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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON 29 MARCH 2001
REGISTRATION NO. 333-46216
333-46216-01
333-46216-02
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 5 TO
FORM F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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UBS AG
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SWITZERLAND 6021 98-0186363
(STATE OR OTHER (PRIMARY (I.R.S.
JURISDICTION OF STANDARD EMPLOYER
INCORPORATION OR INDUSTRIAL IDENTIFICATION
ORGANIZATION) CLASSIFICATION NUMBER)
CODE NUMBER)
UBS PREFERRED FUNDING TRUST I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6712 51-6518252
(STATE OR OTHER (PRIMARY (I.R.S.
JURISDICTION OF STANDARD EMPLOYER
INCORPORATION OR INDUSTRIAL IDENTIFICATION
ORGANIZATION) CLASSIFICATION NUMBER)
CODE NUMBER)
UBS PREFERRED FUNDING
COMPANY LLC I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6712 51-04802885
(STATE OR OTHER (PRIMARY (I.R.S.
JURISDICTION OF STANDARD EMPLOYER
INCORPORATION OR INDUSTRIAL IDENTIFICATION
ORGANIZATION) CLASSIFICATION NUMBER)
CODE NUMBER)
BAHNHOFSTRASSE 45, ZURICH, C/O WILMINGTON TRUST COMPANY THE CORPORATION TRUST COMPANY
SWITZERLAND, 011 41-1-234 11 11 AND 1100 NORTH MARKET STREET 1209 ORANGE STREET
AESCHENVORSTADT 1, BASEL, WILMINGTON, DELAWARE 19890 WILMINGTON, DELAWARE 19801
SWITZERLAND, 011 41-61-288 20 20 302-651-1118 302-658-7581
(ADDRESS AND TELEPHONE NUMBER OF (ADDRESS AND TELEPHONE NUMBER OF (ADDRESS AND TELEPHONE NUMBER OF
REGISTRANT'S PRINCIPAL EXECUTIVE REGISTRANT'S PRINCIPAL EXECUTIVE REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES) OFFICES) OFFICES)
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ROBERT C. DINERSTEIN, ESQ.
UBS AG
299 PARK AVENUE
NEW YORK, NEW YORK 10171
TELEPHONE: 212-821-3000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES TO:
MARK J. WELSHIMER, ESQ. JEFFREY D. BERMAN, ESQ.
SULLIVAN & CROMWELL DAVIS POLK & WARDWELL
125 BROAD STREET 450 LEXINGTON AVENUE
NEW YORK, NY 10004-2498 NEW YORK, NY 10017
212-558-4000 212-450-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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This registration statement contains a prospectus relating to market-making
transactions that may occur on an ongoing basis in trust preferred securities
and company preferred securities that have been previously issued.
This prospectus is intended to be used only in market-making transactions. This
registration statement does not provide for the issuance of new securities by
any of the registrants.
THE REGISTRANTS HEREBY AMEND THIS POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS POST-EFFECTIVE AMENDMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL
THIS POST-EFFECTIVE AMENDMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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PROSPECTUS
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[UBS AG LOGO]
$1,500,000,000
UBS Preferred Funding Trust I
8.622% Noncumulative Trust Preferred Securities
representing a corresponding amount of
8.622% Noncumulative Company Preferred Securities
of
UBS Preferred Funding Company LLC I
guaranteed on a subordinated basis by
UBS AG
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- - Each trust preferred security represents a corresponding amount of the
company preferred securities and related rights under the UBS AG subordinated
guarantee. Dividends and redemption and liquidation payments paid by UBS
Preferred Funding Company on the company preferred securities will pass
through UBS Preferred Funding Trust to you as distributions and redemption
and liquidation payments on the trust preferred securities.
- - The company preferred securities will pay semi-annual distributions on 1
April and 1 October of each year at a fixed rate per annum equal to 8.622%
through the dividend payment date in October 2010, and thereafter will pay
quarterly distributions on 1 January, 1 April, 1 July and 1 October of each
year at a variable rate per annum equal to 3.07% above three-month LIBOR. The
company preferred securities are perpetual securities and do not have a
maturity date. UBS Preferred Funding Company may redeem the company preferred
securities on or after the dividend payment date in October 2010.
- - The company preferred securities will provide holders with rights to
distributions and redemption and liquidation payments that are similar to
those of the most senior ranking noncumulative perpetual preferred shares
issued directly by UBS AG that have financial terms equivalent to those of
the company preferred securities.
- - UBS AG has guaranteed, on a subordinated basis, dividend, redemption and
liquidation payment obligations under the company preferred securities.
- - We have applied to list the trust preferred securities on the Luxembourg
Stock Exchange in accordance with its rules.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR RISKS RELATED TO AN INVESTMENT IN
THE TRUST PREFERRED SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
UBS AG, UBS Warburg LLC, UBS PaineWebber Inc. or any other affiliate controlled
by UBS may use this prospectus in a market-making transaction involving the
trust preferred securities. This prospectus is being used in a market-making
transaction.
UBS Warburg UBS PaineWebber Inc.
The date of this prospectus is 29 March 2001
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TABLE OF CONTENTS
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Certain Terms......................... 2
Prospectus Summary.................... 3
Ratio of Earnings to Fixed Charges.... 11
Risk Factors.......................... 12
Cautionary Note Regarding Forward-
Looking Information................. 16
Capitalization of UBS................. 17
Selected Financial Data............... 18
UBS................................... 23
UBS Preferred Funding Trust I......... 211
UBS Preferred Funding Company LLC I... 212
Use of Proceeds....................... 218
Description of Trust Preferred
Securities.......................... 219
Description of Company Preferred
Securities.......................... 226
Book-Entry Issuance of Trust Preferred
Securities.......................... 240
Description of UBS AG Subordinated
Guarantee........................... 245
Description of Subordinated Notes of
UBS AG.............................. 250
Certain U.S. Tax Considerations....... 253
Certain Tax Considerations Under the
Laws of Switzerland................. 259
Certain ERISA Considerations.......... 261
Validity of the Securities............ 263
Experts............................... 263
Limitations on Enforcement of U.S.
Laws Against UBS AG, Its Management
and Others.......................... 263
General Information................... 264
Where You Can Find More Information... 266
Presentation of Financial
Information......................... 266
Financial Statements of UBS Group..... F-1
Financial Statements of Paine Webber
Group Inc........................... F-103
CERTAIN TERMS
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In this prospectus:
- when we refer to "UBS AG," we mean UBS AG on a parent only basis.
- when we refer to "UBS," "UBS Group" or "Group," we mean UBS AG and its
consolidated subsidiaries.
- when we refer to "PaineWebber," we mean Paine Webber Group Inc. and its
consolidated subsidiaries.
- when we refer to the "trust preferred securities," we mean the 8.622%
Noncumulative Trust Preferred Securities issued by UBS Preferred Funding
Trust.
- when we refer to the "company preferred securities," we mean the 8.622%
Noncumulative Company Preferred Securities issued by UBS Preferred
Funding Company to UBS Preferred Funding Trust in connection with the
offering of the trust preferred securities by UBS Preferred Funding
Trust.
- when we refer to "UBS Preferred Funding Trust," we mean UBS Preferred
Funding Trust I.
- when we refer to "UBS Preferred Funding Company," we mean UBS Preferred
Funding Company LLC I.
- when we refer to "USD," we mean United States dollars.
- when we refer to "CHF," we mean Swiss Francs.
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Prospectus Summary
THE FOLLOWING SUMMARY DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT
TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE MAKING AN INVESTMENT
DECISION. YOU SHOULD PAY SPECIAL ATTENTION TO THE "RISK FACTORS" SECTION TO
DETERMINE WHETHER AN INVESTMENT IN THE TRUST PREFERRED SECURITIES IS APPROPRIATE
FOR YOU.
INTRODUCTION
The trust preferred securities will provide you with rights to distributions and
redemption and liquidation payments that are similar to those to which you would
be entitled if you had purchased the most senior ranking noncumulative perpetual
preferred shares issued directly by UBS AG that have financial terms equivalent
to those of the company preferred securities. The diagram to the right outlines
the relationship among investors in the trust preferred securities, UBS
Preferred Funding Trust, UBS Preferred Funding Company and UBS AG following the
completion of the offering.
UBS Preferred Funding Trust will pass through to you any dividends, redemption
payments or liquidation payments that it receives from UBS Preferred Funding
Company on the company preferred securities.
UBS AG guarantees, on a subordinated basis, dividend, redemption and liquidation
payment obligations under the company preferred securities.
UBS Preferred Funding Company will receive payments under the subordinated notes
issued by the Cayman Islands branch of UBS AG and will pay dividends on the
company preferred securities that are similar to dividends that would be paid on
the most senior ranking noncumulative perpetual preferred shares issued directly
by UBS AG that have equivalent financial terms.
The capital raised in this offering qualifies as consolidated Tier 1 capital for
UBS under the relevant regulatory capital guidelines of the Swiss Federal
Banking Commission.
[Flowchart]
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Parties to the Offering
For a more complete description of UBS AG, UBS Preferred Funding Trust and UBS
Preferred Funding Company, see "UBS," "UBS Preferred Funding Trust I," "UBS
Preferred Funding Company LLC I," "Use of Proceeds" and "Capitalization of UBS
AG."
UBS AG
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
its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and
UBS Asset Management. UBS's clients include international corporations, small
and medium sized businesses in Switzerland, governments and other public bodies,
financial institutions, market participants and individuals. UBS AG's ordinary
shares are listed on the New York Stock Exchange under the symbol UBS.N, on the
Zurich Stock Exchange under the symbol UBSNZn.S and on the Tokyo Stock Exchange
under the symbol UBS.T.
The principal executive offices of UBS AG are located at Bahnhofstrasse 45,
Zurich, Switzerland and Aeschenvorstadt I, Basel, Switzerland. Its telephone
numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20.
UBS PREFERRED FUNDING TRUST I
UBS Preferred Funding Trust I is a Delaware statutory business trust. UBS
Preferred Funding Trust exists for the purpose of issuing the trust preferred
securities representing a corresponding amount of the company preferred
securities, together with related rights under the UBS AG subordinated
guarantee. UBS Preferred Funding Trust will pass the dividends it receives on
the company preferred securities through to you as distributions on the trust
preferred securities. UBS Preferred Funding Trust cannot engage in other
activities. The company preferred securities and the related rights under the
UBS AG subordinated guarantee will be the only assets of UBS Preferred Funding
Trust. UBS AG, Stamford branch, will pay directly all expenses and liabilities
of UBS Preferred Funding Trust.
UBS Preferred Funding Trust will be treated as a grantor trust for United States
federal income tax purposes. As a result, you will be treated as a beneficial
owner of interests in the company preferred securities and the related rights
under the UBS AG subordinated guarantee for United States federal income tax
purposes.
The principal executive offices of UBS Preferred Funding Trust are located at
c/o Wilmington Trust Company, 1100 North Market Street, Wilmington, Delaware
19890. Its telephone number is 302-651-1118.
UBS PREFERRED FUNDING COMPANY LLC I
UBS Preferred Funding Company LLC I is a Delaware limited liability company. UBS
Preferred Funding Company exists for the purposes of acquiring and holding the
subordinated notes issued by the Cayman Islands branch of UBS AG, or other
eligible investments, and issuing the company common securities and the company
preferred securities. UBS AG purchased all of the company common securities,
which represent 100% of the voting rights in UBS Preferred Funding Company,
subject to your limited right to elect additional directors as described below.
UBS Preferred Funding Company will apply the cash generated by the subordinated
notes and other eligible investments, if any, to pay dividends to UBS Preferred
Funding Trust, as holder of the company preferred securities, and UBS AG, as
holder of the company common securities. UBS Preferred Funding Company will be
treated as a partnership for United States federal income tax purposes.
UBS Preferred Funding Company is managed by a board of directors having not less
than three and not more than five members. If the aggregate of unpaid dividends
equals or exceeds an amount equal
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to three semi-annual dividend payments, you and the other holders of trust
preferred securities will have the right to elect two additional directors.
The principal executive offices of UBS Preferred Funding Company are located at
The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801.
Its telephone number is 302-658-7581.
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The Offering
For a more complete description of the trust preferred securities, the company
preferred securities, the UBS AG subordinated guarantee and the subordinated
notes, see "Description of Trust Preferred Securities," "Description of Company
Preferred Securities," "Book-Entry Issuance of Trust Preferred Securities,"
"Description of UBS AG Subordinated Guarantee" and "Description of Subordinated
Notes of UBS AG."
SECURITIES OFFERED
Each trust preferred security represents a corresponding amount of the company
preferred securities and related rights under the UBS AG subordinated guarantee.
The trust preferred securities were issued in denominations of USD1,000
liquidation amount and whole-number multiples of USD1,000, and the company
preferred securities were issued in denominations of USD1,000 liquidation
preference and whole-number multiples of USD1,000. The aggregate liquidation
amount of the trust preferred securities is USD1,500,000,000 and the aggregate
liquidation preference of the company preferred securities is USD1,500,000,000.
DIVIDENDS
UBS Preferred Funding Trust will pass through the dividends it receives on the
company preferred securities as distributions on the trust preferred securities.
UBS Preferred Funding Company will pay dividends on the company preferred
securities from the date of their initial issuance on a noncumulative basis.
These dividends will be payable on the liquidation preference of the company
preferred securities:
- semi-annually in arrears on the first business day on or after 1 April and
1 October of each year at a fixed rate per annum equal to 8.622%, beginning
1 April 2001 and ending 1 October 2010, calculated on the basis of a
360-day year consisting of twelve 30-day months, and
- thereafter quarterly in arrears on the first business day on or after 1
January, 1 April, 1 July and 1 October of each year at a variable rate per
annum equal to 3.07% above three-month LIBOR, calculated on the basis of
the actual number of days elapsed in a 360-day year.
UBS Preferred Funding Company's obligation to pay dividends is subject to
provisions that generally require UBS Preferred Funding Company to pay full or
proportional dividends on the company preferred securities when UBS AG pays
dividends on UBS AG ordinary shares or on other securities of UBS AG that rank
equally with or junior to the UBS AG subordinated guarantee of the company
preferred securities. As described below, UBS Preferred Funding Company will be
required to pay dividends on the company preferred securities in some
circumstances, will be prohibited from paying dividends on the company preferred
securities in other circumstances, and, when not required to pay or prohibited
from paying dividends, will have discretion as to whether to pay dividends on
the company preferred securities. Because UBS AG paid dividends on its ordinary
shares on 26 April 2000, dividends on the company preferred securities will be
mandatory (as described below) through the dividend payment date in April 2001.
The following text outlines the criteria for determining whether and the extent
to which UBS Preferred Funding Company will be required to pay dividends on the
company preferred securities or will be prohibited from paying dividends on the
company preferred securities:
Is there a capital limitation on UBS AG? Unless the Swiss Federal Banking
Commission expressly permits otherwise, if on a dividend payment date UBS AG is
not in compliance with the Swiss Federal Banking Commission's minimum capital
adequacy requirements applicable to UBS AG, or would not be in compliance
because of a payment of dividends on the company preferred securities, UBS
Preferred Funding Company will not pay dividends on the company preferred
securities under any
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circumstances. For a discussion of UBS's capital resources relative to
applicable guidelines, see "UBS--Liquidity and Capital Resources." We refer to
this restriction as a capital limitation.
Are dividends mandatory? Unless there is a capital limitation, the payment of
full dividends by UBS Preferred Funding Company on the company preferred
securities will be mandatory during the one-year period beginning on and
including each date on which:
- UBS AG declares or pays a dividend or makes any other payment or
distribution on any shares or other securities that, in a liquidation of
UBS AG, rank junior to the UBS AG subordinated guarantee of the company
preferred securities; or
- UBS AG or any of its subsidiaries redeems, repurchases (except for its
trading account) or otherwise acquires any shares or other securities that,
in a liquidation of UBS AG, rank equally with or junior to the UBS AG
subordinated guarantee of the company preferred securities.
The payment of proportional dividends by UBS Preferred Funding Company on the
company preferred securities will be mandatory on any date, whether or not a
regularly scheduled dividend payment date, on which UBS AG or any of its
subsidiaries pays a dividend or makes any other payment or distribution on any
shares or other securities that, in a liquidation of UBS AG, rank equally with
the UBS AG subordinated guarantee of the company preferred securities if, on the
dividend payment dates leading up to the payment or distribution on the equally
ranking securities, dividends were paid on the company preferred securities in a
lower percentage than are being paid on the equally ranking securities.
Unless there is a capital limitation, UBS Preferred Funding Company will be
required to pay dividends that are mandatory whether or not:
- UBS AG delivers a notice limiting dividends,
- UBS AG has available distributable profits, or
- interest is paid on the subordinated notes or other eligible investments.
Does UBS AG have available distributable profits? Available distributable
profits are the pro rata proportion (from among all shares and other securities
issued by UBS AG that rank equally with the UBS AG subordinated guarantee of the
company preferred securities) of profits that may be distributed in accordance
with Swiss law. Currently, distributable profits include the total of current
profit, profit brought forward and freely available reserves as reflected in the
most recent audited unconsolidated balance sheet and statement of appropriation
of retained earnings of UBS AG.
Unless required to pay mandatory dividends, UBS Preferred Funding Company will
not pay dividends on the company preferred securities in excess of UBS AG's
available distributable profits.
When are dividends discretionary? The payment of dividends by UBS Preferred
Funding Company on the company preferred securities is discretionary if the
capital limitation does not apply, dividends are not mandatory as described
above, and UBS AG has sufficient available distributable profits. In that case,
UBS Preferred Funding Company will pay dividends on the company preferred
securities at the specified rate unless, on or before the tenth business day
immediately preceding a dividend payment date, UBS AG gives notice to UBS
Preferred Funding Company that UBS Preferred Funding Company must pay no
dividends or less than full dividends, in which case dividends will be due and
payable only in the amount specified in the notice. UBS AG may deliver such a
notice in its sole discretion and for any reason, except that such a notice
shall have no effect where dividends are mandatory as described above.
When does the dividend preference shift from the company preferred securities to
the company common securities? The company preferred securities ordinarily will
rank senior to the company common securities as to the payment of dividends.
However, the dividend preference of the company
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preferred securities may, at UBS AG's option, shift to the company common
securities on dividend payment dates to the extent that no mandatory dividend
payment amount is then required to be paid on the company preferred securities.
If UBS AG does this, the corresponding interest payments or other income
received by UBS Preferred Funding Company on the subordinated notes or its other
eligible investments may be returned as dividends to UBS AG as holder of the
company common securities before any dividends are paid on the company preferred
securities.
WITHHOLDING TAXES
Generally, UBS Preferred Funding Company will pay additional amounts on full or
proportional mandatory dividends otherwise due and payable so that the net
amount received by you will not be reduced by the withholding of certain taxes
or other government charges.
However, UBS Preferred Funding Company will not pay any additional amounts if
the taxes or governmental charges are withheld because you:
- are connected, other than as a holder of trust preferred securities, to
Switzerland or the Cayman Islands if it is the jurisdiction that requires
the withholding of the taxes or charges, or
- have not filed an appropriate declaration stating that you are not a
resident of and do not have a connection with Switzerland or the Cayman
Islands if it is the jurisdiction that requires the withholding of the
taxes or charges, or a similar claim for exemption, if we have given you
the opportunity to do so.
REDEMPTION
UBS Preferred Funding Company may redeem the company preferred securities, in
whole or in part, on any dividend payment date on or after the dividend payment
date regularly scheduled to occur in October 2010. In that case, you will
receive a redemption price equal to unpaid mandatory dividends, other unpaid
definitive dividends (for example, discretionary dividends that became due and
payable because UBS AG did not deliver a notice to pay no dividends), current
accrued dividends (whether or not declared) and the liquidation preference of
your company preferred securities.
UBS Preferred Funding Company may not redeem the company preferred securities
before the dividend payment date regularly scheduled to occur in October 2010,
unless an event occurs that results in an adverse consequence for the tax or
capital treatment of the company preferred securities, or for the investment
company status of UBS Preferred Funding Company or UBS Preferred Funding Trust.
If the circumstance giving rise to redemption arises out of a change in tax law
that results in the imposition of tax on UBS Preferred Funding Trust or UBS
Preferred Funding Company or the imposition of withholding tax on payment of
dividends on the company preferred securities, distributions on the trust
preferred securities or interest on the subordinated notes, then you will
receive a redemption price as described above. If the redemption arises from the
other special events, including adverse tax consequences not arising out of a
change in tax law, you will receive a redemption price equal to unpaid mandatory
dividends, other unpaid definitive dividends, current accrued dividends (whether
or not declared) and a make whole amount equal to the greater of the liquidation
preference and the sum of the net present value of scheduled dividends and the
liquidation preference through October 2010.
UBS Preferred Funding Trust will pass through the redemption payments it
receives on the company preferred securities to redeem a corresponding amount of
the trust preferred securities.
Any redemption of the company preferred securities must comply with applicable
regulatory requirements, including the prior approval of the Swiss Federal
Banking Commission if then required under applicable guidelines or policies of
the Swiss Federal Banking Commission. The Swiss Federal Banking Commission in
its discretion may impose conditions on its approval of any proposed redemption
of the company preferred securities.
You may not require redemption of the company preferred securities at any time.
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LIQUIDATION
If UBS AG is liquidated, UBS Preferred Funding Company will be liquidated. So
long as the company preferred securities are outstanding, UBS AG will not cause
UBS Preferred Funding Company to liquidate unless UBS AG is also liquidating.
If UBS Preferred Funding Company is liquidated, you will be entitled to receive
an amount equal to unpaid mandatory dividends, other unpaid definitive
dividends, current accrued dividends (whether or not declared) and the
liquidation preference of your company preferred securities. However, any
liquidating distributions that you receive will be substantially the same as,
but not greater than, those to which you would be entitled if you had purchased
the most senior ranking noncumulative perpetual preferred shares issued directly
by UBS AG that have financial terms equivalent to those of the company preferred
securities.
BOOK-ENTRY ISSUANCE OF THE TRUST PREFERRED SECURITIES
UBS Preferred Funding Trust will initially issue the trust preferred securities
only in book-entry form through The Depository Trust Company.
You may withdraw the company preferred securities represented by your trust
preferred securities from UBS Preferred Funding Trust and hold the company
preferred securities directly. If you hold the company preferred securities
directly, you must hold the company preferred securities in certificated form.
If you hold the company preferred securities directly, then you may exercise
directly the associated rights under the UBS AG subordinated guarantee, and any
rights under the limited liability company agreement of UBS Preferred Funding
Company in respect of the company preferred securities, including any rights to
elect additional directors of UBS Preferred Funding Company.
THE UBS AG SUBORDINATED GUARANTEE
UBS AG unconditionally guaranteed, on a subordinated basis, the payment by UBS
Preferred Funding Company of any mandatory dividends on the company preferred
securities or dividends that have become definitive because UBS AG has
sufficient available distributable profits to pay out dividends and has not
delivered to UBS Preferred Funding Company an instruction not to pay dividends.
UBS AG also unconditionally guaranteed, on a subordinated basis, the redemption
price payable with respect to any company preferred securities called for
redemption by UBS Preferred Funding Company and the payment by UBS Preferred
Funding Company on its liquidation of an amount sufficient to provide you with
the distributions described under "Liquidation" above.
THE SUBORDINATED NOTES
The subordinated notes are undated and have an aggregate principal amount of
USD1,500,000,000. The subordinated notes are general unsecured debt obligations
of UBS AG and the Cayman Islands branch of UBS AG and, in liquidation of UBS AG,
will rank subordinate and junior to all indebtedness of UBS AG except for
indebtedness that by its terms expressly ranks equally with the subordinated
notes. Interest payable under the subordinated notes will be calculated at the
same rate and payable on the same dates as dividends payable under the company
preferred securities. UBS AG will not pay interest on the subordinated notes if
UBS AG is not solvent.
USE OF PROCEEDS
- UBS Preferred Funding Trust used the proceeds from the offering of the
trust preferred securities to purchase the company preferred securities
from UBS Preferred Funding Company.
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- UBS Preferred Funding Company used the proceeds from the offering of the
company preferred securities to purchase the subordinated notes issued by
the Cayman Islands branch of UBS AG.
- UBS AG used the proceeds from the issuance of the subordinated notes for
general corporate purposes, including paying certain expenses relating to
the offering, and funding a portion of the purchase price of PaineWebber.
All of the sales of securities under this prospectus will be market-making
transactions--that is, transactions in which UBS AG, UBS Warburg LLC, UBS
PaineWebber Inc., or one of UBS AG's other affiliates, resells securities that
the seller, or one of its affiliates, has previously bought from another party.
Only the entity that carries out a particular market-making transaction will
receive any of the proceeds from the resale of the securities. In general, we
expect that the entity that resells any particular securities will retain the
proceeds of its market-making resales and will not pay the proceeds to UBS
Preferred Funding Trust, UBS Preferred Funding Company or, when the resales are
not made by UBS AG, to UBS AG.
RISK FACTORS
You should carefully consider the information under "Risk Factors," together
with the other information contained in this prospectus, before purchasing any
trust preferred securities.
RATINGS
Moody's Investors Service, Inc. has rated both the trust preferred securities
and the company preferred securities aa2 and Standard & Poor's Rating Services
has rated both the trust preferred securities and the company preferred
securities AA-. Each of these ratings reflects only the view of the applicable
rating agency at the time the rating was issued, and any explanation of the
significance of a rating may be obtained only from the rating agency. There is
no assurance that a credit rating will remain in effect for any given period of
time or that a rating will not be lowered, suspended or withdrawn entirely by
the applicable rating agency, if in that rating agency's judgment, circumstances
so warrant.
LISTING
We have applied to list the trust preferred securities on the Luxembourg Stock
Exchange in accordance with its rules.
GOVERNING LAW
The constituent documents of UBS Preferred Funding Trust and UBS Preferred
Funding Company, the trust preferred securities and the company preferred
securities will be governed by the laws of the State of Delaware, United States
of America. The subordinated notes and the UBS AG subordinated guarantee will be
governed by the laws of the State of New York, United States of America.
10
12
Ratio of Earnings to Fixed Charges
The following table sets forth UBS AG's ratio of earnings to fixed charges, for
the periods indicated. Ratios of earnings to combined fixed charges and
preferred stock dividends requirements are not presented as there were no
preferred share dividends in any of the periods indicated.
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.98 31.12.97
- ----------------------------------------------------------------------------------------------------------
International Accounting Standards ("IAS")(1),(2)..... 1.23 1.25 1.11 0.95
U.S. Generally Accepted Accounting Principles
("GAAP")(1),(3)..................................... 1.15 1.14 0.80
- ------------
1. The ratio is provided using both IAS and U.S. GAAP values, as the ratio is
materially different between the two accounting standards. No U.S. GAAP
information is provided for 31 December 1997 as a U.S. GAAP reconciliation
was not required for that period.
2. The deficiency in the coverage of fixed charges by earnings before fixed
charges at 31 December 1997 was CHF 851 million.
3. The deficiency in the coverage of fixed charges by earnings before fixed
charges at 31 December 1998 was CHF 5,319 million.
11
13
- --------------------------------------------------------------------------------
Risk Factors
You should carefully consider the following information, together with the other
information contained in this prospectus, before purchasing any trust preferred
securities in this offering.
YOU MAY NOT RECEIVE DIVIDENDS IF UBS AG'S FINANCIAL CONDITION WERE TO
DETERIORATE.
If UBS AG's financial condition were to deteriorate, UBS Preferred Funding
Company and the holders of trust preferred securities could suffer direct and
materially adverse consequences, including elimination or reduction of
noncumulative dividends on the company preferred securities (and consequently
elimination or reduction of the pass through of such dividends as distributions
on the trust preferred securities) and, if UBS AG were liquidated (whether
voluntarily or involuntarily), loss by the holders of trust preferred securities
of their entire investment.
YOU MAY NOT RECEIVE DIVIDENDS BECAUSE UBS PREFERRED FUNDING COMPANY WILL BE
PROHIBITED FROM PAYING DIVIDENDS ON THE COMPANY PREFERRED SECURITIES UNDER
CERTAIN CIRCUMSTANCES AND WILL HAVE DISCRETION AS TO WHETHER TO PAY DIVIDENDS ON
THE COMPANY PREFERRED SECURITIES IN OTHER CIRCUMSTANCES.
