to engage in another acquisition
transaction or another acquisition transaction occurs; or
- the board of directors of PaineWebber authorizes, recommends or
approves another acquisition transaction or publicly announces an
intention to authorize, recommend or approve another acquisition
transaction.
PaineWebber also must pay a cash termination fee of $370,000,000 if UBS
terminates the merger agreement because PaineWebber recommends another
acquisition proposal to its stockholders.
If UBS terminates the merger agreement because PaineWebber does not
recommend that its stockholders adopt the merger agreement, withdraws such
recommendation or modifies or changes such recommendation in a manner adverse to
the interests of UBS, then
- PaineWebber must pay UBS $125,000,000; and
- if, concurrently with such termination or within fifteen months after
such termination, PaineWebber or its board of directors acts on another
acquisition transaction as described above, then PaineWebber must, in
addition to the payment of $125,000,000, pay UBS $245,000,000.
In no event will the termination fees payable under the merger agreement
exceed $370,000,000 in the aggregate.
EXPENSES
Each party will bear all expenses incurred by it in connection with the
merger agreement, except that PaineWebber and UBS will each bear one-half of the
costs and expenses of filing, printing and distributing the Form F-4, the
PaineWebber proxy statement, the circular to be sent to UBS's shareholders and
documents related to that circular.
AMENDMENT AND WAIVER
Before the merger, any provision of the merger agreement may be waived by
the party benefited by the provision in a written document signed by that party,
or amended or modified at any time by an agreement in writing executed in the
same manner as the merger agreement. However, after the stockholders of
PaineWebber adopt the merger agreement, no amendment may be made which under
applicable law would require further approval of such stockholders without
obtaining such required further approval.
STOCKHOLDER VOTING AGREEMENTS
On 12 July 2000, as a condition and inducement to UBS's entering into the
merger agreement, UBS entered into stockholder voting agreements with the
following stockholders of PaineWebber:
- General Electric Company and its subsidiaries that are stockholders of
PaineWebber;
- The Yasuda Mutual Life Insurance Company;
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- Donald B. Marron, the Chairman of the Board and Chief Executive Officer
of Paine Webber Group Inc. and PaineWebber Incorporated; and
- Joseph J. Grano, Jr., the President of PaineWebber Incorporated.
These stockholders, who together beneficially own and have voting control over
approximately 30% of the shares of PaineWebber common stock, have agreed to vote
for adoption of the merger agreement at the PaineWebber special meeting.
The stockholder voting agreements provide, among other things, that each
stockholder will vote all of the shares of PaineWebber common stock over which
the stockholder has voting power in favor of adoption of the merger agreement
and approval of the merger and any other transaction contemplated by the merger
agreement. The stockholder voting agreements also provide that each stockholder
will not:
- sell or otherwise dispose of, or enter into a contract to sell or
otherwise dispose of, the stockholder's shares of PaineWebber common
stock;
- exchange or convert the stockholder's shares of PaineWebber common stock
for or into shares of non-voting common stock of PaineWebber before the
PaineWebber stockholders have voted on the merger;
- grant any proxies with respect to any of the stockholder's shares of
PaineWebber common stock;
- deposit any of the stockholder's shares of PaineWebber common stock into
a voting trust or enter into a voting or option agreement with respect to
any of those shares;
- directly or indirectly, 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, an acquisition proposal; or
- take any action that would make any representation or warranty of the
stockholder in the stockholder voting agreements untrue or incorrect or
prevent, burden or materially delay the consummation of merger.
The stockholder voting agreements provide that they will terminate upon the
earlier of:
- the effective time of the merger; and
- the termination of the merger agreement.
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DISSENTERS' RIGHTS OF APPRAISAL
Under Section 262 of the Delaware General Corporation Law, if you do not
vote your outstanding shares of PaineWebber common stock in favor of adoption of
the merger agreement, you will be entitled to dissent and elect to have the
"fair value" of your shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if any, judicially determined by the Delaware Court of Chancery and
paid to you in cash.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the Delaware General Corporation Law and is qualified
in its entirety by the full text of Section 262, a copy of which is provided as
Appendix C to this document. All references in Section 262, and in this summary,
to a "stockholder" are to the record holder of the shares of PaineWebber common
stock as to which appraisal rights are asserted. If you have a beneficial
interest in shares of PaineWebber common stock held of record in the name of
another person, such as a broker or nominee, you must act promptly to cause the
record holder to follow properly the steps summarized below and in a timely
manner to perfect your appraisal rights.
Under Section 262, where a merger agreement is to be submitted for adoption
at a meeting of stockholders, as is the case of the special meeting of
PaineWebber stockholders described in this document, the corporation, not less
than 20 days prior to the meeting, must notify each of its stockholders on the
record date entitled to appraisal rights that appraisal rights are available and
include in the notice a copy of Section 262. This document is that notice to
you, and a copy of Section 262 of the Delaware General Corporation Law is
attached to this document as Appendix C. If you wish to exercise your appraisal
rights or wish to preserve the right to do so, you should review carefully
Section 262 and seek advice of legal counsel, as failure to comply fully with
the procedures of that Section will result in the loss of appraisal rights.
If you wish to exercise the right to dissent from the merger and demand
appraisal under Section 262, you must satisfy each of the following conditions:
- you must deliver to PaineWebber a written demand for appraisal of your
shares of PaineWebber common stock before the vote on adoption of the
merger agreement at the special meeting. The demand must satisfy the
requirements described below;
- you must not vote in favor of adoption of the merger agreement. Because a
proxy that does not contain voting instructions will, unless revoked, be
voted in favor of the merger agreement, if you vote by proxy and wish to
exercise appraisal rights, you must vote against adoption of the merger
agreement or abstain from voting on adoption of the merger agreement; and
- you must continuously hold your shares from the date of your written
demand through the effective time of the merger. If you are the record
holder of shares of PaineWebber common stock on the date the written
demand for appraisal is made but then transfer these shares prior to the
effective time of the merger, you will lose any right to appraisal in
respect of the shares.
Neither voting in person or by proxy against, abstaining from voting on or
failing to vote on the proposal to adopt the merger agreement will constitute a
written demand for appraisal within the meaning of Section 262. You must deliver
a written demand in addition to and separate from any such proxy or vote.
Only a holder of record of shares of PaineWebber common stock issued and
outstanding immediately prior to the effective time of the merger is entitled to
assert appraisal rights for the shares of PaineWebber common stock registered in
that holder's name. A demand for appraisal should be executed by or on behalf of
the stockholder of record, fully and correctly, as that stockholder's name
appears on the stock certificates, should specify the stockholder's name and
mailing address, the number of shares of PaineWebber common stock owned and that
the stockholder intends to demand appraisal of the stockholder's shares of
PaineWebber common stock.
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If your shares of PaineWebber common stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, then execution
of a written demand should be made in that capacity. If your shares of
PaineWebber common stock are owned of record by more than one person as in a
joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all owners. An authorized agent, including one or more joint owners,
may execute a demand for appraisal on behalf of a stockholder; however, the
agent must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, the agent is acting as agent for the owner or
owners.
A record holder such as a broker who holds shares of PaineWebber common
stock as nominee for several beneficial owners may exercise appraisal rights
with respect to the shares of PaineWebber common stock held for one or more
beneficial owners while not exercising those rights with respect to the shares
of PaineWebber common stock held for one or more other beneficial owners. In
that case, the written demand should set forth the number of shares of
PaineWebber common stock as to which appraisal is sought, and where no number of
shares is expressly mentioned, the demand will be presumed to cover all shares
of PaineWebber common stock held in the name of the record owner. If you hold
your shares of PaineWebber common stock in brokerage accounts or other nominee
forms and wish to exercise appraisal rights, you are urged to consult with your
broker to determine the appropriate procedures for the making of a demand for
appraisal by the nominee.
If you elect to exercise appraisal rights under Section 262, you should
mail or deliver your written demand to PaineWebber, 1285 Avenue of the Americas,
New York, New York 10019, Attention: Corporate Secretary.
Within ten days after the completion of the merger, the surviving
corporation must send a notice as to the effectiveness of the merger to each
former PaineWebber stockholder who has made a written demand for appraisal in
accordance with Section 262 and who has not voted in favor of adoption of the
merger agreement. Within 120 days after the completion of the merger, but not
thereafter, either PaineWebber or any holder of dissenting shares of PaineWebber
common stock who has complied with the requirements of Section 262 may file a
petition in the Delaware Court of Chancery demanding a determination of the
value of all shares of PaineWebber common stock held by dissenting stockholders.
PaineWebber is under no obligation to and has no present intent to file a
petition for appraisal, and you should not assume that PaineWebber will file a
petition or that PaineWebber will initiate any negotiations with respect to the
fair value of the shares. Accordingly, if you desire to have your shares
appraised, you should initiate any petitions necessary for the perfection of
your appraisal rights within the time periods and in the manner prescribed in
Section 262.
Within 120 days after the effective time of the merger, any stockholder who
has complied with the provisions of Section 262 to that point in time will be
entitled to receive from PaineWebber, upon a written request, a statement
setting forth the aggregate number of shares of PaineWebber common stock not
voted in favor of adoption of the merger agreement and with respect to which
demands for appraisal have been received and the aggregate number of holders of
the shares. PaineWebber must mail this statement to the stockholder within 10
days of its receipt of the request.
A stockholder that timely files a petition for appraisal with the Delaware
Court of Chancery must deliver a copy of the petition to PaineWebber, which must
within 20 days provide the Delaware Court of Chancery with a duly verified list
containing the names and addresses of all stockholders who have demanded
appraisal of their shares of PaineWebber common stock. After notice to the
stockholders, the Delaware Court of Chancery is empowered to conduct a hearing
on the petition to determine which stockholders are entitled to appraisal
rights. The Delaware Court of Chancery may require stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates to the Register in Chancery for
notation on the certificates of the pendency of the appraisal proceedings, and
if any stockholder fails to comply with the requirement, the Delaware Court of
Chancery may dismiss the proceedings as to that stockholder.
After determining the stockholders entitled to an appraisal, the Delaware
Court of Chancery will appraise the "fair value" of their shares, exclusive of
any element of value arising from the
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accomplishment or expectation of the merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
The costs of the action may be determined by the Delaware Court of Chancery and
taxed upon the parties as the Delaware Court of Chancery deems equitable. Upon
application of a holder of dissenting shares of PaineWebber common stock, the
Delaware Court of Chancery may also order that all or a portion of the expenses
incurred by any stockholder in connection with the appraisal proceeding,
including, reasonable attorneys' fees and the fees and expenses of experts, be
charged pro rata against the value of all of the shares of PaineWebber common
stock entitled to appraisal.
IF YOU CONSIDER SEEKING APPRAISAL, YOU SHOULD BE AWARE THAT THE FAIR VALUE
OF YOUR SHARES AS DETERMINED UNDER SECTION 262 COULD BE MORE THAN, THE SAME AS
OR LESS THAN THE $73.50 PER SHARE CASH PAYMENT OR THE 0.4954 OF A UBS ORDINARY
SHARE YOU WOULD BE ENTITLED TO ELECT TO RECEIVE UNDER THE MERGER AGREEMENT IF
YOU DID NOT SEEK APPRAISAL OF YOUR SHARES. YOU SHOULD ALSO BE AWARE THAT
INVESTMENT BANKING OPINIONS ARE NOT OPINIONS AS TO FAIR VALUE UNDER SECTION 262.
In determining fair value and, if applicable, a fair rate of interest, the
Delaware Court of Chancery is to take into account all relevant factors. In
Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that
could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered, and that "fair price obviously requires
consideration of all relevant factors involving the value of a company." The
Delaware Supreme Court stated that, in making this determination of fair value,
the court must consider market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other facts that could be
ascertained as of the date of the merger that throw any light on future
prospects of the merged corporation. In Weinberger, the Delaware Supreme Court
further stated that "elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of the merger
and not the product of speculation, may be considered." Section 262 provides
that fair value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the completion of the merger, be entitled to vote
the shares subject to this demand for any purpose or to receive payment of
dividends or other distributions on those shares, except dividends or other
distributions payable to holders of record of shares as of a record date prior
to the completion of the merger.
If any stockholder who demands appraisal of shares of PaineWebber common
stock under Section 262 fails to perfect, or effectively withdraws or loses, the
right to appraisal, the stockholder's shares of PaineWebber common stock will be
converted into the right to receive $73.50 per share in cash in accordance with
the merger agreement, without interest. A stockholder will fail to perfect, or
effectively lose or withdraw, the right to appraisal if no petition for
appraisal is filed within 120 calendar days after the completion of the merger.
A stockholder may withdraw a demand for appraisal by delivering to PaineWebber a
written withdrawal of the demand for appraisal and acceptance of the merger
consideration, except that any such attempt to withdraw made more than 60
calendar days after the completion of the merger will require the written
approval of PaineWebber. Once a petition for appraisal has been filed, the
appraisal proceeding may not be dismissed as to any stockholder without the
approval of the Delaware Court of Chancery.
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DESCRIPTION OF UBS ORDINARY SHARES
Set forth below is a summary of the material terms of the UBS ordinary
shares as specified in UBS's articles of association and the Swiss Code of
Obligations relating to UBS ordinary shares. This description is not complete
and is qualified in its entirety by reference to Swiss law, including Swiss
company law, and to UBS's articles of association, copies of which are available
at UBS's offices.
The ordinary shares are registered shares with a par value of CHF 10 per
share. The ordinary shares are fully paid-up and non-assessable.
REGISTRATION
Two separate registers are maintained for UBS ordinary shares -- a Swiss
register, which is maintained by UBS acting as Swiss transfer agent, and a U.S.
register, which is maintained by The Bank of New York, as U.S. transfer agent.
You are entitled to hold shares registered in your name on either register and
transfer shares from one register to the other upon giving proper instruction to
the transfer agents. As described below, the manner in which you hold your UBS
ordinary shares, i.e., in your own name or through a nominee such as The
Depository Trust Company, and the register on which your UBS ordinary shares are
held, i.e., the Swiss register or the U.S. register, will affect your dividend
payments and voting rights.
DIVIDENDS
Swiss law requires that at least 5% of the annual net profits of a
corporation must be retained as general reserves for as long as these reserves
amount to less than 20% of the corporation's nominal share capital. Any net
profits remaining may be distributed to the shareholders, except that, if an
annual dividend exceeds 5% of the nominal share capital, then 10% of the excess
must be retained as general reserves.
Under Swiss law, dividends may be paid out only if the corporation has
sufficient distributable profits from previous business years, or if the
reserves of the corporation are sufficient, to allow distribution of a dividend.
Dividends may be paid out only after approval by a shareholders' meeting. UBS's
board of directors may propose that a dividend be paid out, but cannot itself
set the dividend. UBS's auditors must confirm that the dividend proposal of the
board of directors conforms with statutory law. In practice, the shareholders
usually approve the dividend proposal of UBS's board of directors at the annual
shareholders' meeting.
Dividends are usually due and payable after the shareholders' resolution
relating to the allocation of profits has been passed. Under Swiss law, the
statute of limitations in respect of dividend payments is five years.
Accordingly, if a dividend payment is not claimed by its owner within five years
after the date on which the dividend becomes payable, the owner's right to
receive that dividend is extinguished.
UBS pays dividends in Swiss francs. For UBS ordinary shares held through
The Depository Trust Company, any dividend will be converted into U.S. dollars.
Holders of UBS ordinary shares registered on the U.S. register will receive
dividend payments in U.S. dollars, unless they provide notice to The Bank of New
York, UBS's U.S. transfer agent, that they wish to receive dividend payments in
Swiss francs. The Bank of New York will be responsible for paying over the U.S.
dollars or Swiss francs to registered holders on the U.S. register. Holders of
UBS ordinary shares registered on the Swiss register will receive dividend
payments in Swiss francs.
VOTING RIGHTS
Each UBS ordinary share carries one vote at UBS's shareholders' meetings.
Natural and legal persons will be entered in the U.S. or Swiss share register as
shareholders with voting rights, so long as the holder submits to UBS an
application for registration, containing the holder's name, nationality or
registered office and address and an explicit declaration that the holder has
acquired the registered shares in its own name and for its own account.
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Trustees and nominees will be entered as shareholders with voting rights
upon application and provided that they have executed an agreement with UBS in
which the restrictions on entry in the share register and the trustee or
nominee's duty to report to UBS regarding persons who hold shares through the
trustee or nominee are defined. No one trustee or nominee may be entered as a
shareholder with voting rights in respect of more than 5% of the registered
shares issued. Registered shares held through a trustee or nominee that exceed
the limit or for which no agreement exists will be registered without voting
rights. The 5% limit on voting rights does not apply to securities clearing
organizations such as The Depository Trust Company. As such, any shares held
through the DTC will be afforded full voting rights.
The current UBS articles of association provide that resolutions and
elections are decided at a shareholders' general meeting by an absolute majority
of the votes cast, excluding blank and invalid ballots, subject to the
compulsory provisions of Swiss law and certain exceptions pursuant to the UBS
articles of association. Resolutions presented at a UBS shareholders' meeting
generally require the approval of an absolute majority of the votes cast at a
shareholders' meeting. Shareholders' resolutions requiring a vote by absolute
majority include:
- amendments to the articles of association;
- elections of directors and statutory auditors;
- approval of the annual report and the annual group accounts;
- setting the annual dividend;
- decisions to discharge directors and management from liability for
matters disclosed to the shareholders' meeting; and
- the ordering of an independent investigation into the specific matters
proposed to the shareholders' meeting.
Under the articles of association, a resolution passed at a shareholders'
meeting with a supermajority of at least two-thirds of the shares represented at
such meeting is required to:
- change the limits on board size in the articles of association;
- remove one-fourth or more of the members of the board of directors; and
- delete or modify the above supermajority voting requirements.
Under Swiss corporate law, a resolution passed by at least two-thirds of
votes represented and an absolute majority of the par value of the shares
represented must approve:
- a change of UBS's stated purpose in the articles of association;
- the creation of shares with privileged voting rights;
- the creation of a restriction on transferability of registered shares and
removal of such restrictions;
- an increase in authorized or conditional capital;
- an increase of capital by way of capitalization of reserves, against
contribution in kind or for the purpose of acquisition and the granting
of special privileges;
- the restriction or withdrawal of pre-emptive rights of shareholders;
- a change of the registered office of UBS AG; and
- a dissolution of UBS AG other than by liquidation, for example by way of
a merger.