If on a dividend payment date UBS AG is not in compliance with the Swiss Federal
Banking Commission's capital adequacy requirements applicable to UBS AG, UBS
Preferred Funding Company will not pay dividends under any circumstances
(including whether or not funds subsequently become available), even if a full
or proportional dividend is otherwise mandatory. For a discussion of UBS's
capital resources relative to applicable guidelines, see "UBS--Liquidity and
Capital Resources." UBS Preferred Funding Company will not pay dividends
exceeding UBS AG's available distributable profits, except for mandatory
dividends. Except when payment of full or proportional dividends is mandatory or
dividends are prohibited by a capital limitation or prohibited or restricted
because UBS AG does not have available distributable profits, dividends on the
company preferred securities are payable at the discretion of UBS AG and
noncumulative. If discretionary dividends on the company preferred securities
for any dividend period are not paid, UBS Preferred Funding Trust, as holder of
company preferred securities (and, accordingly, investors in the trust preferred
securities), will not be entitled to receive dividends whether or not funds are
or subsequently become available.
YOU SHOULD NOT RELY UPON RECEIVING DIVIDENDS THAT ARE NOT MANDATORY BECAUSE UBS
AG MAY ELECT TO SHIFT THE DIVIDEND PREFERENCE FROM THE COMPANY PREFERRED
SECURITIES TO THE COMPANY COMMON SECURITIES EXCEPT TO THE EXTENT OF FULL OR
PROPORTIONAL MANDATORY DIVIDENDS.
UBS Preferred Funding Company's Amended and Restated Limited Liability Company
Agreement, which we sometimes refer to as its LLC Agreement, provides that,
except to the extent of full or proportional mandatory dividends, the dividend
preference of the company preferred securities may at UBS AG's option shift to
the company common securities on any dividend payment date. As a result, the
corresponding interest payment received by UBS Preferred Funding Company on the
subordinated notes or other eligible investments may be returned as dividends to
UBS AG, as holder of company common securities, before any dividends are paid on
the company preferred securities.
- --------------------------------------------------------------------------------
12
14
RISK FACTORS
- --------------------------------------------------------------------------------
UBS AG IS NOT OBLIGATED TO MAKE PAYMENTS UNDER THE UBS AG SUBORDINATED GUARANTEE
UNLESS IT FIRST MAKES OTHER REQUIRED PAYMENTS.
UBS AG's obligations under the UBS AG subordinated guarantee are unsecured and
rank subordinate and junior in right of payment to all of UBS AG's other
liabilities, except for liabilities that rank equally with the UBS AG
subordinated guarantee. This means that if UBS AG fails to pay any liability
that is senior to the UBS AG subordinated guarantee, it may not make payments on
the UBS AG subordinated guarantee. As of 28 February 2001, UBS AG had CHF 570
billion of other debt obligations that are senior to UBS AG's obligations under
the UBS AG subordinated guarantee.
Also, if UBS AG is bankrupt or liquidates or dissolves, UBS AG or its trustee
will use assets of UBS AG to satisfy all liabilities ranking senior to the UBS
AG subordinated guarantee before making payments on the UBS AG subordinated
guarantee. Parity obligations will share equally in payment with the UBS AG
subordinated guarantee if UBS AG does not have sufficient funds to make full
payments on all of them. The entitlement of the holders of company preferred
securities under the UBS AG subordinated guarantee in a liquidation of UBS AG
will be substantially the same as, and no greater than, the claim such holders
would have been entitled to if they had purchased the most senior ranking
noncumulative perpetual preferred shares issued directly by UBS AG that have
financial terms equivalent to those of the company preferred securities.
UBS PREFERRED FUNDING TRUST MAY REDEEM THE TRUST PREFERRED SECURITIES IF CERTAIN
ADVERSE CONSEQUENCES OCCUR AS A RESULT OF THE APPLICATION OF SWISS OR U.S.
REGULATIONS OR TAX OR INVESTMENT COMPANY LAW AND CERTAIN CONDITIONS ARE
SATISFIED.
If certain consequences occur, which are more fully described below in this
prospectus, as a result of application of Swiss or U.S. regulations or tax or
investment company law and certain other conditions that are more fully
described below are satisfied, UBS Preferred Funding Company could redeem the
company preferred securities before the dividend payment date in October 2010.
If the company preferred securities are redeemed, UBS Preferred Funding Trust
will redeem the trust preferred securities. The redemption price is described
below under "Description of Company Preferred Securities--Redemption." You may
be unable to reinvest the proceeds of a redemption at a yield comparable to the
yield you are receiving on the trust preferred securities.
YOU COULD SUFFER ADVERSE TAX AND LIQUIDITY CONSEQUENCES IF UBS AG LIQUIDATES UBS
PREFERRED FUNDING TRUST AND DISTRIBUTES THE COMPANY PREFERRED SECURITIES TO YOU.
UBS AG has the right to liquidate UBS Preferred Funding Trust in some
circumstances. If UBS AG exercises this right, the company preferred securities
will be distributed to you in an amount corresponding to the amount of trust
preferred securities you hold. If the company trust preferred securities are
distributed to you:
- - you will receive reports of your income in respect of the company preferred
securities on Schedule K-1,
- - the company preferred securities will be in definitive certificated form and
will not be eligible for trading through DTC, Euroclear or Clearstream,
- - the trading value of the company preferred securities you receive may be
lower than the trading value of the trust preferred securities, and, as a
result, you may receive a lower return upon the sale of the company preferred
securities, and
- - you may incur an additional tax liability in excess of what you originally
contemplated. Under current U.S. federal income tax law, a distribution of
company preferred securities to you on the dissolution of UBS Preferred
Funding Trust should not be a taxable event to you. However, if UBS
- --------------------------------------------------------------------------------
13
15
RISK FACTORS
- --------------------------------------------------------------------------------
Preferred Funding Trust is characterized for U.S. federal income tax purposes
as an association taxable as a corporation at the time it is dissolved or if
there is a change in law, the distribution of company preferred securities
may be a taxable event to you.
YOU MAY NOT RECEIVE DISTRIBUTIONS OR REDEMPTION PAYMENTS IF THE SWISS FEDERAL
BANKING COMMISSION RESTRICTS THE OPERATIONS OF UBS PREFERRED FUNDING COMPANY.
The Swiss Federal Banking Commission could make determinations in the future
with respect to UBS AG that could adversely affect UBS Preferred Funding
Company's ability to make distributions to the holders of company preferred
securities or to redeem the company preferred securities. For example, the Swiss
Federal Banking Commission could impose regulatory capital requirements that
cause, or otherwise request or instruct UBS AG to cause, UBS Preferred Funding
Company not to pay dividends on or redeem the company preferred securities at
times when UBS Preferred Funding Company otherwise is entitled to do so.
BECAUSE YOU HAVE LIMITED VOTING RIGHTS AND UBS AG IS INVOLVED IN VIRTUALLY EVERY
ASPECT OF UBS PREFERRED FUNDING COMPANY'S EXISTENCE, YOU COULD SUFFER ADVERSE
CONSEQUENCES FROM UBS PREFERRED FUNDING COMPANY ACTING CONTRARY TO YOUR
INTERESTS.
The company preferred securities will be non-voting, expect in the limited cases
described under "Description of Company Preferred Securities--Voting Rights."
UBS AG is involved in virtually every aspect of UBS Preferred Funding Company's
existence. UBS AG will be the sole holder of the company common securities. As
holder of all outstanding company common securities, UBS AG will have the right
to elect all directors of UBS Preferred Funding Company except for the situation
where the holders of company preferred securities have the right to elect two
directors as described under "Description of Company Preferred
Securities--Voting Rights." The initial (and UBS Preferred Funding Company
anticipates that all future) directors of UBS Preferred Funding Company will
also be directors or employees of UBS AG or its affiliates. Conflicts of
interest may arise between the discharge by such individuals of their duties as
directors of UBS Preferred Funding Company, on the one hand, and as directors or
employees of UBS AG and its affiliates, on the other hand.
Decisions with respect to enforcement of the subordinated notes issued by the
Cayman Islands Branch of UBS AG and actions to be taken by UBS Preferred Funding
Company upon a default by UBS AG under them will be made by the board of
directors of UBS Preferred Funding Company by majority vote. There can be no
assurance that, under any circumstances, enforcement action will be taken by UBS
Preferred Funding Company with respect to a default under the subordinated
notes. However, UBS AG's failure to perform its obligations under the
subordinated notes will not relieve it of its obligations under the UBS AG
subordinated guarantee. See "Description of UBS AG Subordinated Guarantee."
UBS AG and its affiliates may have interests which are different from those of
UBS Preferred Funding Company. As a result, conflicts of interest may arise with
respect to transactions, including UBS Preferred Funding Company's
administration of the subordinated notes.
UBS Preferred Funding Company and UBS AG intend that any agreements and
transactions between UBS Preferred Funding Company, on the one hand, and UBS AG
or its affiliates, on the other hand, be established in good faith and, to the
extent deemed advisable by UBS AG, reflect arm's-length terms for such types of
transactions. The LLC Agreement of UBS Preferred Funding Company requires that
certain actions of UBS Preferred Funding Company be approved by the holders of
company preferred securities; this requirement is also intended to ensure fair
dealings between UBS Preferred Funding Company and UBS AG and its affiliates.
However, there can be no assurance that such agreements or
- --------------------------------------------------------------------------------
14
16
RISK FACTORS
- --------------------------------------------------------------------------------
transactions will be on terms as favorable to UBS Preferred Funding Company as
those that could have been obtained from unaffiliated third parties.
WE CANNOT GIVE YOU ANY ASSURANCE AS TO THE MARKET PRICES FOR THE TRUST PREFERRED
SECURITIES OR THE COMPANY PREFERRED SECURITIES.
We cannot give you any assurance as to the market prices for the trust preferred
securities or the company preferred securities because there is no prior market
for these securities. In addition, because the trust preferred securities are
deeply subordinated securities and payment of dividends on the company preferred
securities may be limited by the capital limitation or by lack of sufficient
available distributable profits, the market prices of the trust preferred
securities or company preferred securities, as applicable, may be more volatile
than other securities not having such provisions.
Although the underwriters of the trust preferred securities have informed UBS
Preferred Funding Company and UBS AG that they intend to make a market in the
trust preferred securities, the underwriters are not obligated to do so, and any
such market-making activity will be subject to the limits imposed by applicable
law and may be interrupted or discontinued at any time.
YOU WILL NOT BE ENTITLED TO RECOVER CERTAIN MISSED PAYMENTS BECAUSE OF THE
NONCUMULATIVE NATURE OF DIVIDENDS ON THE COMPANY PREFERRED SECURITIES AND
RELATED DISTRIBUTIONS ON THE TRUST PREFERRED SECURITIES.
If UBS Preferred Funding Company does not make a payment or only makes a partial
payment on a dividend payment date as a result of a capital limitation, a lack
of available distributable profits or a properly delivered "no dividend
instruction," you will not be entitled to recover that missed payment.
- --------------------------------------------------------------------------------
15
17
- --------------------------------------------------------------------------------
Cautionary Note Regarding Forward-Looking Information
This prospectus contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934. 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. The words
"anticipate", "believe", "expect", "estimate", "intend", "plan", "should",
"could", "may" and other similar expressions are used in connection with
forward-looking statements. In this prospectus, forward-looking statements may,
without limitation, relate to:
- - The implementation of strategic initiatives, such as the implementation of the
European wealth management strategy and a new business model for the UBS
Capital business unit
- - The development of revenues overall and within specific business areas
- - The development of operating expenses
- - The anticipated level of capital expenditures and associated depreciation
expense
- - The expected impact of the risks that affect UBS's business, including the
risk of loss resulting from the default of an obligor or counterparty
- - Expected credit losses based upon UBS's credit review
- - Other statements relating to UBS's future business development and economic
performance
There can be no assurance that forward-looking statements will approximate
actual experience. Several important factors exist that could cause UBS's actual
results to differ materially from expected results as described in the
forward-looking statements. Such factors include:
- - General economic conditions, including prevailing interest rates and
performance of financial markets, which may affect demand for products and
services
- - Changes in UBS's expenses associated with acquisitions and dispositions
- - UBS's and Paine Webber's ability to achieve anticipated cost savings and
efficiencies from their merger, to integrate their sales and distribution
channels in a timely manner and to retain their key employees
- - General competitive factors, locally, nationally, regionally and globally
- - Industry consolidation and competition
- - Changes affecting the banking industry generally and UBS's banking operations
specifically, including asset quality
- - Developments in technology
- - Credit ratings and the financial position of obligors and counterparties
- - UBS's ability to control risk in its businesses
- - Changes in federal tax laws, which could adversely affect the tax advantages
of certain of UBS's products and subject it to increased taxation
- - Changes in currency exchange rates, including the exchange rate for the Swiss
franc into U.S. dollars
You should also consider other risks and uncertainties discussed in documents
filed by UBS with the SEC, including UBS's most recent Annual Report on Form
20-F for the fiscal year ended 31 December 2000.
UBS is not under any obligation to (and expressly disclaims any such obligation
to) update or alter its forward-looking statements, whether as a result of new
information, future events, or otherwise.
- --------------------------------------------------------------------------------
16
18
- --------------------------------------------------------------------------------
Capitalization of UBS
The following table sets forth the consolidated capitalization of UBS in
accordance with International Accounting Standards and translated into U.S.
dollars.
31 JANUARY 2001
CHF USD
- -------------------------------------------------------------------------------------
(in millions)
Debt
Money market paper issued................................. 83,776 50,912
Due to banks.............................................. 95,041 57,758
Cash collateral on securities lent........................ 0 0
Due to customers.......................................... 311,131 189,080
Long-term debt............................................ 54,179 32,926
------- -------
Total Debt................................................ 544,127 330,676
Minority Interest........................................... 2,865 1,741
Shareholders' Equity........................................ 45,262 27,507
------- -------
Total capitalization(1)..................................... 592,254 359,923
======= =======
- ------------
(1) There has been no material change in the capitalization of UBS since 31
January 2001.
CHF amounts have been translated into United States dollars at the rate of CHF 1
= USD1.6455.
- --------------------------------------------------------------------------------
17
19
Selected Financial Data
CHF million, except where indicated
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.97
- ------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Interest income......................................... 51 745 35 604 37 442 23 669
Interest expense........................................ 43 615 29 695 32 424 16 733
Net interest income..................................... 8 130 5 909 5 018 6 936
Credit loss recovery/(expense).......................... 130 (956) (951) (1 278)
Net interest income after credit loss
recovery/(expense).................................... 8 260 4 953 4 067 5 658
Net fee and commission income........................... 16 703 12 607 12 626 12 234
Net trading income...................................... 9 953 7 719 3 313 5 491
Other income............................................ 1 486 3 146 2 241 1 497
Operating income........................................ 36 402 28 425 22 247 24 880
Operating expenses...................................... 26 203 20 532 18 376 18 636
Operating profit before tax............................. 10 199 7 893 3 871 6 244
Restructuring costs..................................... 0 0 0 7 000
Tax expense/(benefit)................................... 2 320 1 686 904 (105)
Minority interests...................................... (87) (54) 5 (16)
Net profit.............................................. 7 792 6 153 2 972 (667)
Cost/income ratio (%)................................... (2) 72.2 69.9 79.2 71.2
Cost/income ratio before goodwill amortization (%)...... (2,3) 70.4 68.7 77.7 70.7
- ------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (CHF)
Basic earnings per share................................ (4,7) 19.33 15.20 7.33 (1.59)
Basic earnings per share before goodwill................ (3,4,7) 20.99 16.04 8.18
Diluted earnings per share.............................. (4,7) 19.04 15.07 7.20 (1.59)
Diluted earnings per share before goodwill.............. (3,4,7) 20.67 15.90 8.03
Cash dividends declared per share (CHF)................. 4.50(9) 5.50 5.00
Cash dividends declared per share (USD)................. (8) 2.57 3.31 3.31
Dividend payout ratio (%)............................... 23.28 36.18 68.21
- ------------------------------------------------------------------------------------------------------------------
RATES OF RETURN (%)
Return on shareholders' equity.......................... (5) 21.5 22.4 10.7
Return on shareholders' equity before goodwill.......... (3,5) 23.4 23.6 12.0
Return on average equity................................ 22.0 18.6 9.0 (2.0)
Return on average assets................................ 0.70 0.65 0.28 (0.07)
- ------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
18
20
Selected Financial Data
CHF million, except where indicated
AS OF 31.12.00 31.12.99(1) 31.12.98(1) 31.12.97
- -----------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets......................... 1 087 552 896 556 861 282 1 086 414
Shareholders' equity................. 44 833 30 608 28 794 30 927
Market capitalization................ 112 666 92 642 90 720
Average equity to average assets
(%)................................ 3.17 3.52 3.06 3.40
- -----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ (7)
Registered ordinary shares........... 433 486 003 430 497 026 429 710 128 426 994 240
Own shares to be delivered........... 2 058 212
Treasury shares...................... (32 514 906) (25 754 544) (24 487 833) (7 724 236)
Weighted average shares for basic
earnings per share................. 403 029 309 404 742 482 405 222 295 419 270 004
- -----------------------------------------------------------------------------------------------------
BIS CAPITAL RATIOS
Tier 1 (%)........................... 11.7 10.6 9.3 8.3
Total BIS (%)........................ 15.7 14.5 13.2 12.6
Risk-weighted assets................. 273 290 273 107 303 719 345 904
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS UNDER MANAGEMENT (CHF
BILLION)........................... 2 469 1 744 1 573
- -----------------------------------------------------------------------------------------------------
HEADCOUNT (FULL TIME EQUIVALENTS).... (6) 71 076 49 058 48 011
- -----------------------------------------------------------------------------------------------------
LONG-TERM RATINGS.................... (10)
Fitch, London........................ AAA AAA AAA
Moody's, New York.................... AA1 Aa1 Aa1
Standard & Poor's, New York.......... AA+ AA+ AA+
- -----------------------------------------------------------------------------------------------------
EARNINGS ADJUSTED FOR SIGNIFICANT FINANCIAL EVENTS(11)
CHF million, except where indicated
FOR THE YEAR ENDED 31.12.00 31.12.99
- ------------------------------------------------------------------------------------------------
Operating income............................................ 36 402 26 587
Operating expenses.......................................... 25 763 20 534
Operating profit before tax................................. 10 639 6 053
Net profit.................................................. 8 132 4 665
- ------------------------------------------------------------------------------------------------
Cost/income ratio before goodwill (%)....................... (2,3) 69.2 73.3
Basic earnings per share before goodwill (CHF).............. (3,4,7) 21.83 12.37
Diluted earnings per share before goodwill (CHF)............ (3,4,7) 21.50 12.26
- ------------------------------------------------------------------------------------------------
Return on shareholders' equity before goodwill (%).......... (3,5) 24.3 18.2
- ------------------------------------------------------------------------------------------------
- ------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive
changes in accounting policy arising from newly applicable International
Accounting Standards and changes in presentation (see Note 1 to the
Financial Statements).
(2) Operating expenses/operating income before credit loss expense.
(3) The amortization of goodwill and other intangible assets is excluded from
the calculation.
(4) For EPS calculation, see Note 10 to the Financial Statements.
(5) Net profit/average shareholders' equity excluding dividends.
(6) The Group headcount does not include the Klinik Hirslanden AG headcount.
(7) The 1999, 1998 and 1997 share figures are restated for the two-for-one
share split, effective 8 May 2000.
(8) Dividends are normally declared and paid in the year subsequent to the
reporting period. In 2000, as part of the arrangements for the merger with
PaineWebber, a dividend was paid on 5 October 2000 in respect of the nine
months ended 30 September 2000. Prior to the merger between Union Bank of
Switzerland and Swiss Bank Corporation, each paid dividends in accordance
with their own dividend policies. Union Bank of Switzerland's dividends
for 1997 were CHF 50.00 (USD 33.65)
- --------------------------------------------------------------------------------
19
21
Selected Financial Data
for its bearer shares and CHF 10.00 (USD 6.73) for its registered shares.
Swiss Bank Corporation paid a dividend of CHF 12.00 (USD 8.01) in 1997.
Dividend payments are reflected at actual historical amounts and have been
translated to US dollars at an exchange rate equal to the noon buying rate
in New York City on the date of payment.
(9) Excludes a proposed distribution of CHF 1.60 per share (USD 0.976 per
share at year end 2000 spot rate) in the form of a par value reduction.
(10) See "Liquidity and Capital Resources" for information about the nature of
these ratings.
(11) Please see "Operating and Financial Review -- Information for Readers" for
a definition of significant financial events. UBS introduced the concept
of significant financial events for the first time in its 1999 reporting
and did not define significant financial events until 1999. Adjusted
figures are therefore not shown for 1998 or 1997.
BALANCE SHEET DATA
CHF million
AS OF 31.12.00 31.12.99(1) 31.12.98(1) 31.12.97
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Total assets..................................... 1 087 552 896 556 861 282 1 086 414
Due from banks................................... 29 147 29 907 68 495 66 582
Cash collateral on securities borrowed........... 177 857 113 162 91 695 82 656
Reverse repurchase agreements.................... 193 801 132 391 141 285 216 355
Trading portfolio assets......................... 253 296 211 932 159 179 210 738
Positive replacement values...................... 57 875 62 957 90 511 149 538
Loans, net of allowances for credit losses....... 244 842 234 858 247 926 270 917
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES
Due to banks..................................... 82 240 76 365 85 716 159 634
Cash collateral on securities lent............... 23 418 12 832 19 171 14 140
Repurchase agreements............................ 295 513 196 914 137 617 191 793
Trading portfolio liabilities.................... 82 632 54 638 47 033 68 215
Negative replacement values...................... 75 923 95 786 125 847 170 162
Due to customers................................. 310 679 279 960 274 850 302 516
Long-term debt................................... 54 855 56 332 50 783 54 284
Shareholders' equity............................. 44 833 30 608 28 794 30 927
- ----------------------------------------------------------------------------------------------------------------
- ------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1 to the Financial
Statements).
- --------------------------------------------------------------------------------
20
22
Selected Financial Data
U.S. GAAP INCOME STATEMENT DATA
CHF million
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1)
- --------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Interest income............................................. 51 565 35 404 29 136
Interest expense............................................ (43 584) (29 660) (25 773)
- --------------------------------------------------------------------------------------------------------------
Net interest income......................................... 7 981 5 744 3 363
Credit loss recovery/(expense).............................. 130 (956) (787)
- --------------------------------------------------------------------------------------------------------------
Net interest income after credit loss recovery/(expense).... 8 111 4 788 2 576
- --------------------------------------------------------------------------------------------------------------
Net fee and commission income............................... 16 703 12 607 8 925
Net trading income.......................................... 8 597 7 174 455
Net gains from disposal of associates and subsidiaries...... 83 1 821 84
Other income................................................ 1 431 1 361 641
- --------------------------------------------------------------------------------------------------------------
Total operating income...................................... 34 925 27 751 12 681
- --------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Personnel................................................... 17 262 12 483 7 938
General and administrative.................................. 6 813 6 664 6 259
Depreciation and amortization............................... 3 952 3 454 2 403
Restructuring costs......................................... 191 750 1 089
- --------------------------------------------------------------------------------------------------------------
Total operating expenses.................................... 28 218 23 351 17 689
- --------------------------------------------------------------------------------------------------------------
OPERATING PROFIT/(LOSS) BEFORE TAX AND MINORITY INTERESTS... 6 707 4 400 (5 008)
- --------------------------------------------------------------------------------------------------------------
Tax expense/(benefit)....................................... 2 183 1 509 (1 339)
- --------------------------------------------------------------------------------------------------------------
NET PROFIT/(LOSS) BEFORE MINORITY INTERESTS................. 4 524 2 891 (3 669)
- --------------------------------------------------------------------------------------------------------------
Minority interests.......................................... (87) (54) 4
- --------------------------------------------------------------------------------------------------------------
NET PROFIT/(LOSS)........................................... 4 437 2 837 (3 665)
- --------------------------------------------------------------------------------------------------------------
- ------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Notes 1 and 41 to the Financial
Statements).
- --------------------------------------------------------------------------------
21
23
Selected Financial Data
U.S. GAAP BALANCE SHEET DATA
CHF million
AS OF 31.12.00 31.12.99(1) 31.12.98(1)
- ------------------------------------------------------------------------------------------------
ASSETS:
Total assets............................. 1 124 554 893 525 899 589
Due from banks........................... 29 182 29 954 68 554
Cash collateral on securities borrowed... 177 857 113 162 91 695
Reverse repurchase agreements............ 193 801 132 391 141 285
Trading portfolio assets................. 197 048 184 085 161 440
Trading portfolio assets, pledged........ (2) 59 448
Positive replacement values.............. (3) 57 775 62 294 90 520
Loans, net of allowance for credit
losses................................. 245 214 235 401 248 657
Intangible assets and goodwill........... 35 726 21 428 21 707
Other assets............................. 26 971 18 717 29 398
LIABILITIES
Due to banks............................. 82 240 76 363 85 716
Cash collateral on securities lent....... 23 418 12 832 19 127
Repurchase agreements.................... 295 513 173 840 136 824
Trading portfolio liabilities............ 87 832 52 658 47 772
Negative replacement values.............. (3) 75 423 95 004 125 857
Due to customers......................... 310 686 279 971 274 861
Accrued expenses and deferred income..... 21 038 12 040 11 232
Long-term debt........................... 54 970 56 049 50 445
Shareholders' equity..................... 62 960 51 833 54 761
- ------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Notes 1 and 41 to the Financial
Statements).
(2) Adjusted for the adoption of FAS 140 required disclosures as of 31 December
2000.
(3) Positive and negative replacement values represent the fair value of
derivative contracts.
- --------------------------------------------------------------------------------
22
24
UBS
HISTORY AND DEVELOPMENT OF THE COMPANY
The legal name of the company is UBS AG.
On 29 June 1998, Union Bank of Switzerland (founded 1860) and Swiss Bank
Corporation (founded 1854) merged to form UBS.
UBS AG is incorporated and domiciled in Switzerland and operates under Swiss
Company Law and Swiss Federal Banking Law as an Aktiengesellschaft, which means
that it is a corporation that has issued shares of common stock to investors.
The address and telephone number of our principal places of business are
Bahnhofstrasse 45, Zurich, Switzerland, telephone 011 41-1-234 11 11; and
Aeschenvorstadt 1, Basel, Switzerland, telephone 011 41-61-288 20 20.
PROPERTY, PLANT AND EQUIPMENT
At 31 December 2000, UBS operated about 1,560 offices and branches worldwide, of
which about 57% were in Switzerland, 7% in the rest of Europe, 34% in the
Americas and 2% in Asia.
43% of the offices and branches in Switzerland were owned directly by UBS with
the remainder, along with most of UBS's offices outside Switzerland, being held
under commercial leases.
These premises are subject to continuous maintenance and upgrading and are
considered suitable and adequate for our current and anticipated operations.
- --------------------------------------------------------------------------------
23
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UBS
- --------------------------------------------------------------------------------
Strategy, Structure and History
Our vision is to be the preeminent global integrated investment services firm
and the leading bank in Switzerland.
We will only succeed by providing our clients with innovative and high-quality
service coupled with long-term personal relationships. Client focus is the main
driver of all our activities.
We seek to create value for our shareholders through sustainable growth of our
business within appropriate risk parameters. Being dedicated to total value
management means creating value for all stakeholders.
We are committed to succeed in the fierce competition for talent. The expertise
and integrity of our staff create value for our clients and for the Group as a
whole. We seek to be a highly attractive firm for our employees.
UBS's reputation is one of our most valuable assets. We aim to adhere to the
highest ethical standards, and to manage our risks with the greatest care. We
are committed to complying fully with the letter and spirit of the laws, rules
and practices that govern UBS and its staff.
STRATEGY
UBS's strategy is to deliver top-quality investment products and advice to a
premier client base across all client segments: individual, institutional and
corporate. UBS aims to bring its content excellence to an ever wider client
base, adding distribution organically, through acquisition or through strategic
partnership.
Choice is central to enhancing UBS's client offerings. The Group aims to
increase product choice by supporting the in-house range with a quality-screened
selection of third-party products.
UBS believes that in the future, its clients will be global in outlook: either
with global presence or global investments. All our businesses must compete on a
global scale.
UBS is committed to attaining scale and scope in all its key businesses: this is
both desirable and necessary to enable us to deliver the full spectrum of
services at maximum efficiency, though price will rarely be a first-line
competitive weapon.
UBS's client philosophy is advice-led, with intimacy stemming from the quality
of its relationship managers. UBS's businesses offer convenient access through
multiple conventional and online channels, but put advice at the heart of
relationships.
UBS is committed to being part of the technological elite, but sees e-commerce
not as a business per se, nor as a discipline in its own right, but as integral
to all its businesses. The Group aims to use technology to extend its reach to
clients and markets it could not previously have accessed, to perfect clients'
experience of UBS, to increase the number of products and services they buy, and
to minimize the production cost of its services.
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UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
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[UBS FUND SOLUTIONS]
[INTEGRATED CLIENT SERVICE MODEL GRAPH]
The first GOALs deal marketed to PaineWebber clients, in November 2000,
demonstrates the strength of this model. GOALs are equity-linked securities
created by UBS Warburg that combine a bond with a short put option on a specific
stock. This deal provided access to an entirely new investment product for
PaineWebber clients, using UBS Warburg's expertise in packaging structured
products for private clients. The credit element of the product relied on UBS
Group's rating and capital strength. Combined with the equity derivative
features, this was a product that PaineWebber could not have originated before
joining the UBS Group, and UBS Warburg could not have distributed in the US.
25
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UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
- --------------------------------------------------------------------------------
[BIS TIER 1 RATIO GRAPH]
4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00
---- ---- ---- ---- ---- ---- ---- ---- ----
9.3 9.4 9.6 10.2 10.6 11.0 12.1 11.7 11.7
For further details see "Risk -- Asset and Liability Management -- Capital
management".
CAPITAL STRENGTH
UBS has a strong and well-managed capital structure. Our financial stability
stems from the fact that we are one of the best capitalized banks in the world.
UBS believes that this financial strength is a key part of the value proposition
it offers to both clients and investors.
UBS is committed to rigorous balance sheet management and the optimization of
its capital structure. It uses the full range of capital management tools to
apply any excess capital generated in the best interests of its shareholders, or
to return it to them.
26
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UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
- --------------------------------------------------------------------------------
BUSINESS AND MANAGEMENT STRUCTURE
UBS pursues its strategies through three Business Groups, all of which are in
the top echelon of their businesses globally, and aims to further enhance the
competitive position of each one. However, UBS is not merely a holding
company - it operates an integrated client service model.
UBS's Business Groups are managed together to optimize shareholder value - to
make the whole worth more than the sum of the parts.
In practice this means that products from the wholesale-focused units, Corporate
and Institutional Clients, UBS Capital and UBS Asset Management, are distributed
to their own corporate and institutional clients and through the units focused
on individual clients, International Private Clients, US Private Clients and UBS
Switzerland. This benefits both sides - UBS's individual clients get access to
sophisticated products and services; UBS's wholesale units have access to
premier distribution; and the Group captures the whole of the value chain.
Each Business Group is led by a member of the Group Executive Board who is
individually responsible for the performance of the Business Group.
27
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UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
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[UBS's reporting structure in 2000 GRAPH]
UBS SWITZERLAND - STEPHAN HAERINGER. UBS Switzerland's Private Banking business
unit offers comprehensive wealth management services for private clients from
across the world, who bank in Switzerland and other financial centers
world-wide.
Private Banking is the world's biggest private bank. Its strategy is centered on
the client advisor, combining strong personal relationships with a full range of
products and services specifically designed for the wealthy client, complemented
by leading-edge technology.
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UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
- --------------------------------------------------------------------------------
Within Switzerland, the Private and Corporate Clients business unit provides a
complete set of banking and securities services for individual and corporate
clients, focused foremost on customer service excellence, profitability and
growth via multi-channel distribution.
UBS ASSET MANAGEMENT - PETER WUFFLI. UBS Asset Management provides asset
management services and products to a broad range of institutional and mutual
fund clients across the world. It offers a diverse range of investment
management capabilities from the traditional to the alternative, with a core
focus on price/value management. UBS Asset Management also provides investment
fund products for the UBS Group and intends to increasingly widen its reach
through third parties to individual clients outside the UBS Group.
UBS Asset Management is one of the top five institutional asset managers in the
world, the largest investment fund manager in Europe and the leading fund
manager in Switzerland.
UBS WARBURG - MARKUS GRANZIOL. UBS Warburg operates globally as a client-driven
securities, investment banking and wealth management firm. For both its own
corporate and institutional clients and for other parts of the UBS Group, UBS
Warburg provides product innovation, top-quality research and advice, and
complete access to the world's capital markets.
Through UBS PaineWebber, the fourth largest private client firm in the US, we
provide advisory services and best-in-class products to a uniquely affluent US
client base.
CORPORATE CENTER - LUQMAN ARNOLD. The UBS Group's portfolio of businesses is
planned and managed exclusively for the long-term maximization of shareholder
value. Risk/reward profiles are carefully monitored and controlled. Strong
capitalization and ratings will remain key distinguishing characteristics of
UBS. The Corporate Center ensures that the Business Groups operate as a coherent
and effective whole with a common set of values and principles.
Corporate Center is led by Luqman Arnold, who will be President of the Group
Executive Board from April 2001.
BOARD STRUCTURE. In order to further the highest standards of corporate
governance, UBS has a dual board structure. UBS's Board of Directors, a majority
of whom are independent non-executive directors, has the ultimate responsibility
for the strategic direction of the Group'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 the
Group's strategies, for implementation of strategy and for the results of the
business.
UBS'S FINANCIAL TARGETS
UBS focuses on four key performance targets, designed to ensure that it delivers
continually improving returns to its shareholders. UBS's performance against
these targets is reported each quarter.
- UBS seeks to increase the value of the Group by achieving a sustainable,
after-tax return on equity of 15-20%, across periods of varying market
conditions.
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UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
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[SEC REGISTRATION AND BEYOND GRAPH]
- UBS aims to increase shareholder value through double-digit average
annual earnings per share (EPS) growth, across periods of varying market
conditions.
- Through cost reduction and earnings enhancement initiatives UBS aims to
reduce the Group's cost/income ratio to a level that compares positively
with best-in-class competitors.
- UBS aims to achieve a clear growth trend in net new money in the private
client businesses.
The first three targets are all reported pre-good-will amortization, and
adjusted for significant financial events (see "Corporate Governance--Financial
Disclosure Principles").
UBS seeks to achieve a fair market value by always communicating transparently,
openly and consistently with investors and the financial markets.
PAINEWEBBER
On 14 December 1999, UBS announced its plans to apply for registration with the
US Securities and Exchange Commission and to list its shares on the New York
Stock Exchange. It achieved this goal on 16 May 2000, when its shares started
trading in New York. On 12 July 2000, it announced an agreement to merge with
PaineWebber Group, Inc. The merger and associated capital issuance by UBS were
approved by PaineWebber and UBS shareholders, and the merger was completed on 3
November 2000.
The progress of the integration of Paine Webber into UBS has been very
successful with all businesses operationally integrated by the end of 2000, and
no significant client advisor turnover. The merger has received an excellent
reception from PaineWebber staff, with 98% of those offered jobs in the new
Group accepting them.
30
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UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
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[UBS HEADCOUNT PRE- AND POST-MERGER GRAPH]
UBS HEADCOUNT PRE- AND POST-MERGER
Heeadcount Post-PaineWebber-merger(1)13% 5% 40% 42%
Total headcount: 71,076
Headcount Pre-PaineWebber-merger(1)18% 7% 11% 64%
Total headcount: 48,099
* Switzerland ** Americas *** Asia/Pacific **** Europe (ex-Switzerland)
(1) Full time equivalents excluding contractors and Klinik Hirslanden
[ASSETS BY CLIENT DOMICILE GRAPH]
ASSETS BY CLIENT DOMICILE
UBS
4% 27% 69%
UBS and PaineWebber
37% 49% 14%
* USA ** Switzerland *** Europe and rest of the world
The merger with PaineWebber brings UBS a leading wealth management franchise in
the US, with a focus on the higher end of the wealth management market.
PaineWebber has a significantly higher average account size than its biggest
rivals.
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UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
- --------------------------------------------------------------------------------
PaineWebber provides a new route for product distribution in the US, and
transforms the size and geographic spread of UBS's client base, making it unique
in extent and global coverage.
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UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
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The impact of the merger extends beyond UBS's private client businesses. It
expands UBS Warburg's US capabilities in asset-backed securities, real estate,
corporate finance and fixed income sales, and transforms its US equities
franchise, with UBS analysts now covering 90% of S&P 500 and NASDAQ 100
companies.
As well as this direct impact, the integration with PaineWebber has also
positioned UBS Warburg much more strongly as an employer of choice in the US
investment banking market, providing a platform on which to take advantage of
the ongoing industry consolidation and build capabilities by hiring new staff
across a wide range of products.
INDUSTRY TRENDS
UBS believes that it is particularly well positioned to gain from the developing
trends in global financial markets.
The increasing reliance of individuals on equity investment, for their personal
savings and for their pension provision, will benefit firms that manage assets
or trade in capital market products.
Commoditization of wholesale products, with increased competition and shrinking
margins, is a fact of life, but one that is least harmful to institutions like
UBS with the scale, global reach and technology infrastructure to support the
volumes required to maintain profitability.
UBS believes markets will further deregulate and globalize, driving sharp
increases in crossborder investment, both corporate and institutional. These
changes present enormous opportunities for a firm like UBS with a global
presence and the expertise to capitalize on cross-border flows.
The biggest trend that will drive UBS's business in the coming years is the
anticipated expansion and concentration of private wealth. In the US, wealthy
households (those with USD 500,000 or more in net investable assets),
represented 65% of assets in 1999. By 2003 they are expected to represent 78% of
total household assets. In Europe, the effect is less pronounced, but still,
wealthy individuals (in this case with more than EUR 500,000 of investable
assets), are expected to represent 43% of total household assets by 2005, up
from 35% in 2000. The combination of this growth in wealth with the increasing
shift towards equity investments, will provide huge opportunities for the best,
most global, asset managers. Those securities firms with large institutional
franchises will experience significant growth servicing the expanding asset
management industry. And of course, the concentration and growth of wealth will
bring with it a huge demand for private banking services, providing a further
opportunity for the current market leaders to grow their market share.
All of UBS's businesses are positioned to benefit from this increase in private
wealth. UBS Asset Management is among the top five global asset managers, with
an increasingly diversified range of investment styles. UBS Warburg has an
extremely strong institutional client franchise--only 20% of its revenues derive
from corporate clients. And the combination of Private Banking and PaineWebber
already gives UBS the largest and most balanced share of the global wealth
market.
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UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
- --------------------------------------------------------------------------------
HISTORY AND DEVELOPMENT OF UBS
UBS was formed on 29 June 1998, by the merger of two of Switzerland's leading
banking Groups, Union Bank of Switzerland and Swiss Bank Corporation.
Union Bank of Switzerland's history as a powerful force in banking began in the
1860s with the founding of the Bank in Winterthur and the Toggenburger Bank. In
1912, the merger of these two financial institutions resulted in the creation of
the Union Bank of Switzerland. Subsequently, Union Bank of Switzerland developed
primarily through internal growth, although it also made certain significant
acquisitions such as the asset management firm Phillips & Drew in 1985.
Swiss Bank Corporation celebrated its 125th anniversary in 1997. It 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. Swiss Bank
Corporation's expansion involved significant acquisitions, including:
- O'Connor & Associates, a group of affiliated firms specializing in the
trading of options and other derivative instruments, in 1992;
- Brinson Partners, a leading institutional investment management firm, in
1995;
- the investment banking and securities operations of S.G. Warburg Group,
in 1995, and
- Dillon Read & Co. Inc., a United States-based investment bank in 1997.
All the entities that have joined UBS have, regardless of their size, had a
significant impact on its culture and ethos. O'Connor & Associates was a much
smaller firm than Swiss Bank Corporation, but brought an affinity for
technology, which has remained with UBS ever since, and a trading approach and
risk management sophistication which still remains core to UBS today. The most
significant benefit was the reverse cultural revolution O'Connor brought to SBC.
This was quite deliberate; it transformed SBC and helped it move into the modern
age in a dramatic way. Later mergers reinforced this pattern of cultural change,
with S.G. Warburg bringing a deep and passionate client focus, and Brinson
Partners redefining the asset management process.
This history of acquisition and openness to cultural diversity continues to be a
key strength of the UBS Group. UBS is conscious of the importance of cultural
change as a response to the growing challenges of the competitive global
environment. The diversity of knowledge and experience offered by new
acquisitions means UBS can import better corporate cultures, better ways of
doing business and better insights.
In May 2000, UBS listed its Global Registered Share on the New York Stock
Exchange (NYSE). On 3 November 2000, UBS transformed the scope and scale of its
private client business in the US, through the merger with PaineWebber, one of
the leading US wealth management firms. Like previous merger partners, we expect
that PaineWebber will transform UBS; not just through increased US presence, but
through the proven strengths in marketing, technology, product development and
training that PaineWebber can now bring to all our private client businesses,
leveraging PaineWebber's skills to drive UBS's European private banking
strategy.
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UBS
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The Business Groups
UBS Switzerland
REPORTING BY BUSINESS UNITS
Private and
Corporate Clients Private Banking UBS Switzerland
CHF million ----------------------- ----------------------- -----------------------
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.00 31.12.99(1) 31.12.00 31.12.99(1)
- ---------------------------------------------------------------------------------------------------------------------------------
Income 7,443 7,193 6,739 5,568 14,182 12,761
Credit loss expense (759) (1,050) (25) (21) (784) (1,071)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 6,684 6,143 6,714 5,547 13,398 11,690
- ---------------------------------------------------------------------------------------------------------------------------------
Personnel expenses 3,187 3,363 1,572 1,328 4,759 4,691
General and administrative expenses 1,058 1,123 1,336 1,185 2,394 2,308
Depreciation 419 384 89 76 508 460
Goodwill amortization 27 2 35 21 62 23
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 4,691 4,872 3,032 2,610 7,723 7,482
- ---------------------------------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 1,993 1,271 3,682 2,937 5,675 4,208
- ---------------------------------------------------------------------------------------------------------------------------------
Cost/income ratio (%) 63 68 45 47 54 59
Assets under management (CHF billion) 440 439 681 671 1,121 1,110
Headcount (full time equivalents) 21,100 24,098 7,685 7,256 28,785 31,354
- ---------------------------------------------------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy and changes in presentation. The Business Group reporting
for 1999 has been rearranged to reflect the new business structure for the
Group.
UBS Switzerland offers comprehensive wealth management services for private
banking clients from across the world, banking in Switzerland and in other
financial centers. Our strategy is centered on the client advisor, combining
strong personal relationships with a full range of products and services
specifically designed for the wealthy client, supplemented by leading-edge
technology. Within Switzerland, we also provide a complete set of banking and
securities services for individual and corporate clients, focused foremost on
customer service excellence, profitability and growth via multi-channel
distribution. We are the leading bank in Switzerland.
ORGANIZATION STRUCTURE
The UBS Switzerland Business Group is made up of two business units:
- Private Banking; wealth management services
- Private and Corporate Clients; banking for private individuals and
commercial clients in Switzerland.
These two business units were brought together under a single management in
February 2000, to benefit from the synergies available from the utilization of a
common infrastructure in the domestic market and the potential for shared
distribution and servicing of clients located outside of Switzerland. In
addition, the centralization of core functions such as investment research and
financial planning and wealth management, allows us to serve all UBS
Switzerland's client groups consistently, efficiently, to the highest standard,
and without duplication.
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UBS
THE BUSINESS GROUPS--UBS SWITZERLAND
- --------------------------------------------------------------------------------
E-CHANNELS AND PRODUCTS
UBS Switzerland created a single "e-Channels and Products" business area in
April 2000 to lead its e-banking activities and drive forward its e-commerce
vision and strategy.
This new business area is responsible for all electronic channels and products,
as well as associated services and customer support centers. All revenues earned
from e-banking activities are reflected in the results of the UBS Switzerland
business units concerned and not within the "e-Channels and Products" business
area which is run as a cost center. Its costs are shared between Private Banking
and Private and Corporate Clients.
E-COMMERCE STRATEGY
e-commerce brings direct cost benefits to UBS Switzerland. Processing
transactions which are entered online is less expensive and more efficient, and
this is reflected in the new personal account charging structure introduced in
Private and Corporate Clients in January 2001, which rewards clients for the use
of electronic services.
Cost savings are not our key focus however. UBS Switzerland aims to use
e-banking to help perfect the client experience - offering the information and
services that clients want in the most convenient way, and increasing the
personalization of their interface with the bank. Through this, UBS increases
client retention, and increases the proportion of their savings and investments
that clients hold with UBS rather than elsewhere. As internet usage increases,
and the public becomes more used to transacting online, a top-class e-banking
service can also encourage client acquisition.
There is obviously a risk of conflict between UBS's e-banking offerings and its
traditional channels. However, despite the growth of online banking, UBS
Switzerland has not experienced a significant level of cannibalization of its
revenues. Based on continuous monitoring of customer behavior online, UBS
estimates that 80% of revenue-generating e-banking transactions during 2000
represented additional revenue, as the ease of transacting online leads clients
to do more.
E-COMMERCE HIGHLIGHTS
UBS Switzerland's internet offering continues to grow at a significant rate, as
new functions and services are added and client acceptance of this convenient
and easy to use distribution channel increases. The number of customers with
e-banking contracts has risen during 2000 from 454,000 to 555,000. In December
2000, 22% of all payment orders processed by UBS Switzerland were initiated
through e-banking, as were 14% of stock exchange transactions, up from 6% in
December 1999.
UBS Switzerland's comprehensive free on-line financial information service, UBS
Quotes, is an integral part of UBS's e-commerce offering, acting both as a
service for existing clients and a tool to attract new clients to the bank. UBS
Quotes now has the broadest coverage of any free-access financial information
system, with prices for more than 500,000 different financial instruments. It
received an average of 22 million page views per month during 2000, up 60% from
December 1999.
UBS Switzerland's e-banking solution is particularly noted for its integrated
approach and seamless navigation, permitting rapid access to all e-banking
offerings through a consistent user interface. Forrester Research's "Best of
Europe's Net Banking" report, published in November 2000, ranked UBS e-banking
as the number two internet bank in Europe, and in January 2001, BlueSky Rating,
an independent provider of on-line broker ratings, named UBS e-banking as the
best online broker in Switzerland.
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UBS
THE BUSINESS GROUPS--UBS SWITZERLAND
- --------------------------------------------------------------------------------
UBS aims to remain at the forefront of technical developments in e-commerce,
where clear client benefits are obvious. During 2000 we became one of the first
banks in the world to offer stock market transactions via mobile phones, with
the launch in August of a WAP-based mobile-telephone banking service. In
September 2000, we were the first bank in Switzerland to introduce a fully
integrated business to business electronic bill presentment and payment system.
UBS Switzerland has invested heavily in its e-commerce offering, and expects to
continue to invest approximately CHF 100 million per year, to remain a market
leader. UBS Switzerland will build on these strengths, and intends to further
enhance its leading position by developing increased personalization of its
websites and a broadened content offering.
Private and Corporate Clients
Private and Corporate Clients mission is to further develop its position as the
most profitable bank serving private and corporate clients in Switzerland. To
achieve its objectives, Private and Corporate Clients has established a clear
business strategy focused on creating additional value for its clients, and
centered on providing integrated solutions incorporating world-class products
and services.
BUSINESS DESCRIPTION AND ORGANIZATION
The Private and Corporate Clients business unit of UBS Switzerland is the
leading bank in Switzerland. It aims to provide our clients with optimal levels
of convenience and service by continuously expanding our comprehensive range of
alternative distribution channels, built around a successful e-banking offering,
full-service ATM's, customer service centers and more physical locations across
Switzerland than any of our competitors. At the same time, we follow a program
of business excellence to ensure that our operating infrastructure is efficient,
cost effective and capable of supporting our overall objectives.
Private and Corporate Clients is committed to providing its clients with
innovative, personalized products, which consistently meet the highest
standards, and to optimizing customer related processes.
At 31 December 2000, this business unit had CHF 440 billion in assets under
management and a loan portfolio of approximately CHF 155 billion. Private and
Corporate Clients employs over 21,000 people.
Private and Corporate Clients consists of six business areas, four of which have
income generating activities (Individual Clients, Corporate Clients, Operations
and Risk Transformation and Capital Management) and two of which provide
essential support services (Resources and Information Technology).
INDIVIDUAL CLIENTS
This business area provides a comprehensive range of financial products and
services for private clients, from residential mortgages to current accounts,
savings products, wealth management and life insurance, combining UBS Group's
own products with best-in-class third-party products, through an open product
architecture.
At year end, Private and Corporate Clients had in excess of 4 million individual
client accounts of which more than one-quarter related to affluent clients, with
an account balance of between approximately CHF 50,000 and CHF 1 million. The
trend towards growth in wealth is expected to benefit this key client group, and
represents a significant opportunity - providing the financial products and
services necessary to support and attract this key segment is a clear focus. An
example of
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UBS
THE BUSINESS GROUPS--UBS SWITZERLAND
- --------------------------------------------------------------------------------
this effort is the recent introduction of UBS Fund Solutions, which provides
clients access to a quality-screened selection of third party and UBS investment
funds. UBS Switzerland's Investment Center selects a recommended list of funds
on the basis of their asset allocation, past performance and the quality of
their management. Individual clients and their client advisors then select the
appropriate combination of these funds to meet the client's investment
philosophy and risk profile.
ASSETS UNDER MANAGEMENT
For the year ended
----------------------------------------
CHF BILLION 31.12.00 31.12.99 31.12.98
- --------------------------------------------------------------------------------------------------
Individual clients 218 223 229
Corporate clients 217 212 178
Banks 5 4 27
- --------------------------------------------------------------------------------------------------
Total 440 439 434
- --------------------------------------------------------------------------------------------------
ASSETS UNDER MANAGEMENT BY ASSET CLASS
For the year ended
----------------------------------------
CHF BILLION 31.12.00 31.12.99 31.12.98
- --------------------------------------------------------------------------------------------------
Deposit and current accounts 128 129 153
Securities accounts 312 310 281
- --------------------------------------------------------------------------------------------------
Total 440 439 434
- --------------------------------------------------------------------------------------------------
Private and Corporate Clients also continues to promote its electronic services,
both to increase convenience for clients and to reduce costs. A new charging
structure was introduced at the beginning of 2001, in which charges reflect more
closely the type and cost of services used, rewarding customers who use low cost
electronic alternatives such as e-banking and the extensive UBS ATM network. It
is expected to further reduce the amount of routine transactional business
carried out face to face or by phone to branches, giving client advisors more
capacity, and allowing them to intensify sales efforts and enhance the quality
of the advice they can offer.
During 2000, we further expanded our range of alternative distribution channels
and closed another 36 branches, bringing the total number of post-merger
closures to 209. We believe that we are fast approaching the optimal number of
physical locations required to adequately serve our clients, but will continue
to develop the profitability of all our sites.
CORPORATE CLIENTS
Private and Corporate Clients' corporate client list consists of some 160
top-tier companies, many of which are multinationals and whose needs include
frequent use of the capital markets; approximately 7,500 large companies who
require expertise in handling complex financial transactions, and some 180,000
small and medium size enterprises with specific needs related to business
financing.
UBS Private and Corporate Clients provides its corporate clients with a full
range of banking products and services including traditional credit products,
transaction services, structured finance and investment advisory services. In
addition, and in conjunction with UBS Warburg, it is able to assist its clients
in accessing the world's capital markets. The Corporate Clients business area
also supports promising Swiss-based enterprises by providing start-up financing,
primarily in the form of equity participations, through its UBS Startcapital
unit and the Aventic AG subsidiary.
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UBS
THE BUSINESS GROUPS--UBS SWITZERLAND
- --------------------------------------------------------------------------------
The Corporate Clients business area has also taken an equity stake in
plenaxx.com, the first comprehensive B2B internet portal for small and medium
sized enterprises (SME) in Switzerland serving as the hub for the daily internet
activities of SME's and their employees, and intends to further take advantage
of the rapidly growing B2B marketplace during 2001 and beyond.
OPERATIONS
Operations provides transaction processing support to UBS Switzerland and to
Swiss-based offices of other UBS units. This combined approach reduces
duplication of efforts and ensures that synergies between the different units in
Switzerland are fully realized.
The Operations business area also provides payment and custodial services to
approximately 1,800 banking institutions throughout the industrialized world and
some 700 in emerging markets.
Following the merger between UBS and SBC in 1998, and the tremendous efforts
required to integrate the transaction processes of the combined bank, this unit
is now focused on generating additional operating efficiencies and on realizing
further economies of scale from the combined volumes of Private and Corporate
Clients and Private Banking.
RISK TRANSFORMATION AND CAPITAL MANAGEMENT
This business area was formed in 1999 and has responsibility for clients with
impaired or non-performing loans and for managing the risk in the Private and
Corporate Clients' loan portfolio. It is also responsible for optimizing capital
utilization in UBS Switzerland, including equity participations, and works
closely with Group Treasury and UBS Warburg on funding and other asset and
liability management matters.
During 2000, Risk Transformation and Capital Management began implementation of
its portfolio management strategy, which focuses on providing advice to the
client servicing business areas within Private and Corporate Clients. It also
achieved a number of "firsts" in the Swiss market by working closely with UBS
Warburg on key secondary market initiatives.
At the end of the second quarter 2000, a special purpose vehicle, Helvetic Asset
Trust AG (HAT), was created by UBS in order to securitize parts of the credit
risk attached to a CHF 2.5 billion reference portfolio consisting primarily of
loans to Swiss small and medium sized enterprises. This was the first domestic
Swiss franc capital market transaction of its kind, in which the credit default
risk, but not the loan itself, was transferred to the capital market in the form
of a fixed-rate bond. The bond, which offered a higher yield than was previously
available on debt of a similar quality, was well received by the markets and was
named as the "Swiss Franc Bond of the Year" by the International Financial
Review. HAT is another indication of the way in which UBS seeks to implement
innovative solutions by providing investors, both institutional and private,
with attractive portfolio diversification opportunities while, at the same time,
optimizing the risk/return profile of its credit portfolio.
Risk Transformation and Capital Management also helped to reduce Private and
Corporate Clients large exposure to the Swiss real estate sector by the creation
and sale of two real estate companies, Impris AG and Nurestra SA.
SUPPORT AREAS
UBS businesses in Switzerland are provided with real estate, marketing,
personnel and administrative services by the Resources business area and
information technology by the Information Technology business area.
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During 2000, the Information Technology business area embarked on a program to
replace aging and multifaceted IT platforms with a new architecture utilizing
components which can be used across all business units in Switzerland. This
standardization will help to provide efficient support for our multichannel
distribution strategy, enhanced flexibility and the ability to more rapidly
deploy new applications.
During fourth quarter 2000, UBS Warburg's mainframe computer system in Stamford,
used for processing worldwide foreign exchange trading, was closed-down and the
processing moved onto systems operated by the Operations business area in
Switzerland. The integration of these systems not only allows for significant
cost savings but also demonstrates the ability of UBS to work on a truly global
scale, creating synergies through the utilization of common technical resources
across its different business groups. Further consolidation is planned later
this year, with the move of UBS Warburg's London-based securities transaction
processing system onto mainframes in Zurich.