LIQUIDATION RIGHTS
Under Swiss law, UBS may be dissolved at any time by a shareholders'
resolution, which must be passed by an absolute majority of the shares
represented at the meeting if UBS is to be dissolved by way
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of liquidation, or by a supermajority of at least two-thirds of the votes
represented and an absolute majority of the par value of the shares represented
at the meeting in other cases, for example in a merger where UBS is not the
surviving entity. UBS will be dissolved if declared bankrupt and may be
dissolved by court order in certain other circumstances.
Under Swiss law, any surplus arising out of a liquidation is distributed,
after the settlement of all claims of all creditors, to shareholders in
proportion to the paid-up nominal value of shares held.
PREEMPTIVE RIGHTS
Under Swiss law, any issuance of shares, whether for cash or non-cash
consideration or for no consideration, must be approved by a shareholders'
meeting. Shareholders of a Swiss corporation have certain preemptive rights to
subscribe for new issues of shares in proportion to the nominal amount of shares
held. A resolution adopted at a shareholders' meeting with a supermajority may,
however, limit or suspend these preemptive rights in limited circumstances.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The term of office for members of the UBS board of directors is four years.
The initial term of office for each director is such that about one-fourth of
the board must be newly elected or re-elected every year.
SHAREHOLDERS' MEETINGS
Under Swiss law, annual ordinary shareholders' meetings must be held within
six months after the end of each of UBS's fiscal years, which ends 31 December.
Shareholders' meetings may be convened by the UBS board of directors or, if
necessary, by UBS's statutory auditors, on twenty days' advance notice. The UBS
board of directors is required to convene an extraordinary shareholders' meeting
if the shareholders at a shareholders' meeting resolve that an extraordinary
shareholders' meeting should be called, or if shareholders holding in aggregate
at least 10% of UBS's nominal share capital request such a meeting. Shareholders
that hold shares with an aggregate par value of at least CHF 1,000,000 have the
right to request that a specific proposal be put on the agenda and voted upon at
the next shareholders' meeting. An invitation for each shareholders' meeting is
sent to all registered shareholders.
A shareholders' meeting is convened by publishing a notice in the Swiss
Official Commercial Gazette (Schweizerisches Handelsamtsblatt) at least twenty
days prior to such meeting.
The UBS articles of association do not require a minimum number of
shareholders to be present in order to hold a shareholders' meeting.
At shareholders' meetings, shareholders can be represented by proxy, but
only by another shareholder eligible to vote, a proxy appointed by UBS, an
independent representative nominated by UBS, or a depository institution. Votes
are taken on a show of hands unless a written ballot is requested by at least 3%
of the votes present at the shareholders' meeting or a ballot is ordered by the
chairman of the meeting.
TRANSFER OF UBS ORDINARY SHARES
UBS ordinary shares are transferred by the making of an entry in the books
of a bank or depositary institution after an assignment in writing by the
selling shareholder and notification of the assignment to UBS by the bank or
depository institution. The purchaser must file the declaration described above
in order to be registered in either the Swiss register or the U.S. register as a
shareholder with voting rights. Failing such registration, the purchaser may not
vote at or participate in shareholders' meetings. See "-- Voting Rights" above.
A purchaser of shares will be recorded in the Swiss register or the U.S.
register with voting rights upon disclosure of its name, citizenship and address
and a declaration that it is the beneficial owner of the shares, as described
under "-- Voting Rights" above. UBS may decline to make a registration that will
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give the shareholder voting rights if the shareholder does not make this
declaration. In that case, the shareholder will be registered as a shareholder
without voting rights.
There is no limitation under Swiss law or the UBS articles of association
on the right of non-Swiss residents or nationals to own or vote UBS ordinary
shares.
CERTIFICATES
The UBS articles of association provide that UBS may elect not to print and
deliver certificates in respect of UBS ordinary shares. However, any shareholder
may request at any time that UBS print and deliver such certificates free of
charge.
NOTICES
Notices to UBS's shareholders are made by publication in the Swiss Official
Commercial Gazette. UBS's board of directors may designate further means of
communication for publishing notices to shareholders.
Notices required under the listing rules of the SWX Swiss Exchange must be
published in two Swiss newspapers in German and French. UBS or the SWX Swiss
Exchange may also disseminate the relevant information on the online exchange
information systems. The New York Stock Exchange listing rules also require that
publicity be given to the calling of a shareholders' meeting where any matter
affecting the rights or privileges of shareholders or any matter not of a
routine nature is to be considered.
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COMPARISON OF RIGHTS
OF PAINEWEBBER STOCKHOLDERS AND UBS SHAREHOLDERS
In connection with the merger, holders of PaineWebber common stock will
have the ability to elect to receive UBS ordinary shares. UBS is organized under
the laws of Switzerland, and PaineWebber is incorporated under the laws of
Delaware. The following is a summary comparison of material differences between
the rights of a PaineWebber stockholder and a UBS shareholder arising from the
differences between the corporate laws of Delaware and of Switzerland, the
governing instruments of the two companies, and the securities laws and
regulations governing the two companies. The following summary, however, is not
a complete description of the laws of Delaware or of Switzerland, the other
rules or laws referred to in this summary, the PaineWebber certificate of
incorporation, the PaineWebber by-laws or the UBS articles of association. You
are encouraged to obtain and read these documents in their entirety. See "Where
You Can Find More Information" beginning on page 18.
VOTING RIGHTS
Under Delaware law, each stockholder is entitled to one vote for each share
of capital stock held by the stockholder unless the certificate of incorporation
provides otherwise. The PaineWebber certificate of incorporation does not alter
the voting rights of holders of PaineWebber common stock.
The presence, in person or by proxy, of shares representing a majority of
the votes entitled to be cast at any PaineWebber stockholders meeting
constitutes a quorum. Shares that are represented at a shareholders' meeting but
are not voted have the same effect as a vote against the proposals raised at the
meeting. Most proposals are passed upon a vote of the majority of the shares of
PaineWebber common stock represented at a meeting at which a quorum is present,
except as set forth below under "-- Amendment of Governing Instruments." In
addition, the consummation of business combinations (as defined in the
PaineWebber certificate of incorporation) requires the affirmative vote of the
holders of at least 80% of the combined voting power of the then-outstanding
shares of PaineWebber common stock and the affirmative vote of a majority of the
combined voting power of the then-outstanding shares of PaineWebber common stock
held by disinterested stockholders (as defined in the PaineWebber certificate of
incorporation). However, this higher vote requirement does not apply to some
transactions if, as specified in the certificate of incorporation, certain
conditions are met, including approval of the transaction by a majority of the
disinterested directors or certain fair price provisions. The PaineWebber board
has unanimously approved the merger agreement and the transactions that it
contemplates. Accordingly, the affirmative vote of a majority, rather than 80%,
of the outstanding shares of PaineWebber is required to approve the adoption of
the merger agreement.
Each registered share of UBS stock entitles its holder to one vote, subject
to certain registration and declaration requirements and limitations described
above under "Description of UBS Ordinary Shares -- Voting Rights." Votes are
generally taken on a show of hands unless a written ballot is requested by at
least 3% of the votes represented or if the chairman of the meeting so orders.
The UBS articles of association do not require a minimum number of shareholders
to be present in order to hold a shareholders' meeting.
Under Swiss law, the shareholders pass resolutions and elect directors upon
the vote of an absolute majority of the votes represented, with abstentions from
voting by shares represented at the meeting having the effect of votes against
the proposal, unless provided otherwise by law or the articles of association.
Certain resolutions must be approved by at least 66 2/3% of the votes
represented and the absolute majority of the nominal value of the shares
represented, as described above under "Description of UBS Ordinary
Shares -- Voting Rights."
SHAREHOLDER PROPOSALS AND SHAREHOLDER NOMINATIONS OF DIRECTORS
Under the PaineWebber by-laws, any stockholder entitled to vote at an
annual meeting may bring business before the annual meeting, including
nominations of directors, if the stockholder gives timely notice, in writing and
in proper form, of the stockholder's intention to bring the business before the
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meeting. To be timely, a stockholder must have given written notice to the
secretary of PaineWebber 90 days in advance of the annual meeting. In addition,
SEC rules allow precatory resolutions to be included in management's proxy
statement for annual meetings of stockholders if, among other conditions
required to be met, advance notice is given to the corporation.
Under Swiss law and the articles of association of UBS, shareholders
holding shares with a nominal value of at least one million Swiss francs have
the right to request that a specific proposal be put on the agenda and voted on
at the next shareholder meeting. The UBS articles of association specify further
that the proposals must be submitted in writing prior to the deadline published
by UBS and must include the actual motion(s) to be put forward.
SOURCES AND PAYMENT OF DIVIDENDS
Under Delaware law, the board of directors, subject to restrictions set
forth in the corporation's certificate of incorporation, may declare and pay
dividends out of (1) surplus of the corporation, which is defined as net assets
less statutory capital, or (2) if no surplus exists, out of the net profits of
the corporation for the year in which the dividend is declared and/or the
preceding year. If, however, the capital of the corporation has been diminished
to an amount less than the aggregate amount of capital represented by the issued
and outstanding stock of all classes having preference upon the distribution of
assets, the board may not declare and pay dividends out of the corporation's net
profits until the deficiency in the capital has been repaired.
The PaineWebber certificate of incorporation contains no provisions
restricting dividends on PaineWebber common stock beyond the statutory
provisions.
Under Swiss law, dividends may be paid out only if the corporation has
sufficient distributable profits from previous business years, or if the
reserves of the corporation are sufficient to allow distribution of a dividend.
In either event, dividends may be paid out only after approval at the
shareholders' meeting. The board of directors may propose that a dividend be
paid out but cannot set the dividend itself. In practice, the shareholders
usually approve the dividend proposal of the board of directors. Dividends are
usually due and payable promptly after the shareholders' resolution relating to
the allocation of profits has been passed. The statute of limitations with
respect to dividend payments is five years; as a result, if the dividend is not
claimed within five years of the date on which the dividend becomes payable, the
owner's right to receive that dividend is extinguished.
The UBS articles of association, pursuant to Swiss law, provide that at
least 5% of annual profit must be allocated to the general statutory reserve
until such time as the reserve amounts to 20% of UBS's share capital. The
remaining profit is, subject to the provisions of the Swiss Code of Obligations
and of the Swiss Federal Banking law, available for distribution to the
shareholders or to be used to establish free or special reserves.
RIGHTS OF PURCHASE AND REDEMPTION
Under Delaware law, any corporation may purchase or redeem its own shares,
except that it may not purchase or redeem these shares if the capital of the
corporation is impaired at the time or would become impaired as a result of the
redemption.
Swiss law limits the number of shares a Swiss corporation may hold or
repurchase. A Swiss corporation and its subsidiaries may repurchase shares only
if they have sufficient free reserves to pay the purchase price, and if the
aggregate nominal value of such shares does not exceed 10% of the nominal share
capital. Shares repurchased by a Swiss corporation and its subsidiaries do not
carry any rights to vote at shareholders' meetings. Furthermore, the Swiss
corporation must create a blocked reserve on its balance sheet in the amount of
the purchase price of the shares held as treasury shares.
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APPRAISAL RIGHTS
Delaware law generally provides stockholders of a corporation involved in a
merger the right to demand and receive payment of the fair value of their stock.
Appraisal rights are not available, however, to holders of shares:
- listed on a national securities exchange;
- designated as a national market system security on an interdealer
quotation system operated by the National Association of Securities
Dealers, Inc.; or
- held of record by more than 2,000 stockholders;
unless the holders are required to accept in the merger anything other than
any combination of
- shares of stock or depositary receipts of the surviving corporation in
the merger;
- shares of stock or depositary receipts of another corporation that, at
the effective date of the merger, will be
(1) listed on a national securities exchange,
(2) designated as a national market system security on an interdealer
quotation system operated by the National Association of Securities
Dealers, Inc., or
(3) held of record by more than 2,000 holders; or
- cash instead of fractional shares of the stock or depositary receipts
received.
There are no appraisal rights under Swiss law.
PREEMPTIVE RIGHTS
Under Delaware law, a stockholder is not entitled to preemptive rights to
subscribe for additional issuances of stock or any security convertible into
stock unless preemptive rights are specifically granted in the certificate of
incorporation. The PaineWebber certificate of incorporation provides for
preemptive rights only with respect to shares held by The Yasuda Mutual Life
Insurance Company under an Amended Investment Agreement, dated as of 3 November
1992, between Yasuda and PaineWebber. Under the investment agreement, Yasuda is
entitled (a) if PaineWebber does not have outstanding public common stock, or if
it has outstanding public common stock and the granting of equity purchase
rights of the type set forth in this clause (a) are permitted by the rules of
any national stock exchange upon which such stock is listed, or over-the-counter
market in which such stock is traded if no longer listed, to equity purchase
rights that give it the preemptive right to purchase the amount of voting
securities or securities convertible into voting securities equal to (i) the
quotient of (x) the number of voting securities of PaineWebber owned by Yasuda
immediately prior to the issuance of equity purchase shares divided by (y) the
aggregate number of outstanding voting securities owned by persons other than
Yasuda immediately prior to the issuance of equity purchase shares, multiplied
by (ii) the aggregate number of equity purchase shares being issued by
PaineWebber to persons other than Yasuda; or (b) if the equity purchase rights
set forth in clause (a) above are not available to Yasuda, to equity purchase
rights no less favorable than the preemptive or equity purchase rights that
might be granted by PaineWebber to any other person.
Under Swiss law, any share issue, whether for cash, non-cash or no
consideration, requires the prior approval of the shareholders' meeting.
Shareholders of UBS have certain preemptive rights to subscribe for new issues
of shares, option bonds or convertible bonds in proportion to the nominal value
of shares they hold. A resolution adopted at the UBS shareholders meeting on 7
September 2000 provides that the existing shareholders will have no preemptive
rights to receive new shares in connection with the merger. However, the
existing shareholders have two months from 7 September 2000 to take legal action
to contest the resolution.
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AMENDMENT OF GOVERNING INSTRUMENTS
Under Delaware law, unless the certificate of incorporation requires a
greater vote, an amendment to the certificate of incorporation requires:
- the recommendation of the board of directors;
- the affirmative vote of a majority of the outstanding stock entitled to
vote on the amendment; and
- the affirmative vote of a majority of the outstanding stock of each class
entitled to vote on the amendment as a class.
Under the PaineWebber certificate of incorporation, PaineWebber reserves
the right to amend, alter, change or repeal any provisions contained in the
certificate of incorporation. However, the approval of the holders of shares
representing at least 80% of the combined voting power of the then-outstanding
shares of PaineWebber common stock is required to amend, alter or repeal, or
adopt a provision inconsistent with, the provisions of the certificate of
incorporation that:
- govern classification of the board or directors;
- govern stockholder meetings;
- govern liability of directors; and
- govern the adoption and amendment of PaineWebber's by-laws.
In addition, the affirmative vote of the holders of at least 80% of the
combined voting power of the then-outstanding shares of PaineWebber common stock
and the affirmative vote of a majority of the combined voting power of the
then-outstanding shares of PaineWebber common stock held by disinterested
stockholders (as defined in PaineWebber's certificate of incorporation) is
required to amend, alter or repeal, or adopt a provision inconsistent with, the
provisions of the certificate of incorporation that govern business combinations
(as defined in the certificate of incorporation).
Under Delaware law, stockholders have the power to adopt, amend or repeal
by-laws, but the certificate of incorporation may give those powers to the
directors of the corporation as well. The PaineWebber certificate of
incorporation and by-laws provide that the board of directors is authorized to
make, amend or repeal the by-laws, without any action on the part of the
stockholders, but with a vote of a majority of the board. The stockholders may,
however, adopt, amend, alter or repeal any provision of PaineWebber's by-laws
with the approval of 80% of the combined voting power of the then outstanding
shares of PaineWebber common stock. This 80% voting requirement does not apply
if two-thirds of the disinterested directors, as defined in the certificate of
incorporation, of PaineWebber recommend that the stockholders adopt, amend,
alter or repeal the relevant provision or provisions of the by-laws.
Under Swiss law, provisions of the articles of association may be amended
by the affirmative vote of the absolute majority of the votes represented at a
shareholders meeting. However, under the articles of association of UBS, these
provisions may be amended by the affirmative vote of the absolute majority of
the votes cast, except for the following resolutions, which require a vote of at
least two-thirds of the votes represented at the meeting:
- a change in the required number of directors;
- the removal of one fourth or more of the members of the board of
directors;
- change or modify the above supermajority voting requirements;
- changes in UBS's business purpose;
- the creation of shares with privileged voting rights;
- the creation of restrictions on the transferability of registered shares
and the removal of such restrictions;
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- an increase in the authorized or conditional share capital;
- an increase in capital by way of capitalization of reserves, against
contribution in kind or for the purpose of acquisition of assets and the
granting of special privileges;
- the restriction or withdrawal of pre-emptive rights of shareholders;
- a change of the registered office of UBS AG; or
- a dissolution of UBS AG other than by liquidation, for example, by way of
a merger.
PREFERRED STOCK
The PaineWebber certificate of incorporation authorizes the PaineWebber
board of directors to provide for the issuance of one or more series of
preferred stock. At the date of this document, no preferred stock was
outstanding.
Under Swiss law, the shareholders may, in accordance with the articles of
association, or by way of an amendment of the articles of association, authorize
the issuance of preferred shares. UBS's articles of association do not provide
for preferred shares.
ANNUAL OR GENERAL MEETINGS
A Delaware corporation is required to hold an annual meeting of
stockholders. The PaineWebber by-laws provide that all meetings of stockholders
are to be held at any place designated by the PaineWebber board of directors.
Under Swiss law and the UBS articles of association, an annual ordinary
shareholders' meeting must be held within six months after the end of UBS's
financial year. Ordinary shareholders' meetings may be convened by the board of
directors or, in exceptional circumstances, by the statutory auditors.
SPECIAL MEETINGS
Delaware law provides that special meetings of stockholders may be called
by:
- the board of directors; or
- any person or persons authorized by the corporation's certificate of
incorporation or by-laws.
The PaineWebber by-laws provide that special meetings of stockholders may
be called only by the board of directors.