LOAN PORTFOLIO BY LOAN CATEGORY
For the year ended
----------------------------------------
CHF BILLION 31.12.00 31.12.99 31.12.98
- --------------------------------------------------------------------------------------------------
Commercial credits 38 44 44
Mortgages 117 121 121
- --------------------------------------------------------------------------------------------------
Total 155 165 165
- --------------------------------------------------------------------------------------------------
of which recovery 15 21 26
- --------------------------------------------------------------------------------------------------
DEVELOPMENT IN UBS'S RECOVERY PORTFOLIO
CHF billion
- --------------------------------------------------------------------
BALANCE, 1 JANUARY 1998 29
- --------------------------------------------------------------------
CHANGES IN 1998:
New recovery loans added 7
Settlement of outstanding recovery loans (10)
- --------------------------------------------------------------------
BALANCE, 31 DECEMBER 1998 26
- --------------------------------------------------------------------
CHANGES IN 1999:
New recovery loans added 5
Settlement of outstanding recovery loans (10)
- --------------------------------------------------------------------
BALANCE, 31 DECEMBER 1999 21
- --------------------------------------------------------------------
CHANGES IN 2000:
New recovery loans added 3
Settlement of outstanding recovery loans (9)
- --------------------------------------------------------------------
BALANCE, 31 DECEMBER 2000 15.0
- --------------------------------------------------------------------
LOAN PORTFOLIO
At 31 December 2000, about CHF 117 billion (or 75%) of the CHF 155 billion loan
portfolio in Private and Corporate Clients related to mortgages, of which
approximately 84% were secured by residential real estate.
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RECOVERY PORTFOLIO
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 the Recovery Group, which specializes in
working-out or otherwise recovering the value of those loans. At 31 December
2000, Private and Corporate Clients' loan portfolio included approximately CHF
15 billion in this recovery portfolio. CHF 13.7 billion of Private and Corporate
Clients' year-end recovery portfolio was impaired and related to provisioned
positions and positions which resulted from the weakness in Swiss commercial
real estate markets during the 1990s. Total provisions of CHF 7.3 billion have
been established against the portion of impaired loans not secured by collateral
or otherwise deemed uncollectable. Approximately CHF 1.4 billion of UBS's
recovery portfolio was performing and unimpaired at 31 December 2000. The
unimpaired loans included in UBS's recovery portfolio are outstanding with
counterparties for whom other loans have become impaired. No provisions have
been established against these loans. UBS's lending officers actively manage the
recovery portfolio, seeking to transform the lending relationship with a goal of
removing the loan from the recovery portfolio.
Approximately two-thirds of the loans that were originally included in UBS's
recovery portfolio in 1997 have been worked-out and removed.
CREDIT QUALITY
Private and Corporate Clients concentrates its lending activities on seeking out
quality counterparties, rather than simply chasing increased market share. This,
together with the continued implementation of risk-adjusted pricing, which
differentiates loan pricing based on risk profiles, has led to improved credit
quality and higher margins on UBS Switzerland's lending portfolio, resulting in
a more effective use of UBS's capital.
Further information on the credit portfolio can be found in "Risk--Risk
Management and Control--Credit Risk".
STRATEGIC INITIATIVES
STRATEGIC PROJECTS PORTFOLIO
One of the key aims of UBS when it was formed in 1998 from the merger of Union
Bank of Switzerland and Swiss Bank Corporation, was to generate synergies and
increased revenue opportunities from the integration of the two Groups' Swiss
based retail and corporate banking businesses. This has been a major and
successful effort, which is still continuing.
A number of initiatives covering both revenue generation and cost saving,
intended to enhance profitability and exploit merger synergies, are included
within our Strategic Project Portfolio and continue to show good progress. UBS
believes that in the two and half years since the merger, these strategic
projects have contributed significant earnings enhancement, some of which has
been reinvested in growth initiatives such as e-banking.
Our revenue enhancement initiatives include offering personalized client
relationship management, based on the utilization of sophisticated data mining
technologies in order to optimize advisory processes and maximize cross-selling
opportunities. In addition, we continue to optimize our credit portfolio by
implementing risk adjusted pricing, securitizing parts of the portfolio and
realigning the balance of our exposures towards preferred risk classes. In order
to meet the changing needs of our
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clients, we have also successfully launched a number of new products and
services such as the Money Line flexible mortgage and UBS Fund Solutions.
The Strategic Projects Portfolio also has a strong focus on costs, primarily
through process reengineering in logistics and IT areas, the automation of
credit processes, and the rationalization of infrastructure, including branch
closures and alternative distribution channels.
Our multichannel distribution strategy is aimed at reducing counter traffic and
providing our customers with convenient alternative points of service, including
our e-banking services. During 2000, we started implementing a two-zone concept
in our branches, creating a cash services zone and a flexible advisory zone. We
also continue to replace increasing numbers of traditional automated teller
machines with sophisticated multifunctional BancomatPlus and Multimat machines
which allow clients to perform core banking transactions 24-hours a day at
strategic sites throughout Switzerland.
UBS has also continued to close branches, reducing the duplication and
redundancy in the network it inherited from its predecessor banks. 209 branches,
or 38% of the pre-merger network had been closed by the end of 2000. The pace of
branch closures is expected to slow-down this year as the number of branches
approaches the optimal level necessary to service UBS's clients effectively.
However, UBS will not compromise the return requirements for its branch
locations and will continue to evaluate each branch's profitability in light of
changing client demands and willingness to utilize alternative distribution
channels.
Private Banking
UBS Private Banking's mission is to provide customized solutions through a
comprehensive range of financial products and services to wealthy private
individuals. Caring for our clients is central. To achieve our objectives, we
combine strong personal relationships with state-of-the-art technology and are
committed to accessibility, quality and confidentiality.
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LOGO
BUSINESS DESCRIPTION AND ORGANIZATION
The Private Banking business unit of UBS Switzerland is the leading provider of
private banking services in Switzerland and in other financial centers
internationally. Its client advisors cater to the needs of wealthy individuals
worldwide.
As of 31 December 2000, the Private Banking business unit had CHF 681 billion in
assets under management with slightly more than 21% of these managed on a
discretionary basis. Private Banking employs over 7,000 people and conducts
business in more than 60 locations throughout the world, with products and
services tailored to the specific needs of different markets and client
segments. Key banking centers outside Switzerland include London, Luxembourg,
Monaco, Jersey, New York, Singapore and Toronto.
Private Banking tailors its advice and products to the specific needs of its
clients. Client advisors are organized by client market, which allows them to
make best use of their extensive local market knowledge and to provide a high
level of dedicated client focus. We also meet the needs of specialized client
segments across regions, and have formed dedicated client advisor teams to serve
entrepreneurs, executives, and sports and entertainment professionals.
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The Private Banking business unit consists of four business areas which maintain
direct client relationships:
- Europe, Middle East and Africa;
- Overseas - including the Americas and Asia;
- Swiss Clients - responsible for the domestic market;
- Private Banks: six independently branded, but wholly-owned Private
Banks: Cantrade, Banco di Lugano, Ferrier Lullin, Ehinger, Armand von
Ernst and Hyposwiss,
and other areas which provide services to the rest of Private Banking:
- Investment Center,
- Investment Products and Services (IP&S),
- Logistics.
As part of UBS Switzerland, Private Banking uses support services from the
Private and Corporate Clients business unit, including its information
technology platforms, securities and payment processing services and
multichannel distribution platform. Private Banking also benefits from close
cooperation with other parts of the UBS Group to help it provide its clients
with a unique offering of global financial products.
INVESTMENT CENTER
The Investment Center, which started operations on 1 October 2000, is
responsible for developing coherent and high quality investment strategies for
the core investment products and services offered by UBS Switzerland. The
strategies developed by the Investment Center guide the investment process
through which the two business units manage private wealth and advise their
clients on their global investment decisions. The strategies and advice
developed by the Investment Center are primarily "buy-side" oriented. The Center
filters and further analyzes research, sourced both from inside UBS and from
complementary external providers, and transforms this into investment strategies
and advice specifically suited to private clients. The Investment Center also
controls the tactical asset allocation for active advisory products, the UBS
Strategy Funds and for discretionary managed portfolios. It is central to UBS
Switzerland's new open architecture strategy, taking responsibility for the
"screening" of third party investment funds for the new UBS Fund Solutions
products.
INVESTMENT PRODUCTS AND SERVICES
The Investment Products and Services business area includes the teams focusing
on Active Advisory, Portfolio Management, Financial Planning and Wealth
Management, and Credit Origination & Structuring. These units support the
client-facing areas in delivering new, high quality products and providing
active advisory services.
LOGISTICS
This area manages Private Banking's relations with other service providers
within the UBS Group, and provides additional IT and facilities management
services where required.
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MARKETING, DISTRIBUTION, PRODUCTS AND SERVICES
Private Banking's client advisors are central to the delivery of services to
Private Banking's clients and retain primary responsibility for introducing new
products and services to existing and prospective clients.
Each business area is responsible for its own marketing activities, supported by
a centralized UBS Switzerland marketing function, which is responsible for
co-ordinating brand management activities, advertizing, market research, and for
sponsoring and the preparation of standardized marketing materials.
Private Banking is committed to leveraging UBS Switzerland's e-solutions and
rolling out these services globally, adapting them to meet local requirements.
Private Banking's e-strategy clearly places the client advisor at the center of
the client relationship, with electronic channels providing complementary
support and information. As well as offering UBS Switzerland's e-banking
solutions to its clients, Private Banking is actively involved in the
development of a personalized interface between the client and UBS. In addition
to access to the full range of UBS's e-banking and information services, in a
format designed by the client with his or her advisor, this will provide a
direct channel between them for communication of advice and recommendations.
Private Banking provides a full range of financial products and services,
including:
- financial planning and wealth management consulting, covering
proprietary trusts and foundations, the execution of wills, corporate
and personal tax structuring, art banking and numismatics, and tax
efficient investments;
- asset-based services such as portfolio management, custody, deposit
accounts, loans and fiduciary products;
- transaction-based services, such as trading, brokerage, and investment
funds;
- Private Banking also provides loan facilities to some of its clients. At
31 December 2000, outstanding loans amounted to CHF 28.6 billion, or 16%
of UBS Switzerland's gross loan book.
TYPE OF ENGAGEMENT
Assets under management
------------------------------------------
CHF BILLION 31.12.00 31.12.99 31.12.98
- -------------------------------------------------------------------------------------------------
Advisory 535 517 437
Discretionary 146 154 142
- -------------------------------------------------------------------------------------------------
Total 681 671 579
- -------------------------------------------------------------------------------------------------
ASSET CLASS
Deposit and current accounts 63 59 50
Equities 187 196 148
Bonds 189 187 187
UBS Investment funds 104 119 93
Other 138 110 101
- -------------------------------------------------------------------------------------------------
Total 681 671 579
- -------------------------------------------------------------------------------------------------
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STRATEGIC INITIATIVES
PRODUCT INITIATIVES
UBS is committed to developing an open product platform, widening the choices
available to its clients by complementing its own range of products with the
sale of top quality third party products through a screened open-architecture.
During 2000, Private Banking has made significant progress towards this goal.
In September 2000, Private Banking began offering GAM funds to its clients in
Switzerland. GAM was acquired by UBS in December 1999 and is part of UBS Asset
Management. Its business model is based on the belief that clients always
deserve access to the best investment talent, and recognizes that this may not
always be found in-house. GAM therefore operates a screened multi-manager
program, giving access to the highest quality expertise in specialized areas.
Private Banking clients now also have access to this investment talent.
In December 2000, UBS Switzerland extended this idea with the launch of UBS Fund
Solutions. This new product offers access to a pre-screened selection of "best
in class" investment funds from a range of UBS and third party fund managers,
helping clients obtain the best funds from a "confusing universe".
The entire population of funds available for sale in Switzerland is screened by
the Investment Center using their expertise to select the best balance between
performance and risk. Each individual client then receives a tailored sub-set of
the screened funds, selected by their client advisor to suit their investment
objectives and risk appetite, and pays an all-in "wrap" fee, based on the level
of assets.
Private Banking is also focused on generating increased asset-based revenues,
which currently represent about 65% of total revenues, and further reducing its
reliance on more volatile transaction fees. Two new products provided by the
Active Advisory Team are designed to achieve this goal:
- Active Portfolio Supervision (APS) in which a client receives investment
recommendations whenever their portfolio breaches specified parameters;
and
- Active Portfolio Advisory (APA) which, in addition, provides direct
access to a dedicated investment specialist and tailor-made strategies.
Both are structured advisory services based on an all-inclusive fee.
EUROPEAN WEALTH MANAGEMENT
Through its merger with PaineWebber, UBS now has scale and excellence in two
different traditions of serving private clients: the banking model, through
Private Banking; and the brokerage model, through UBS PaineWebber. UBS is
therefore uniquely positioned to combine these capabilities, giving its clients
access to the best of both traditions, and the full range of its combined
expertise, wherever they hold their accounts, whether in their home countries or
internationally.
As an important step towards this vision, UBS is bringing together its domestic
and international private client businesses in Europe, and infusing the new
combination with the spirit and expertise of UBS PaineWebber - the key catalyst
to build a successful future.
UBS's strategy is to build on its successful domestic private client businesses
in the key target markets of Germany, the UK, France, Italy and Spain, by adding
the skills and experience of the UBS PaineWebber team - in marketing, product
innovation, training and technology - and by transferring knowledge and
resources from UBS Switzerland's International Private Banking business. Client
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advisors will be central to the success of our plans, and we see potential for
increasing the number of advisors in this business at an average rate of 250 per
annum over the next five years, obviously carefully tailoring that growth to the
evolving market opportunities.
The private banking industry will increasingly reflect the changing profile of
high-net-worth individuals, emerging technologies and increased competition.
Clients are taking a more active role in managing their wealth and are demanding
more sophisticated products and a broader geographical range of services. They
are focused on asset performance and allocation, quality of information and
advice and extended availability of services, such as 24-hour, remote and
internet access. More wealth now resides in the domestic markets where clients
are domiciled, particularly in the form of equity and equity-linked investments,
as capital markets become more developed. UBS believes that its unique mix of
businesses positions it excellently to meet these trends.
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UBS Asset Management
REPORTING BY BUSINESS UNITS
Institutional Investment Funds / UBS
Asset Management GAM Asset Management
CHF million ------------------------ ------------------------ ------------------------
FOR THE YEAR ENDED 31.12.00 31.12.99 (1) 31.12.00 31.12.99 (1) 31.12.00 31.12.99 (1)
- --------------------------------------------------------------------------------------------------------------------------
Income 1,301 1,099 652 270 1,953 1,369
Credit loss expense 0 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
Total operating income 1,301 1,099 652 270 1,953 1,369
- --------------------------------------------------------------------------------------------------------------------------
Personnel expenses 631 458 249 58 880 516
General and administrative expenses 243 178 196 93 439 271
Depreciation 27 25 22 7 49 32
Goodwill amortization 173 113 90 0 263 113
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,074 774 557 158 1,631 932
- --------------------------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 227 325 95 112 322 437
- --------------------------------------------------------------------------------------------------------------------------
Cost/income ratio (%) 83 70 85 59 84 68
Assets under management (CHF billion) 496 574 219 225 522 598
Headcount (full time equivalents) 1,728 1,653 1,132 923 2,860 2,576
- --------------------------------------------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy and changes in presentation. The Business Group reporting
for 1999 has been rearranged to reflect the new business structure for the
Group.
UBS Asset Management provides asset management services and products to a retail
and institutional client base across the world. We have a diverse range of
investment management capabilities from the traditional to the alternative, with
a core focus on price/value management. UBS Asset Management also provides
investment fund products for the UBS Group and will increasingly widen its reach
through third parties to individual clients outside the UBS Group.
BUSINESS DESCRIPTION AND ORGANIZATION
UBS Asset Management brings together all of UBS's asset management businesses.
Formed in February 2000, it was organized in two business units during the year:
- Institutional Asset Management - one of the largest institutional asset
managers in the world.
- Investment Funds / GAM - one of the two largest fund providers in Europe
and the seventh largest in the world. GAM is a diversified asset
management group focused on private client portfolios.
In 2001, these business units have been combined and will no longer be reported
separately.
In February 2001, UBS PaineWebber's asset management unit, Mitchell Hutchins,
also became a part of UBS Asset Management. UBS Asset Management is
headquartered in Chicago, with offices across the world.
INSTITUTIONAL ASSET MANAGEMENT
Based on assets under management, Institutional Asset Management is one of the
largest institutional asset managers in the world and particularly prominent in
the United States, the United Kingdom and Switzerland. At 31 December 2000,
Institutional Asset Management had CHF 496 billion in assets under management,
including CHF 300 billion of institutional assets and CHF 196 billion of non-
institutional assets, including the UBS Investment Funds.
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Institutional Asset Management markets its services under the UBS Asset
Management umbrella, with two major sub-brands: Brinson Partners in the US, and
Phillips & Drew in the UK. Institutional Asset Management will pursue growth
opportunities in Continental Europe and Asia-Pacific and maintain its strong
positions in the mature markets it serves in the United States, the United
Kingdom and Switzerland.
Institutional Asset Management operates a client-centric business model with
strong local presence through regional business areas in the UK, Americas, Asia
and Europe. A new specialized unit branded O'Connor, was formed in June 2000.
Reviving the name of the derivatives business which became part of the Group in
1992, O'Connor focuses on alternative investment strategies designed to provide
attractive risk-adjusted returns with a low correlation to traditional
investments.
ASSETS UNDER MANAGEMENT BY CLIENT TYPE
CHF BILLION 31.12.00 31.12.99 31.12.98
- ------------------------------------------------------------------------------------------------------
Institutional 300 376 360
Non-institutional 196 198 171
- ------------------------------------------------------------------------------------------------------
INSTITUTIONAL ASSETS UNDER MANAGEMENT BY CLIENT LOCATION
CHF BILLION 31.12.00 31.12.99 31.12.98
- ------------------------------------------------------------------------------------------------------
Europe, Middle East & Africa 160 185 202
The Americas 100 140 122
Asia-Pacific 40 51 36
- ------------------------------------------------------------------------------------------------------
Total 300 376 360
- ------------------------------------------------------------------------------------------------------
INSTITUTIONAL ASSETS UNDER MANAGEMENT BY CLIENT MANDATE
CHF BILLION 31.12.00 31.12.99 31.12.98
- --------------------------------------------------------------------------------------------------------
Equity 89 125 115
Asset allocation 94 130 148
Fixed income 77 90 83
Private markets 40 31 14
- --------------------------------------------------------------------------------------------------------
Total 300 376 360
- --------------------------------------------------------------------------------------------------------
CLIENTS
Institutional Asset Management has a diverse institutional client base located
throughout the world. Its clients consist of
- corporate and public pension plans;
- endowments and private foundations;
- insurance companies;
- central banks and supranationals; and
- financial advisors.
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MARKETING AND DISTRIBUTION
Institutional Asset Management uses its longterm 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.
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.
Brinson Advisors, the former PaineWebber Mitchell Hutchins business, provides
products and services to the wholesale intermediary market in the US, focusing
on three core areas: quantitatively driven investments, short-term fixed income
products and municipal securities.
INVESTMENT PROCESS AND RESEARCH
Institutional Asset Management's client mandates reflect the very broad range of
its capabilities, from fully discretionary global asset allocation portfolios to
equity or fixed income portfolios with a single country emphasis, including
alternative asset classes such as real estate, timber, and private equity. These
portfolios are available through separately managed portfolios as well as
through a comprehensive range of pooled investment funds.
Within this wide range of capabilities, Institutional Asset Management's core
investment process is based on its efforts to determine and quantify investment
value. Its method is to identify periodic discrepancies between market price and
investment value and turn them to its clients' advantage.
Institutional Asset Management operates a global investment platform. Research
and strategies are coordinated across regions, giving clients access to the
whole of Institutional Asset Management's expertise, wherever they are located.
FUND CATEGORY
CHF BILLION 31.12.00 31.12.99 31.12.98
- -------------------------------------------------------------------------------------------------------
Asset allocation 48 44 35
Money market 44 46 45
Bond 36 40 43
Equity 60 53 36
Capital preservation 6 12 12
Real estate 5 6 5
- -------------------------------------------------------------------------------------------------------
Total 199 201 176
- -------------------------------------------------------------------------------------------------------
INVESTMENT FUNDS
Investment Funds is the leading investment fund provider in Switzerland in terms
of assets under management, and seventh largest in the world. As of 31 December
2000, Investment Funds had CHF 199 billion in assets under management, including
CHF 9.3 billion in assets under management distributed through third-party
partners. In addition, Investment Funds has a significant third-party fund
administration business.
Investment Funds has an extensive product range of approximately 159 funds.
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The continuing trend toward equity investments helped increase equity funds by
13% since the end of 1999, making it Investment Funds' largest asset category,
accounting for 30% of total volume. UBS Switzerland's Investment Fund Accounts,
which make it easy for clients to make regular savings in UBS Investment Funds,
have grown in number by 57% to over 140,000 during 2000, with assets invested
through them increasing by 20% to a total of CHF 3.1 billion at 31 December
2000.
MARKETING AND DISTRIBUTION
Investment Funds are distributed primarily through UBS Switzerland and UBS
Warburg, with a minority of assets distributed through third-party providers.
Investment Fund's penetration of UBS Group's existing client base is already
very high, and the implementation of screened open architecture in UBS
Switzerland will make sales within the group increasingly competitive.
Investment Funds is therefore evolving towards an open, multichannel
distribution architecture, in which an increasing proportion of its funds will
be sold by third parties, outside the UBS Group.
UBS's intermediary strategy, funds@ubs, was launched in November 2000. It is
designed to boost third-party distribution of our funds by providing a turn-key
solution for distribution partners, including technical, administrative and
operational support. The first implementation, in partnership with Lufthansa,
provides Lufthansa Miles and More clients with access to UBS Investment Funds. A
new web-site dedicated to Lufthansa clients provides investment education,
advice on investment strategies and online decision support tools, and will
provide automated online fund purchases. Over the coming months, UBS expects to
announce similar joint ventures with other non-traditional intermediaries, using
the same strategy and technical platform.
Other distribution initiatives include establishing additional partnerships with
financial intermediaries, developing direct electronic sale channels and
leveraging Institutional Asset Management's distribution efforts to better
capture defined contribution opportunities for Investment Funds.
UBS is also expanding its distribution in Asia, with the creation of a joint
venture investment advisory firm to manage Real Estate Investment Trusts in
Japan and the acquisition of a majority holding of Taiwan-based mutual fund
provider, Fortune Securities Investment & Trust Company.
INVESTMENT PROCESS AND RESEARCH
The Institutional Asset Management business unit is responsible for managing
almost all the investment funds offered by Investment Funds, 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 CHF 20 billion of assets under management, slightly over
600 employees and operations in Europe, North America, Asia and the Middle East.
Its mandates include private client portfolios, over 230 mutual funds, and
institutional mandates. GAM operates under its established brand name within UBS
Asset Management and continues to employ its own distinctive investment style.
UBS Asset Management will increasingly leverage GAM's range of mutual funds and
its external manager selection process, in which it selects the best from over
4,000 third-party fund providers, to enhance the range of its investment styles
and products. GAM products are now actively distributed by UBS Switzerland.
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MARKETING AND DISTRIBUTION
GAM operates a client-centric business model with regional client acquisition
and servicing responsibilities.
INVESTMENT PROCESS AND RESEARCH
GAM was founded in 1983 to give private clients "access to great investment
talent". As a result, its investment process is based on selecting the world's
leading investment talent, whether the manager selected for a particular fund or
mandate is employed by GAM or an external manager. GAM has pioneered a unique
and highly disciplined approach to identifying, selecting and managing external
fund managers.
An in-house team of investment professionals is responsible for managing the
various internally managed mandates or funds, and also for creating external and
multimanager mandates. Approximately 1,000 external managers are selected, using
a quantitative database of 50,000 funds, and a qualitative database of over
4,000 investment managers. These are then subjected to detailed qualitative
scrutiny to identify less than a hundred of the world's most talented investment
managers, whose talents are then used to create single and multimanager funds
for use by GAM clients.
The range of funds and mandates extends from traditional equity and bond funds
to a comprehensive range of alternative investment funds.
STRATEGY
INDUSTRY TRENDS AND COMPETITIVE POSITIONING
UBS Asset Management operates in a business which is growing across all market
segments and geographic locations, with Europe and Japan leading the way. The US
remains the largest market on an absolute basis, but shows slower growth rates
and a much more competitive environment than other regions.
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. This is especially true
in the US, while in other major markets defined contribution business is still
in a relatively embryonic state. However, the need for pension reform is widely
recognized.
UBS Asset Management believes that it is strongly positioned to take advantage
of this growing and changing market:
- It has the reach to succeed in an increasingly global industry.
- It has a multispecialist offering of diverse investment capabilities
matched by very few companies.
- It is one of very few investment management firms of its size with an
equally strong institutional and mutual fund capability.
INVESTMENT PERFORMANCE
UBS Asset Management's biggest challenge in recent years has been the relative
under-performance of its core value-based investment style compared to growth
investment styles. 2000 saw a reversal of this trend, with a retreat in
technology stock valuations and generally difficult market conditions, and
consequently significant improvements in UBS Asset Management's performance
relative to benchmarks and peers. UBS Asset Management has also invested in
diversification of its investment approach, with the expansion of its growth
capabilities and the very successful launch of O'Connor, its
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alternative investment business area. UBS Asset Management intends to further
leverage the strengths of O'Connor and GAM to expand its range of investment
capabilities and styles.
UBS Asset Management will continue to develop the integrated global investment
platform it created in 2000, increasing the coverage of its research in all
major asset classes, broadening its search for future investment opportunities
in alternative asset classes and committing to product innovation.
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UBS Warburg
REPORTING BY BUSINESS UNITS ADJUSTED FOR SIGNIFICANT FINANCIAL EVENTS
Corporate and
Institutional Clients UBS Capital US Private Clients
CHF million ------------------------ ----------------------- -------------------
FOR THE YEAR ENDED 31.12.00 31.12.99 (1) 31.12.00 31.12.99 (1) 31.12.00 31.12.99
- ------------------------------------------------------------------------------------------------------------------
Income 18,033 12,529 368 315 1,225
Credit loss expense (243) (330) 0 0 0
- ------------------------------------------------------------------------------------------------------------------
Total operating income 17,790 12,199 368 315 1,225
- ------------------------------------------------------------------------------------------------------------------
Personnel expenses 9,284 6,861 142 105 955
General and administrative expenses 2,779 2,429 49 46 258
Depreciation 555 629 2 2 30
Goodwill amortization 149 134 2 5 1
- ------------------------------------------------------------------------------------------------------------------
Total operating expenses 12,767 10,053 195 158 1,244
- ------------------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 5,023 2,146 173 157 (19)
- ------------------------------------------------------------------------------------------------------------------
Cost / income ratio (%) 71 80 53 50 102
Assets under management (CHF billion) 794
Headcount (full time equivalents) 15,262 12,694 129 116 21,490
- ------------------------------------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy and changes in presentation. The Business Group reporting
for 1999 has been rearranged to reflect the new business structure for the
Group.
International
Private Clients e-services UBS Warburg
CHF million ----------------------- ----------------------- -----------------------
FOR THE YEAR ENDED 31.12.00 31.12.99 (1) 31.12.00 31.12.99 (1) 31.12.00 31.12.99 (1)
- --------------------------------------------------------------------------------------------------------------------
Income 286 197 (1) 0 19,779 13,041
Credit loss expense (4) (3) 0 0 (247) (333)
- --------------------------------------------------------------------------------------------------------------------
Total operating income 282 194 (1) 0 19,532 12,708
- --------------------------------------------------------------------------------------------------------------------
Personnel expenses 385 294 150 18 10,916 7,278
General and administrative expenses 188 187 134 18 3,408 2,680
Depreciation 30 25 35 3 652 659
Goodwill amortization 7 15 1 0 298 154
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 610 521 320 39 15,274 10,771
- --------------------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX (328) (327) (321) (39) 4,258 1,937
- --------------------------------------------------------------------------------------------------------------------
Cost / income ratio (%) 213 264 77 83
Assets under management (CHF billion) 33 36 827 36
Headcount (full time equivalents) 1,154 1,386 410 70 38,445 14,266
- --------------------------------------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy and changes in presentation. The Business Group reporting
for 1999 has been rearranged to reflect the new business structure for the
Group.