Under Swiss law, the board of directors is required to convene an
extraordinary shareholders meeting if resolved by an ordinary shareholders
meeting or if requested by shareholders holding in the aggregate at least 10% of
the nominal share capital of UBS.
The UBS articles of association provide that an extraordinary general
meeting may be convened whenever the board of directors or the auditors consider
it necessary. Additionally, an extraordinary general meeting must be convened if
such a meeting is demanded by a resolution of the shareholders in a general
meeting or by a written request from one or more shareholders representing
together at least 10% of the share capital.
NOTICES
The PaineWebber by-laws provide that notice of each meeting of stockholders
must be mailed or personally delivered to stockholders entitled to receive
notice of an annual or special meeting not less than ten days and not more than
60 days prior to the meeting. The notice must specify the place, date and hour
of the meeting and, in the case of a special meeting, the purpose for which the
meeting is called.
Under Swiss law, a shareholders' meeting is convened by publishing a notice
in the Swiss Official Commercial Gazette at least 20 days prior to such meeting.
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The UBS articles of association provide that a general meeting may be
called by publishing a single notice in the publication of record designated by
the corporation and sending an invitation to all registered shareholders.
The notices of UBS's shareholders' meetings must specify the items on the
agenda and recommendations put forward. No later than 20 days prior to the
ordinary shareholders' meeting, UBS must make available to its shareholders its
annual report and the auditors' report. Each shareholder has the right to ask
for immediate delivery of these reports.
PROXY STATEMENTS AND REPORTS
Under the rules of the New York Stock Exchange, both PaineWebber and UBS
must publish at least once a year and submit to shareholders an annual report.
Both parties are also required to submit their annual financial statements or a
summary of the statements to newspapers of general circulation in large cities
and national news wire services.
The rules of the New York Stock Exchange also state that interim earnings
statements must be published as soon as available, and that they must be
released to newspapers and the national wire services.
Under the U.S. proxy rules, PaineWebber must comply with notice and
disclosure requirements relating to the solicitation of proxies for
stockholders' meetings. As a foreign private issuer, UBS is not subject to these
rules. However, UBS must comply with the notice and disclosure provisions set
forth above in respect of shareholder meetings.
Under the listing rules of the SWX Swiss Exchange and under the Swiss
Banking Act, UBS must publish an interim financial report in addition to the
annual report (including the auditors' report). This report must cover a time
frame of six months or less.
Under the listing rules of the SWX Swiss Exchange, UBS has the obligation
to disclose price-sensitive facts to its shareholders ("ad hoc publicity"). As a
general rule, UBS must inform the market of any price-sensitive facts that have
arisen in its sphere of activity and are not public knowledge. Moreover, UBS has
certain additional reporting obligations under the rules of the SWX Swiss
Exchange as a condition to maintaining its listing.
As a foreign private issuer, UBS is not required to file with the SEC all
of the reports and notices that PaineWebber, as a reporting public company under
the Securities Exchange Act of 1934, is required to file. UBS must, however,
file an annual report on Form 20-F with the SEC within six months of the end of
each fiscal year pursuant to the requirements of the Securities Exchange Act and
must also provide certain other information on Form 6-K upon the occurrence of
significant corporate events.
SHAREHOLDERS' VOTES ON CERTAIN TRANSACTIONS
Generally, under Delaware law, unless the certificate of incorporation
provides for the vote of a larger portion of the stock, completion of a merger,
a consolidation, or the sale, lease or exchange of all or substantially all of a
corporation's assets or dissolution of the corporation requires:
- the approval of the board of directors; and
- the approval by a vote of the holders of a majority of the outstanding
stock or, if the certificate of incorporation provides for more or less
than one vote per share, a majority of the votes of the outstanding stock
of a corporation entitled to vote on the matter.
Under the rules of the New York Stock Exchange, the issuance of additional
shares of common stock of a listed company involving directors, officers,
substantial security holders or other affiliates of the company, involving a
change in control or totaling 20% or more of the outstanding shares of common
stock of the company requires the approval of the holders of a majority of the
shares voting on the transaction. Other transactions do not require shareholder
approval under the New York Stock Exchange rules.
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Under Swiss law, a resolution passed at a shareholders meeting with a
majority of 66 2/3% of the votes represented and the absolute majority of the
nominal values of the shares represented is required for the dissolution of UBS
other than by liquidation, including by way of a merger.
RIGHTS OF INSPECTION
Delaware law allows any stockholder the right:
- to inspect the corporation's stock ledger, a list of its stockholders,
and its other books and records; and
- to make copies or extracts of those materials during normal business
hours, provided that the stockholder makes a written request under oath
stating the purpose of his inspection, and the inspection is for a
purpose reasonably related to the person's interest as a stockholder.
Under Swiss law, company books and correspondence may be inspected only
with the express authorization of the shareholders, given at the shareholders'
meeting, or by resolution of the board of directors and subject to the Swiss
laws regarding the safeguarding of business secrets. At the shareholders'
meeting, any shareholder is entitled to request information from the board of
directors concerning the affairs of the corporation and from the corporation's
auditors concerning the execution and results of their examination. The
information will be given to the extent necessary to exercise shareholders'
rights. It may be refused if business secrets or other interests of the
corporation are jeopardized.
In addition, if the shareholders' inspection and information rights prove
to be insufficient, each shareholder may petition the general shareholders'
meeting to appoint a special commissioner to examine specified facts in a
special inspection. If the general meeting approves the request, the corporation
or any shareholder may ask a court of competent jurisdiction in the
corporation's domicile to appoint a special commissioner within thirty days. If
the general meeting denies the request, within three months one or more
shareholders who hold at least 10% of the equity capital of the corporation or
shares with an aggregate nominal value of at least CHF 2 million may petition a
court of competent jurisdiction to order the appointment of a special
commissioner. Such a request must be granted and a special commissioner
appointed if the court finds prima facie evidence that the board of directors or
an officer breached the law or did not act in accordance with the corporation's
charter documents and thereby has damaged the company or the shareholders. The
costs of the investigation are generally allocated to the corporation and only
in exceptional cases to the petitioner(s).
STANDARD OF CONDUCT FOR DIRECTORS
Neither Delaware law nor the PaineWebber certificate of incorporation and
by-laws contain any specific provisions setting forth the standard of conduct of
a director. The scope of the fiduciary duties of the PaineWebber board is
therefore determined by the courts of the State of Delaware. In general,
directors have a duty to act in good faith, considering all material information
reasonably available, and with loyalty to the company and the stockholders.
Under Swiss law, the directors and senior officers of a Swiss corporation
are bound, as specified in the Swiss Code of Obligations, to perform their
duties with due care, to safeguard the interests of the corporation in good
faith, and to extend equal treatment to shareholders in like circumstances. For
example, pursuant to the statutory rule that the board of directors must extend
equal treatment to its shareholders in like circumstances, selective share
repurchases at prices differing from market levels or share issues only to
selected shareholders might violate statutory law.
CLASSIFICATION OF THE BOARD OF DIRECTORS
Delaware law permits the certificate of incorporation or a
stockholder-adopted by-law to provide that directors be divided into one, two or
three classes, with the term of office of one class of directors to expire each
year. The PaineWebber certificate of incorporation and by-laws provide for a
classified board, divided into three classes, as nearly equal in number as
possible, with each class elected for a three-year staggered term.
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The UBS articles of association provide that the term of office for each
director 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 is fixed in such a way as to assure that about one fourth of all the
members must be newly elected or re-elected every year.
REMOVAL OF DIRECTORS
Delaware law provides that a director may be removed with or without cause
by the holders of a majority in voting power of the shares entitled to vote at
an election of directors, or such larger proportion of the voting power as may
be provided in the certificate of incorporation, except that:
- members of a classified board of directors may be removed only for cause,
unless the certificate of incorporation provides otherwise; and
- directors may not be removed in certain situations in the case of a
corporation having cumulative voting.
The certificate of incorporation and by-laws of PaineWebber provide that
directors may only be removed for cause, and only by the affirmative vote of a
majority of the combined voting power of the then-outstanding shares of all
stock entitled to vote in the election of directors.
Under Swiss law, the shareholders appoint the members of the board of
directors and the shareholders may remove directors at any time in a
shareholders' meeting. Directors may be re-elected by the shareholders. The UBS
articles of association do not modify this legal standard.
VACANCIES ON THE BOARD OF DIRECTORS
Under Delaware law, unless otherwise provided in the certificate of
incorporation or the by-laws, vacancies on a board of directors resulting from
death, resignation, removal or other cause and newly created directorships
resulting from an increase in the number of directors may be filled by a
majority of the directors in office. However, if the holders of a specific class
of stock are entitled to elect directors, vacancies and newly created
directorships may be filled only by a majority of the directors elected by that
class of stock.
The PaineWebber certificate of incorporation and by-laws provide that,
subject to the rights of any class of stock having a preference over the
PaineWebber common stock as to dividends and liquidation, vacancies on the
PaineWebber board resulting from death, resignation, removal or other causes or
newly created directorships will be filled only by the affirmative vote of a
majority of the remaining directors in office, even if less than a quorum. The
PaineWebber certificate of incorporation and by-laws also provide that any
directors so chosen to fill a vacancy or newly created directorship will serve
for the remainder of the full term of the relevant directorship and until such
director's successor has been elected and qualified.
The PaineWebber by-laws provide that the PaineWebber board of directors may
fix the number of directors from time to time, without decreasing the number to
less than three, subject to the right of the holders of any class of stock
having preference over the common stock as to dividends and liquidation.
The UBS articles of association provide that (i) vacancies may be filled
only by a majority of the votes cast at a general meeting and (ii) new directors
elected by a majority of votes cast at a general meeting to replace members who
vacate their office before completion of their term will 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.
LIABILITY OF DIRECTORS AND OFFICERS
Delaware law permits a corporation's certificate of incorporation to
include a provision eliminating or limiting the personal liability of a director
to the corporation and its stockholders for monetary damages
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arising from a breach of fiduciary duty as a director. However, no provision can
limit the liability of a director for
- any breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- intentional or negligent payment of unlawful dividends or stock purchases
or redemptions; or
- any transaction from which the director derives an improper personal
benefit.
Under Swiss law, directors and senior officers who act 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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware law provides that a corporation may indemnify any officer or
director who is made a party to any third party suit or proceeding on account of
being a director, officer, employee or agent of the corporation against
expenses, including attorney's fees, judgments, fines and amounts paid in
settlement, reasonably incurred by him in connection with the action, through,
among other things, a majority vote of a quorum consisting of directors who were
not parties to the suit or proceeding if:
- the officer or director acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
corporation; and
- in a criminal proceeding, the officer or director had no reasonable cause
to believe his conduct was unlawful.
The PaineWebber by-laws provide that, to the fullest extent permitted by
Delaware law, PaineWebber will indemnify any person who is or was a director or
officer or is or was involved in any manner or is threatened to be made so
involved in any threatened, pending or completed investigation, claim, action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director or officer of
PaineWebber, or is or was serving at the request of PaineWebber as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, against all expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by that person in connection with
the proceeding. The certificate of incorporation provides that, to the fullest
extent permitted by Delaware law, directors will not be liable to PaineWebber or
its stockholders for money damages for breach of fiduciary duty as a director.
PaineWebber maintains directors' and officers' insurance for its directors
and officers.
Under Swiss law, a corporation may indemnify a director or officer of the
corporation against losses and expenses, unless arising from his or her 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 having been the representative of or
serving at the request of the corporation.
UBS also maintains directors' and officers' insurance for its directors and
officers.
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SHAREHOLDERS' SUITS
Under Delaware law, a stockholder may initiate a derivative action to
enforce a right of a corporation if the corporation fails to enforce the right
itself. The complaint must state that the plaintiff was a stockholder at the
time of the transaction of which the plaintiff complains or that the plaintiff's
shares thereafter devolved on the plaintiff by operation of law, and either
allege with particularity the efforts made by the plaintiff to obtain the action
the plaintiff desires from the directors, or state the reasons for the
plaintiff's failure to obtain the action or for not making the effort.
As a general principle, the board of directors of a Swiss corporation has
the power to institute lawsuits on behalf of the corporation. This authority may
also be granted to specific attorneys-in-fact. A shareholder may not, by virtue
of his or her interest as shareholder, institute a derivative action on behalf
of the corporation except in limited circumstances. However, such shareholders
may invoke the personal liability of the directors if an action by the directors
damages the corporation.
Swiss law permits a shareholder to take legal action against resolutions of
the shareholders' meeting that violate the law or the articles of association by
filing a suit within two months after the shareholders' meeting has taken place.
If the suit is dismissed, the judge allocates the costs in his or her own
discretion between the corporation and the plaintiff.
LIMITATIONS ON ENFORCEABILITY OF CIVIL LIABILITIES UNDER U.S. FEDERAL SECURITIES
LAWS
UBS is a Swiss company headquartered in Switzerland. Many of the directors
and officers of UBS 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 and the directors and officers of
UBS located outside the U.S.;
- enforce in U.S. courts or outside the U.S. judgments obtained against
those persons in U.S. courts;
- 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.
Switzerland and the United States do not have a treaty providing for
reciprocal recognition of and enforcement of judgments in civil and commercial
matters. The recognition and enforcement of a judgment of the courts of the
United States in Switzerland is governed by the principles laid out in the Swiss
Federal Act on Private International Law. This statute provides in principle
that a judgment rendered by a non-Swiss court may be enforced in Switzerland
only if (1) the foreign court had jurisdiction (pursuant to the Swiss Federal
Act on Private International Law), (2) the judgment of such foreign court has
become final and non-appealable, (3) the judgment does not contravene Swiss
public policy and (4) the court procedures and the service of documents leading
to the judgment was in compliance with the principles of due process of law.
"SHORT SWING" PROFITS
Directors and officers of PaineWebber are subject to rules under the
Securities Exchange Act that may require directors and officers to forfeit to
PaineWebber any "short swing" profits realized from purchases and sales, as
determined under the Securities Exchange Act and the related rules, of
PaineWebber securities over short periods.
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Swiss law does not explicitly address "short swing" profits. However, short
swing profits realized from purchases and sales by directors and officers of a
Swiss company may constitute insider trading, which is a criminal offense under
the Swiss penal code.
CERTAIN PROVISIONS RELATING TO SHARE ACQUISITIONS
Section 203 of the Delaware General Corporation Law prohibits "business
combinations," including mergers, sales and leases of assets, issuances of
securities and similar transactions by a corporation or a subsidiary with an
"interested stockholder" who beneficially owns 15% or more of a corporation's
voting stock, within three years after the person or entity becomes an
interested stockholder, unless:
- the transaction that will cause the person to become an interested
stockholder is approved by the board of directors of the target prior to
the transaction;
- after completion of the transaction in which the person becomes an
interested stockholder, the interested stockholder holds at least 85% of
the voting stock of the corporation not including (a) shares held by
directors who are also officers and (b) shares held by certain employee
benefit plans; or
- after the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and
holders of at least 66 2/3% of the outstanding voting stock, excluding
shares held by the interested stockholder.
The merger of UBS and PaineWebber is governed by the limitations set forth
in Section 203. In addition, the PaineWebber certificate of incorporation
provides that in some circumstances pertaining to certain sales, leases,
exchanges, mortgages, pledges, transfers or other dispositions of assets or
securities, plans for dissolution, or reclassification of securities, the
affirmative vote of at least 80% of the combined voting power of the
then-outstanding shares of voting stock and the affirmative vote of a majority
of the combined voting power of the then-outstanding share of voting stock held
by disinterested stockholders, as defined in the certificate of incorporation,
in each case voting as a single class, is required. However, this higher vote
requirement does not apply to some transactions if, as specified in the
certificate of incorporation, certain conditions are met, including approval of
the transaction by a majority of the disinterested directors or certain fair
price provisions.
The PaineWebber board has unanimously approved the merger agreement and
each of the transactions that it contemplates. Accordingly, the affirmative vote
of a majority, rather than 80%, of the outstanding shares of PaineWebber is
required to approve the adoption of the merger agreement.
Swiss law does not prohibit business combinations with an interested
shareholder. However, in certain circumstances, shareholders and members of the
board of directors, as well as persons close to them, must return unjustified
benefits they received from the company.
ANTI-TAKEOVER MEASURES
A Delaware court will generally apply a policy of judicial deference to
board of director decisions to adopt anti-takeover measures in the face of a
potential takeover if the directors are able to show that:
- they had reasonable grounds for believing that there was a danger to
corporate policy and effectiveness from an acquisition proposal; and
- the board action taken was reasonable in relation to the threat posed.
According to the Swiss Stock Exchange Act, from the moment a takeover offer
is published until the result is announced, the board of directors of the target
company may not enter into legal transactions that would have the effect of
altering significantly the assets or liabilities of the company. Decisions taken
by the general shareholders' meeting are not subject to this restriction and may
be implemented irrespective of whether they were adopted before or after
publication of an offer.
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DISCLOSURE OF INTERESTS IN SHARES
Under the applicable provisions of the Swiss Stock Exchange Act, persons
who acquire or dispose of shares and thereby reach, exceed or fall below any of
the thresholds of 5%, 10%, 20%, 33 1/3%, 50% or 66 2/3% of the voting rights of
a Swiss listed corporation must notify the corporation and the SWX Swiss
Exchange of such transactions, whether or not the voting rights can be
exercised. Following receipt of such notification, the corporation must inform
the public of those transactions. An additional disclosure requirement exists
under Swiss company law, according to which UBS must disclose the identity of
all of its shareholders who hold more than five percent of its voting rights.
This disclosure must be made once a year in an annex to the financial statements
as published in UBS's annual report.
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THE COMPANIES
PAINE WEBBER GROUP INC.
DESCRIPTION OF BUSINESS
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 approximately 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.
DESCRIPTION OF PROPERTY
The principal executive offices of PaineWebber are located at 1285 Avenue
of the Americas, New York, New York, under leases expiring through 31 December
2015. PaineWebber is currently leasing approximately 669,000 square feet at 1285
Avenue of the Americas principally comprising the offices of its investment
banking, asset management, capital markets, and corporate headquarters staff, as
well as four branch offices for retail financial advisors.
PaineWebber leases approximately 968,000 square feet of space at Lincoln
Harbor in Weehawken, New Jersey under leases expiring through 31 December 2013.