UBS Warburg operates globally as a client-driven securities, investment banking
and wealth management firm. For both its own corporate and institutional clients
and for other parts of the UBS Group, UBS Warburg provides product innovation,
top-quality research and advice, and complete access to the world's capital
markets. Through UBS PaineWebber, the fourth largest private client firm in the
US, UBS Warburg provides advisory services and best-in-class products to a
uniquely affluent US client base.
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BUSINESS DESCRIPTION AND ORGANIZATION
During 2000, UBS Warburg was organized along the following lines:
- The Corporate and Institutional Clients business unit is one of the
leading global investment banking and securities firms, providing
products and advice to institutional and corporate clients. The former
capital markets business of Paine Webber Group Inc. is integrated into
this business unit.
- UBS Capital is responsible for the private equity investment of UBS and
third-party funds in a diverse global range of private companies.
- US Private Clients is the fourth largest private client broker in the
US, operating under the brand of UBS PaineWebber.
- International Private Clients provides private banking products and
services for high net worth individuals outside the US and Switzerland
who bank in their country of residence. During 2001, the European part
of this business is becoming part of UBS Switzerland's Private Banking
business unit.
- e-services.
Corporate and Institutional Clients
The global reach, breadth and diversification of Corporate and Institutional
Clients direct access to investors is unique, and its relationship-enhancing
technology is among the best in the world. Corporate and Institutional Clients
aims to maintain its position as one of the leading global financial services
firms, rivaling the top competitors both in terms of client franchise and
profitability.
BUSINESS DESCRIPTION AND ORGANIZATION
The Corporate and Institutional Clients business unit is one of the leading
global investment banking and securities firms. Its diverse heritage has shaped
a business with a truly global client base and culture.
Corporate and Institutional Clients provides wholesale products and advisory
services globally to a diversified client base, which includes institutional
investors, corporations, sovereign governments and supranational organizations.
It has a significant corporate client financing and advisory business and is one
of the top-ranked providers for institutional clients.
Corporate and Institutional Clients also manages cash and collateral trading and
interest rate risks on behalf of the UBS Group and executes the vast majority of
securities, derivatives and foreign exchange transactions for UBS's retail
clients. Corporate and Institutional Clients' headquarters are in London and it
employs 15,000 people in over 40 countries throughout the world.
Following the merger with PaineWebber in November 2000, the capital markets
business of PaineWebber was integrated into the Corporate and Institutional
Clients business unit, expanding its capabilities in asset-backed securities,
real estate, equity research, corporate finance and equity and fixed income
sales. As well as this direct and immediate impact, the integration of
PaineWebber also positioned UBS Warburg much more strongly as an employer of
choice in the critical US investment banking market.
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BUSINESS AREAS
At 31 December 2000, Corporate and Institutional Clients operated four main
business areas, organized by the type of products and services offered and the
nature of business risks: Equities, Fixed Income, Corporate Finance and Treasury
Products.
EQUITIES
The Equities business is a leading player in the secondary equity markets and in
equity, equity-linked and equity derivative products for the primary markets.
Primary areas of responsibility include
- researching companies, industry sectors, geographic markets and
macro-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.
A multi-local model, with membership on over 28 different stock exchanges and a
local presence in 40 offices globally, gives unparalleled market access. UBS
also participates in a number of electronic exchange ventures.
OPERATING INCOME BY CLIENT TYPE
For the year ended
-------------------------
% OF TOTAL 31.12.00 31.12.99
- ---------------------------------------------------------------------------------------
Investment banking 21 23
Other income from corporate clients 4 5
Institutional clients and markets 75 72
- ---------------------------------------------------------------------------------------
Total 100 100
- ---------------------------------------------------------------------------------------
OPERATING INCOME BY BUSINESS AREA(1)
For the year ended
--------------------------------------------
CHF MILLION 31.12.00 31.12.99 31.12.98
- ------------------------------------------------------------------------------------------------
Equities 10,429 5,724 3,253
Fixed income 2,969 2,464 (267)
Corporate finance 2,701 2,054 1,665
Treasury products 1,653 1,805 2,351
Non-core business 281 482 (96)
- ------------------------------------------------------------------------------------------------
Total 18,033 12,529 6,906
- ------------------------------------------------------------------------------------------------
(1) Before credit loss expense
FIXED INCOME
The Fixed Income business structures, originates, trades and distributes a
variety of fixed income, banking and structured products. It is also responsible
for loan syndication and the core loan portfolio.
The Fixed Income business serves a broad client base 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, including structured finance and
leveraged finance products;
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- principal finance, which involves the purchase, origination and
securitization of credit products;
- sales of investment-grade, high-yield and emerging market bonds;
- credit derivatives, including credit-linked notes and total return
swaps;
- derivative products; and
- products structured to meet clients' individual risk management needs.
CORPORATE FINANCE
The Corporate Finance business manages UBS's relationships with large
supranational, corporate and sovereign clients. It provides a variety of
advisory services in areas such as mergers and acquisitions, strategic advisory
and restructuring. The Corporate Finance business also provides primary capital
markets and leveraged finance services, in co-operation with the Equity and
Fixed Income businesses. Responsibilities include
- mergers and acquisitions;
- equity and equity-linked capital offerings, initial public offerings and
other public and private equity offerings in conjunction with the
Equities business area;
- investment grade and high-yield debt offerings in conjunction with the
Fixed Income business area;
- leveraged debt offerings in conjunction with the Fixed Income business
area; and
- structured finance.
TREASURY PRODUCTS
Treasury Products serves institutional investors, banks, sovereigns, and
corporate clients, as well as retail and wholesale clients of UBS's other
businesses. Treasury Products' primary areas of responsibility include
- sales and trading of foreign exchange (spot and derivatives), precious
metals, short-term interest rate products and exchange-traded
derivatives;
- collateral trading, securities lending and repurchase agreements;
- bank note sales and distribution; and
- foreign currency research.
With effect from the beginning of 2001, the Treasury Products and Fixed Income
business areas have been reorganized into two new areas, the Credit Fixed Income
business area (the former Fixed Income business less interest rate derivatives
and government bonds) and the Interest Rates and Foreign Exchange business area
(the former Treasury Products business area, with the addition of interest rate
derivatives and government bonds).
E-COMMERCE INITIATIVES
The institutional client business worldwide is rapidly moving to an electronic
basis. 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 functionality
from a single home page with direct access to prices, research, trade
ideas and analytical tools for UBS Warburg's
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- --------------------------------------------------------------------------------
clients. Corporate and Institutional Clients delivers electronic research to
over 5,000 clients and has signed up over 21,000 individual 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
online order routing and trading capabilities for all securities,
foreign exchange and derivatives products. 30% of all institutional
orders are sent via the internet.
- 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.
- Debtweb. Using Debtweb, about USD 80 billion of primary market bond
issuance was distributed online in 2000.
- DealKey. Designed for primary equity investors, DealKey uses the web as
an additional channel for the distribution of value-added information
relating to current equity and equity-linked offerings and provides
investors with the ability to communicate feedback and enter orders for
all UBS Warburg's current primary equity issues.
Providing superior advice will be key to the Corporate and Institutional Clients
business unit's future success. UBS believes its e-commerce initiatives enhance
its ability to add value to clients, as well as allowing it to extract value
from the scale of its core business processes. 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
UBS took a strategic decision during 1998 to reduce the size of its
international loan portfolio, limiting exposures unless they directly supported
core client relationships. UBS continues to avoid engaging in balance-sheet-led
earnings growth, with the result that the size of its international loan
portfolio has reduced considerably from the level recorded in 1998.
See "Risk--Risk Analysis--Credit Risk" below for a more in-depth review of UBS's
credit portfolio and business, including a discussion of its impaired and
non-performing loans.
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- --------------------------------------------------------------------------------
[GRAPH]
STRATEGIC INITIATIVES
UBS Warburg is one of the few truly global content and advice providers for
institutional clients, with a full range of products. The global reach, breadth
and diversification of its direct access to investors is best-in-class. UBS
Warburg will seek to extend these advantages, fully exploiting the added
distribution potential and expanded capital markets capabilities brought to it
by PaineWebber.
UBS Warburg is among the leaders in the provision of innovative e-commerce and
technology solutions to institutional clients, using these to strengthen the
link between advisors and their clients. It will continue to expand and enhance
its web-based technology solutions, in order to simplify distribution of
information and execution, and provide individualized services, analytic tools
and transparency to its clients. UBS Warburg sees technology as an enabling
tool, allowing clients to benefit from the expertise and skills of its advisors.
UBS Warburg intends to continue to expand its Equities business organically,
investing in top quality staff to broaden its geographical and sector coverage,
particularly in US cash equities, and building presence in key Asian markets. It
will closely monitor the moves to consolidate European stock exchanges and
clearing houses, to ensure that it retains current levels of market access.
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The merger with PaineWebber, which positions UBS Warburg more strongly as an
employer of choice in the key US market, provides an excellent opportunity for
UBS Warburg to grow its investment banking capabilities, through strategic hires
in key sectors and regions. This approach has already generated some success,
with recruitment of several senior investment bankers in the US in the second
half of 2000 and early part of 2001. UBS intends to continue to grow its
corporate franchise.
UBS Capital
Actively adding value, UBS Capital is one of the few private equity operations
with a truly global presence.
BUSINESS DESCRIPTION AND ORGANIZATION
The UBS Capital business unit of UBS Warburg is the private equity business of
UBS.
UBS Capital has increased the amount 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 5.5 billion at 31 December 2000.
UBS Capital has offices in London, Zurich, New York, Sao Paulo, Buenos Aires,
Paris, The Hague, Munich, Milan, Singapore, Hong Kong, Seoul, Sydney and Tokyo
and employs about 130 people.
As a private equity group, UBS Capital invests primarily in unlisted companies,
managing these investments over the medium-term to increase their value, and
"exiting" the investments in a manner that will maximize 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 breadth, UBS Capital endeavors to differentiate
itself from its competitors by working together with the management of companies
it invests in over a three to six-year period to optimize performance.
ORGANIZATIONAL STRUCTURE
UBS Capital is structured on a country and sector basis and has fourteen
individual teams covering over 30 countries. UBS Capital's established local
presence and expertise, coupled with the global reach of its operations, leads
to the early identification of opportunities and their timely and effective
development.
UBS Capital's teams are divided geographically between Western Europe,
Asia-Pacific and the Americas. UBS Capital's presence in the Asia-Pacific region
started in Singapore and now includes Australia and new offices in South Korea
and Hong Kong.
In 1999, 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 investor in both funds.
COOPERATION WITH THE REST OF UBS
UBS Capital collaborates with the Corporate and Institutional Clients business
unit on deal execution and IPOs. It has incentive schemes in place to encourage
referrals of potential business leads from the investment banking business and
from private banking, for example where a private banking client who is an
owner-manager of a business faces management succession problems.
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UBS Capital also provides fund products for sale to UBS's private clients.
INVESTMENT PORTFOLIO
UBS Capital's investment portfolio had a book value of approximately CHF 5.5
billion and a fair-market value of approximately CHF 6.9 billion at 31 December
2000.
UBS Capital has designed its portfolio to reduce risk exposure by
- geographically diversifying its portfolio and minimizing concentration of
investment in specific locations;
- diversifying by industry sector to obtain a good mix between
manufacturing and services sectors;
- investing a minority of the portfolio in early stage growth
opportunities, such as technology and telecommunications; and
- focusing on later-stage investments, such as management buy-outs of
existing businesses.
At 31 December 2000, approximately 77% of the investment portfolio was three
years old or less. Generally, investments are sold, and operating income
recognized, between the third and the sixth year after the initial investment.
INVESTMENT PORTFOLIO BY INVESTMENT STAGE
CHF MILLION; ALL AMOUNTS ARE BOOK VALUES 31.12.00 31.12.99 31.12.98
- ----------------------------------------------------------------------------------------
Early stage 917 488 49
Late stage 4,632 2,505 1,735
- ----------------------------------------------------------------------------------------
Total 5,549 2,993 1,784
- ----------------------------------------------------------------------------------------
AGING (BASED ON DATE OF INITIAL INVESTMENT)
CHF MILLION; ALL AMOUNTS ARE BOOK VALUES 31.12.00 31.12.99 31.12.98
- ----------------------------------------------------------------------
Pre-1994 65 89 112
1994 253 199 195
1995 272 308 282
1996 166 204 183
1997 520 496 450
1998 842 718 562
1999 1,490 979 -
2000 1,941 - -
- ----------------------------------------------------------------------
Total 5,549 2,993 1,784
- ----------------------------------------------------------------------
GEOGRAPHIC REGION (BY HEADQUARTERS OF INVESTEE)
CHF MILLION; ALL AMOUNTS ARE BOOK VALUES 31.12.00 31.12.99 31.12.98
- ----------------------------------------------------------------------
North America 2,406 1,389 939
Europe 2,284 1,153 689
Latin America 381 217 123
Asia-Pacific 478 234 33
- ----------------------------------------------------------------------
Total 5,549 2,993 1,784
- ----------------------------------------------------------------------
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INDUSTRY SECTOR (BASED ON INDUSTRY CLASSIFICATION CODES)
CHF MILLION; ALL AMOUNTS ARE BOOK VALUES 31.12.00 31.12.99 31.12.98
- ----------------------------------------------------------------------
Consumer related 1,023 610 400
Transportation 640 605 186
Communications 380 326 208
Computer related 819 282 109
Energy 190 167 153
Other electronics related 247 38 32
Other manufacturing 106 45 53
Chemicals and materials 106 23 52
Industrial products and services 1,361 635 436
Others 677 262 155
- ----------------------------------------------------------------------
Total 5,549 2,993 1,784
- ----------------------------------------------------------------------
INVESTMENT PROCESS
UBS Capital concentrates on late-stage investments, believing that these have a
better chance of producing superior risk-adjusted returns. At 31 December 2000,
83% of the book value of UBS Capital's investments was late-stage at the time of
investment.
Investment opportunities originate from a variety of sources, including
referrals from UBS Switzerland and UBS Warburg. UBS Capital's investment policy
concentrates on five aims:
- 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 of earnings than the entry price.
Where appropriate, UBS Capital tries to participate actively with the management
of companies it invests 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.
STRATEGIC INITIATIVES
PRIVATE EQUITY FUNDS
UBS Capital has committed to form private equity investment funds concentrating
on each of four regions - Europe, North America, Latin America and Asia - which
will provide opportunities for third-party investors to participate in
investments made by UBS Capital and provide a larger pool of capital for its
investments.
In late 1999, UBS Capital launched a USD 1 billion investment fund targeting
North America to which it has committed up to USD 500 million, and a USD 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%. Two new funds
were also launched in Europe during 1999. Phildrew Ventures V, a GBP 330 million
United Kingdom private equity fund, and CapVis Equity Partners, which, at CHF
300 million, is Switzerland's largest private equity fund. Further funds are
expected to be launched during 2001.
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To support its fund products, the private equity business is launching a
marketing campaign during 2001 to build its public profile.
INDUSTRY TRENDS
Superior returns and the widespread recognition of private equity as an
alternative asset class has led to a substantial growth in 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 include the introduction of the euro and the resulting
changes in the structure of business ownership in Europe, 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.
NEW STRUCTURE
During 2001, UBS will implement a unique new business model for its private
equity business, designed to best capture the opportunities available from the
growth of the international private equity market, and the strength of demand
for the asset class.
UBS Capital will increase the level of funding sourced from third parties,
reducing its dependence on direct funding from the UBS balance sheet. To support
this move towards wider participation, the new business model will center on the
formation of an autonomous investment management firm known as a fund advisor.
The fund advisor will be 80% owned by UBS Capital's current management and 20%
by UBS, and will adopt a new corporate identity towards the end of 2001.
The explicit autonomy of this structure is particularly attractive to
third-party investors, and fully in line with best market practice in the
private equity industry. Combined with UBS Capital's consistently impressive
track record, it will provide a compelling investment proposition.
The formation of the fund advisor will have a neutral effect on the earnings
stream of UBS. UBS will remain a cornerstone investor in new funds, continuing
to benefit from a strong commitment to this product. The new fund advisor will
remain strongly affiliated with UBS. UBS's private client and investment banking
businesses will retain their close links to the private equity business.
Individual clients will be supplied with a full range of proprietary private
equity products, while maintaining complete freedom of choice to select private
equity investments from other providers. UBS Warburg will continue to benefit
from IPO and M&A referrals.
In tandem with supporting this new business model, UBS has raised its target
overall commitment to private equity investment from CHF 5 billion to CHF 7.5
billion.
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[UBS/PaineWebber]
US Private Clients
The newest member of UBS, US Private Clients, operating under the UBS
PaineWebber brand, is a growth firm in a growth industry.
BUSINESS DESCRIPTION AND ORGANIZATION
Operating under the brand name UBS PaineWebber, US Private Clients is the fourth
largest private client business in the US, with one of the most affluent client
bases in the industry. Its 9,000 financial advisors provide a full range of
wealth management services to some 2.1 million affluent households in America.
Its focus is on households with investable assets in excess of USD 500,000, the
segment with the largest, fastest growing pool of assets in the US.
US Private Clients was formed from the combination of the Private Client,
Insurance and Transaction Services groups of PaineWebber, with the US business
of the former UBS Warburg Private Clients business unit. From the date of the
merger with PaineWebber until the start of 2001, it also included Mitchell
Hutchins, PaineWebber's asset management arm, which has since been transferred
to UBS Asset Management.
MARKETING, PRODUCTS AND SERVICES
UBS PaineWebber financial advisors are key to its client relationships,
supported, but never replaced, by its top class online services. Financial
advisors build and maintain strong relationships with their clients, taking the
time to understand their financial objectives and risk appetite, in order to
help them select the specific products and services they need. They also form
the frontline in client acquisition, responsible for developing relationships
with prospective investors and converting them into UBS PaineWebber clients. UBS
PaineWebber's financial advisors are based in 383 offices across the US, with
representation in every major region.
Financial advisors' individual efforts are backed up by sophisticated and
long-running marketing and advertising campaigns, featuring the long famous
tag-line "Thank you, PaineWebber", and now its revised version "UBS PaineWebber,
Thank you".
This new tag-line reflects the introduction in March 2001 of the new brand, UBS
PaineWebber. The decision to introduce the new brand so soon was taken in the
light of the smooth progress of the PaineWebber integration and the benefits of
interlocking UBS and PaineWebber. The new name is designed to underscore UBS and
PaineWebber's complementary strengths and to reinforce the benefits of the
merger to clients, financial advisors and other employees. UBS PaineWebber
reflects PaineWebber's place as a core influence on UBS's future.
US Private Clients' financial advisors are backed up by comprehensive online
capabilities, centered on UBS PaineWebber Online Services. Launched in 1997,
this now reaches 352,000 client households, representing more than USD 223
billion in assets at year-end 2000. The system provides a wealth of information
and analysis to each client, about their accounts, the markets and stocks they
might want to invest in, and gives them a convenient means to keep in touch with
their financial advisor. It also provides a range of trading, bill payment and
other transactional tools. Each client and their client advisor has the
opportunity to customize these services, extending the advisory relationship
online, and empowering the client to make more confident decisions.
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UBS PaineWebber provides a full range of wealth management services, including:
- financial planning and wealth management consulting;
- asset-based and advisory services such as discretionary and
non-discretionary portfolio management, money market accounts, loans and
fiduciary products; and
- transaction-based services, such as securities brokerage.
It covers the full range of products available to private clients, including
purchase and sale of securities, option contracts, commodity and financial
futures contracts, fixed income instruments, mutual funds, trusts, wrap-fee
products, alternative investments and selected insurance products.
In addition the Transaction Services group provides prime brokerage and
securities lending to major US and international investment firms, and execution
and clearing services to correspondent broker-dealers across the US.
STRATEGIC INITIATIVES SINCE THE MERGER
UBS Private Clients remains clearly focused on increasing its market share of US
household financial assets, by leveraging its broad domestic distribution
capabilities and building the strength of the new UBS PaineWebber brand.
EMERGING WEALTH
Employee stock option plans are a major source of new wealth creation in the US.
To help address this large potential market, UBS PaineWebber launched a major
initiative at the end of 2000, to significantly expand its already successful
stock option finance business through the formation of Corporate Employee
Financial Services.
Corporate Employee Financial Services features dedicated distribution,
technology and service groups whose goal is to capture a larger share of the
management and administration of the USD 1 trillion of stock options awarded to
corporate executives in the US. UBS PaineWebber already provides these services
to well known companies such as Cisco, Enron, General Electric and Texas
Instruments, whose 300,000 option holders together own more than USD 70 billion
of in-the-money stock options managed by UBS PaineWebber.
The opportunity for UBS PaineWebber is twofold: to administer employee stock
option services for additional Fortune 1000 and major international
corporations, and simultaneously to offer the highest levels of online and
personalized service through its financial advisors to the employees of those
companies.
When properly co-ordinated, the combination of these services will allow UBS
PaineWebber not only to execute option exercises, but also to capture clients as
long-term investors, managing the wealth they have generated.
International Private Clients and e-services
The PaineWebber merger is a transforming partnership for UBS, not just in the
US, but through the strengths that UBS PaineWebber can bring across the private
client business.
INTERNATIONAL PRIVATE CLIENTS
During 2000, our International Private Clients business unit provided private
banking products and services for high net worth clients outside the US and
Switzerland, banking in their country of
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residence. The business has offices in Germany, France, Italy, Spain, the United
Kingdom, Japan and Australia. It provides wealth management products and
services tailored to the specific cultural, legal and regulatory environment of
each country.
e-SERVICES
The e-services initiative made good progress during 2000, successfully creating
the technology backbone for our renewed efforts in European domestic private
banking.
However, as a result of the merger with PaineWebber, UBS now has a unique
opportunity to target the market for wealthy clients in Europe with an enhanced,
advisor-centered wealth management service, taking advantage of the transforming
potential of UBS PaineWebber's expertise and award winning online services. As
part of this strategy, the e-services proposition has been integrated with our
other wealth management businesses. UBS no longer plans to target the "mass
affluent" segment separately.
EUROPEAN WEALTH MANAGEMENT
Following the PaineWebber merger, UBS now has scale and excellence in two
different types of private client business: the brokerage model, through UBS
PaineWebber, and the banking model, through Private Banking. It is therefore
uniquely positioned to combine these capabilities to provide a complete range of
wealth management services to its clients. With this combination UBS can meet
all the needs of a sophisticated clientele, whether banking in their home
country or internationally.
As an important step towards this vision, UBS is bringing together its domestic
and international private client businesses in Europe. The International Private
Clients business unit will therefore cease to exist, with its European
businesses being transferred to UBS Switzerland's Private Banking business unit.
UBS's European strategy will focus on wealthy clients, with client
self-segmentation based on content and pricing, and services designed primarily
for those with more than EUR 500,000 of investable assets.
Our domestic banking efforts will be centered on Germany, the UK, France, Italy
and Spain, a scope that covers about 80% of Europe's investable assets, while
our international offering will continue to be pan-European. We intend to extend
the single brand, UBS Private Banking, from the top international private
banking brand, to become the top wealth management brand within each of our
targeted countries.
UBS is clearly committed to open architecture and the provision of a full range
of best-in-class investment products to all our clients. Client advisors will
help to structure the appropriate range of products for each client, building
portfolios to reflect their investment objectives and risk criteria. This
advice-centered approach will be supported by online systems which combine the
best of UBS PaineWebber's client interface technology with the core banking
system developed by the e-services initiative.
UBS PaineWebber's top-class abilities in marketing, product management and
innovation, technology, and training will be deployed as the key catalyst for
our European businesses. UBS will accelerate the positive momentum of the
existing domestic business, transferring knowledge and resources from the
Private Banking business unit to add to the 170 existing advisors in 17 local
offices in Europe, and supplementing them with a program of new hires.
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Corporate Center
REPORTING BY BUSINESS UNITS ADJUSTED FOR SIGNIFICANT FINANCIAL EVENTS
Corporate Center
CHF million ----------------------------
FOR THE YEAR ENDED 31.12.00 31.12.99(1)
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Income 358 372
Credit loss recovery 1,161 448
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Total operating income 1,519 820
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Personnel expenses 490 548
General and administrative expenses 281 385
Depreciation 320 366
Goodwill amortization 44 50
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Total operating expenses 1,135 1,349
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BUSINESS GROUP PERFORMANCE BEFORE TAX 384 (529)
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Headcount (full time equivalents) 986 862
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(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy and changes in presentation. The Business Group reporting
for 1999 has been rearranged to reflect the new business structure for the
Group.
Our Business Groups are managed together to optimize shareholder value--making
the whole worth more than the sum of the parts.
AIMS AND OBJECTIVES
UBS's commitment to an integrated business model remains as strong as ever. UBS
is not merely a holding company. It is a portfolio of complementary businesses,
managed together for optimal shareholder value, where the whole is worth more
than the sum of its parts.
UBS's Business Groups are accountable for their results and enjoy considerable
autonomy in pursuing their business objectives - hence the need for a strong
Corporate Center, with the mission to maximize sustainable shareholder value by
co-ordinating the activities of the Business Groups. It ensures that they
operate as a coherent and effective Group with a common set of values and
principles. To perform its role, Corporate Center avoids process ownership
wherever possible, but instead establishes standards and principles, thereby
minimizing its own staffing levels.
FUNCTIONS
FINANCE AND RISK MANAGEMENT AND CONTROL
Corporate Center includes the Group's accounting, treasury and risk management
and control functions. These teams are responsible for safeguarding UBS's
long-term financial stability by maintaining an appropriate balance between risk
and rewards, so that the Group is competitively positioned in growing market
places with an optimal business model and adequate resources.
Further details of risk management and control policies and Treasury activities
can be found in "Risk Management and Control" and "Asset and Liability
Management".
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GROUP CONTROLLING
Group Controlling is responsible for devising and implementing integrated and
consistent controlling and accounting processes throughout the Group, in order
to produce the Group's regulatory, financial and management accounts.
GROUP COMMUNICATIONS AND MARKETING
The Group Communications and Marketing function is responsible for the effective
communication of our strategy, values and results to employees, clients,
investors and the public, and for building the UBS brand worldwide.
GROUP HUMAN RESOURCES
Group Human Resources mission is to make UBS a global employer of choice, able
to attract, develop, motivate and retain top talents by establishing standards,
principles and procedures for performance evaluation, compensation and benefits,
graduate and professional recruitment, training and development.
LEGAL AND COMPLIANCE
Legal and Compliance protects UBS's reputation by managing its legal, compliance
and regulatory affairs.
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Value-Based Management
UBS's performance measurement framework considers the creation of value for
shareholders and other stakeholders in a more explicit way than traditional
profit-based measures. UBS believes that the measurement of value creation can
only be effective in the context of a comprehensive value-based management (VBM)
process which is truly embedded in its management decisions, and consistently
applied across the organization.
UBS's value-based management (VBM) framework supports value-based decisions,
performance assessment and external communication. The heart of the framework is
a process for monitoring the development of the value of the Group and its
constituent businesses, based on the identification of the fundamental drivers
of value creation.
OVERVIEW OF OBJECTIVES AND PROCESS
The aim of VBM is to create an understanding of the sources and drivers of value
within all of UBS's businesses, and to integrate this understanding into its
management processes and principles, translating the value creation mindset into
action. The diagram below summarizes the VBM processes.
Value-based business decisions: To ensure that UBS's actions are
value-enhancing, the Group evaluates strategic initiatives, acquisitions and
investments on the basis of the impact of their earnings potential and the
inherent risk on shareholder value. Funding and capital resources are only
allocated to business plans and projects that are expected to create value on a
sustainable basis.
UBS benchmarks the internal assessment of a project's potential against
analysts' and investors' expectations. The Group also assesses and manages the
risk of current and planned business strategies by analyzing the impact of
long-term industry and macro-economic trends on value.
Performance assessment: Performance measures are designed to communicate the
extent to which value has been created: both the value derived from actual
performance during the current reporting period and the value of future growth
prospects resulting from tactical and strategic positioning.