The Lincoln Harbor facility principally comprises the offices of the Private
Client Group headquarters, systems, operations, administrative services, and
finance divisions.
During 1999, PaineWebber entered into an agreement to lease 267,000 square
feet at the Newport Center in Jersey City, New Jersey. PaineWebber began
occupying the space during the second quarter of 2000. The Newport Center
facility will principally comprise the offices of the operations and information
services divisions.
At 30 June 2000, PaineWebber maintained approximately 385 offices worldwide
under leases expiring between 2000 and 2015. In addition, PaineWebber leases
various furniture and equipment.
FURTHER INFORMATION ABOUT PAINEWEBBER
For further information about PaineWebber, please see the documents
incorporated by reference into this document, as described under "Where You Can
Find More Information" beginning on page 18.
UBS AG
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.
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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.
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.
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Set forth below is summary information relating to UBS.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
--------------------- ------------------
2000 1999(1) 1999 1998
---------- ------- ------- -------
(CHF IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(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.
<TABLE>
<CAPTION>
AT 30 JUNE AT 31 DECEMBER AT 31 DECEMBER
2000 1999 1998
---------- -------------- --------------
<S> <C> <C> <C>
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
</TABLE>
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 in 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.
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<PAGE> 95
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).
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 PaineWebber
On 12 July 2000, UBS announced that it had entered into a definitive merger
agreement with PaineWebber 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.
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<PAGE> 96
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.
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.
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- 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.
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
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<PAGE> 98
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."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
------------------ ------------------
2000 1999(1) 1999 1998
------- ------- ------- -------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
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
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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.
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.
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT 30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
----------------------- ------------ ---------------- ----------------
(CHF IN BILLIONS)
<S> <C> <C> <C>
Individual Clients................. 221 223 229
Corporate Clients.................. 213 212 178
Banks.............................. 5 4 27
--- --- ---
Total............................ 439 439 434
=== === ===
</TABLE>
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.
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- 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.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN BILLIONS)
<S> <C> <C> <C>
Deposit and current accounts........... 125 129 153
Securities accounts.................... 314 310 281
--- --- ---
Total................................ 439 439 434
=== === ===
</TABLE>
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.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN BILLIONS)
<S> <C> <C> <C>
Individual Clients..................... 77 76 90
Corporate Clients...................... 68 68 49
Recovery Portfolio..................... 18 21 26
--- --- ---
Total................................ 163 165 165
=== === ===
</TABLE>
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.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN BILLIONS)
<S> <C> <C> <C>
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
=== === ===
</TABLE>
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
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<PAGE> 101
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.
<TABLE>
<CAPTION>
(CHF IN BILLIONS)
-----------------
<S> <C>
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
===
</TABLE>
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 performance
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<PAGE> 102
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."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
---------------- --------------
2000 1999 1999 1998
----- ----- ----- -----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(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 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
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<PAGE> 103
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.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN MILLIONS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
---------------
(1) Includes money market instruments, UBS medium-term notes, derivatives,
mutual funds not managed by UBS and precious metals.
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
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<PAGE> 104
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."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
------------------ ------------------
2000 1999(1) 1999 1998
----- ------- ----- -----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(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 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
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<PAGE> 105
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.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN MILLIONS)
<S> <C> <C> <C>
Institutional.................................. 326,000 376,000 360,000
Non-institutional.............................. 199,000 198,000 171,000
------- ------- -------
Total..................................... 525,000 574,000 531,000
======= ======= =======
</TABLE>
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.
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.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN MILLIONS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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.
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<PAGE> 106
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.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN MILLIONS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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 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.
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<PAGE> 107
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."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
------------------ --------------
2000 1999(1) 1999 1998
----- ------- ---- ----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(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.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN MILLIONS)
<S> <C> <C> <C>
Investment Funds............................. 202,500 201,000 175,600
GAM.......................................... 22,100 23,500 0
------- ------- -------
Total...................................... 224,600 224,500 175,600
======= ======= =======
</TABLE>
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
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<PAGE> 108
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.
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.
<TABLE>
<CAPTION>
FUND CATEGORY 30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------- ------------ ---------------- ----------------
(CHF IN MILLIONS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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.
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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 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
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<PAGE> 110
trading began in New York and London in the 1970s and grew in the 1980s with the
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."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
----------------- ----------------
2000 1999(1) 1999 1998
------ ------- ------ ------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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)
====== ====== ====== ======
Average regulatory equity used.......................... 9,850 10,750 10,050 13,300
(at period end)
Number of employees..................................... 12,730 13,148 12,694 13,794
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
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
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<PAGE> 111
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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
31 DECEMBER(1)
-------------------
1999 1998
-------- -------
(CHF IN MILLIONS)
<S> <C> <C>
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
====== =====
</TABLE>
---------------
(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;
- 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.
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<PAGE> 112
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.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
31 DECEMBER
------------
1999 1998
---- ----
(% OF TOTAL)
<S> <C> <C>
Corporations................................................ 26% 39%
Institutional investors..................................... 70% 55%
Governments and supranational organizations................. 4% 6%
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
104
<PAGE> 113
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 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.
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<PAGE> 114
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.
<TABLE>
<CAPTION>
AS OF 31 DECEMBER
------------------------
1999 1998
---------- ----------
(CHF IN MILLIONS)
<S> <C> <C>
Due from banks.............................................. 25,891 62,272
Loans to customers.......................................... 56,374 72,425
------ -------
Total loans............................................... 82,265 134,697
====== =======
</TABLE>
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 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."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
---------------- --------------
2000 1999(1) 1999 1998
----- ------- ----- -----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
===== ===== ===== =====
</TABLE>
106
<PAGE> 115
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
---------------- --------------
2000 1999(1) 1999 1998
----- ------- ----- -----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(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. 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;
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<PAGE> 116
- 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.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN MILLIONS; ALL AMOUNTS ARE BOOK VALUES)
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN MILLIONS; ALL AMOUNTS ARE BOOK VALUES)
<S> <C> <C> <C>
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
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
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN MILLIONS; ALL AMOUNTS ARE BOOK VALUES)
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
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.
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<PAGE> 117
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.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
------------ ---------------- ----------------
(CHF IN MILLIONS)
<S> <C> <C> <C>
Early stage................................ 582 488 49
Late stage................................. 3,183 2,505 1,735
----- ----- -----
3,765 2,993 1,784
===== ===== =====
</TABLE>
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."
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 V 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.
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<PAGE> 118
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
---------------- ---------------
2000 1999(1) 1999 1998
----- ------- ------ -----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(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.
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.
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<PAGE> 119
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.
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
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<PAGE> 120
- 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 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.
<TABLE>
<CAPTION>
AS OF AS OF
30 JUNE 31 DECEMBER
------- ----------------
2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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.
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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
- 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
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<PAGE> 122
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
- 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
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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 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.
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<PAGE> 124
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,
- 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.
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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 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 121 for a discussion
of options and warrants issued by UBS.
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NATURE OF TRADING MARKET
Trading on the Swiss Exchange
The primary market for the UBS ordinary shares is the SWX Swiss Exchange.
The UBS ordinary shares trade on the SWX Swiss Exchange under the symbol
"UBSNZn.S." The SWX Swiss Exchange was founded in 1993 as the successor to the
local stock exchanges of Zurich, Basel and Geneva. Trading in foreign equities
and derivatives began in December 1995. In August 1996, the SWX Swiss Exchange
introduced full electronic trading in Swiss equities, derivatives and bonds. The
aggregate turnover of the SWX Swiss Exchange, for both equity and debt
instruments, was in excess of CHF 1.1 trillion in 1999. As of 31 December 1999,
the equity securities of 412 corporations, including 173 foreign corporations,
were listed and traded on the SWX Swiss Exchange.
Trading on the SWX Swiss Exchange occurs through a fully integrated trading
system covering the entire process from trade order through settlement. Trading
begins each business day at 9:00 a.m. and continues until 5:00 p.m. After close
of exchange trading, new orders can be entered or deleted until 10:00 p.m., the
system is not available between 10:00 p.m. and 6:00 a.m. From 6:00 a.m., new
entries and inquires can be made until 9:00 a.m. For the opening phase, starting
at 9:00 a.m., the system closes the order book and starts opening procedures; it
establishes the opening prices and determines orders to be executed according to
established rules that match bid and asked prices.
Transactions take place through the automatic matching of orders. Each
valid order is entered and listed according to the price limit. In general,
market orders, orders placed at best price, are executed first, followed by
limit orders, orders placed at a price limit, provided that if several orders
are listed at the same price, they are executed according to the time of entry.
Transactions in shares effected by or through members of the SWX Swiss Exchange
are subject to a stock exchange levy of up to 0.02%, calculated on the
settlement price.
Banks and broker-dealers doing business in Switzerland are required to
report all transactions in listed securities traded on the SWX Swiss Exchange.
For transactions effected via the exchange system, reporting occurs
automatically. Off-exchange transactions must be reported to the SWX Swiss
Exchange within 30 minutes. Transaction information is collected, processed and
immediately distributed by the SWX Swiss Exchange. Transactions outside trading
hours must be reported no later than the next opening. The SWX Swiss Exchange
distributes a comprehensive range of information through various publications,
including in particular the Swiss Market Feed, or "SMF." The SMF supplies SWX
Swiss Exchange data in real time to all subscribers, as well as to other
information providers such as Reuters.
Exchange transactions are usually settled on a "T+3" basis, meaning that
delivery and payment of exchange transactions occur three days after the trade
date. The SWX Swiss Exchange promotes efficient processing by automatically
transmitting transactions to SIS SEGAINTERSETTLE AG (or Intersettle) via the
SECOM electronic settlement system.
A listed security may be suspended by the SWX Swiss Exchange if large price
fluctuations are observed, if important, price-sensitive information is about to
be disclosed, or in other situations that might endanger fair and orderly
trading. Surveillance and monitoring is the responsibility of the SWX Swiss
Exchange, as the organizer of the market. The aim of supervision is to ensure
fair trading and an orderly market.
UBS Ordinary Shares
The principal trading market for the UBS ordinary shares in the SWX Swiss
Exchange.
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The following table sets forth, for the calendar quarters indicated, the
reported highest and lowest closing price for one UBS ordinary share on the SWX
Swiss Exchange, as derived from the SWX Swiss Exchange, and the trading volume
for the UBS ordinary shares on the SWX Swiss Exchange.
<TABLE>
<CAPTION>
UBS ORDINARY SHARES(1)
-------------------------
HIGH LOW VOLUME(3)
----- ----- ---------
(IN CHF)
<S> <C> <C> <C>
1998(2):
Third quarter............................................... 326.5 135.0 165.0
Fourth quarter.............................................. 221.0 137.5 134.0
1999:
First quarter............................................... 246.0 207.5 106.2
Second quarter.............................................. 264.0 221.5 76.2
Third quarter............................................... 247.0 202.5 78.2
Fourth quarter.............................................. 240.0 202.5 95.8
2000:
First quarter............................................... 218.5 191.0 107.4
Second quarter.............................................. 250.0 209.5 92.7
Third quarter (through 15 September 2000)................... 261.0 224.0 52.2
</TABLE>
---------------
(1) The share prices and volumes in this table have been adjusted for the
two-for-one stock split that became effective on 8 May 2000.
(2) As a result of the 1998 merger of Union Bank of Switzerland and Swiss Bank
Corporation, shares of UBS AG began trading on 29 June 1998. UBS ordinary
shares did not trade at any time prior to that date.
(3) In millions of UBS ordinary shares on the SWX Swiss Exchange.
Official trading of UBS ordinary shares on the New York Stock Exchange
began on 16 May 2000, under the symbol "UBS.N." The following table sets forth,
for the periods indicated, the reported highest and lowest closing price for one
UBS ordinary share on the New York Stock Exchange, as derived from the New York
Stock Exchange, and the trading volume for UBS ordinary shares on the New York
Stock Exchange.
<TABLE>
<CAPTION>
UBS ORDINARY SHARES
--------------------------
HIGH LOW VOLUME
---- --- ---------
(IN US$)
<S> <C> <C> <C>
16 May -- 30 June 2000...................................... 153 130 7/16 598,900
1 July -- 31 August 2000.................................... 153 3/16 135 3/16 5,144,300
</TABLE>
At 30 June 2000, 8,767,209 UBS ordinary shares were held by 1,124
shareholders with registered addresses in the U.S. The combined shareholdings of
these shareholders comprise approximately 2.27% of the total number of
outstanding UBS ordinary shares, including treasury shares, at 30 June 2000.
These figures do not include either the number of UBS ordinary shares held by
shareholders with registered addresses outside the U.S. in which U.S. residents
have an interest or the number of any such U.S. residents.
MARKET ACTIVITIES
During the distribution of UBS ordinary shares in the merger, UBS Warburg,
a business group of UBS, intends to engage in various dealing and brokerage
activities involving UBS ordinary shares outside the United States. Among other
things, UBS Warburg intends to make a market in the UBS ordinary shares by
purchasing and selling UBS ordinary shares for its own account. These activities
may occur on
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the SWX Swiss Exchange, in the over-the-counter market in Switzerland or
elsewhere outside the United States. UBS Warburg is not obliged to make a market
in UBS ordinary shares and any such market making may be discontinued at any
time. In addition, UBS may borrow UBS ordinary shares for delivery to
PaineWebber stockholders in the merger. If UBS delivers borrowed shares, then,
after the merger is completed, UBS or UBS Warburg may also purchase UBS ordinary
shares in the market in order to cover any short position created by borrowing
UBS ordinary shares for delivery. These activities could have the effect of
preventing or retarding a decline in the market price of the UBS ordinary
shares.
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.
<TABLE>
<CAPTION>
EXPIRATION OF
YEAR OF INITIAL CURRENT TERM
NAME POSITION HELD APPOINTMENT OF OFFICE
---- ------------- --------------- -------------
<S> <C> <C> <C>
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
</TABLE>
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Information concerning the members of the Group Executive Board is set
forth below:
<TABLE>
<CAPTION>
YEAR OF INITIAL
NAME POSITION HELD APPOINTMENT
---- ------------- ---------------
<S> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
INSTRUMENT TYPE NUMBER ISSUED EXERCISE PRICE (IN CHF) EXPIRATION (IN YEARS)
--------------- ------------- ----------------------- ---------------------
<S> <C> <C> <C>
Options.............. 14,004,159 199 4.4
Warrants............. 6,257,804 227 2.3
Total........... 21,251,398 208 3.7
</TABLE>
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.
121
<PAGE> 130
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:
<TABLE>
<CAPTION>
CHF MILLION 1999
----------- ----
<S> <C>
Mortgages at 1 January...................................... 27
Additions................................................... 6
Reductions.................................................. 5
Mortgages at 31 December.................................... 28
</TABLE>
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.
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 the merger or an election between cash
and UBS ordinary shares. We strongly urge that you read this document in its
entirety.
122
<PAGE> 131
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 the 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.
<TABLE>
<CAPTION>
ITEM PAGES
---- ---------------
<S> <C>
Private and Corporate Clients Loan Portfolio, percentage of
original recovery portfolio worked out at 30 June 2000.... 93
Additional breakdown of the Private and Corporate Clients
Loan Portfolio at 30 June 2000............................ 92 - 93
UBS Capital Investment Portfolio -- Investments by Sector at
30 June 2000 and Investment Portfolio aging at 30 June
2000...................................................... 108 - 109
Additional detail on property at 30 June 2000............... 116
Additional information on country risk exposure at 30 June
2000...................................................... 166 - 167 and
186 - 188
More detailed information on NPL and credit loss allowance
and provisions at 30 June 2000............................ 167 - 170,
185 - 186,
188 - 191
</TABLE>
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.
123
<PAGE> 132
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.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE YEAR ENDED
30 JUNE 31 DECEMBER(1)
------------------- ------------------
2000 1999(1) 1999 1998
----- ------- ----- ------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
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
===== ===== ===== ======
</TABLE>
---------------
(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.
124
<PAGE> 133
- 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.
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
125
<PAGE> 134
variability at an acceptably low level. For further discussion of UBS's risk
management and control see "-- Analysis of Risks -- Consequential Risks."
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.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
------------------------ ------------------------
2000 1999(1) 1999 1998
---------- ---------- ---------- ----------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
------ ------ ------ ------
TOTAL 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
====== ====== ====== ======
</TABLE>
---------------
(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.
126
<PAGE> 135
Net fee and commission income increased by CHF 1,651 million, or 21.1%,
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.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
30 JUNE
------------------
2000 1999
----- ---------
(CHF IN MILLIONS)
<S> <C> <C>
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
===== =====
</TABLE>
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 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.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
30 JUNE
------------------
2000 1999(1)
----- ---------
(CHF IN MILLIONS)
<S> <C> <C>
Foreign exchange(2)......................................... 680 718
Fixed income................................................ 643 1,303
Equities.................................................... 4,346 2,439
----- -----
Total............................................. 5,669 4,460
===== =====
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
(2) Includes other trading income such as banknotes, precious metals and
commodities.
127
<PAGE> 136
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 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.
128
<PAGE> 137
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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
31 DECEMBER(1)
-------------------
1999 1998
------- -------
(CHF IN MILLIONS)
<S> <C> <C>
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
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
====== ======
</TABLE>
---------------
(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.
129
<PAGE> 138
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.
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER(1)
------------------
1999 1998
------ -------
(CHF IN MILLIONS)
<S> <C> <C>
Foreign exchange(2)......................................... 1,108 1,992
Fixed income................................................ 2,603 162
Equities.................................................... 4,008 1,159
----- ------
Total..................................................... 7,719 3,313
===== ======
</TABLE>
---------------
(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 CHF 790 million write-down of UBS's trading position in
Long Term Capital Management, L.P., or "LTCM," 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 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
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<PAGE> 139
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.
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.
<TABLE>
<CAPTION>
31 DECEMBER
------------------
1998 1997
------- -------
(CHF IN MILLIONS)
<S> <C> <C>
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
</TABLE>
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<PAGE> 140
<TABLE>
<CAPTION>
31 DECEMBER
------------------
1998 1997
------- -------
(CHF IN MILLIONS)
<S> <C> <C>
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)
====== ======
</TABLE>
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 counterparty allowances. The largest provisions in the emerging
markets economies were as follows at 31 December 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------ ------
(CHF IN MILLIONS)
<S> <C> <C>
Brazil...................................................... 276 55
Indonesia................................................... 168 29
South Korea................................................. 186 19
</TABLE>
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
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<PAGE> 141
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.
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.
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<PAGE> 142
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.
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.
<TABLE>
<CAPTION>
USAGE IN 2000 30 JUNE 31 DECEMBER
---------------------------------- ------- -------------
PERSONNEL IT PREMISES OTHER 2000 1999 1998
--------- --- -------- ----- ------- ----- -----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
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
== == == == === ===== =====
</TABLE>
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.
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<PAGE> 143
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.
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 million investment, to leave a remaining balance of $29
million, and $25 million was recorded as income.
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<PAGE> 144
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 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.
136
<PAGE> 145
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.
<TABLE>
<CAPTION>
EXPECTED CREDIT IAS CREDIT
LOSS 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
==== === ==== === ===== ===== === ===
</TABLE>
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;
- 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.
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<PAGE> 146
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.
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.
138
<PAGE> 147
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.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE(1) 31 DECEMBER(2)
-------------------- --------------------
2000 1999(2) 1999 1998
------- ------- ------- -------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
------- ------- ------- -------
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
======= ======= ======= =======
</TABLE>
---------------
(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.
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<PAGE> 148
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.
- 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.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
------------------------ ------------------------
2000 1999(1) 1999 1998
---------- ---------- ---------- ----------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
===== ===== ===== =====
</TABLE>
140
<PAGE> 149
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
------------------------ ------------------------
2000 1999(1) 1999 1998
---------- ---------- ---------- ----------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
===== ===== ===== =====
</TABLE>
---------------
(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 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.
Assets under management increased CHF 53.6 billion, or 8.5%, 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.
141
<PAGE> 150
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.
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.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED 30 YEAR ENDED
JUNE 31 DECEMBER(1)
------------------------ ------------------------
2000 1999(1) 1999 1998
---------- ---------- ---------- ----------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(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
142
<PAGE> 151
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.
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.
143
<PAGE> 152
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.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
---------------- ---------------
2000 1999(1) 1999 1998
---- ------- ----- -----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(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 23 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.
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.
144
<PAGE> 153
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.
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.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
------------------ -------------------
2000 1999(1) 1999 1998
------ ------- ------ ------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING INCOME:
Equities(2).......................................... 5,724 3,253
Fixed Income(2)...................................... 2,464 (267)
Corporate Finance(2)................................. 2,054 1,665
Treasury Products(2)................................. 1,805 2,351
Non-Core Business(2)................................. 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)
====== ====== ====== ======
</TABLE>
---------------
(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.
145
<PAGE> 154
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.
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.
146
<PAGE> 155
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 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
147
<PAGE> 156
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 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.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
---------------- --------------
2000 1999(1) 1999 1998
---- ------- ---- ----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
=== === === ===
</TABLE>
---------------
(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
restructuring related to
148
<PAGE> 157
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.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
----------------- --------------
2000 1999(1) 1999 1998
----- -------- ----- -----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(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 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.
149
<PAGE> 158
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.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 2000 31 DECEMBER 1999(1)
---------------- -------------------
(CHF IN MILLIONS)
<S> <C> <C>
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)
==== ===
</TABLE>
---------------
(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, 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.
150
<PAGE> 159
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.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
----------------- -----------------
2000 1999 1999 1998
----- ------ ----- ------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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)
==== ===== ===== ======
</TABLE>
---------------
(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.
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.
151
<PAGE> 160
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 50.7%, 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.
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.
152
<PAGE> 161
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.
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER
------------------
1998 1997(1)
------- -------
(CHF IN MILLIONS)
<S> <C> <C>
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)
======= =======
</TABLE>
---------------
(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 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.
153
<PAGE> 162
Private Banking. The following table sets forth the results of Private
Banking for the years ended 31 December 1998 and 1997.
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER
------------------------
1998 1997
---------- ----------
(CHF IN MILLIONS)
<S> <C> <C>
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................................. 4,336 3,165
======= =======
(at period end)
ASSETS UNDER MANAGEMENT (CHF IN BILLIONS):
Advisory.................................................. 458 470
Discretionary............................................. 149 140
------- -------
Total............................................. 607 610
======= =======
</TABLE>
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.
Depreciation and amortization increased slightly, from CHF 122 million in
1997 to CHF 126 million in 1998.
154
<PAGE> 163
UBS Asset Management. The following table sets forth the results of UBS
Asset Management for the years ended 31 December 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER
------------------------
1998 1997
---------- ----------
(CHF IN MILLIONS)
<S> <C> <C>
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
======= =======
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(at period end)
ASSETS UNDER MANAGEMENT (CHF IN BILLIONS):
Institutional............................................. 360 373
Non-institutional......................................... 171 131
------- -------
Total............................................. 531 504
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER
------------------
1998 1997(1)
------- -------
(CHF IN MILLIONS)
<S> <C> <C>
OPERATING INCOME:
Equities.................................................. 3,334
Fixed income.............................................. (267)
Corporate Finance......................................... 1,665
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
====== ======
</TABLE>
155
<PAGE> 164
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER
------------------
1998 1997(1)
------- -------
(CHF IN MILLIONS)
<S> <C> <C>
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
====== ======
</TABLE>
---------------
(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 goodwill on Russian and
Brazilian subsidiaries of CHF 35 million due to weak market conditions in these
countries in 1998.
156
<PAGE> 165
UBS Capital. The following table sets forth the results of UBS Capital for
the years ended 31 December 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER
------------------------
1998 1997
---- ----
(CHF IN MILLIONS)
<S> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER
------------------
1998 1997
------- -----
(CHF IN MILLIONS)
<S> <C> <C>
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
====== ====
</TABLE>
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 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.
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<PAGE> 166
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.
UBS PERFORMANCE AGAINST TARGETS
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 2000 31 DECEMBER 1999
---------------- ----------------
<S> <C> <C>
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
</TABLE>
---------------
(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
158
<PAGE> 167
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 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
159
<PAGE> 168
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.
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 retained earnings as well as
a further reduction in risk weighted assets.
<TABLE>
<CAPTION>
PRO
FORMA 31 DECEMBER
30 JUNE -----------------------
2000 30 JUNE 2000 1999 1998
------- ------------ ------- -------
(CHF IN MILLIONS EXCEPT RATIOS)
<S> <C> <C> <C> <C>
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 options................................ 12,450 12,450 10,813 16,018
------- ------- ------- -------
Total BIS risk-weighted assets..................... 293,527 264,706 273,106 303,719
======= ======= ======= =======
</TABLE>
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
160
<PAGE> 169
- 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.
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,
161
<PAGE> 170
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.
The following table sets forth information regarding total shareholders'
equity at 30 June 2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
31 DECEMBER
30 JUNE --------------------
2000 1999 1998
--------- -------- --------
(CHF IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C>
Total shareholders' equity............................... 31,876 30,608 28,794
Total shareholders' equity to total assets............... 3.4% 3.4% 3.3%
</TABLE>
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.
<TABLE>
<CAPTION>
31 DECEMBER
30 JUNE ------------
2000 1999 1998
------- ---- ----
<S> <C> <C> <C>
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
</TABLE>
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 in April 2000 that it had changed
its outlook for its long-term rating of UBS 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.
162
<PAGE> 171
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.
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
163
<PAGE> 172
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 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
164
<PAGE> 173
companies, financial institutions, multi-national corporate clients and
investment 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.
<TABLE>
<CAPTION>
UBS ASSET
UBS SWITZERLAND MANAGEMENT UBS WARBURG CORPORATE 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
--------------------------------------- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
</TABLE>
---------------
(1) Deducted from assets.
(2) Booked as liabilities.
165
<PAGE> 174
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 of
30 June 2000 compared to 31 December 1999 and 31 December 1999 compared to 31
December 1998.
<TABLE>
<CAPTION>
BANKING TRADED TRADABLE
COUNTRY CATEGORIES PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL
------------------ -------- ----------- --------- -------
<S> <C> <C> <C> <C>
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
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
</TABLE>
---------------
(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.
166
<PAGE> 175
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.
<TABLE>
<CAPTION>
BANKING TRADED TRADABLE
REGION PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL
------ -------- ----------- --------- ------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
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
</TABLE>
---------------
(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.
167
<PAGE> 176
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
------ ------ ----- ----- -- -- ------ ------
</TABLE>
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.
The following table provides a breakdown of impaired loans by type at 30
June 2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
31 DECEMBER
30 JUNE --------------------------
2000 1999 1998
------- ----------- -----------
(CHF IN MILLIONS)
<S> <C> <C> <C>
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%
</TABLE>
168
<PAGE> 177
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.
<TABLE>
<CAPTION>
31 DECEMBER
30 JUNE --------------------------
2000 1999 1998
------- ----------- -----------
(CHF IN MILLIONS)
<S> <C> <C> <C>
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
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%
</TABLE>
The following analysis provides an overview of UBS's credit loss experience
for 30 June 2000 and 31 December 1999 and 1998:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED
SIX MONTHS ENDED 31 DECEMBER
30 JUNE ----------------
2000 1999 1998
---------------- ------ ------
(CHF IN MILLIONS)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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 12,389
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
169
<PAGE> 178
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
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.
170
<PAGE> 179
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, 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
<TABLE>
<CAPTION>
SIX MONTHS ENDED 30 JUNE 2000 YEAR ENDED 31 DECEMBER 1999
--------------------------------------- -------------------------------------------
30 JUNE 31 DECEMBER
CHF MILLIONS MIN. MAX. AVERAGE 2000 MIN. MAX. AVERAGE 1999
------------ ----- ------ ------- ------------ ----- ------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
----- ------ ------ ------ ----- ------ ------ ------
</TABLE>
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.
171
<PAGE> 180
[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 UBS GROUP
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER
---------------- --------------
CHF MILLION 2000 1999 1998
----------- ---------------- ----- -----
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
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.
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
172
<PAGE> 181
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 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.
173
<PAGE> 182
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 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.
174
<PAGE> 183
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.
<TABLE>
<CAPTION>
WITHIN 1 1 TO 3 3 TO 12 1 TO 5 OVER 5
CHF THOUSANDS PER BASIS POINT MONTH MONTHS MONTHS YEARS YEARS TOTAL
----------------------------- -------- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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)
</TABLE>
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.
- 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.
175
<PAGE> 184
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.
<TABLE>
<CAPTION>
31 DECEMBER
30 JUNE ------------
2000 1999 1998
------- ---- ----
(CHF IN MILLIONS)
<S> <C> <C> <C>
Net interest income at risk................................. (188) (355) (265)
Economic value sensitivity.................................. (787) (555) (493)
</TABLE>
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 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.
176
<PAGE> 185
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 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.
177
<PAGE> 186
The following table summarizes the VaR usage during the second half of
1998, 1999 and the first half of 2000.
<TABLE>
<CAPTION>
VAR (CHF IN MILLIONS) MINIMUM MAXIMUM AVERAGE LAST VALUE OF PERIOD
--------------------- ------- ------- ------- --------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
178
<PAGE> 187
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.
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ------------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%)
------- -------- -------- --------- -------- -------- ------- -------- --------
(CHF IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
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%
</TABLE>
179
<PAGE> 188
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ------------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%)
------- -------- -------- --------- -------- -------- ------- -------- --------
(CHF IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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 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.
<TABLE>
<CAPTION>
1997
-----------------
(CHF IN MILLIONS)
<S> <C>
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
=======
</TABLE>
180
<PAGE> 189
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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)
====== ======
</TABLE>
181
<PAGE> 190
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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)
====== ====== ====== ===== ====== ======
</TABLE>
182
<PAGE> 191
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.
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
DEPOSIT RATE (%) DEPOSIT RATE (%) DEPOSIT RATE (%)
------- -------- ------- -------- ------- --------
(CHF IN MILLIONS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
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%
======= ======= =======
</TABLE>
---------------
(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.
<TABLE>
<CAPTION>
AT 31 DECEMBER 1999
-------------------
DOMESTIC FOREIGN
-------- -------
(CHF IN MILLIONS)
<S> <C> <C>
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
====== =======
</TABLE>
183
<PAGE> 192
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.
<TABLE>
<CAPTION>
MONEY MARKET PAPER ISSUED DUE TO BANKS REPURCHASE AGREEMENTS
--------------------------- ------------------------- ---------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------- ------- ------ ------ ------- ------- ------- -------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
1999 1998 1997 UBS SBC UBS SBC
------- ------- ------- ------- ------- ------- -------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======= ======= =======
</TABLE>
---------------
(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.
184
<PAGE> 193
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.
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
1999 1998 1997 UBS SBC UBS SBC
------- ------- ------- ------ ------ ------ ------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ====== ====== ====== ======
</TABLE>
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.
<TABLE>
<CAPTION>
WITHIN 1 YEAR 1 TO 5 YEARS OVER 5 YEARS TOTAL
------------- ------------ ------------ -------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C>
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
======= ====== ===== =======
</TABLE>
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."
185
<PAGE> 194
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
1999 1998 1997 UBS SBC UBS SBC
------ ------ ------ ----- ------ ----- ------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
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
====== ====== ====== ===== ====== ===== ======
</TABLE>
---------------
(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."
186
<PAGE> 195
<TABLE>
<CAPTION>
AT 31 DECEMBER 1999
----------------------------------------------------------------------
BANKING PRODUCTS
------------------ TRADED TRADEABLE % OF TOTAL
BANKS NON-BANKS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
----- --------- ----------- --------- ------ ----------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
<TABLE>
<CAPTION>
AT 31 DECEMBER 1998
------------------------------------------------------------------------
BANKING PRODUCTS
------------------- TRADED TRADEABLE % OF TOTAL
BANKS NON-BANKS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
------ --------- ----------- --------- ------- ----------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
---------------
(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.
<TABLE>
<CAPTION>
UBS
AT 31 DECEMBER 1997
------------------------------------------------------------
BANKING TRADED TRADEABLE % OF TOTAL
PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
-------- ----------- --------- ------ ----------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
187
<PAGE> 196
<TABLE>
<CAPTION>
SBC
AT 31 DECEMBER 1997
------------------------------------------------------------
BANKING TRADED TRADEABLE % OF TOTAL
PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
-------- ----------- --------- ------ ----------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
---------------
(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.
188
<PAGE> 197
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
1999 1998 1997 UBS SBC UBS SBC
------ ------ ------ ------ ------ ------ ------
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== ====== ====== ======
</TABLE>
---------------
(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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(CHF IN MILLIONS)
<S> <C> <C> <C>
Doubtful interest..................................... 409 423 450
Net foreign exchange.................................. 351 (98) 91
Subsidiaries sold and other........................... (86) (246) (217)
--- ---- ----
Total adjustments..................................... 674 79 324
=== ==== ====
</TABLE>
189
<PAGE> 198
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."
<TABLE>
<CAPTION>
1996 1995
------------- -------------
1999 1998 1997 UBS SBC UBS SBC
------ ------ ------ ----- ----- ----- -----
(CHF IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
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
====== ====== ====== ===== ===== ===== =====
</TABLE>
---------------
(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.
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
1999 1998 1997 UBS SBC UBS SBC
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
190
<PAGE> 199
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
1999 1998 1997 UBS SBC UBS SBC
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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%
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%
===== ===== ===== ===== ===== ===== =====
</TABLE>
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.
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
30 JUNE 2000 1999 1998 1997 UBS SBC UBS SBC
------------ ------- ------- ------- ------- ------- ------- -------
(CHF IN MILLIONS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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................. 1,442 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................. 0.5% 1.2% 0.7% 1.0% 0.7% 0.8% 0.7% 1.2%
Allowance and provisions for
credit losses............. 11.6% 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............ 8.60 4.17 6.61 4.41 7.37 5.69 3.78 3.25
</TABLE>
---------------
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."
191
<PAGE> 200
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma financial statements on pages 192 to
214 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.
192
<PAGE> 201
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 and
incorporated by reference into, respectively, this document. These statements
have been prepared in accordance with IAS.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
UBS AND UBS AND
UBS AND PAINEWEBBER PAINEWEBBER
PAINEWEBBER PRO FORMA CONSOLIDATED CONSOLIDATED
PAINEWEBBER UBS COMBINED ADJUSTMENT(2) PRO FORMA PRO FORMA
-------------- ------- ----------- ------------- ------------ ------------
US$ CHF(1) CHF CHF CHF REFERENCE(2) CHF US$(3)
(IN MILLIONS) ----- ------ ------- ----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
----- ------- ------ ------
</TABLE>
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.
193
<PAGE> 202
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
AS OF 30 JUNE 2000
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
UBS AND UBS AND
UBS AND PAINEWEBBER PAINEWEBBER
PAINEWEBBER PRO FORMA CONSOLIDATED CONSOLIDATED
PAINEWEBBER UBS COMBINED ADJUSTMENT(2) PRO FORMA PRO FORMA
---------------- ------- ----------- ------------- ------------ ------------
US$ CHF(1) CHF CHF CHF REFERENCE(2) CHF US$(3)
(IN MILLIONS) ------ ------- ------- ----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
====== ======= ======= ========= ====== ========= =======
</TABLE>
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.
194
<PAGE> 203
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 and incorporated by reference into, respectively, this
document. These statements have been prepared in accordance with IAS.
FOR THE YEAR ENDED 31 DECEMBER 1999
<TABLE>
<CAPTION>
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
--------------- ------ ----------- ------------- ------------ ------------
US$ CHF(1) CHF CHF CHF REF(2) CHF US$(3)
(IN MILLIONS) ------ ------ ------ ----------- ------------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
----- ------ ------ ------
</TABLE>
The notes to the UBS and PaineWebber unaudited pro forma condensed
consolidated balance sheet and income statement are an integral part of this
information.
195
<PAGE> 204
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, $1,500 million
(CHF 2,478 million) in trust preferred securities during the third and fourth
quarters of 2000. Although it has not yet been determined how the proceeds of
these trust preferred securities will be applied, we have assumed, solely for
the purposes of these pro forma financial statements, that the cash
consideration in the merger will be financed from the proceeds of those trust
preferred securities and through the issuance of short-term debt instruments.
UBS will also enter into certain interest rate swap transactions in order to
produce the effect of issuing medium- to long-term debt.
196
<PAGE> 205
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
The pro forma net cash requirement relating to the merger, including additional
cost considerations and sources of funding, are shown below.