External communication: Value creation is the focal point of our communication
to investors and analysts. The analysis and interpretation of sources of
valuation gaps provides valuable evidence of the external evaluation of our
internal plans.
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[THE OBJECT OF THE VMB FRAMEWORK GRAPH]
MEASURING VALUE CREATION
MEASURING VALUE CREATION AT THE GROUP LEVEL
The fundamental assumption underlying the VBM framework is that the creation of
sustainable value is the primary objective of business activity. By emphasizing
sustainable value creation, UBS considers the interests of both its shareholders
and other important stakeholders such as employees, clients and regulators. The
framework views the management as fiduciaries of shareholder wealth. They are
responsible for generating adequate returns on a risk-adjusted basis through
strategic decisions and their effective implementation.
To ensure long-term success, a company must provide its owners with a total
return greater than its risk-adjusted cost of capital. For the shareholders, the
total return on their investment is a combination of dividends, capital
repayments and share price appreciation over a specific period. Share price
development is therefore a very important indicator of value creation at the
corporate level, since it reflects the assessment by investors of current
performance, of the ability of management to define, communicate and implement
innovative and compelling strategies for the future and of the level of
strategic risk those plans involve.
MEASURING VALUE CREATION AT THE BUSINESS UNIT LEVEL
The share price is a useful indicator of the value creation performance of the
Group, but it cannot be used to evaluate the performance of business units. As
business units are not listed on any stock
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exchange, UBS needs a measure that corresponds to the total return on shares but
is applicable to business units. For this, UBS has chosen fair value and total
return on fair value as the most suitable measures of value creation.
The starting point in assessing value creation for a business unit is thus to
assess its fair value, i.e., the theoretical value of the current franchise and
associated earnings potential as well as the resources the business unit
management has been entrusted with.
By relating realized cash earnings and the incremental value of strategic plans
and investments to the initial fair value, we then calculate the total return on
fair value of the business unit. Actual total return is compared to the business
unit hurdle rate, which represents the minimum required return for a given level
of business risk.
Technically, fair value is calculated as the sum of all future discounted free
cash flows, which correspond to earnings adjusted for investments and
depreciation. The discount rate reflects the financial and business risks of the
unit and is also the targeted total return on fair value (the business unit
hurdle rate). Discount rates are derived from historical market data using the
capital asset pricing model (CAPM), which yields discount rates that account for
the undiversifiable (systematic) risk of the business. Since our business units
are not listed on any stock market, their cost of equity is inferred from stock
market data of listed competitors and peers.
GENERATED FREE EQUITY
An important difference between a financial institution and industrial firms is
that borrowing and lending form part of everyday business activities and are not
used merely for financing and placement of excess liquidity. This makes the
traditional definition of cash flow, as used in industrial firms, difficult to
apply to a bank. In addition, banks face regulatory constraints in the form of
capital adequacy regulation, which reduce their discretion to determine and
implement an optimal capital structure.
In view of these differences, free cash flow for banks is generally defined as
residual cash, after investments and after all claims from debt holders
(interests and amortization) have been serviced. UBS has dubbed this measure
"Generated Free Equity" (GFE) as it is the amount that can be either reinvested
or returned to shareholders via dividends and share repurchases. UBS uses GFE in
the calculation of its fair value and the total return on fair value.
GFE is the sum of adjusted net profit after tax adjusted for significant
financial events and change in regulatory equity requirements.
THE VBM PROCESS
The implementation of a comprehensive VBM framework in a large organization like
UBS is a complex task and the full benefit of it will only materialize over
time. To be truly effective the VBM framework must become an integrated part of
key management processes, such as the formulation and evaluation of strategic
plans and investments, the measurement and evaluation of performance, and the
definition of criteria for performance related compensation.
VALUE DRIVERS
In order to have an operational tool for analyzing the extent to which current
and projected performance contribute to sustainable value creation, UBS has
identified value drivers for each business unit, relating to revenue, cost and
investment. Net new money growth and average margins on assets are examples of
typical revenue drivers for the private banking and asset management businesses.
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The analysis of the future development of value drivers extends beyond the
standard business plan horizon of three years to consider the potential impact
on value of long-term industry and macroeconomic trends, and constitutes an
important input in the evaluation of strategic options.
Internal value driver projections and valuations are benchmarked against
external assessments and the expectations of the stock market and leading
analysts and against performance of key competitors. They are also subjected to
a sensitivity analysis, both to understand the sensitivity of the valuation to
assumptions, and to test the impact on value of failing to meet plans. Together
these measures help to avoid the risk that over-optimistic planning might
distort the VBM process.
VALUE-BASED DECISIONS IN STRATEGIC PLANNING
During 2000, the business units of UBS have begun to complement their standard
business plans and budgets with explicit targets for key value drivers. Equity
expenditures (investments and incremental working capital), which are required
to increase or sustain current operating levels, are explicitly considered via
their effect on generated free equity.
The impact of business plans on valuation is analyzed on the basis of the
internal value driver targets and long-term forecasts on the development of
value drivers beyond the planning horizon. The valuation analysis considers the
views on sector and macro-economic development of neutral internal and external
experts and the impact of worst case scenarios.
VALUE-BASED DECISIONS AND STRATEGIC RISK
UBS considers strategic risk, such as the failure to recognize changing customer
priorities, the failure to recognize opportunities and threats from emerging
technologies and business models or the failure to define and implement
innovative, compelling value propositions for customers and investors, as the
major challenge in today's competitive environment.
In order to meet this challenge, companies need to implement systematic and
rigorous tools and processes (as has already been done in the case of market,
credit and operational risk control) to identify and manage strategic risk.
Valuebased analysis constitutes a key input for assessing and addressing
strategic risk.
In parallel with the changes in planning and investment appraisals, UBS has
introduced a new value report. This quarterly report to management tracks actual
generated free equity and the development of value drivers and also measures
total return on fair value, which includes the incremental impact of new
business initiatives. In addition, the value report contains a section which
analyses the source of gaps between internal valuation and market capitalization
and between internal valuation and leading external analysts' valuations of
business units.
COMPENSATION
A key aspect of a comprehensive VBM framework is compensation. The objective of
value based compensation is to reward sustainable shareholder value creation.
Managers and employees should receive an appropriate share of the value created
in order to align their interests to the interests of shareholders. As with all
other professional services organizations, human resources costs in banking are
the single largest operating expense. As a result compensation is a highly
sensitive area, where market practice and cultural considerations need to be
taken into account.
Total return on fair value and the development of value drivers are very
powerful measures for compensation and UBS currently is in the process of
developing methods to include the VBM measures in its compensation scheme.
However, UBS believes that compensation should never be formula driven,
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so, while these measures will become important inputs, they will not replace
managerial judgement in determining compensation levels.
EXTERNAL COMMUNICATION
Although VBM is essentially an internal management tool, it can also provide
useful information for investors and analysts. Future public disclosure will
therefore contain further quantitative information on the development of key
value drivers.
CONCLUSION
UBS believes that the focus on value drivers in planning and performance
tracking is the most effective and efficient way to direct the organization
towards building value. It also allows the linking of compensation to the key
drivers of sustainable profitability in a pragmatic way. Value based management
combines the analysis of current performance with the analysis of future
earnings potential. This increases management's focus on strategic risk and
further improves UBS's ability to create sustainable value.
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Brand Strategy at UBS
Brands are becoming formal assets that provide tangible benefit. In free and
fiercely contested markets, they are a vital communication tool for attracting
target clients. Nowhere is this more so than in the competitive market of
financial services providers. UBS is responding to this challenge with
integrated brand management and a clear brand strategy, with responsibility for
brand equity taken at the highest level.
BRANDS ARE INCREASINGLY IMPORTANT IN THE FINANCIAL SERVICES INDUSTRY
Until recently, banks seldom went far beyond national borders. Clients did not
shop around for a financial advisor, but were directed towards prestigious
companies through word-of-mouth and often remained loyal to these institutions
throughout their whole lives. As a result of this privileged market position,
financial services providers deliberately cultivated an image of discretion and
exclusivity.
The easing of regulatory restrictions, increased transparency of services and a
shift to more consumer "activism", has led to a dramatic increase in
competition, making it much easier for new players to enter the financial
markets, significantly expanding choice and turning the previously restricted
world of privileged providers into a buyer's market. Today, customer loyalty has
weakened, and clients can change products and providers more easily than before.
A new generation of wealthy clients is increasingly comfortable using the media
to collect information on financial matters, often in the form of advertising
and marketing messages. Clients increasingly select companies and products based
on image and perception. Strong brands with a well-articulated and attractive
message are becoming a crucial competitive factor in this type of environment.
In a survey of American banking clients, at least 80 percent of those questioned
said that the influence of brand was "fairly important" to "extremely important"
in their choice of financial products.
A BRAND STRATEGY FOR HIGHLY COMPETITIVE FINANCIAL MARKETS
A strong and familiar brand with a clear profile offers the client focus and
security, giving the company sustained competitive advantage. A firm such as UBS
formed through merger and with a portfolio of legacy brands, faces particular
challenges. UBS has therefore refined its brand strategy and, in July 2000,
launched a brand campaign concentrating on the UBS brand as the focus for the
entire UBS Group.
UBS'S BRAND IDENTITY
The only brands that make an impression amid the current flood of information
and frenzied pace of communication are ones that are strong and communicate a
clear message. Defining the brand message is therefore crucial to the success of
brand communication.
The Group's global reach, technology excellence, sophisticated products and
services, integrated business platform and strong focus on advice are ideal
brand attributes. "Partnership for success", the core message of the UBS
corporate brand, reflects these strengths. UBS's brand stands for success
through partnership: partnership with the outside world, partnership with our
clients, partnership with shareholders, partnership with investors, but also
partnership within UBS, thanks to the close co-operation that exists between the
individual business areas.
Supporting this core message are a number of subsidiary associations. The UBS
brand also stands for "value added solutions" and transparency of benefits and
price. Furthermore, it symbolizes the committed and motivated employee and
embodies the collective power of the UBS Group which comes
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from the combination of services provided by a wide range of business units. And
finally, the brand conveys the trust which is associated with characteristics
such as quality, reliability, security, stability and sense of responsibility.
WORLDWIDE BRAND CAMPAIGN
The UBS brand with its powerful message was positioned in the major markets
through a worldwide campaign during 2000. The core message, "The Power of
Partnership", is based on a concept which can be applied across the board for
all Business Groups, service and product categories. The pictures from the
campaign symbolize the way to success through partnership.
UBS'S SYSTEMATIC APPROACH TO BRANDING
UBS's systematic approach to branding is based on a corporate brand and a
limited number of subsidiary business brands.
The corporate brand identifies the Group as a whole and reflects its values. It
is aimed at steering clients towards the company when they make market
decisions. Its visual appearance is determined by design guidelines which are
binding, company-wide.
As a general rule the business brands (such as UBS Warburg) are strongly linked
to the corporate brand. They represent the individual business units and
subsidiaries with their range of products and services, with the linkage
reflecting the benefits offered by UBS as an integrated financial services
group.
For jurisdictional or strategic reasons, such as identification of an asset
management style, other business units may have a "some link" or a "no link"
status, though the medium-term plan for brand development clearly focuses on a
smooth transition from the current brand portfolio to a single brand. Finally
there are also simple word brands for products and services, like KeyClub or
Fund Solutions.
[USB BRAND ARCHITECTURE CHART]
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UBS and the Environment
UBS aims to maintain best-in-class environmental standards in all that it does.
INTRODUCTION
UBS strives to be among the leaders in all its businesses, but will only succeed
if it anticipates long term opportunities and risks. UBS is convinced that it is
not only financial market trends and political developments that will shape its
business, but to an increasing extent environmental conditions and social
expectations as well. This section describes briefly how environmental aspects
affect UBS's shareholder value in the Group's different areas of activity.
Further details are available in UBS's Environmental Report 2000, which is
available at www.ubs.com/environment.
UBS takes its responsibility towards its clients, shareholders and employees
seriously. It believes that its international prominence confers "role model"
status, and that its long-term success will only be guaranteed if the long-term
consequences of all its actions are seen to be beneficial. For UBS it is self-
evident that the Group should take as much care of natural resources as it does
with the assets its clients entrust to it. A precondition for this is a
forward-looking assessment of the environmental impact of the Group's actions.
This is why UBS aims to observe international environmental standards in all
that it does - not only with respect to its own conduct but also in terms of the
transactions it finances. UBS's commitment to the environment is underpinned
with a professional environmental management system.
UBS views the ISO 14001 certification awarded to its environmental management
system as the first important step towards comprehensive independent assessment
of the corporate responsibility which it embodies in its corporate culture.
During 2001, UBS will create a Corporate Responsibility Committee composed of
Board, GEB and GMB members which will be responsible for corporate social
responsibility issues, for supervision of the Group's adherence to relevant
international standards, and for developing appropriate reporting in this area.
UBS - COMMITTED TO SUSTAINABILITY
UBS'S ENVIRONMENTAL POLICY
UBS's environmental policy has been approved by the Group Executive Board. The
following extracts outline the key points of the policy.
Environmental protection is one of the most pressing issues facing our world
today. Consequently environmental issues are a challenge for all companies in
all sectors. UBS regards sustainable development as a fundamental aspect of
sound business management.
UBS is committed to continuing the integration of environmental aspects into
business activities.
We seek to build shareholder value by taking advantage of environmental market
opportunities. At the same time, we will incorporate due consideration of
environmental risks into our risk management processes, especially in lending
and investment banking.
We will actively seek ways of reducing the environmental impact to air, soil and
water from our in-house operations. The main focus is the reduction of
greenhouse gas emissions.
We seek to ensure the efficient implementation of our environmental policy via
an environmental management system which includes sound objectives, programs and
monitoring.
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THE UN GLOBAL COMPACT AND THE UNEP BANK DECLARATION - A GLOBAL COMMITMENT
UBS has undertaken to comply with the UN Global Compact principles proposed at
the 1999 World Economic Forum in Davos. These principles set out the framework
in which a company can help ensure sustainable development worldwide. In
addition to protecting the environment, the nine principles deal with aspects
such as respecting human rights and workplace rights.
UBS was one of the first signatories of the UNEP Bank Declaration and is helping
to shape further developments through its role on the Steering Committee for
financial institutions.
UBS does not just acknowledge these principles in theory, but takes concrete
action to turn them into reality. Internally, compliance with social standards
is a day-to-day reality within human resources. UBS is aware, however, that in
the financial services industry the main focus of corporate social
responsibility must be on client relationships. Financing transactions and
managing assets for clients whose activities are seen as socially irresponsible
can lead to financial and regulatory risks for the Group, and damage its
reputation. UBS seeks to avoid these risks through the application of the
highest standards of probity, and through its involvement in initiatives such as
the Wolfsberg Anti-Money Laundering Principles.
THE UBS ENVIRONMENTAL MANAGEMENT SYSTEM: THE ISO 14001 CERTIFICATE
In May 1999, UBS was the first bank to obtain ISO 14001 certification for its
worldwide environmental management system in its banking business. ISO 14001 is
an international standard for environmental management systems. UBS also
received certification for its environmental management system for its corporate
services in Switzerland. The certification was undertaken by an independent
certification company, SGS International Certification Services AG.
ENVIRONMENTAL RATINGS
UBS's share price is part of the Dow Jones Sustainability Group Index (DJSGI).
The DJSGI comprises around 230 companies from various sectors that rank as
leaders in their field in terms of social and environmental performance.
In October 2000, UBS was ranked first in the financial sector by DJSGI.
In a survey published in January 2000, the Munich-based rating agency, Oekom
Research, examined the environmental performance of larger European banks. The
study, which looked at environmental management systems, products and services,
and the quality of environmental data, ranked UBS first amongst the 26 banks
examined.
THE ENVIRONMENTAL FACTOR IN ASSET MANAGEMENT
HIGHLIGHTS
- The performance of the "UBS (Lux) Equity Fund - Eco Performance" was
1.7% in 2000, outperforming the MSCI World Index by 15.7%.
- The size of the "UBS (Lux) Equity Fund - Eco Performance" and of the
corresponding investment foundation for Swiss pension funds doubled in
2000 to 487 million Swiss francs.
- The Japanese fund "UBS Nihon Kabushiki Eco Fundo" was successfully
launched on the market at the end of October 1999. The size of fund
assets at end 2000 was around JPY 7 billion.
- UBS is currently reviewing the launch of a product which will allow
clients to invest worldwide in projects aimed at reducing greenhouse gas
emissions.
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There are a number of factors involved in acquiring new client assets, including
the financial performance of a company's products, the level of service it
offers and its reputation. In addition, some clients now demand that asset
management decisions take into account environmental and social aspects as well
as economic ones. UBS's expertise in incorporating environmental and social
aspects into its company research and portfolio management is becoming more and
more important - particularly for institutional investors such as pension funds.
UBS's environmental investment research looks at how companies' strategies,
processes and products impact both their financial success and the environment,
and what contribution these elements make to each company and its employees. The
stocks selected through this process are shares in companies which demonstrate
long-term success and generate sustainable financial revenues. Specialist
studies and stock indices show that there can be a positive link between
environmental, social and economic performance.
Focusing on the concept of sustainability, UBS launched a new investment fund in
1997, the "UBS (Lux) Equity Fund - Eco Performance". This fund invests worldwide
in stocks of exemplary sector leaders and forward-looking small and medium-sized
companies. The selection criteria include above average environmental and social
performance as well as a sound financial basis. This investment strategy and the
fund's broad diversification has resulted in an excellent financial performance
for the fund and a positive contribution to the value of UBS's asset management
business.
THE ENVIRONMENTAL FACTOR IN INVESTMENT BANKING
While no two investment banking transactions are the same, they all have a
common element that is crucial to their success, namely the ability to identify
opportunities and risks early on, and to assess them correctly. Although
financial risks dominate this assessment, environmental aspects can also be an
important part of risk analysis.
First, environmental risks could become credit risks - for example, if a client
can no longer repay a loan as a result of environmental problems. Second,
liability risks could be incurred if, for example, UBS were to become owner of a
company or were to sit on the management board of a company which finds itself
facing environmental liabilities. Lastly, environmental risks could damage the
Group's reputation if it were to be involved in a controversial transaction.
Based on its Global Environmental Risk Policy, UBS Warburg has introduced
processes that allow early identification of environmental risk in relation to a
transaction. In an initial phase, environmental factors are screened by
investment banking staff. If there are indications of increased risk,
environment specialists are called in to investigate the issues as part of the
due diligence process.
THE ENVIRONMENTAL FACTOR IN CREDIT BUSINESS
HIGHLIGHTS
- The assessment of environmental risks is integrated fully into the loan
review process and the set of tools used.
- Almost all employees in recovery departments in Zurich, Bern and
Lausanne were trained in environmental risk management in 2000.
Professional management of environmental risks is particularly relevant
in these departments, as they manage distressed debt.
A prerequisite for a healthy loan portfolio is professional risk analysis that
takes account of all types of risk, including environmental risks. Alongside
traditional rating factors such as key financial data and management quality, a
careful review of financially relevant environmental aspects is an important
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part of UBS's credit risk analysis. In assessing a loan application, the client
advisor uses internal guidelines and up-to-date information to assess
environmental risks, and includes environmental information in the data provided
to the loan assessor.
UBS can take several courses of action if a client's credit-worthiness is
compromised by environmental risks. If the risks involved cannot be calculated
or estimated, it can refuse the credit transaction; it can demand a higher risk
premium or additional collateral; it can reduce the term of the loan or
repayment period, or it can offer advisory services or act as an agent to help
resolve the problem.
The benefits of incorporating the "environmental factor" in lending business are
threefold: UBS has a healthy loan portfolio, the client is aware of the
environmental risks and opportunities for its company, and the environment
itself benefits from the resulting improvements.
THE ENVIRONMENTAL FACTOR IN-HOUSE
HIGHLIGHTS
- Environmental aspects are incorporated as a core part of our procurement
and design processes for services such as cleaning or waste disposal
services and for products such as paper or office materials.
The more efficiently and sparingly UBS uses its resources and hence reduces
emission levels, the less it will have to pay in terms of costs. Energy
management and in-house environmental initiatives enhance operating margins.
UBS impacts the environment primarily through its energy consumption, the
running of its heating systems, its paper consumption and business travel.
Professional know-how and an efficient environmental management system allow the
Group to use resources better and bring down costs.
Costs can be optimized in three different ways. Firstly, the necessary level of
environmental performance to comply with regulatory requirements must be
achieved in as effective and cost-efficient a manner as possible. Secondly,
costs can be reduced by improving internal processes or implementing technical
measures, such as adjusting the heating or air conditioning of a building.
Lastly, UBS and the specialist companies it works with are continually working
to reduce the impact on the environment using intelligent engineering, for
example in the building services.
UBS'S ENVIRONMENTAL PERFORMANCE IN FIGURES
Full details of UBS's environmental performance can be found in UBS's
Environmental Report 2000.
The environmental report shows how UBS's environmental commitment affects its
enterprise value, highlighting the effect of the "environmental factor" on some
of the Group's key value drivers. It includes data on UBS's performance against
key environmental metrics in banking and corporate services, based on the
EPI-Finance 2000 standard which was jointly developed by eleven finance and
insurance companies. It also provides further details about UBS's ISO 14001
certification.
For further information please visit: www.ubs.com/environment, or contact:
environment@ubs.com.
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Corporate Governance
UBS is committed to meeting the highest international standards of corporate
governance in its organizational structure. Corporate and executive bodies are
organized in line with the leading codes of best practice.
Corporate Organization
UBS's organizational structure, based on two separate boards having different
functions and responsibilities, guarantees clear controls and a balance between
the Board of Directors (Board) and the Group Executive Board (GEB).
The functions of Chairman of the Board of Directors (Chairman) and President of
the Group Executive Board (President) are conferred on two different people,
guaranteeing separation of powers.
ORGANIZATIONAL PRINCIPLES
The shareholders elect each member of the Board. The Board appoints the
Chairman, the Vice Chairmen and the members of the various Board committees from
among the elected Board members. It also appoints the President and members of
the GEB and the Group Managing Board (GMB).
The Board is the highest corporate body with responsibility for the ultimate
direction and strategy of the company and the appointment and supervision of its
executive management. A large majority of the Board members are non-executive
and fully independent. The Chairman and at least one Vice Chairman have
executive roles and assume supervisory and leadership responsibilities for
matters including strategy, risk supervision, compensation principles and
succession planning.
The GEB has executive management responsibility for the company. Together with
the Chairman's Office it assumes overall responsibility for the development of
UBS's strategies. It is responsible for the implementation and results of those
strategies. Its membership includes the CEOs of the Business Groups, who are
accountable to the President for the financial results and management of their
Business Groups. The President and the GEB are accountable to the Chairman and
his Board for the Group results, and the Board in turn is accountable to
shareholders.
In order to ensure that the Board and GEB are independent of each other, no
member of one board may also be a member of the other.
THE BOARD OF DIRECTORS
As at 31 December 2000, the Board consisted of eight Directors (see list below).
Alex Krauer, Chairman since 1998, and Andreas Reinhart will step down from their
functions at the Annual General Meeting of Shareholders (AGM), to be held on 26
April 2001. The Board will propose to the AGM that Marcel Ospel, currently Group
Chief Executive Officer, be elected to the Board, and has decided to then
appoint Marcel Ospel as its Chairman. In order to reflect UBS's global reach at
board level, the AGM will also be asked to elect three new non-Swiss Directors:
Sir Peter Davis (born 1941), CEO of Sainsbury plc, London; Johannes Antonie de
Gier (1944), former Chairman and CEO of Warburg Dillon Read (now UBS Warburg),
London; Lawrence Allen Weinbach (1940), Chairman and CEO of Unisys Corporation,
New York.
The Board is organized as follows:
The Chairman operates a Chairman's Office, including the Vice-Chairmen, which
meets regularly with the President and his appointees from the GEB to address
fundamental issues for the Group, such as
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overall strategy, mid-term financial and business planning, mid-term succession
plans, global compensation principles, and the risk profile of the Group. The
Chairman's Office assumes special authority in the credit approval process. It
also acts as the Audit Supervisory Board, with responsibility for the
supervision of Group Internal Audit, and as the Nomination Committee.
Following the 2001 AGM, a separate Compensation Committee will be appointed,
mainly from among the non-executive directors. It will have responsibility for
setting the global compensation policy of the organization and for determining
the individual compensation and bonus for the members of the Chairman's Office,
GEB and GMB.
The Board appoints an Audit Committee from among its non-executive members. The
Audit Committee meets at least three times a year to oversee the performance of
the external Group and Statutory Auditors. It also monitors interaction between
Group Internal Audit and the external auditors. All three members - Peter Bockli
as Chairman, Rolf Meyer and Andreas Reinhart - are fully independent from UBS.
They are financially literate and familiar with the accounting practices of
international financial services groups. The Audit Committee does not itself
perform audits, but supervises the auditing work done by internal and external
auditors. Its primary responsibility is thereby to review the organization and
efficiency of internal control procedures and the financial reporting process.
Following the 2001 AGM, the Board will appoint a Corporate Responsibility
Committee, composed of Board, GEB and GMB members. The Committee will be
responsible for corporate social responsibility issues, for supervision of the
Group's adherence to relevant international standards, and for appropriate
associated reporting.
THE GROUP EXECUTIVE BOARD
From 1 January 2001, the Group Executive Board (GEB) consisted of eight members
(see list below). Joseph J. Grano joined the GEB on 1 January 2001, following
UBS's merger with PaineWebber. Marcel Ospel, Chief Executive Officer, will step
down from his function after the 2001 AGM when he is to be proposed for election
to the Board. Luqman Arnold, currently Chief Financial Officer, will assume the
role of President of the GEB.
The GEB appoints the following major committees:
The Group Governance Committee is responsible for the co-ordination of the
Group's interface with central banks and regulators, and for minimizing the
Group's reputation risks.
The Group Finance Committee is responsible for co-ordinating the Group's
accounting, risk management and control, treasury and financial communication
processes, aiming for the long-term maximization of shareholder value. The Group
Finance Committee includes the chairmen of the associated functional committees:
Group Risk Committee, Group Controlling Committee, and Group Treasury Committee.
The Group Communications and Marketing Committee ensures that communication to
all stakeholders, internally and externally, is transparent, accurate, concise,
timely and consistent.
The Group Human Resources Committee has responsibility for the definition of
human resources policies and standards which contribute to the identification,
recruitment, development and retention of high-caliber staff.
The Group IT Committee ensures Groupwide coordination of policies and standards
in the information technology area.
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THE GROUP MANAGING BOARD
As of 1 March 2001 the Group Managing Board (GMB) had 30 members all of whom
hold high-level functions in the business groups, or the Corporate Center (see
list below).
The GMB is regularly informed of important decisions and meets physically at
least once a year to discuss fundamental Group issues.
AUDIT
GROUP INTERNAL AUDIT
To guarantee full independence, the head of Group Internal Audit - Walter
Sturzinger until 31 December 2000, Markus Ronner from 1 January 2001 - reports
directly to the Chairman of the Board.
With 240 professionals worldwide, Group Internal Audit provides an independent
review of the effectiveness of the system of internal controls and compliance
with key rules and regulations. All key issues raised by Group Internal Audit
are communicated to the management responsible, to the President and to the
Chairman's Office via formal Audit Reports. The Audit Supervisory Board and the
Audit Committee of the Board are regularly informed of important findings.
Extensive coordination and close cooperation with the external auditors enhances
the efficiency of Group Internal Audit's work.
EXTERNAL AUDITORS
Ernst & Young Ltd., Basel, have been assigned the mandate of global auditors for
the UBS Group. They assume all auditing functions according to laws, regulatory
requests, and the UBS Articles of Association (see also paragraph on Relations
with Regulators). Ernst & Young Ltd. meets all independence requirements
established by the Securities and Exchange Commission (SEC). As part of its
audit process, Ernst & Young Ltd. informs the Audit Committee of the measures it
takes to ensure its and its employees' independence from UBS, and outlines the
nonaudit services which it delivers to UBS.
At the Extraordinary General Meeting on 7 September 2000, UBS shareholders
appointed Deloitte & Touche Experta AG, Basel, as Special auditors according to
Article 31 paragraph 3 of the UBS Articles of Association. The Special auditors
provided an audit opinion in respect of the details of the capital increase
required for the PaineWebber transaction, independently from the normal
auditors.