<TABLE>
<CAPTION>
US$ CHF
(IN MILLIONS) (IN MILLIONS)
------------- -------------
<S> <C> <C>
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
===== ======
</TABLE>
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.
197
<PAGE> 206
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
<TABLE>
<CAPTION>
US$ CHF
(IN MILLIONS) (IN MILLIONS)
------------- -------------
<S> <C> <C>
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
===== ======
</TABLE>
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.
<TABLE>
<CAPTION>
US$ CHF
(IN MILLIONS) (IN MILLIONS)
------------- -------------
<S> <C> <C>
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
====== ======
</TABLE>
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 $1,845
198
<PAGE> 207
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
million (CHF 3,048 million). This would change the pro forma information
presented in this document as follows:
<TABLE>
<CAPTION>
US$ CHF
(IN MILLIONS (IN MILLIONS
EXCEPT FOR EXCEPT FOR
EARNINGS PER EARNINGS PER %
SHARE) SHARE) CHANGE
------------ ------------ ------
<S> <C> <C> <C>
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%)
</TABLE>
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 $875
199
<PAGE> 208
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
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 $1.1 billion (CHF 1.8 billion). This proposed dividend has not
been reflected in the assumptions made for purposes of presenting pro forma
financial information.
200
<PAGE> 209
PAINEWEBBER UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000
The following unaudited condensed consolidated statement of financial
condition and income statement as of and for the six months ended 30 June 2000
is derived from the historical unaudited condensed consolidated statement of
financial condition and income statement of PaineWebber as of and for the six
months then ended, after giving effect to the unaudited IAS adjustments
described in the notes to the PaineWebber unaudited pro forma condensed
consolidated statement of financial condition and income statement: conversion
from U.S. GAAP to IAS. This information has been prepared from, and should be
read together with, the unaudited condensed consolidated financial statements
and related notes from PaineWebber's 10-Q for the six months ended 30 June 2000,
which are incorporated by reference into this document.
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
PAINE WEBBER
-----------------------------------------------------------
U.S. GAAP(1) IAS ADJUSTMENT(2) REFERENCE(2) IAS
(IN US$ MILLIONS) ------------ ----------------- ------------ ------
<S> <C> <C> <C> <C>
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
------ ------
</TABLE>
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.
201
<PAGE> 210
STATEMENT OF FINANCIAL CONDITION
AS OF 30 JUNE 2000
<TABLE>
<CAPTION>
US GAAP(1) IAS ADJ(2) REF(2) IAS
(IN USD MILLIONS) ---------- ---------- ------ ------
<S> <C> <C> <C> <C>
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
------ ------ ------
</TABLE>
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.
202
<PAGE> 211
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 incorporated by
reference from PaineWebber's 10-K for the year ended 31 December 1999 into this
document.
FOR THE YEAR ENDED 31 DECEMBER 1999
<TABLE>
<CAPTION>
U.S. GAAP(1) IAS ADJUSTMENT(2) REFERENCE(2) IAS
(IN US$ MILLIONS) ------------ ----------------- ------------ -----
<S> <C> <C> <C> <C>
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
----- -----
</TABLE>
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.
203
<PAGE> 212
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.
204
<PAGE> 213
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.
205
<PAGE> 214
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.
206
<PAGE> 215
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
and incorporated by reference into, respectively, this document.
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
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)
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
------ ------
</TABLE>
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.
207
<PAGE> 216
BALANCE SHEET
AS OF 30 JUNE 2000
<TABLE>
<CAPTION>
UBS AND
PAINEWEBBER UBS AND
CONSOLIDATED UBS PAINEWEBBER PAINEWEBBER
PRO FORMA U.S. GAAP U.S. GAAP CONSOLIDATED
IAS ADJUSTMENT(1) ADJUSTMENT U.S. GAAP
------------ ----------------------- -------------------- ------------
(IN MILLIONS) CHF CHF REFERENCE(1) CHF CHF
-------------------------------------- ------------ ----------------------- ------------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and balances with central
banks............................... 3,457 3,457
Money market paper.................... 68,506 30 68,536
Due from banks........................ 28,510 18,866 a,j 741 48,117
Cash collateral on securities
borrowed............................ 163,387 163,387
Reverse repurchase agreements......... 193,666 (3,773) 189,893
Trading portfolio assets.............. 241,697 (10,307) g,i,j 3,685 235,075
Positive replacement values........... 58,068 (380) i 57,688
Loans, net of allowance for credit
losses.............................. 251,167 8,787 a,j 741 60,695
Financial investments................. 10,962 (5,880) d (1,458) 3,624
Accrued income and prepaid expenses... 7,533 7,533
Investments in associates............. 818 818
Property and equipment................ 9,398 878 a,h 41 10,317
Intangible assets and goodwill........ 17,319 16,965 a,h 59 34,343
Other assets.......................... 14,100 15,025 c,d,e,f 1,253 30,378
--------- ------- ------ ---------
TOTAL ASSETS.......................... 1,068,588 43,954 1,319 1,113,861
--------- ------- ------ ---------
LIABILITIES
Money market paper issued............. 87,299 87,299
Due to banks.......................... 85,341 18,104 j 2,206 105,651
Cash collateral on securities lent.... 27,181 27,181
Repurchase agreements................. 277,674 (15,703) j (1,482) 260,489
Trading portfolio liabilities......... 67,207 (259) 66,948
Negative replacement values........... 78,449 (378) i (205) 77,866
Due to customers...................... 296,631 18,519 a,j 741 315,891
Accrued expenses and deferred
income.............................. 18,885 18,885
Long-term debt........................ 61,840 130 a,g (644) 61,326
Other liabilities..................... 24,082 4,212 a,b,c,d,g,i,j 250 28,544
--------- ------- ------ ---------
TOTAL LIABILITIES..................... 1,024,589 24,884 607 1,050,080
--------- ------- ------ ---------
MINORITY INTERESTS.................... 2,877 644 3,521
--------- ------- ------ ---------
TOTAL SHAREHOLDERS' EQUITY............ 1,122 19,070 68 60,260
--------- ------- ------ ---------
TOTAL LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS' EQUITY............ 1,068,588 43,954 1,319 1,113,861
--------- ------- ------ ---------
<CAPTION>
CONVENIENCE
TRANSLATION
UBS AND
PAINEWEBBER
CONSOLIDATED
PRO FORMA
U.S. GAAP
------------
(IN MILLIONS) US$(2)
-------------------------------------- ------------
<S> <C>
ASSETS
Cash and balances with central
banks............................... 2,115
Money market paper.................... 41,936
Due from banks........................ 9,442
Cash collateral on securities
borrowed............................ 99,974
Reverse repurchase agreements......... 116,192
Trading portfolio assets.............. 143,839
Positive replacement values........... 35,298
Loans, net of allowance for credit
losses.............................. 159,515
Financial investments................. 2,217
Accrued income and prepaid expenses... 4,609
Investments in associates............. 501
Property and equipment................ 6,313
Intangible assets and goodwill........ 21,014
Other assets.......................... 18,588
-------
TOTAL ASSETS.......................... 681,553
-------
LIABILITIES
Money market paper issued............. 53,417
Due to banks.......................... 64,649
Cash collateral on securities lent.... 16,632
Repurchase agreements................. 159,389
Trading portfolio liabilities......... 40,964
Negative replacement values........... 47,645
Due to customers...................... 193,288
Accrued expenses and deferred
income.............................. 11,555
Long-term debt........................ 37,524
Other liabilities..................... 17,466
-------
TOTAL LIABILITIES..................... 642,526
-------
MINORITY INTERESTS.................... 2,154
-------
TOTAL SHAREHOLDERS' EQUITY............ 36,873
-------
TOTAL LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS' EQUITY............ 681,553
-------
</TABLE>
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.
208
<PAGE> 217
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 and incorporated
by reference into, respectively, this document.
FOR THE YEAR ENDED 31 DECEMBER 1999
<TABLE>
<CAPTION>
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
------------ ------------- ----------- ------------ ------------
CHF CHF REFERENCE CHF CHF US$(2)
(IN MILLIONS) ------------ ------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
------ ------
</TABLE>
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.
209
<PAGE> 218
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.
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.
210
<PAGE> 219
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
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:
<TABLE>
<CAPTION>
BALANCE BALANCE JAN-JUN JAN-JUN
1 JANUARY 1999 1999 31 DECEMBER 2000 2000 BALANCE
1999 USAGE REVISION 1999 USAGE REVISION 30 JUNE 2000
(CHF MILLIONS) --------- ----- -------- ----------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
====== ==== ==== ===== === === =====
</TABLE>
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.
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.
211
<PAGE> 220
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
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 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.
212
<PAGE> 221
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
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 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.
213
<PAGE> 222
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
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.
214
<PAGE> 223
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
This document 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 such words as "anticipates," "expects," "believes,"
"should," "could," "intends," "estimates," and "may," or other comparable
language. In this document, forward-looking statements include, without
limitation, statements relating to:
- the implementation of strategic initiatives,
- the development of revenues overall and within specific business areas,
- the development of operating expenses, particularly personnel expenses,
- the development of other operating expenses,
- the anticipated level of capital expenditures and associated depreciation
expense,
- the expected impact of the risks that affect UBS's and PaineWebber's
businesses, including the risk of loss resulting from the default of an
obligor or counterparty,
- expected credit losses,
- the expected timing and outcome of the merger, and
- other statements relating to UBS's and PaineWebber's future business
development and economic performance.
Many factors may influence UBS's and PaineWebber's actual results and cause
them to differ materially from expected results as described in the
forward-looking statements. These factors include:
- general economic trends, including prevailing interest rates and
performance of financial markets, which may affect UBS's ability to sell
its products,
- the market of UBS's investments,
- UBS's and PaineWebber's ability to consummate their merger on the
anticipated schedule, including their ability to obtain required
stockholder and regulatory approvals, 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 UBS to increased
taxation,
- changes in UBS's and PaineWebber's expenses associated with acquisitions
and dispositions, including the merger,
- UBS's and PaineWebber's ability to attract and retain skilled personnel,
including the ability to retain personnel after the merger,
- the credit ratings and the financial position of UBS's and PaineWebber's
obligors and counterparties,
- UBS's and PaineWebber's ability to control risk in their businesses,
including their ability to improve their overall risk profiles,
- changes affecting the banking industry generally and UBS AG's banking
operations specifically, including asset quality,
215
<PAGE> 224
- increasing levels of competition in emerging markets and general
competitive factors, locally, nationally, regionally and globally,
- macroeconomic trends and government and regulatory policies affecting
business in Switzerland, the United States and around the world,
including changes in the level of interest or tax rates and movements in
foreign currency exchange rates including the exchange rate for the Swiss
franc into U.S. dollars, and
- current, pending and future legislation and regulations.
All of these factors are difficult to predict, and many are beyond the
control of the companies. Accordingly, although UBS believes that the
assumptions underlying the forward-looking information are reasonable, there can
be no assurance that those assumptions will approximate actual experience.
You should also consider other risks and uncertainties discussed in
documents filed by UBS and PaineWebber with the SEC, including UBS's most recent
Annual Report on Form 20-F for the fiscal year ended 31 December 1999 and
PaineWebber's most recent Annual Report on Form 10-K, which is incorporated by
reference into this document. Neither UBS nor PaineWebber has any obligation to
update forward-looking information.
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 on such financial statements appearing
elsewhere in this document, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements and schedules of PaineWebber
incorporated in this document by reference from PaineWebber's Annual Report on
Form 10-K for the year ended 31 December 1999 have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report on such financial
statements incorporated by reference into such Annual Report and incorporated in
this document by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
VALIDITY OF UBS ORDINARY SHARES
The validity of the shares of UBS common stock will be passed upon on
behalf of UBS by Baer & Karrer, Swiss counsel for UBS.
STOCKHOLDER PROPOSALS AND OTHER MATTERS
PaineWebber will hold an annual meeting of its stockholders in 2001 only if
the merger is not completed. If the annual meeting is to be held, proposals of
stockholders intended for inclusion pursuant to Securities Exchange Act Rule
14a-8 in proxy materials to be distributed by PaineWebber in connection with
PaineWebber's 2001 Annual Meeting of Stockholders must be received by the office
of the Secretary of Paine Webber Group Inc. no later than 26 November 2000.
In addition, pursuant to PaineWebber's by-laws, for business to be properly
brought before PaineWebber's 2001 Annual Meeting of Stockholders (other than
stockholder proposals submitted pursuant to Securities Exchange Act Rule 14a-8
referred to above), stockholders must give notice of the proposed business to
the office of the Secretary of Paine Webber Group Inc., 1285 Avenue of the
Americas, New York, New York 10019, no later than 90 days in advance of the date
of the meeting.
A putative class action seeking to direct Mr. Marron to relinquish control
of the fund referred to under "Interests of Certain Persons in the
Merger-Employment Agreements -- The Private Equity Investment Fund" was filed on
24 July 2000, in Delaware Chancery Court against PaineWebber and its board of
directors.
216
<PAGE> 225
TABLE OF CONTENTS
FINANCIAL STATEMENTS OF UBS
<TABLE>
<S> <C>
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-84
UBS Group Balance Sheet..................................... F-85
UBS Group Statement of Changes in Equity.................... F-86
UBS Group Statement of Cash Flows........................... F-87
UBS Group Notes to the Financial Statements................. F-88
</TABLE>
F-i
<PAGE> 226
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.
<TABLE>
<S> <C>
/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
</TABLE>
F-1
<PAGE> 227
CONSOLIDATED FINANCIAL STATEMENTS
UBS GROUP
YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
F-2
<PAGE> 228
UBS GROUP
INCOME STATEMENT
<TABLE>
<CAPTION>
FOR THE YEAR ENDED NOTE 31.12.1999(1) 31.12.1998(1) 31.12.1997
------------------ ---- ------------- ------------- ----------
CHF MILLION, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
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)
------- ------- -------
</TABLE>
---------------
(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
<PAGE> 229
UBS GROUP
BALANCE SHEET
<TABLE>
<CAPTION>
31.12.1999(1) 31.12.1998(1)
NOTE ------------- -------------
<S> <C> <C> <C>
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
------- -------
</TABLE>
---------------
(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
<PAGE> 230
UBS GROUP
STATEMENT OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
31.12.1999(1) 31.12.1998(1) 31.12.1997
FOR THE YEAR ENDED ------------- ------------- ----------
CHF MILLION
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
---------------
(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
<PAGE> 231
UBS GROUP
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999(1) 31.12.1998(1) 31.12.1997
CHF MILLION ------------- ------------- ----------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
---------------
(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
<PAGE> 232
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 using the closing
exchange rate. Exchange differences arising on the settlement of transactions at
rates different
F-7
<PAGE> 233
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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
<PAGE> 234
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
<PAGE> 235
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:
<TABLE>
<S> <C> <C>
- Buildings Not exceeding 50 years
- Furnishings and Not exceeding 10 years
fixtures
- Leasehold improvements Not exceeding 10 years
- Equipment Not exceeding 5 years
</TABLE>
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.
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
F-10
<PAGE> 236
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-11
<PAGE> 237
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<S> <C> <C>
- IAS 1 Presentation of Financial Statements
- IAS 14 Segment Reporting
- IAS 17 Accounting for Leases
- IAS 19 Employee Benefits
- IAS 36 Impairment of Assets.
</TABLE>
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 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
F-12
<PAGE> 238
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-13
<PAGE> 239
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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
<PAGE> 240
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.
<TABLE>
<CAPTION>
UBS
UBS ASSET UBS CORPORATE UBS
FOR THE YEAR ENDED 31 DECEMBER 1999(2) SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
-------------------------------------------- ----------- ---------- ------- --------- -------
CHF MILLION
<S> <C> <C> <C> <C> <C>
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
</TABLE>
---------------
(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
<PAGE> 241
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UBS
UBS ASSET UBS CORPORATE UBS
FOR THE YEAR ENDED 31 DECEMBER 1998(2) SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
-------------------------------------- ----------- ---------- ------- --------- -------
CHF MILLION
-----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
---------------
(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
<PAGE> 242
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C>
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
======
</TABLE>
---------------
(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
<PAGE> 243
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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31 DECEMBER 1999
------------------ ----------------------------------------------------------------
TOTAL OPERATING INCOME TOTAL ASSETS CAPITAL INVESTMENT
---------------------- ----------------- -------------------
CHF M SHARE % CHF M SHARE % CHF M SHARE %
-------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
====== === ======= === ==== ===
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31 DECEMBER 1998
------------------ ----------------------------------------------------------------
TOTAL OPERATING INCOME TOTAL ASSETS CAPITAL INVESTMENT
---------------------- ----------------- -------------------
CHF M SHARE % CHF M SHARE % CHF M SHARE %
-------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
====== === ======= === ===== ===
</TABLE>
NOTE 4 NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997(1)
------------------ ---------- ---------- -------------
CHF MILLION
<S> <C> <C> <C>
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
------ ------ ------
</TABLE>
F-18
<PAGE> 244
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997(1)
------------------ ---------- ---------- -------------
CHF MILLION
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
---------------
(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
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ---------- ---------- ----------
CHF MILLION
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
F-19
<PAGE> 245
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 NET TRADING INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997(2)
------------------ ---------- ---------- -------------
CHF MILLION
<S> <C> <C> <C>
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
====== ===== =====
</TABLE>
---------------
(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
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ---------- ---------- ----------
CHF MILLION
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
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
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ---------- ---------- ----------
CHF MILLION
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
F-20
<PAGE> 246
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ---------- ---------- ----------
CHF MILLION
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
---------------
(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
<PAGE> 247
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ----------- ----------- -----------
<S> <C> <C> <C>
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)
=========== =========== ===========
</TABLE>
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
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
F-22
<PAGE> 248
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
------- -------
</TABLE>
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
======= =======
</TABLE>
The composition of due from banks and loans to customers by type of
collateral at the end of the year was as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
======= =======
</TABLE>
F-23
<PAGE> 249
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:
<TABLE>
<CAPTION>
TOTAL
SPECIFIC COUNTRY RISK ------------------------
CHF MILLION ALLOWANCE PROVISION 31.12.1999 31.12.1998
----------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
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
====== ===== ====== ======
</TABLE>
---------------
(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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
====== ======
</TABLE>
NOTE 12C NON-PERFORMING LOANS
An analysis of changes in non-performing loans is presented in the
following table:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
====== ======
</TABLE>
The non-performing loans by type of exposure at the end of the year, were
as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
====== ======
</TABLE>
F-24
<PAGE> 250
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
====== ======
</TABLE>
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
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------ ------------------------
SECURITIES SECURITIES SECURITIES SECURITIES
CHF MILLION BORROWED LENT BORROWED LENT
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
======= ====== ====== ======
</TABLE>
NOTE 14 REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------ ------------------------
REVERSE REVERSE
REPURCHASE REPURCHASE REPURCHASE REPURCHASE
CHF MILLION AGREEMENTS AGREEMENTS AGREEMENTS AGREEMENTS
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
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.