SENIOR MANAGEMENT COMPENSATION PRINCIPLES
OVERALL PHILOSOPHY
UBS operates in extremely competitive labor markets around the world.
Accordingly, it seeks to attract, retain, motivate and develop highly qualified
employees at all levels. In particular, it is critical to achieve this for
positions where performance is most important to the UBS's overall success. UBS
is prepared to provide superior compensation opportunities in return for
superior performance, and has developed the measurement systems and decision
processes necessary to ensure that pay is tied directly to performance.
Individual performance is measured on the basis of business area, Business
Group, or Groupwide results, as appropriate to a particular executive's
responsibilities. In assessing performance, the Group considers both
quantitative and qualitative factors. It also makes a balanced assessment of
both current results and key performance indicators - longer-term value drivers
crucial to the Group's ability to
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deliver future performance and growth. This assessment is closely linked to the
value-based management process which UBS is now implementing.
In conducting its assessments of executive performance, UBS reviews changes to
its overall performance and the performance of its business units over time,
against specifically established performance targets, and against the
performance of our competitors, to the extent that such data are available.
COMPONENTS OF COMPENSATION
Compensation of senior executives consists of base salary and discretionary
(performance-based) bonus, a significant portion of which is paid in the form of
forfeitable restricted stock and employee stock option grants. Annual
examination of competitors' pay practices is conducted to ensure that UBS's
compensation policies and practices continue to support the objectives of
attracting outstanding new executives, and motivating and retaining valuable
employees.
Bonuses are discretionary, and generally represent a substantial portion of
total compensation for UBS's senior management.
SHARE OWNERSHIP COMMITMENT
It is UBS's long-standing policy to strongly encourage significant levels of
stock ownership among its senior management, aligning the interests of
management closely with those of our shareholders. Share ownership is encouraged
in the following ways:
- A significant portion of each senior executive's annual
performance-based compensation is delivered in the form of UBS shares or
employee stock options, on a mandatory basis.
- Additional incentives are provided for senior managers who voluntarily
elect to take an even greater portion of their annual performance-based
compensation in the form of shares or employee stock options.
- Below the senior executive level, significant numbers of employees are
required to take a significant portion of their annual performance-based
compensation in the form of shares, employee stock options, or other UBS
equity-linked vehicles. Additionally, they are provided with
opportunities to own stock through various programs.
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Directors and Officers of UBS
THE BOARD OF DIRECTORS
Each member of the Board is elected at the Annual General Meeting of
Shareholders for a four-year term. The initial term of office for each Director
is, however, fixed in such a way as to ensure that about a quarter of all the
members have to be newly elected or reelected every year.
The table below shows information about the Board of Directors as at 31 December
2000.
Expiration of
Year of initial current term
Name and business address Position held appointment of office
- ---------------------------------------------------------------------------------------------------------------
ALEX KRAUER CHAIRMAN 1998 2002(1)
UBS AG MEMBER OF THE AUDIT SUPERVISORY BOARD
Bahnhofstrasse 45
CH-8098 Zurich
- ---------------------------------------------------------------------------------------------------------------
ALBERTO TOGNI VICE CHAIRMAN 1998 2001
UBS AG CHAIRMAN OF THE AUDIT SUPERVISORY BOARD
Bahnhofstrasse 45
CH-8098 Zurich
- ---------------------------------------------------------------------------------------------------------------
MARKUS KUNDIG VICE CHAIRMAN 1998 2002
Bundesplatz 10 MEMBER OF THE AUDIT SUPERVISORY BOARD
CH-6304 Zug
- ---------------------------------------------------------------------------------------------------------------
PETER BOCKLI CHAIRMAN OF THE AUDIT COMMITTEE 1998 2003
Bockli Bodmer & Partners
St. Jakobs-Strasse 41
P.O. Box 2348
CH-4002 Basel
- ---------------------------------------------------------------------------------------------------------------
ROLF A. MEYER MEMBER OF THE AUDIT COMMITTEE 1998 2003
Heiniweidstrasse 18
CH-8806 Bach
- ---------------------------------------------------------------------------------------------------------------
HANS PETER MING BOARD MEMBER 1998 2004
Sika Finanz AG
Wiesenstrasse 7
CH-8008 Zurich
- ---------------------------------------------------------------------------------------------------------------
ANDREAS REINHART MEMBER OF THE AUDIT COMMITTEE 1998 2004(1)
Volkart Brothers Holding Ltd.
P.O. Box 343
CH-8401 Winterthur
- ---------------------------------------------------------------------------------------------------------------
ERIC HONEGGER BOARD MEMBER 1999 2003
SAirGroup
CH-8058 Zurich-Airport
- ---------------------------------------------------------------------------------------------------------------
(1) Alex Krauer and Andreas Reinhart will step down from their functions at the
Annual General Meeting in April 2001.
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Alex Krauer, Chairman of the Board of Directors since 1998, joined the Board of
Directors of Swiss Bank Corporation in 1988. In 1994, he became First Vice
Chairman of Swiss Bank Corporation, and following the merger between Swiss Bank
Corporation and Union Bank of Switzerland was named Vice Chairman of UBS AG in
1998. Mr. Krauer previously held various management functions in Ciba Ltd. and
subsequently Ciba-Geigy Ltd. He was Chairman and CEO of Ciba-Geigy Ltd. from
1987 to 1996, and after the merger between Ciba-Geigy Ltd. and Sandoz Ltd.
Chairman of Novartis Inc. from 1996 to 1999. He also served as a member of the
Boards of Directors of Baloise Holding from 1980 to 1999 and of Chiron
Corporation from 1995 to 1999. Mr. Krauer was born on 3 June 1931.
Alberto Togni, Vice Chairman of the Board of Directors, has been with UBS and
SBC since 1959. From 1994 to 1997 he was Chief Risk Officer and a member of the
Group Executive Committee of Swiss Bank Corporation. He previously held various
functions in the Commercial division, becoming its head in 1993. In 1987 he was
named General Manager and member of the Executive Board. Prior to that, he
assumed different management roles in Zurich, New York, Tokyo and as
representative for the Middle East in Beirut. Mr. Togni serves as a director of
Unilever (Schweiz) AG, Zurich; Thomson Multimedia Ltd., Zurich; and Swiss
National Bank, Zurich. Mr. Togni was born on 30 October 1938.
Markus Kundig, Vice Chairman of the Board of Directors, is also the Chairman of
the Board of Directors of LZ Medien Holding AG and the Vice Chairman of the
Board of Directors of Clariant. He is a member of the Boards of Directors of
Metro International AG, Merck AG and Pelikan Holding AG. Until 1999, Mr. Kundig
was the proprietor of Kundig Printers Ltd. Mr. Kundig was born on 12 October
1931.
Peter Bockli, Chairman of the Audit Committee, is a partner in the law office of
Bockli Bodmer & Partners and a part-time professor of tax and business law at
the University of Basel. He is a member of the Boards of Directors of Nestle
S.A., and Firmenich. In addition, he is the Vice Chairman of the Board of
Directors of Manufacture des Montres Rolex S.A. Mr. Bockli was born on 7 May
1936.
Rolf A. Meyer, a member of the Audit Committee, was until recently Chairman and
CEO of Ciba Specialty Chemicals. He is now a consultant and is also a member of
the Board of Siber Hegner AG. Mr. Meyer was born on 31 October 1943.
Hans Peter Ming, a member of the Board, is the Chairman of the Board of
Directors of Sika Finanz AG. He is also a member of the Board of Directors of
Swiss Steel and sits on the Board of the Swiss Society of Chemical Industries.
Mr. Ming was born on 12 October 1938.
Andreas Reinhart, a member of the Audit Committee, is proprietor and Chairman of
Volkart Group and a member of the Board of Directors of Volkart Foundation and
Volkart Vision. He is Chairman of SAM Sustainability Group and of Non-Violence
Project AG. He is a member of the Board of Directors of Scalo Publishers. Mr.
Reinhart was born on 24 December 1944.
Eric Honegger, a member of the Board, is the Chairman of the Board of Directors
of SAirGroup. He is also the Chairman of the Board of Directors of Neue Zurcher
Zeitung. Before joining SAirGroup Mr. Honegger was a member of the Zurich
Government. Mr. Honegger was born on 29 April 1946.
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THE GROUP EXECUTIVE BOARD
The table below shows the membership of the Group Executive Board at 1 January
2001, following the appointment to the board of Joseph J. Grano.
Year of initial
Name Position held appointment
- -----------------------------------------------------------------------------------------------
Marcel Ospel President and Group Chief Executive Officer 1998
- -----------------------------------------------------------------------------------------------
Luqman Arnold Chief Financial Officer 1999
- -----------------------------------------------------------------------------------------------
Georges Gagnebin Chief Executive Officer, UBS Private Banking 2000
- -----------------------------------------------------------------------------------------------
Joseph J. Grano Jr. President and CEO, UBS PaineWebber 2001
- -----------------------------------------------------------------------------------------------
Markus Granziol Chairman and Chief Executive Officer, UBS Warburg 1999
- -----------------------------------------------------------------------------------------------
Stephan Haeringer Chief Executive Officer, UBS Switzerland 1998
- -----------------------------------------------------------------------------------------------
Pierre de Weck Chief Executive Officer, UBS Capital 1998
- -----------------------------------------------------------------------------------------------
Peter A. Wuffli Chairman and Chief Executive Officer, UBS Asset 1998
Management
- -----------------------------------------------------------------------------------------------
The business address of all members of the Group Executive Board is UBS AG,
Bahnhofstrasse 45, Zurich, Switzerland.
Marcel Ospel, Group Chief Executive Officer, was the President and Group Chief
Executive Officer of Swiss Bank Corporation (SBC), from 1996 to 1998. He was
made CEO of SBC Warburg in 1995, having been a member of the Executive Board of
SBC since 1990. From 1987 to 1990, he was in charge of Securities Trading and
Sales at SBC. From 1984 to 1987 Mr. Ospel was Managing Director with Merrill
Lynch Capital Markets; and from 1980 to 1984, he worked at SBC London and New
York in the Capital Markets division. He began his career at Swiss Bank
Corporation in the Central Planning and Marketing Division in 1977. Mr. Ospel
was born on 8 February 1950.
Luqman Arnold previously served as Chief Operating Officer of Warburg Dillon
Read. Mr. Arnold joined SBC Warburg in 1996 as Chairman of the Asia/Pacific
division and was later named Chief Executive Officer of the successor
organization in Asia/Pacific. From 1993 to 1996 he was employed by Banque
Paribas and was appointed to the Executive and Management Committees. Between
1983 and 1992 Mr. Arnold held various senior management positions at Credit
Suisse First Boston. From 1973 to 1983 he worked at Manufacturers Hanover
Corporation and at First National Bank in Dallas. Mr. Arnold was born on 16
April 1950.
Georges Gagnebin is the CEO of the Private Banking unit of UBS Switzerland.
Before holding this function, he was the Head of the International Clients
Europe, Middle East & Africa business area in the Private Banking division. In
1994, he was named General Manager and Member of the SBC Group Executive Board,
and in 1992, he became Deputy General Manager and a Member of the Executive
Board. Between 1987 and 1992, he served as Head of Finance & Investment at SBC
in Berne and Lausanne. In 1982, he was named Head of the Finance & Investment
unit of SBC in Berne. Mr. Gagnebin began his career in 1969 at SBC in Berne. Mr.
Gagnebin was born on 3 March 1946.
Joseph J. Grano, Jr., President and CEO of UBS PaineWebber, joined the UBS AG
Group Executive Board on 1 January 2001. In 1994, he was named President of
PaineWebber Inc. He joined PaineWebber in 1988 as President of Retail Sales and
Marketing. Before working for PaineWebber, Mr. Grano was with Merrill Lynch for
16 years holding various senior management positions including director of
National Sales for Merrill Lynch Consumer Markets. Prior to joining Merrill
Lynch in 1972, Mr. Grano served in the US Special Forces. Mr. Grano was born on
7 March 1948.
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Markus Granziol, Chairman and CEO of UBS Warburg, served from 1998 to 1999 as
Global Head Equities and Fixed Income at Warburg Dillon Read and was a member of
the Group Managing Board. From 1996 to 1998, he was General Manager and member
of the SBC Group Executive Board. Between 1995 and 1996 he served with SBC
Warburg as the Joint Global Head of Equities. In 1994, he became Global Head of
Equities at SBC in Hong Kong. Mr. Granziol joined SBC in 1987 as Head of the
Securities Department at SBC in Zurich. Prior to that, he was Chief of Staff at
the Swiss National Bank, and was also lecturer in macroeconomics and financial
theory at the University of Zurich. Mr. Granziol was born on 21 January 1952.
Stephan Haeringer, CEO of UBS Switzerland and of its Private and Corporate
Clients business unit, has held several positions with UBS during the last three
decades. From 1996 to 1998, he was Chief Executive Officer Region Switzerland.
From 1991 to 1996, he served as Division Head, Private Banking and Institutional
Asset Management. In 1991, he was appointed member of the Group Executive Board,
and in 1987 he became Executive Vice President and served as Head of the
Financial division. During the years 1967 to 1988, Mr. Haeringer assumed various
management roles within the areas of Investment Counseling, Specialized
Investments, Portfolio Management, Securities Administration and Collateral
Loans. Mr. Haeringer was born on 6 December 1946.
Pierre de Weck, CEO of UBS Capital, has assumed several functions at UBS. Until
1999, he served as Chief Credit Officer and Head of Private Equity. From 1995 to
1998, he served as a member of the Group Executive Board and Division Head
Corporate and Institutional Finance. In 1994, Mr. de Weck was named Executive
Vice President and member of the Group Executive Board while heading the
Corporate Finance, Primary Markets and Merchant Banking division. Between 1992
and 1994 he was Chief Executive Officer Europe and between 1991 and 1992 Chief
Executive Officer North America. In 1987, Mr. de Weck became Branch Manager in
New York. He joined UBS in 1985 as Head of Project Finance in Zurich. Between
1976 and 1985 he held various positions at Citicorp in Zurich and New York. Mr.
de Weck was born on 15 July 1950.
Peter A. Wuffli is the Chairman and CEO of UBS Asset Management. Most recently,
he was Group Chief Financial Officer of UBS. From 1994 to 1998, he was the Chief
Financial Officer at SBC and a member of SBC's Group Executive Committee. In
1984, he joined McKinsey & Co as management consultant and in 1990 became a
partner of the McKinsey Switzerland senior management. Mr. Wuffli was born on 26
October 1957.
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GROUP MANAGING BOARD
In addition to the members of the Group Executive Board, the following members
belonged to the Group Managing Board as at 1 March 2001:
Colin Buchan Global Head Equities, UBS Warburg
- -----------------------------------------------------------------------------------------
Crispian Collins Vice Chairman, UBS Asset Management
- -----------------------------------------------------------------------------------------
John Costas President and Chief Operating Officer, UBS Warburg
- -----------------------------------------------------------------------------------------
Arthur Decurtins Head Business Area Asia, UBS Private Banking
- -----------------------------------------------------------------------------------------
Jeffrey J. Diermeier Chief Investment Officer, UBS Asset Management
- -----------------------------------------------------------------------------------------
Regina Dolan Chief Administrative Officer, UBS PaineWebber
- -----------------------------------------------------------------------------------------
Thomas K. Escher Head Business Area IT, UBS Switzerland
- -----------------------------------------------------------------------------------------
John A. Fraser Head Business Area Asia Pacific, UBS Asset Management
- -----------------------------------------------------------------------------------------
Robert Gillespie Joint Global Head, Corporate Finance, UBS Warburg
- -----------------------------------------------------------------------------------------
Jurg Haller Head Business Area Risk Transformation and Capital
Management, UBS Switzerland
- -----------------------------------------------------------------------------------------
Eugen Haltiner Head Business Area Corporate Clients, UBS Switzerland
- -----------------------------------------------------------------------------------------
Gabriel Herrera Head Business Area Europe, Middle East and Africa, UBS Asset
Management
- -----------------------------------------------------------------------------------------
Alan C. Hodson Head of European Equities, UBS Warburg
- -----------------------------------------------------------------------------------------
Benjamin F. Lenhardt, Jr. Head Business Area Americas, UBS Asset Management
- -----------------------------------------------------------------------------------------
Donald Marron Chairman UBS Americas
- -----------------------------------------------------------------------------------------
Urs. B. Rinderknecht Group Mandates
- -----------------------------------------------------------------------------------------
Alain Robert Head Business Area Individual Clients, UBS Switzerland
- -----------------------------------------------------------------------------------------
Marcel Rohner Chief Operating Officer, Deputy CEO, UBS Private Banking
- -----------------------------------------------------------------------------------------
Gian Pietro Rossetti Head Business Area Swiss Clients, UBS Private Banking
- -----------------------------------------------------------------------------------------
Hugo Schaub Group Controller
- -----------------------------------------------------------------------------------------
Jean Francis Sierro Head Business Area Resources, UBS Switzerland
- -----------------------------------------------------------------------------------------
Robert H. Silver Head Operations and Systems, UBS PaineWebber
- -----------------------------------------------------------------------------------------
J. Richard Sipes Joint Head Business Area Europe, UBS Private Banking
- -----------------------------------------------------------------------------------------
Clive Standish CEO Asia Pacific, UBS Warburg
- -----------------------------------------------------------------------------------------
Walter Sturzinger Group Chief Risk Officer
- -----------------------------------------------------------------------------------------
Marco Suter Group Chief Credit Officer
- -----------------------------------------------------------------------------------------
Mark B. Sutton Head US Private Clients, UBS PaineWebber
- -----------------------------------------------------------------------------------------
Rory Tapner Joint Global Head, Corporate Finance, UBS Warburg
- -----------------------------------------------------------------------------------------
Raoul Weil Joint Head Business Area Europe, UBS Private Banking
- -----------------------------------------------------------------------------------------
Stephan Zimmermann Head Business Area Operations, UBS Switzerland
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AUDITORS
EXTERNAL AUDITORS
Ernst & Young, Ltd., Basel Auditors for the Parent Bank and for the Group
(term expires AGM 2001, proposed for reelection)
Deloitte&Touche Experta, Ltd., Basel Special auditors (term expires AGM 2003)
INTERNAL AUDIT
Markus Ronner Head of Group Internal Audit
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Relations with Regulators
THE GROUP GOVERNANCE COMMITTEE
The Group Governance Committee, chaired by the President of the GEB, ensures
that adequate policies and procedures to minimize the Group's reputational risks
exist and are enforced. The Committee co-ordinates the Group's public policy
interface with governments, central banks and regulators. The permanent members
of the committee are the Group Controller, Group Chief Risk Officer and Group
Chief Credit Officer, the head of Group Internal Audit, the Group General
Counsel and the Business Groups' heads of Corporate Governance and of Legal and
Compliance.
As a Swiss-registered company, UBS's main regulator is the Swiss Federal Banking
Commission, but it is also regulated by key regulators worldwide. UBS aims to
comply with all local and regional provisions and to work closely with the
regulators in all jurisdictions where it has offices, branches and subsidiaries.
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 where UBS operates impose additional
limitations on or affecting 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 or level of ownership of local banks;
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 following sections describe the regulation and supervision of UBS's business
in Switzerland, and, to extend discussion of our regulatory relationships, we
also discuss regulation of our business in the United States and the United
Kingdom, where a total of 49% of our staff are employed.
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, known as the Federal
Banking Law (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 (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
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Swiss Bankers Association (SBA). The SBA issues guidelines to banks on conduct
of business issues, such as
- 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;
- Portfolio Management Guidelines, which set standards for banks when
managing customer funds and administering assets on their behalf;
- Guidelines for the Management of Country Risk; and
- Guidelines on the Treatment of Dormant Accounts, Custody Accounts and
Safe Deposit Boxes held in Swiss Banks.
In its capacity as a securities broker, UBS is governed by the Swiss Federal Law
on Stock Exchanges and Trading in Securities of 24 March 1995, as amended, which
appoints the FBC as prime regulator for these activities. Certain aspects of
securities broking, such as the organization of trading, are subject to
self-regulation through the SWX Swiss Exchange and the SBA, but under the
overall supervision of the FBC.
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 and 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
In July 1999, the FBC established a dedicated unit called the Large Banking
Groups Department which focuses solely on the supervision of UBS AG and the
Credit Suisse Group. The group, which consists of experts covering all the main
business activities in which UBS operates, supervises UBS directly through
regular meetings with management and on-site visits. The group also co-ordinates
the activities of the FBC with those of UBS's main overseas supervisors and the
external auditors.
The FBC also monitors UBS's compliance with capital and liquidity requirements.
These are described in detail in "Risk--Asset and Liability Management" below.
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
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+ 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.
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, which it uses to
monitor compliance with liquidity rules. The Swiss National Bank may require
further disclosures from UBS concerning its financial condition and other
information relevant to its regulatory oversight.
REGULATION AND SUPERVISION IN THE UNITED STATES
BANKING REGULATION
UBS's operations in the United States are subject to a variety of regulatory
regimes. UBS maintains branches in California, Connecticut, Illinois and New
York and agencies in Florida and Texas. UBS refers to these as its US "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 US banking offices is licensed by the state banking authority of the state
in which it is located. Each US 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 statelicensed US banking offices. None of UBS's US banking offices are
insured by the Federal Deposit Insurance Corporation. The regulation of UBS's US
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 US 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 US
federal law. As a result, if the Office of the Comptroller of the Currency
exercised its authority over UBS's US banking offices pursuant to federal law in
the event of a UBS insolvency, all of UBS's US assets would be applied first to
satisfy creditors of its US 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 US banking offices, operating its US
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
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1956, as amended. The Bank Holding Company Act imposes significant restrictions
on UBS's US non-banking operations and on its worldwide holdings of equity in
companies operating in the United States. Historically, UBS's US non-banking
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 enacted last
year, liberalizing the restrictions on the non-banking activities of banking
organizations, including non-US banks operating US banking offices. Among other
things, the Gramm-Leach-Bliley Act
- allows bank holding companies meeting management and capital standards
to engage in a substantially broader range of non-banking 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
- revises the overall regulatory structure applicable to bank holding
companies, including those that also engage in insurance and securities
operations.
These provisions 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 also modifies other current financial laws, including
laws related to the conduct of securities activities by US banks and US banking
offices. As a result, UBS will relocate certain activities now conducted by its
US banking offices to a UBS subsidiary or elsewhere.
OTHER US REGULATION
In the United States, UBS's US registered broker-dealer entities, including
Paine Webber, Incorporated, 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.
These entities are regulated by a number of different government agencies and
self-regulatory organizations, including the Securities and Exchange Commission
and the National Association of Securities Dealers. Depending upon the specific
nature of a broker-dealer's business, it may also be regulated by some or all of
the New York Stock Exchange, the Municipal Securities Rulemaking Board, the US
Department of the Treasury, the Commodities Futures Trading Commission, and
other exchanges of which it may be a member. These regulators have available a
variety of sanctions, including the authority to conduct administrative
proceedings that can result in censure, fines, the
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issuance of cease-and-desist orders of the suspension or expulsion of the
broker-dealer or its directors, officers or employees.
UBS subsidiaries in the United States, including the former PaineWebber
businesses, are also subject to regulation by applicable federal and state
regulators of their activities in the investment advisory, trust company,
mortgage lending and insurance businesses.
REGULATION AND SUPERVISION IN THE UNITED KINGDOM
UBS operates in the United Kingdom under a regulatory regime that is undergoing
comprehensive restructuring aimed at establishing the Financial Services
Authority (FSA), as the United Kingdom's unified regulator. The Bank of
England's responsibilities for regulation of banking activities were transferred
to the FSA by the Bank of England Act 1998.
During 2000, UBS was regulated by the FSA in respect of its banking activities,
the Securities and Futures Authority 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.
Full implementation of the Financial Services and Markets Act 2000, the
legislation establishing the complete role of the FSA, is currently anticipated
in the second half of 2001. When it is fully implemented the responsibilities of
the Securities and Futures Authority and Investment Management Regulatory
Organization will be taken over by the FSA.
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 US law.
A number of UBS's United Kingdom incorporated subsidiaries have the benefit of
the "passport" conferred by European Directives, enabling them to establish
branches in, and provide services cross-border into, other European Union
countries without the need to comply with local (or "host state") licensing
requirements, although host state customer protection requirements will often
apply.
BASEL COMMITTEE ON BANKING SUPERVISION
UBS supports the current initiative of the Basel Committee on Banking
Supervision to reform the Capital Accord introduced in 1988, and is an active
participant in industry dialogue with the Committee and with international
regulators on this reform. It is critically important that the revision of the
Capital Accord achieves a more flexible and risk-sensitive assessment of capital
requirements, without undue complexity, and particularly that banks are not
disadvantaged relative to securities firms that are not subject to the same
capital requirements.
RELATIONS WITH SHAREHOLDERS
UBS has almost 250,000 registered shareholders, ranging from sophisticated
investment institutions to individual investors. All registered shareholders
receive an illustrated Annual Review providing an overview of the Group during
the year, and a short letter each quarter outlining new initiatives and UBS's
financial performance during the quarter. More detailed financial reports are
produced each
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quarter and each year, and can be received on request. All registered
shareholders are informed by mail about extraordinary general meetings, or other
special events.
SHAREHOLDER RIGHTS
Shareholders, as the owners of the company, have specific rights under Swiss
law. UBS is committed to make it as easy as possible for shareholders to take
part in its decision-making processes. There are no restrictions with regard to
share ownership and voting rights, except for nominees and trustees, whose
voting rights are limited to a maximum of 5% of the outstanding shares. This
limitation exists in order to avoid the risk of unknown shareholders with
extensive holdings being entered in the share register. An exception from the
strict 5% rule exists for securities clearing organizations such as the
Depository Trust Company (DTC) in New York and SegaInterSettle (SIS) in
Switzerland, which both fulfil a special fiduciary function for UBS
shareholders.
UBS Annual General Meetings (AGMs) are open for participation to all
shareholders. Personal invitations are sent to every registered shareholder at
least 20 days ahead of the meeting. Shareholders may, if they do not wish to
attend in person, issue instructions to accept, reject or abstain on each
individual item on the agenda. They may also appoint UBS, another bank or the
Independent Proxy to vote on their behalf AGMs offer the opportunity to
shareholders to raise any questions regarding the development of the company and
the events of the year under review. The members of the Board and Group
Executive Board as well as the internal and external auditors are present to
answer these questions. Decisions are normally taken by the majority of votes
cast and in some cases, defined by law or UBS Articles of Association, a
two-third majority of the votes represented at the AGM is required.
Shareholders representing shares with an aggregate par value of one million
Swiss francs may submit proposals for matters to be placed on the agenda for
consideration by the AGM, provided that their proposals are submitted in writing
within the deadline published by the company. Shareholders representing at least
ten percent of the share capital, may ask that an Extraordinary General Meeting
be convened to deal with a specific issue put forward by these shareholders.
UBS GROUP LEGAL ENTITY STRUCTURE
The legal entity group structure of UBS is designed to support the Group's
businesses within an efficient legal, tax, regulatory and funding framework.
Neither the Business Groups of UBS (UBS Warburg, UBS Switzerland and UBS Asset
Management) nor the Corporate Center operate through their own individual legal
entities but rather they generally operate out of the parent bank, UBS AG,
through its Swiss and foreign branches.
The goal of the focus on the parent bank structure is to capitalize on the
synergies offered by the use of a single legal platform, enable the flexible use
of capital in an efficient manner and to provide a structure where the
activities of the Business Groups may be carried on without the need to set up
separate subsidiaries beforehand.
Where it is either not possible or not efficient to operate out of the parent
bank, usually due to local legal, tax or regulatory rules or due to additional
legal entities joining the UBS Group via acquisition, then the businesses
operate through local subsidiary companies. The significant operating subsidiary
companies in the Group are listed in Note 38 to the Financial Statements below.
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Financial Disclosure Principles
UBS's financial disclosure policies aim to achieve a fair market value for the
UBS share by communicating transparently, openly and consistently with investors
and the financial markets at all times.