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
TRADING PORTFOLIO ASSETS
DEBT INSTRUMENTS
Swiss government and government agencies.................... 7,391 13,448
U.S. Treasury and government agency......................... 21,821 9,969
Other government............................................ 65,821 62,639
</TABLE>
F-25
<PAGE> 251
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
======= =======
</TABLE>
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
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 12.31.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
F-26
<PAGE> 252
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The following table gives additional disclosure in respect of the valuation
methods used.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------ ------------------------
CHF MILLION BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
===== ===== ===== =====
</TABLE>
NOTE 17 INVESTMENTS IN ASSOCIATES
<TABLE>
<CAPTION>
CARRYING CARRYING
AMOUNT AS OF AMOUNT AS OF
CHF MILLION 31.12.1998 INCOME ADDITIONS DISPOSALS 31.12.1999
----------- ------------ ------ --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Total investments in associates...... 2,805 211 47 (1,961) 1,102
===== === == ====== =====
</TABLE>
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
<TABLE>
<CAPTION>
ACCUMULATED CARRYING CARRYING
AMORTIZATION AMOUNT AMOUNT
HISTORICAL AS OF AS OF DEPRECIATION, AS OF
CHF MILLION COST 31.12.1998 31.12.1998 ADDITIONS DISPOSALS WRITE-OFFS 31.12.1999
----------- ---------- ------------ ---------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Bank premises............. 10,668 (4,096) 6,572 292 (1,050) (354) 5,460
Other properties.......... 1,802 (656) 1,146 705 (325) (59) 1,467
Equipment and furniture... 6,035 (3,867) 2,168 1,823 (525) (1,692) 1,774
------ ------ ----- ----- ------ ------ -----
TOTAL PROPERTY AND
EQUIPMENT(1)............ 18,505 (8,619) 9,886 2,820 (1,900) (2,105)(2) 8,701
====== ====== ===== ===== ====== ====== =====
<CAPTION>
ACCUMULATED
DEPRECIATION
AS OF
CHF MILLION 31.12.1999(3)
----------- -------------
<S> <C>
Bank premises............. (3,625)
Other properties.......... (539)
Equipment and furniture... (4,345)
------
TOTAL PROPERTY AND
EQUIPMENT(1)............ (8,509)
======
</TABLE>
---------------
(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
<PAGE> 253
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 INTANGIBLE ASSETS AND GOODWILL
<TABLE>
<CAPTION>
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)
----------- ---------- ------------ ---------- ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
===== ==== ===== ===== ==== ===== ====
</TABLE>
---------------
(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
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
====== ======
</TABLE>
---------------
(1) Additional tax information is provided in Note 25.
NOTE 21 DUE TO BANKS AND CUSTOMERS
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
CHF MILLION ---------- ----------
<S> <C> <C>
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
======= =======
</TABLE>
NOTE 22 LONG-TERM DEBT
<TABLE>
<CAPTION>
31.12.1999
CHF MILLION -----------
<S> <C>
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
======
</TABLE>
F-28
<PAGE> 254
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
UBS AG (PARENT) SUBSIDIARIES
--------------------- ---------------------
FLOATING FLOATING TOTAL TOTAL
FIXED RATE RATE FIXED RATE RATE 31.12.1999 31.12.1998
CHF MILLION ---------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
====== ===== ===== ===== ====== ======
</TABLE>
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
<PAGE> 255
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23 OTHER LIABILITIES
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
====== ======
</TABLE>
---------------
(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
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
====== ======
</TABLE>
---------------
(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
<PAGE> 256
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
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
CHF MILLION ---------- ---------- ----------
<S> <C> <C> <C>
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)
===== ===== ====
</TABLE>
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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
CHF MILLION ---------- ---------- ----------
<S> <C> <C> <C>
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)
===== ====== ======
</TABLE>
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
<PAGE> 257
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Group's deferred income tax assets and
liabilities (gross) are as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998 31.12.1997
----------- ---------- ---------- ----------
<S> <C> <C> <C>
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
====== ====== =====
</TABLE>
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:
<TABLE>
<CAPTION>
31.12.1999
----------
<S> <C>
One year.................................................... 15
2 to 4 years................................................ 215
More than 4 years........................................... 8,919
-----
Total....................................................... 9,149
=====
</TABLE>
F-32
<PAGE> 258
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 26 MINORITY INTERESTS
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Minority interests in profit/(loss)......................... 54 (5)
Preferred stock(1).......................................... 0 689
Minority interests in equity................................ 380 306
--- ---
TOTAL MINORITY INTERESTS.................................... 434 990
=== ===
</TABLE>
---------------
(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.
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
F-33
<PAGE> 259
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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
<PAGE> 260
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 --
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
---------------
(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
<PAGE> 261
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 --
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
---------------
(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
<PAGE> 262
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
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
--------------------- ---------------------
CARRYING RELATED CARRYING RELATED
AMOUNT LIABILITY AMOUNT LIABILITY
CHF MILLION -------- --------- -------- ---------
<S> <C> <C> <C> <C>
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
====== ===== ====== =====
</TABLE>
---------------
(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
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
CHF MILLION ---------- ----------
<S> <C> <C>
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
====== ======
</TABLE>
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 of
F-37
<PAGE> 263
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
---------- ----------
<S> <C> <C>
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
====== =======
</TABLE>
---------------
(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
<PAGE> 264
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MORTGAGE OTHER
CHF MILLION COLLATERAL COLLATERAL UNSECURED TOTAL
----------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C>
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
=== ====== ====== =======
</TABLE>
NOTE 31 OPERATING LEASE COMMITMENTS
Our minimum commitments for non-cancellable leases of premises and
equipment are presented as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999
----------- -----------
<S> <C>
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
=====
</TABLE>
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 payment
F-39
<PAGE> 265
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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
<PAGE> 266
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate sensitivity position
<TABLE>
<CAPTION>
INTEREST SENSITIVITY BY TIME BANDS AS AT 31.12.1999
-----------------------------------------------------------
WITHIN 1 1 TO 3 3 TO 12 1 TO 5 OVER 5
MONTH MONTHS MONTHS YEARS YEARS TOTAL
-------- ------ ------- ------ ------ ------
CHF THOUSAND PER BASIS POINT
<S> <C> <C> <C> <C> <C> <C> <C>
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
==== ====== ==== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY BY TIME BANDS AS AT 31.12.1998
-----------------------------------------------------------
WITHIN 1 1 TO 3 3 TO 12 1 TO 5 OVER 5
MONTH MONTHS MONTHS YEARS YEARS TOTAL
-------- ------ ------- ------ ------ ------
CHF THOUSAND PER BASIS POINT
<S> <C> <C> <C> <C> <C> <C> <C>
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
=== ==== ==== ====== ===== ======
</TABLE>
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
<PAGE> 267
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
<PAGE> 268
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
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------------- -----------------------
CHF USD EUR OTHER CHF USD OTHER
CHF BILLION ----- ----- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
Due to customers........................... 127.5 93.8 23.7 35.0 138.0 80.2 56.7
</TABLE>
F-43
<PAGE> 269
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------------- -----------------------
CHF USD EUR OTHER CHF USD OTHER
CHF BILLION ----- ----- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
===== ===== ==== ===== ===== ===== =====
</TABLE>
(d) Liquidity Risk
Maturity analysis of assets and liabilities
<TABLE>
<CAPTION>
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 ------ ---------- ---------- ----------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
F-44
<PAGE> 270
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
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 ------ ---------- ---------- ----------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
===== ==== ===== ==== ==== ==== =====
</TABLE>
---------------
(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)
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
--------------------- ---------------------
BALANCE BALANCE
SHEET/ RISK- SHEET/ RISK-
NOTIONAL WEIGHTED NOTIONAL WEIGHTED
AMOUNT AMOUNT AMOUNT AMOUNT
CHF MILLION --------- -------- --------- --------
<S> <C> <C> <C> <C>
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
========= ======= ========= =======
</TABLE>
---------------
(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
<PAGE> 271
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
BIS Capital ratios
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
---------------- ----------------
CAPITAL BIS % CAPITAL BIS %
------- ----- ------- -----
<S> <C> <C> <C> <C>
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%
====== ==== ====== ====
</TABLE>
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
<PAGE> 272
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
<PAGE> 273
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------------------ ------------------------------------
UNREALIZED UNREALIZED
CARRYING GAIN/ CARRYING GAIN/
VALUE FAIR VALUE (LOSS) VALUE FAIR VALUE (LOSS)
CHF BILLION -------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
==== ====
</TABLE>
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.
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
F-48
<PAGE> 274
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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 assets (previously unrecognized due to the paragraph 58(b)
limitation of IAS 19 (revised 1998)) used to fund this increase in benefits.
F-49
<PAGE> 275
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998 31.12.1997
CHF MILLION ---------- ---------- ----------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
F-50
<PAGE> 276
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).
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998 31.12.1997
----------- ---------- ---------- ----------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
F-51
<PAGE> 277
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998 31.12.1997
----------- ---------- ---------- ----------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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
<PAGE> 278
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
<TABLE>
<CAPTION>
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
---------- ---------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
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 --
========== === ========= === ========= ===
</TABLE>
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999
----------- -----------
<S> <C>
Mortgages at the beginning of the year...................... 27
Additions................................................... 6
Reductions.................................................. (5)
--
MORTGAGES AT THE END OF THE YEAR............................ 28
==
</TABLE>
F-53
<PAGE> 279
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999
----------- -----------
<S> <C>
Loans and advances at the beginning of the year............. 165
Additions................................................... 42
Reductions.................................................. (145)
----
LOANS AND ADVANCES AT THE END OF THE YEAR................... 62
====
</TABLE>
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
<TABLE>
<CAPTION>
EQUITY
SHARE INTEREST
REGISTERED CAPITAL ACCUMULATED
COMPANY OFFICE DIVISION IN MILLIONS IN %
------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C>
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
Indelec Holding AG Basel CAP CHF 10.0 100.0
</TABLE>
F-54
<PAGE> 280
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
SHARE INTEREST
REGISTERED CAPITAL ACCUMULATED
COMPANY OFFICE DIVISION IN MILLIONS IN %
------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C>
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
UBS Brinson SA Paris AM EUR 0.8 100.0
UBS Capital AG Zurich CAP CHF 0.5 100.0
</TABLE>
F-55
<PAGE> 281
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
SHARE INTEREST
REGISTERED CAPITAL ACCUMULATED
COMPANY OFFICE DIVISION IN MILLIONS IN %
------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C>
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
UBS UK Limited London WA GBP 609.0 100.0
Warburg Dillon Read (Asia) Ltd Hong Kong WA HKD 20.0 100.0
</TABLE>
F-56
<PAGE> 282
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
SHARE INTEREST
REGISTERED CAPITAL ACCUMULATED
COMPANY OFFICE DIVISION IN MILLIONS IN %
------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C>
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
</TABLE>
---------------
(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
<PAGE> 283
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
SIGNIFICANT ASSOCIATES
<TABLE>
<CAPTION>
EQUITY SHARE CAPITAL
COMPANY INTEREST IN MILLIONS
------- -------- -------------
<S> <C> <C>
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
</TABLE>
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
<TABLE>
<S> <C>
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)
</TABLE>
Deconsolidated companies
<TABLE>
<CAPTION>
NAME REASON FOR DECONSOLIDATION
---- --------------------------
<S> <C>
UBS (East Asia) Ltd., Singapore Deregistered
UBS Securities (Singapore) Pte Ltd., Singapore Deregistered
</TABLE>
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.
<TABLE>
<CAPTION>
SPOT RATE AVERAGE RATE
-------------------------------------- --------------------------------------
31.12.1999 31.12.1998 31.12.1997 31.12.1999 31.12.1998 31.12.1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
F-58
<PAGE> 284
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.
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
F-59
<PAGE> 285
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ---------- ---------- ----------
CHF MILLION
<S> <C> <C> <C>
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
</TABLE>
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..
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
F-60
<PAGE> 286
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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)
=== ====
</TABLE>
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 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.
F-61
<PAGE> 287
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1998 1998 BALANCE 1999 1999 BALANCE
PROVISION USAGE 31.12.1998 USAGE PROVISION 31.12.1999
CHF MILLION --------- ----- ---------- ----- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
==== ==== ===== ==== ==== =====
</TABLE>
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.
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.
F-62
<PAGE> 288
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-63
<PAGE> 289
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-64
<PAGE> 290
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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.
42.2 RECONCILIATION OF IAS SHAREHOLDERS' EQUITY AND NET PROFIT/(LOSS) TO U.S.
GAAP
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY NET PROFIT/(LOSS)}
----------------------- ------------------------
31.12.1999 31.12.1998 31.12.1999 31.12.1998
CHF MILLION ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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)
====== ====== ====== ======
</TABLE>
F-65
<PAGE> 291
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:
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
----------- ------------
<S> <C> <C>
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)
</TABLE>
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:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE SHARES OUTSTANDING: 31.12.1999 31.12.1998
------------------------------------ ----------- -----------
<S> <C> <C>
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
----------- -----------
</TABLE>
---------------
(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-66
<PAGE> 292
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:
<TABLE>
<S> <C>
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
=====
</TABLE>
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
positions
F-67
<PAGE> 293
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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' 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.
F-68
<PAGE> 294
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
----------------- -----------------
CHF MILLION US GAAP IAS US GAAP IAS
----------- REFERENCE ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
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
------ ------ ------ ------
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
====== ====== ====== ======
</TABLE>
---------------
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-69
<PAGE> 295
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.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------- -------------------
CHF MILLION U.S. GAAP IAS U.S. GAAP IAS
----------- REFERENCE --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
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
------- ------- --------- -------
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
======= ======= ========= =======
</TABLE>
---------------
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-70
<PAGE> 296
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
UNREALIZED ACCUMULATED
FOREIGN GAINS IN OTHER
CURRENCY AVAILABLE-FOR-SALE COMPREHENSIVE COMPREHENSIVE
CHF MILLION TRANSLATION SECURITIES INCOME INCOME
----------- ----------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
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)
---- ---- ----
</TABLE>
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
F-71
<PAGE> 297
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
CHF MILLION UNION BANK OF SWITZERLAND SWISS BANK CORPORATION
----------- ------------------------- ----------------------
<S> <C> <C>
Total operating income.................... 5,702 8,646
Net profit................................ 739 2,614
</TABLE>
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:
<TABLE>
<CAPTION>
CHF MILLION TOTAL OPERATING INCOME NET LOSS
----------- ---------------------- --------
<S> <C> <C>
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)
</TABLE>
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.
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.
F-72
<PAGE> 298
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UTILIZATION THROUGH 31 DECEMBER 1999
------------------------------------------------
CHF MILLION PERSONNEL IT PREMISES OTHER TOTAL
----------- --------- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C>
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
===== ===== === ===== =====
</TABLE>
<TABLE>
<CAPTION>
31.12.99
--------
<S> <C> <C> <C> <C> <C>
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
========
</TABLE>
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.
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.
F-73
<PAGE> 299
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
F-74
<PAGE> 300
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
---------------
(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-75
<PAGE> 301
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:
<TABLE>
<CAPTION>
GROSS GROSS
BOOK AMORTIZED UNREALIZED UNREALIZED FAIR
CHF MILLION VALUE COST GAINS LOSSES VALUE
----------- ----- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
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
===== ===== === == =====
</TABLE>
F-76
<PAGE> 302
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:
<TABLE>
<CAPTION>
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS
----------------- ----------------- ----------------- -----------------
CHF MILLION, EXCEPT PERCENTAGES AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%)
------------------------------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
=== === === ===
</TABLE>
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-77
<PAGE> 303
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.
<TABLE>
<CAPTION>
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
------- ------- ------- ------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
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
------- ------- ------- ------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
---------------
(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-78
<PAGE> 304
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
F-79
<PAGE> 305
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
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
</TABLE>
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-80
<PAGE> 306
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.
<TABLE>
<CAPTION>
STOCK BONUS PLANS 31.12.1999 31.12.1998
----------------- ---------- ----------
<S> <C> <C>
Shares awarded.............................................. 3,469,000 2,524,000
Weighted-average fair market value per share (in CHF)....... 220 210
</TABLE>
<TABLE>
<CAPTION>
STOCK PURCHASE PLANS
--------------------
<S> <C> <C>
Shares awarded.............................................. 1,802,000 1,338,000
Weighted-average fair market value per share (in CHF)....... 148 155
</TABLE>
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.
<TABLE>
<CAPTION>
CHF MILLION, EXCEPT PER SHARE DATA 31.12.99 31.12.98
---------------------------------- -------- --------
<S> <C> <C> <C>
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
</TABLE>
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.
F-81
<PAGE> 307
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
---------- ----------
<S> <C> <C>
Expected volatility.................................... 33% 40%
Risk free interest rate................................ 2.07% 2.56%
Expected dividends..................................... 6.2 6.9
Expected life.......................................... 6 YEARS 6 years
</TABLE>
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-82
<PAGE> 308
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UBS GROUP
SIX-MONTH PERIODS ENDED 30 JUNE 2000 AND 1999
(UNAUDITED)
F-83
<PAGE> 309
UBS GROUP
INCOME STATEMENT
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED
CHF MILLION, EXCEPT PER SHARE DATA NOTE 30.6.00 30.6.99(1)
---------------------------------- ---- ------- ----------
<S> <C> <C> <C>
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
------- -------
</TABLE>
---------------
(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-84
<PAGE> 310
UBS GROUP
BALANCE SHEET
<TABLE>
<CAPTION>
CHF MILLION 30.6.00 31.12.99(1)
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C>
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
======= =======
</TABLE>
---------------
(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-85
<PAGE> 311
UBS GROUP
STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1)
------------------------------ ------- ----------
CHF MILLION
<S> <C> <C>
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
====== ======
</TABLE>
---------------
(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-86
<PAGE> 312
UBS GROUP
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1)
------------------------------ ------- ----------
CHF MILLION
-----------
<S> <C> <C>
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
======= =======
</TABLE>
---------------
(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
<PAGE> 313
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
reduction to total assets, CHF 4,561 million was a reduction in trading
portfolio assets and the remaining CHF 334 million
F-88
<PAGE> 314
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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-89
<PAGE> 315
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
UBS
UBS ASSET UBS CORPORATE UBS
SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
CHF MILLION ----------- ---------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
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
===== === ====== ==== ======
</TABLE>
---------------
(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-90
<PAGE> 316
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 1999(2)
<TABLE>
<CAPTION>
UBS
UBS ASSET UBS CORPORATE UBS
SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
CHF MILLION ----------- ---------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
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
===== === ===== ===== ======
</TABLE>
---------------
(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-91
<PAGE> 317
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
INCOME STATEMENT
NOTE 3 NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.06.00 30.06.99(1)
------------------------------ -------- -----------
CHF MILLION
<S> <C> <C>
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
====== ======
</TABLE>
---------------
(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-92
<PAGE> 318
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 4 NET FEE AND COMMISSION INCOME
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99
------------------------------ ------- -------
CHF MILLION
<S> <C> <C>
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
===== =====
</TABLE>
NOTE 5 NET TRADING INCOME
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1)
------------------------------ ------- ----------
<S> <C> <C>
CHF MILLION
FOREIGN EXCHANGE(2)......................................... 680 718
Fixed income................................................ 643 1,303
Equities.................................................... 4,346 2,439
------ -----
NET TRADING INCOME.......................................... 5,669 4,460
====== =====
</TABLE>
---------------
(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
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99
------------------------------ ------- -------
CHF MILLION
<S> <C> <C>
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
== =====
</TABLE>
F-93
<PAGE> 319
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 7 OTHER INCOME
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99
------------------------------ ------- -------
CHF MILLION
<S> <C> <C>
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
==== ===
</TABLE>
F-94
<PAGE> 320
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 8 OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99
------------------------------ ------- -------
CHF MILLION
<S> <C> <C>
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
====== ======
</TABLE>
---------------
(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-95
<PAGE> 321
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 9 EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1)
------------------------------ ----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
---------------
(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-96
<PAGE> 322
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:
<TABLE>
<CAPTION>
JAN-JUNE JAN-JUNE
BALANCE 2000 2000 BALANCE
1.1.00 USAGE REVISION 30.6.00
CHF MILLION -------- -------- -------- ---------
<S> <C> <C> <C> <C>
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
---- ----- ----- -----
</TABLE>
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-97
<PAGE> 323
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
10.2 Reconciliation of IAS Shareholders' equity and Net profit to U.S. GAAP
<TABLE>
<CAPTION>
30.06.00
-----------------------------
NET PROFIT
SIX-MONTH
SHAREHOLDERS' PERIOD
EQUITY ENDED
------------- ------------
<S> <C> <C>
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
======
</TABLE>
Note: References above refer to the discussions in Note 42.1 of the
restated 31 December 1999 financial statements.
F-98
<PAGE> 324
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:
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00
------------------------------ ------------
<S> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00
------------------------------ -------------------
CHF MILLION U.S. GAAP IAS
----------- --------- ------
<S> <C> <C> <C>
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
------ ------
</TABLE>
F-99
<PAGE> 325
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00
------------------------------ -------------------
CHF MILLION U.S. GAAP IAS
----------- --------- ------
<S> <C> <C> <C>
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
======
</TABLE>
---------------
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-100
<PAGE> 326
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.
<TABLE>
<CAPTION>
30.06.00
------------------
U.S.
GAAP IAS
CHF MILLION ------- -------
<S> <C> <C> <C>
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
======= =======
</TABLE>
---------------
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-101
<PAGE> 327
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
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD
ENDED
CHF MILLION PERSONNEL IT PREMISES OTHER 30.6.00
----------- --------- --- -------- ----- ---------
<S> <C> <C> <C> <C> <C>
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
-- --- -- -- -------
</TABLE>
<TABLE>
<CAPTION>
30.6.00
---------
<S> <C> <C> <C> <C> <C>
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
-------
</TABLE>
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. Private and Corporate Clients
provides a broad range of products and services to these clients, including
retail banking, investment services and lending.
F-102
<PAGE> 328
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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.
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-103
<PAGE> 329
APPENDIX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 330
TABLE OF CONTENTS
RECITALS
ARTICLE I
CERTAIN DEFINITIONS; INTERPRETATION
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C>
1.01 Certain Definitions................................... A-1
ARTICLE II
THE MERGER
2.01 The Merger............................................ A-8
2.02 Effective Time........................................ A-8
2.03 Closing............................................... A-8
2.04 Reservation of Right to Revise Structure.............. A-8
ARTICLE III
CONSIDERATION; EXCHANGE
3.01 Merger Consideration.................................. A-9
3.02 Rights as Stockholders; Stock Transfers............... A-11
3.03 Fractional Shares..................................... A-11
3.04 Exchange Procedures................................... A-11
3.05 Anti-Dilution Adjustments............................. A-12
3.06 Options; Other Equity-Based Awards.................... A-13
3.07 Dissenting Stockholders............................... A-14
ARTICLE IV
ACTIONS PENDING THE EFFECTIVE TIME
4.01 Forbearances of the Company........................... A-14
4.02 Forbearances of Parent................................ A-16
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01 Disclosure Schedules.................................. A-16
5.02 Standard.............................................. A-17
5.03 Representations and Warranties of the Company......... A-17
5.04 Representations and Warranties of Parent and the
Merger Subsidiary......................................... A-25
ARTICLE VI
COVENANTS
6.01 Reasonable Best Efforts............................... A-28
6.02 Registration Statement................................ A-28
6.03 Parent Documents...................................... A-29
6.04 Stockholder Meetings.................................. A-30
6.05 Publicity............................................. A-30
6.06 Access; Information................................... A-30
6.07 Acquisition Proposals................................. A-31
6.08 Regulatory Applications; Consents..................... A-32
6.09 Employee Matters...................................... A-32
6.10 Notification of Certain Matters....................... A-34
6.11 Indemnification; Directors' and Officers' Insurance... A-34
</TABLE>
i
<PAGE> 331
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C>
6.12 Stock Exchange Approvals.............................. A-35
6.13 Dividends............................................. A-35
6.14 Section 15 of the Investment Company Act.............. A-35
6.15 Affiliates............................................ A-36
6.16 Letters of Accountants................................ A-36
6.17 GE Stockholders Agreement............................. A-36
6.18 ERISA Clients......................................... A-36
6.19 GE Amendment and Yasuda Amendment..................... A-37
6.20 Tax Matters........................................... A-37
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01 Conditions to Each Party's Obligation to Effect the
Merger.................................................... A-37
7.02 Conditions to Obligation of the Company............... A-38
7.03 Conditions to Obligation of Parent.................... A-38
ARTICLE VIII
TERMINATION
8.01 Termination........................................... A-39
8.02 Effect of Termination and Abandonment................. A-39
8.03 Termination Fee....................................... A-40
ARTICLE IX
MISCELLANEOUS
9.01 Survival.............................................. A-40
9.02 Waiver; Amendment..................................... A-40
9.03 Counterparts.......................................... A-41
9.04 Governing Law and Venue............................... A-41
9.05 Expenses.............................................. A-41
9.06 Notices............................................... A-41
9.07 Entire Understanding; No Third-Party Beneficiaries.... A-42
9.08 Severability.......................................... A-42
9.09 Assignment............................................ A-42
9.10 Enforcement........................................... A-42
9.11 Interpretation........................................ A-42
</TABLE>
ii
<PAGE> 332
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%.
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"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.
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"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).
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"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.
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"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.
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"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
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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).
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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
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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
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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
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(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
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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
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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)).
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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
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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
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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
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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.
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(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
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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
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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
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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
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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
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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
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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.
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(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.
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(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)
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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
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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
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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
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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.
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(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
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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.
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(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
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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
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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
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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
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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.
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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.
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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.
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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
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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
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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".
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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
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APPENDIX B
July 12, 2000
PERSONAL AND CONFIDENTIAL
Board of Directors
Paine Webber Group Inc.
1285 Avenue of the Americas
New York, NY 10019
Lady and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders (other than UBS AG ("Buyer") or any of its subsidiaries) of
the outstanding shares of Common Stock, par value $1.00 per share (the
"Shares"), of Paine Webber Group Inc. (the "Company") of the Consideration (as
defined below) to be received for Shares, in the aggregate, pursuant to the
Agreement and Plan of Merger (the "Agreement"), dated as of July 12, 2000, among
Buyer, Neptune Merger Subsidiary, Inc., a wholly-owned subsidiary of Buyer, and
the Company. Pursuant to the Agreement, the Company will merge with (the
"Merger") and into Neptune Merger Subsidiary, Inc., a wholly-owned subsidiary of
Buyer, and will become a wholly owned subsidiary of Buyer and each Share (other
than those Shares held in treasury by the Company or any of its subsidiaries and
those Shares owned by Buyer or any of its subsidiaries) will be exchanged,
subject to election by each holder of the Shares, for either $73.50 in cash or
0.4954 shares of Buyer, par value 10 CHF per share ("Buyer Common Stock"), at
the closing of the Merger (together, the "Consideration"); provided that the
allocation will be adjusted as set forth in the Agreement so that the aggregate
number of Shares to be exchanged for Buyer Common Stock will be equal as nearly
as practicable to 50% of the total number of Shares outstanding immediately
prior to the closing of the Merger, as to which adjustments (and the related
procedures and limitations) we are expressing no opinion.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other banking services to
the Company from time to time, including having acted as co-manager in Paine
Webber Group Capital Trust's $175 million offering of 8.30% Trust Preferred
Securities in December 1995, having acted as co-manager in Paine Webber Group
Capital Trust's $175 million offering of 8.08% Trust Preferred Securities in
March 1997, having acted as co-manager in the Company's offering of $525 million
of 6.38% Notes due 2004 in May 1999, having acted as the Company's financial
advisor in connection with its acquisition of J.C. Bradford & Co., LLC in June
2000, and having acted as its financial advisor in connection with, and having
participated in certain of the negotiations leading to, the Agreement. We also
have provided certain investment banking services to Buyer from time to time and
may provide investment banking services to Buyer in the future. Goldman, Sachs &
Co. provides a full range of financial advisory and securities services and, in
the course of its normal trading activities, does from time to time effect
transactions and hold securities including derivative securities of the Company
and/or Buyer for its own account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders of the Company on Form 10-K of the
Company and Annual Reports to Stockholders of the Buyer for the five years ended
December 31, 1999; the Registration Statement of the Buyer filed on May 9, 2000
on Form 20-F; certain interim reports to stockholders of the Buyer and certain
interim reports to stockholders of the Company; Quarterly Reports on Form 10-Q
of the Company; and certain internal financial analyses and forecasts for the
Company and the Buyer prepared by their
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Paine Webber Group Inc.
July 12, 2000
Page Two
respective managements, including certain cost savings and operating synergies
projected by the management of the Buyer to result from the transaction
contemplated by the Agreement. We also have held discussions with members of the
senior management of the Company and Buyer regarding their assessment of the
strategic rationale for, and the potential benefits of, the Merger and the past
and current business operations, financial condition and future prospects of
their respective companies. In addition, we have reviewed the reported price and
trading activity for the Shares and the Buyer Common Stock, compared certain
financial and stock market information for the Company and the Buyer with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the broker/dealer industry specifically and in other industries
generally and performed such other studies and analyses as we considered
appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information discussed with or reviewed by us and have assumed such
accuracy and completeness for purposes of rendering this opinion. We have not
made an independent evaluation or appraisal of the assets and liabilities of the
Company or Buyer or any of their subsidiaries (including any derivative or off
balance sheet assets or liabilities of the Company or Buyer or any of their
subsidiaries) and we have not been furnished with any such evaluation or
appraisal. We are not experts in the valuation of loan portfolios for purposes
of assessing the adequacy of the allowances for losses with respect thereto and
have assumed, with your consent, that these allowances for the Buyer are
adequate to cover all such losses. In addition, we were not requested to
solicit, and did not solicit, interest from other parties with respect to an
acquisition of or other business combination with the Company. We have also
assumed that all material governmental, regulatory or other consents and
approvals necessary for the consummation of the transaction contemplated by the
Agreement will be obtained without any adverse effect on the Company, Buyer or
on the contemplated benefits of the transaction. Our advisory services and the
opinion expressed herein are provided for the information and assistance of the
Board of Directors of the Company in connection with its consideration of the
transaction contemplated by the Agreement and such opinion does not constitute a
recommendation as to how any holder of Shares should vote with respect to such
transaction or the form of consideration any holder of Shares should request to
receive in such transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof the
Consideration to be received by the holders of Shares, in the aggregate, is fair
from a financial point of view to the holders of Shares (other than Buyer or any
of its subsidiaries) receiving such Consideration.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
--------------------------------------
(GOLDMAN, SACHS & CO.)
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APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated
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therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
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submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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[UBS AG LOGO]
LOGO
<PAGE> 382
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) The following Exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2 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. (included as Appendix A to the Proxy
Statement/ Prospectus which is part of this Registration
Statement).
3.1 Articles of Association of UBS AG.
3.2 By-Laws of UBS AG.
5 Opinion of Baer & Karrer, Swiss counsel of UBS AG, regarding
validity of the securities of UBS AG being registered under
this Registration Statement.
8.1 Opinion of Sullivan & Cromwell regarding United States
federal tax consequences of the merger.
8.2 Opinion of Cravath, Swaine & Moore regarding United States
federal tax consequences of the merger.
21 Subsidiaries of UBS AG.
23.1 Consent of ATAG Ernst & Young Ltd.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Baer & Karrer (included in Exhibit 5 to this
Registration Statement).
23.4 Consent of Sullivan & Cromwell (included in Exhibit 8.1 to
this Registration Statement).
23.5 Consent of Cravath, Swaine & Moore (included in Exhibit 8.2
to this Registration Statement).
24 Powers of Attorney.
99.1 Consent of Goldman, Sachs & Co.
99.2 Form of Proxy Card of Paine Webber Group Inc.
(b) Financial Statement Schedules. Schedule I is hereby
incorporated by reference; other schedules are omitted
because they are either not required, are not applicable or
because equivalent information has been included in the
financial statements, the notes thereto or elsewhere herein.
(c) Reports, Opinions and Appraisals. The opinion of Goldman,
Sachs & Co. is included as Appendix B to the Proxy
Statement/Prospectus which is part of this Registration
Statement.
</TABLE>
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<PAGE> 383
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
the Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To file a post-effective amendment to the registration statement
to include any financial statements required by Rule 3-19 of Regulation S-X
at the start of any delayed offering or throughout a continuous offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement 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.
(c) (1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a) (3) of the Act and is used in connection with
an offering of securities subject to rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) 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
II-2
<PAGE> 384
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.
(e) The undersigned registrant hereby undertakes: (i) to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means; and (ii) to arrange or provide for a
facility in the U.S. for the purpose of responding to such requests. The
undertaking in subparagraph (i) above include information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE> 385
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Zurich, Switzerland, on 21
September 2000.
UBS AG
By: /s/ LUQMAN ARNOLD
------------------------------------
Name: Luqman Arnold
Title: Group Chief Financial
Officer and Member of the
Group Executive Board
By: /s/ HUGO SCHAUB
------------------------------------
Name: Hugo Schaub
Title: Group Controller and
Member of the Group
Managing Board
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* President and Group Chief September 21, 2000
--------------------------------------------------- Executive Officer
Marcel Ospel
* Chief Financial Officer September 21, 2000
---------------------------------------------------
Luqman Arnold
* Group Controller and Member September 21, 2000
--------------------------------------------------- of Group Managing Board
Hugo Schaub
* Member of Board of Directors September 21, 2000
---------------------------------------------------
Alex Krauer
* Member of Board of Directors September 21, 2000
---------------------------------------------------
Alberto Togni
* Member of Board of Directors September 21, 2000
---------------------------------------------------
Markus Kundig
* Member of Board of Directors September 21, 2000
---------------------------------------------------
Peter Bockli
* Member of Board of Directors September 21, 2000
---------------------------------------------------
Rolf A. Meyer
</TABLE>
II-4
<PAGE> 386
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* Member of Board of Directors September 21, 2000
---------------------------------------------------
Hans Peter Ming
* Member of Board of Directors September 21, 2000
---------------------------------------------------
Andreas Reinhart
* Member of Board of Directors September 21, 2000
---------------------------------------------------
Eric Honegger
*By Power of Attorney Attorney-in-Fact
/s/ LUQMAN ARNOLD
---------------------------------------------------
Name: Luqman Arnold
</TABLE>
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 the 21st day of September, 2000.
By: /s/ ROBERT B. MILLS
------------------------------------
Name: Robert B. Mills
Title: Managing Director
II-5
<PAGE> 387
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
2 -- 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. (included as Appendix A to the Proxy
Statement/Prospectus which is part of this Registration
Statement).
3.1 -- Articles of Association of UBS AG.
3.2 -- By-Laws of UBS AG.
5 -- Opinion of Baer & Karrer, Swiss counsel of UBS AG, regarding
validity of the securities of UBS AG being registered under
this Registration Statement.
8.1 -- Opinion of Sullivan & Cromwell regarding United States
federal tax consequences of the merger.
8.2 -- Opinion of Cravath, Swaine & Moore regarding United States
federal tax consequences of the merger.
21 -- Subsidiaries of UBS AG
23.1 -- Consent of ATAG Ernst & Young Ltd.
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of Baer & Karrer (included in Exhibit 5 to this
Registration Statement).
23.4 -- Consent of Sullivan & Cromwell (included in Exhibit 8.1 to
this Registration Statement).
23.5 -- Consent of Cravath, Swaine & Moore (included in Exhibit 8.2
to this Registration Statement).
24 -- Powers of Attorney.
99.1 -- Consent of Goldman, Sachs & Co.
99.2 -- Form of Proxy Card of Paine Webber Group Inc.
</TABLE>