UBS believes that the market accords a "transparency premium" to the share
prices of companies who provide clear, consistent and informative disclosure
about their business. UBS aims to communicate its strategy and results in such a
way that investors can gain a full and accurate understanding of how the company
works, what its growth prospects are and what risks there are that this growth
will not be realized.
To continue to achieve these goals, UBS applies the following principles:
- Transparency: disclosure aims to enhance the understandability of the
economic drivers and detailed results of the business building trust and
credibility;
- Consistency: disclosure should be consistent and comparable within each
reporting period and between reporting periods;
- Simplicity: disclosure of information is made in as simple a manner as
possible to facilitate the required level of understanding of business
performance;
- Relevance: information is disclosed only when relevant to UBS's
stakeholders, or required by regulation or statute;
- Best practice: disclosure is in line with and, if possible, leads
industry norms.
UBS reports its results quarterly, including a breakdown of results by business
unit and extensive disclosures relating to credit and market risk. The quantity
of disclosure and the quality of analysis and comment provided put UBS's
reporting among the leaders in the banking sector, worldwide.
UBS also aims to take a prominent role in developing industry standards for
disclosure. The Group is actively represented in committees and similar bodies
helping to develop new accounting standards and risk disclosure standards.
UBS recently took the lead in proposing a new standard for measuring and
reporting client assets. This has been well received by investors, analysts and
peers and UBS is optimistic that the International Accounting Standards
Committee will include such a standard in its revised publication of IAS 30
relating to bank-specific disclosure.
PERFORMANCE MEASURES AND TARGETS
GROUP TARGETS
UBS focuses on four key performance targets, designed to ensure that it delivers
continually improving returns to its shareholders. UBS's performance against
these targets is reported each quarter:
- UBS seeks to increase the value of the Group by achieving a sustainable,
after-tax return on equity of 15-20%, across periods of varying market
conditions.
- UBS aims to increase shareholder value through double-digit average
annual earnings per share (EPS) growth, across periods of varying market
conditions.
- Through cost reduction and earnings enhancement initiatives UBS aims to
reduce the Group's cost/income ratio, to a level that compares
positively with best-in-class competitors.
- UBS aims to achieve a clear growth trend in net new money in its private
client businesses.
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The first three targets are all reported pregoodwill amortization, and adjusted
for significant financial events see "--Financial reporting
policies--significant financial events" below.
BUSINESS UNIT KEY PERFORMANCE INDICATORS
UBS reports carefully chosen key performance indicators for each of its business
units. These do not carry explicit targets, but are indicators of the business
units' success in creating value for shareholders. They include financial
metrics, such as the cost/income ratio and non-financial metrics such as client
assets.
The key performance indicators are used for internal performance measurement as
well as external reporting. This ensures that management have a clear
responsibility to lead their businesses towards achieving success in the
externally reported value drivers and reduce the risk of managing to purely
internal performance measures.
FINANCIAL REPORTING POLICIES
ACCOUNTING PRINCIPLES
UBS Group prepares its accounts according to International Accounting Standards,
and provides additional information to reconcile its accounts to U.S. GAAP. A
detailed explanation of the basis of UBS's accounting is given in Note 1 to the
Financial Statements below.
SIGNIFICANT FINANCIAL EVENTS
UBS's financial targets and the analysis of financial results which is provided
in quarterly and annual reports, concentrate on figures which have been adjusted
by the exclusion of what UBS calls Significant Financial Events. This
facilitates meaningful comparisons between different reporting periods,
illustrating the underlying operational performance of the business, insulated
from the impact of one-off gains or losses outside the normal course of
business.
Treatment of an item as a significant financial event is at the discretion of
the Group Executive Board, but in general the item should be:
- Non-recurring
- Event specific
- Material at Group level
- UBS-specific, not industry-wide
and should not be a consequence of the normal run of business.
Examples of items that are treated as significant financial events include the
gain or loss on the sale of a significant subsidiary or associate, such as the
divestment in 1999 of UBS's stake in Swiss Life/ Rentenanstalt, or the
restructuring costs associated with a major integration, such as the merger with
PaineWebber.
Significant financial events are not a recognized accounting concept under
International Accounting Standards, and are therefore not separately reflected
in our financial statements. The use of numbers which have been adjusted for
significant financial events is restricted to the business group and business
unit reporting and to the analysis of the Group results and the accompanying
illustrative tables. All adjusted figures are clearly identified as such, and
the pre-tax amount of each individual significant financial event is disclosed
in the quarter in which it is recorded, and in the annual report for that year,
as is the net tax benefit or loss associated with the significant financial
events recorded in each period.
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RESTATEMENT OF RESULTS
As required under IAS, UBS is committed to maintaining the transparency of its
reported results and to ensuring that analysts and investors can make meaningful
comparisons with previous periods. If there is a major reorganization of its
business units or if changes to accounting standards or interpretations lead to
a material change in the Group's reported results, UBS restates results for
previous periods to show how they would have been reported according to the new
basis, and provides clear explanations of all changes.
DISCLOSURE CHANNELS
UBS meets with its institutional investors regularly throughout the year,
holding results presentations, specialist investor seminars, roadshows and
one-on-one or group meetings across the world. Where possible, these events
involve UBS senior management in addition to the UBS Investor Relations team.
UBS is also developing the use of technology to further broaden access to its
presentations through webcasting, audio links and cross-location
video-conferencing for external audiences.
UBS fully subscribes to the principle of equal treatment of all shareholders. To
ensure fair access to information, all UBS publications are made available to
shareholders at the same time and key documents are generally available in both
English and German. Shareholder letters and media releases are also translated
into French and Italian. Letters to shareholders and material information
related to corporate events are posted direct to all shareholders, while other
information is distributed via press release and posted to UBS's website, at
www.ubs.com/investorrelations.
US REGULATORY DISCLOSURE REQUIREMENTS
As a Swiss company listed on the New York Stock Exchange, UBS complies with
disclosure requirements of the Securities and Exchange Commission (SEC) and the
NYSE for foreign issuers with registered securities listed on the NYSE. These
include the requirement to make certain filings with the SEC. As a foreign
issuer, some of the SEC's regulations and requirements which apply to domestic
issuers are not applicable to UBS. Instead, UBS files its regular quarterly
reports with the SEC under cover of Form 6-K, and files an annual report on Form
20-F. These reports, as well as materials sent to shareholders in connection
with annual and special meetings, are all available on our website, at
www.ubs.com/investor-relations.
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Operating and Financial Review
Information for Readers
The discussion and analysis in the Group Financial Review and Review of Business
Group Performance should be read in conjunction with the UBS Group's
consolidated financial statements and the related notes, which are shown in
pages F-10 to F-103 of this document.
ACCOUNTING STANDARDS
The UBS Group's consolidated financial statements have been prepared in
accordance with International Accounting Standards (IAS). As a US listed
company, UBS provides a description in Note 41 to its consolidated financial
statements of the significant differences which would arise were our accounts to
be presented under U.S. GAAP, and a specific reconciliation of the two methods
of calculating shareholders' equity and net profit.
Unless otherwise stated, all of UBS Group's financial information presented in
this document is presented on a consolidated basis under IAS.
All references to 2000, 1999 and 1998 refer to the UBS Group's fiscal years
ended 31 December 2000, 1999 and 1998, respectively. The financial statements
for the UBS Group for each of these periods have been audited by Ernst & Young
Ltd., as described in the Report of the Independent Auditors on page F-3.
ACCOUNTING CHANGES AND RESTATEMENTS
For comparative purposes, UBS Group's 1999 and 1998 figures have been restated
to conform to the 2000 presentation, reflecting certain changes in accounting
standards and methods of presentation, 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 and dividend revenues
from net trading income to net interest income; and
- the removal of the credit to net interest income and matching debit to
net trading income for the cost of funding trading positions.
Note 1 of UBS's consolidated financial statements includes a complete
explanation of these and other accounting changes.
PAINEWEBBER
Except where otherwise stated, all 2000 figures for UBS Group throughout this
report, include the impact of the merger with Paine Webber Group, Inc., which
was completed on 3 November 2000. Under purchase accounting rules, the results
reflect PaineWebber's income and expenses for two months only, from 3 November
2000 until year end.
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RESTRUCTURING PROVISION
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 merger was effected, UBS began integrating the operations of the two
banks. This process included streamlining operations, eliminating duplicate
information technology infrastructure, and consolidating banking premises. At
the time of the merger, UBS established a restructuring provision of CHF 7
billion to cover its expected costs associated with the integration process.
An additional pre-tax restructuring charge of CHF 300 million in respect of the
merger, representing about 4% of the original CHF 7 billion provision, was
recognized in December 1999. The majority of the additional provision was due to
revised estimates of the cost of lease breaks and property disposals.
RESTRUCTURING PROVISION USED
For the year ended
CHF million Personnel IT Premises Other 31.12.00 31.12.99 31.12.98
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UBS Switzerland 176 32 4 16 228 916 821
UBS Asset Management 7 0 0 0 7 15 22
UBS Warburg 0 0 0 0 0 348 2,423
Corporate Center 5 31 395 33 464 565 761
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GROUP TOTAL 188 63 399 49 699 1,844 4,027
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Initial restructuring provision in 1997 7,000
Additional provision in 1999 300
Used in 1998 4,027
Used in 1999 1,844
Used in 2000 699
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Total used through 31.12.2000 6,570
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RESTRUCTURING PROVISION REMAINING AT 31.12.2000 730
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UBS has now largely completed the integration and restructuring process relating
to the merger and, at 31 December 2000, had used approximately CHF 6.6 billion
of the CHF 7.3 billion restructuring provision. UBS expects to have utilized the
entire provision by the end of 2001.
SIGNIFICANT FINANCIAL EVENTS
UBS analyses its performance on a reported basis determined in accordance with
International Accounting Standards, and on a normalized basis which excludes
from the reported amounts certain items UBS calls significant financial events.
Figures adjusted for significant financial events are used to illustrate the
underlying operational performance of the business, insulated from the impact of
one off gains or losses outside the normal run of business. In particular, UBS's
financial targets have been set in terms of adjusted results, excluding
significant financial events. A policy approved by the Group Executive Board
defines which items may be classified as significant financial events.
The use of numbers which have been adjusted for significant financial events is
restricted to UBS's business unit reporting and to the discussion and analysis
of the Group's results and the accompanying
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illustrative tables. All segmental reporting includes tables showing both
reported figures and adjusted ones, if applicable.
All adjusted figures are clearly identified as such, and the pre-tax amount of
each individual significant financial event is clearly disclosed, as is the net
tax benefit or loss associated with all the significant financial events in each
period.
UBS introduced the concept of significant financial events for the first time in
its 1999 Reporting, and did not define significant financial events for 1998.
The comparison of results for 1999 against 1998 therefore considers only
unadjusted figures.
Significant financial events during 1999 and 2000 are shown in the table below
and described in more detail below.
- During 2000, UBS recorded restructuring charges and provisions of CHF
290 million pre-tax relating to the integration of PaineWebber into UBS.
- 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
the disposal of Julius Baer registered shares; CHF 200 million on the
sale of its international Global Trade Finance business; and CHF 38
million from its residual holding in Long Term Capital Management.
- In fourth quarter 1999, UBS recognized a one-time credit of CHF 456
million in connection with excess pension fund employer pre-payments.
- In fourth quarter 1999, UBS recognized an additional pre-tax
restructuring charge of CHF 300 million in respect of the 1998 merger
between Union Bank of Switzerland and Swiss Bank Corporation.
- During 1998, UBS established a provision of CHF 842 million in connection
with the US Global Settlement of World War II related claims. UBS
recognized additional pre-tax provisions relating to this claim of CHF
154 million in 1999 and CHF 150 million in 2000.
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SIGNIFICANT FINANCIAL EVENTS
For the year ended
CHF MILLION 31.12.00 31.12.99
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OPERATING INCOME AS REPORTED 36,402 28,425(1)
Julius Baer registered shares divestment (110)
International Global Trade Finance divestment (200)
Swiss Life / Rentenanstalt divestment (1,490)
LTCM gain (38)
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ADJUSTED OPERATING INCOME 36,402 26,587
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OPERATING EXPENSES AS REPORTED 26,203 20,532
US Global Settlement Fund provision (150) (154)
Pension Fund accounting credit 456
UBS / SBC Restructuring provision (300)
PaineWebber integration costs (290)
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ADJUSTED OPERATING EXPENSES 25,763 20,534
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ADJUSTED OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS 10,639 6,053
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Tax expense 2,320 1,686
Tax effect of significant financial events 100 (352)
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Adjusted tax expense 2,420 1,334
Minority interests (87) (54)
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ADJUSTED NET PROFIT 8,132 4,665
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(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
RISK FACTORS
As a global financial services firm, UBS's businesses are affected by the
external environment in the markets in which UBS 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, global economic and political
conditions can impact UBS's results 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 activity 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 managers, retail and commercial banks, private banking firms, investment
banking firms, brokerage firms and other investment services firms. In addition,
the trend toward consolidation in the global financial services industry is
creating competitors with broader ranges of product and service offerings,
increased access to capital, and greater efficiency and pricing power.
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 US dollar, may have an
effect on the earnings that it reports. UBS's
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approach to managing this risk is explained in "Risk--Asset and Liability
Management--Currency Management" below.
In addition, changes in financial market structures can affect UBS's earnings.
For example, the establishment of the euro during 1999 affected 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. UBS's interest income is affected
by changes in interest rates, although the precise mechanisms are complicated.
Interest rate movements can also affect UBS's fixed income trading portfolio and
the investment performance of its asset management businesses. For further
discussion of the effect of interest rate changes on UBS's business see
"Risk--Asset and Liability Management--Interest Rate Risk Management" below.
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.
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.
For a discussion of UBS's risk management and control procedures see "Risk--Risk
Management and Control" below.
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Group Financial Review--Group Performance
INTRODUCTION
UBS is a global integrated investment services firm and the leading bank in
Switzerland. We are the world's leading provider of private banking services and
one of the largest asset managers globally. In the investment banking and
securities businesses we are among the select bracket of major global houses. In
Switzerland we are the clear market leader in corporate and retail banking. As
an integrated group, not merely a holding company, we create added value for
clients by drawing on the combined resources and expertise of all our
businesses.
UBS operates through three Business Groups and its Corporate Center. 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, until January 2001, consisted of two
business units: Institutional Asset Management and Investment Funds/GAM;
and,
- UBS Warburg, which, until January 2001, was composed of five business
units: Corporate & Institutional Clients, UBS Capital, US Private
Clients, International Private Clients and e-services.
Within each Business Group, business units share senior management,
infrastructure and other resources.
A full description of UBS and its Business Groups can be found above in the
sections entitled "The UBS Group" and "The Business Groups."
THE FINANCIAL IMPACT ON UBS OF THE PAINEWEBBER MERGER
RESTRUCTURING COSTS
UBS has incurred a total of CHF 746 million (USD 431 million) of restructuring
costs and other one-off merger-related costs as a result of the PaineWebber
merger.
In accordance with IAS purchase accounting rules, CHF 456 million of these costs
have been accounted for as a pre-acquisition liability of PaineWebber and were
therefore added to the goodwill amount for the transaction.
The remaining expenses, of CHF 290 million, were charged in fourth quarter 2000,
and treated as a significant financial event. CHF 152 million was charged in UBS
Warburg's e-services business unit, representing the costs of closure of
telephone call centers and the write-down of capitalized software no longer
required in light of changes in the strategy due to the PaineWebber acquisition.
CHF 106 million was charged in the Corporate and Institutional Clients business
unit, principally covering severance and other personnel costs. The remaining
CHF 32 million was charged in Corporate Center.
GOODWILL
The amount of goodwill and intangible assets resulting from the merger was USD
10.0 billion, or CHF 17.5 billion.
Within this total USD 2.7 billion relates to identified intangible assets,
including the value of PaineWebber's brand and infrastructure.
The goodwill and intangible assets will be amortized over 20 years. Amortization
costs amounted to CHF 138 million in the fourth quarter 2000.
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RETENTION PAYMENTS
As part of the merger, UBS agreed to make retention payments to PaineWebber
financial advisors, senior executives, and other staff, subject to these
employees' continued employment and other restrictions. The value of these
payments is expected to amount to a total of USD 875 million (CHF 1,541
million), the vast majority of which will be paid in the form of UBS shares. The
payments will vest over periods of up to four years from the merger. USD 76
million (CHF 128 million) was charged in fourth quarter 2000, and approximately
USD 280 million (approximately CHF 458 million at year end 2000 exchange rates)
is expected to be charged in 2001.
CASH CONSIDERATION
The cash portion of the merger consideration was USD 6.0 billion, or CHF 10.6
billion. UBS took advantage of the focus on the company in US markets as a
result of the PaineWebber transaction to make its inaugural US public offering,
issuing USD 1.5 billion of 8.622% Trust Preferred Securities on 10 October 2000.
ISSUE OF SHARES TO FINANCE THE PAINEWEBBER MERGER
At an Extraordinary General Meeting on 7 September 2000, UBS shareholders
approved a resolution to create 38 million shares of authorized capital in
connection with the PaineWebber merger. UBS shareholders also granted the Board
of Directors a "green shoe option" giving them the flexibility to issue some of
these shares at the time of the merger, and then to issue additional shares as
required during the three months following completion of the merger, up to the
38 million shares limit.
As announced at the completion of the merger, 40.6 million shares were delivered
to PaineWebber shareholders as part of the merger consideration. UBS chose to
fund this amount by issuing 12 million new ordinary shares, re-issuing 7 million
shares held in Treasury and borrowing the remaining 21.6 million ordinary shares
that were required.
On 6 November 2000, following completion of the merger, UBS launched a new
treasury share buy-back program in Switzerland, designed principally to
repurchase shares to cover the borrowings. When the program was completed on 2
March 2000, a total of 30 million shares had been repurchased at an average
price of CHF 266. By 31 December 2000, 14.2 million shares had been purchased
through this program, and 13.8 million of them had been delivered to cover the
borrowed shares, leaving 7.8 million borrowed shares still outstanding. UBS
completed the repurchase of sufficient shares to cover all the borrowed shares
on 24 January 2001, having paid an average price of CHF 262 per share.
With no requirement to issue further shares in connection with the PaineWebber
merger, the green shoe option lapsed. UBS has met its commitment to minimize the
dilution of earnings and voting power, by keeping the final number of new UBS
shares issued as small as possible. The weighted average number of shares in the
fourth quarter was 5% higher than if the PaineWebber transaction had not
occurred.
The Annual General Meeting on 26 April 2001 will be asked to give formal
approval for the elimination of the remaining 26 million shares of authorized
capital which were not required for the transaction. It will also be asked to
reduce the conditional capital created to cover future exercise of options held
by PaineWebber staff from 16.3 million to the 5.6 million required to cover the
remaining outstanding options.
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UBS GROUP PERFORMANCE AGAINST TARGETS
FOR THE YEAR ENDED 31.12.00 31.12.99(1)
------------------------------------------------------------------------
ROE (%)
as reported 21.5 22.4
before goodwill and adjusted for significant
financial events(2) 24.3 18.2
------------------------------------------------------------------------
BASIC EPS (CHF)
as reported(3) 19.33 15.20
before goodwill and adjusted for significant
financial events(2, 3) 21.83 12.37
------------------------------------------------------------------------
COST / INCOME RATIO (%)
as reported 72.2 69.9
before goodwill and adjusted for significant
financial events(2) 69.2 73.3
------------------------------------------------------------------------
ASSETS UNDER MANAGEMENT
NET NEW Net new
MONEY(4) money(4)
CHF BILLION 31.12.00 31.12.99 2000 1999
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UBS GROUP 2,469 1,744
-------------------------------------------------------------------------
UBS SWITZERLAND
Private and Corporate Clients 440 439 0
Private Banking 681 671 (1) 1
-------------------------------------------------------------------------
UBS ASSET MANAGEMENT
Institutional Asset
Management(5) 496 574 (67) (50)
Investment Funds / GAM 219 225 4 1
-------------------------------------------------------------------------
UBS WARBURG
US Private Clients(6) 794 8
International Private Clients 33 36 10 4
-------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect
retroactive changes in accounting policy arising from
newly applicable International Accounting Standards
and changes in presentation (see Note 1: Summary of
Significant Accounting Policies).
(2) The amortization of goodwill and other intangible
assets is excluded from the calculation.
(3) 1999 share figures are restated for the two-for-one
share split, effective 8 May 2000.
(4) Excludes interest and dividend income.
(5) Includes non-institutional assets also reported in the
Investment Funds / GAM business unit.
(6) Client Assets were CHF 890 billion at 3 November 2000.
graphs
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GROUP RESULTS 2000
GROUP TARGETS
UBS focuses on four key performance targets, designed to drive us to deliver
continually improving returns to our shareholders.
- UBS seeks to achieve a sustainable, after-tax return on equity of
15-20%, across periods of varying market conditions.
- UBS aims to increase shareholder value through double-digit average
annual earnings per share (EPS) growth, across periods of varying market
conditions.
- Through cost reduction and earnings enhancement initiatives, UBS aims to
reduce the Group's cost/income ratio to a level that compares positively
with best-in-class competitors.
- UBS aims to achieve a clear growth trend in net new money in its private
client businesses.
The first three targets are all measured pre-goodwill amortization, and adjusted
for significant financial events.
Adjusted for significant financial events, our pre-goodwill return on equity for
the year 2000 was 24.3%, clearly above our target range of 15-20%. Pre-goodwill
earnings per share, again on an adjusted basis, were CHF 21.83 in 2000,
representing an increase of 76% over 1999, well in excess of our target of
double-digit growth over the cycle. Continued focus on cost control has brought
the pre-goodwill cost/income ratio, adjusted for significant financial events,
down to 69.2% in 2000, from 73.3% in 1999.
Net new money in the private client businesses (Private Banking, US Private
Clients and International Private Clients) was CHF 18 billion for the year,
compared to CHF 4 billion in 1999, and including CHF 8 billion of net new money
in PaineWebber in only two months. PaineWebber's net new money growth since
completion of the merger demonstrates the strength of its franchise and the
momentum that it brings to UBS's asset gathering performance.
NET PROFIT
Full year net profit was CHF 7,792 million, up 27% from the CHF 6,153 million
reported in 1999. When adjusted for significant financial events, net profit for
2000 was CHF 8,132 million, up 74% from the CHF 4,665 million achieved in 1999.
These results reflect the very strong and consistent performance recorded by the
Group in every quarter of 2000.
Operating income and expense includes income and expense of the former
PaineWebber businesses from 3 November 2000, the date of the completion of the
merger with PaineWebber.
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OPERATING INCOME
Total operating income increased 28% from 1999, to CHF 36,402 million, from CHF
28,425 million. Adjusted for significant financial events, total operating
income increased 37%, to CHF 36,402 million, from CHF 26,587 million in 1999.
This strong performance relative to 1999, was driven by excellent trading
results, improved credit conditions in the Swiss market, much higher fee and
commission income, and a successful year for the Group's investment banking
business.
The principal significant financial events affecting the income comparison were
from the one-off sales of businesses and investments in 1999, including pre-tax
gains of CHF 1,490 million on the sale of UBS's 25% stake in Swiss
Life/Rentenanstalt and CHF 110 million on the disposal of Julius Baer registered
shares, recorded in Net gains from disposal of associates and subsidiaries, and
CHF 200 million on the sale of UBS's international Global Trade Finance
business, which was recorded in Other income. In addition UBS recognized a CHF
38 million gain in 1999 from its residual holdings in Long Term Capital
Management, L.P., which was also recorded in Other income.
Net interest income before credit loss increased by CHF 2,221 million, or 38%,
from CHF 5,909 million in 1999 to CHF 8,130 million in 2000. This was
principally the result of much stronger trading-related performance, as a result
of buoyant markets, and the return of the balance sheet to more normal
proportions after the contraction implemented as part of the Group's precautions
against potential Year 2000 related problems.
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NET INTEREST INCOME
CHF million % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- --------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest earned on loans and advances
to banks 5,615 6,105 7,687 (8)
Interest earned on loans and advances
to customers 14,692 12,077 14,111 22
Interest from finance leasing 36 49 60 (27)
Interest earned on securities borrowed
and reverse repurchase agreements 19,088 11,422 10,380 67
Interest and dividend income from
financial investments 202 160 372 26
Interest and dividend income from
trading portfolio 11,842 5,598 3,901 112
Other 270 193 931 40
- --------------------------------------------------------------------------------------------------
Total 51,745 35,604 37,442 45
- --------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on amounts due to banks 6,155 5,515 8,205 12
Interest on amounts due to customers 9,505 8,330 9,890 14
Interest on securities lent and
repurchase agreements 14,915 8,446 7,543 77
Interest and dividend expense from
trading portfolio 5,309 2,070 1,741 156
Interest on medium and long term debt 7,731 5,334 5,045 45
- --------------------------------------------------------------------------------------------------
Total 43,615 29,695 32,424 47
- --------------------------------------------------------------------------------------------------
NET INTEREST INCOME 8,130 5,909 5,018 38
- --------------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
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NET FEE AND COMMISSION INCOME
CHF million % change from
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.98 31.12.99
- ----------------------------------------------------------------------------------------------
CREDIT-RELATED FEES AND COMMISSIONS 310 372 559 (17)
- ----------------------------------------------------------------------------------------------
SECURITY TRADING AND INVESTMENT ACTIVITY
FEES
Underwriting fees(1) 1,434 905 1,122 58
Corporate finance fees(1) 1,772 1,298 1,016 37
Brokerage fees 5,792 3,934 3,670 47
Investment fund fees 2,821 1,915 1,778 47
Fiduciary fees 351 317 349 11
Custodian fees 1,439 1,583 1,386 (9)
Portfolio and other management and
advisory fees(1) 3,677 2,612 2,891 41
Other 50 57 110 (12)
- ----------------------------------------------------------------------------------------------
Total 17,336 12,621 12,322 37
- ----------------------------------------------------------------------------------------------
COMMISSION INCOME FROM OTHER SERVICES 802 765 776 5
- ----------------------------------------------------------------------------------------------
TOTAL FEE AND COMMISSION INCOME 18,448 13,758 13,657 34
- ----------------------------------------------------------------------------------------------
FEE AND COMMISSION EXPENSE
Brokerage fees paid 1,084 795 704 36
Other 661 356 327 86
- ----------------------------------------------------------------------------------------------
Total 1,745 1,151 1,031 52
- ----------------------------------------------------------------------------------------------
NET FEE AND COMMISSION INCOME 16,703 12,607 12,626 32
- ----------------------------------------------------------------------------------------------
(1) In prior periods, Corporate finance related advisory fees were included in
Portfolio and other management and advisory fees. These fees are now
reported in the new disclosure line Corporate finance fees together with
merger and acquisition fees which were previously reported in Underwriting
and corporate finance fees. All previous periods have been restated
accordingly.
Net interest income from loans and advances to banks and amounts due to banks
fell from CHF 590 million in 1999 to a net expense of CHF 540 million in 2000
due to increased average liabilities as UBS used its unsecured funding power to
take advantage of opportunities for investments in low risk assets such as
collateralized lending. Net interest income from collateralized lending - repos,
reverse repos, securities borrowing and lending - increased 40%, or CHF 1,197
million to CHF 4,173 million in 2000.
Interest paid on medium and long term debt (including commercial paper)
increased 45% or CHF 2,397 million from CHF 5,334 million in 1999 to CHF 7,731
million in 2000 as interest rates rose and UBS's funding requirements increased,
due to balance sheet growth in more active markets. UBS also changed the mix of
its debt to include a higher proportion of short-term financing.
Credit loss expense. As a result of the significant recovery of the Swiss
economy in 2000 and especially its effect on the real estate and construction
markets, UBS was able to write back CHF 695 million of credit loss provisions in
UBS Switzerland in 2000. These write-backs were offset by additional provisions
for the UBS Warburg portfolio of CHF 565 million, leading to an overall net
credit recovery of CHF 130 million for 2000, compared to an expense of CHF 956
million in 1999.
Net fee and commission income increased by CHF 4,096 million, or 32%, from CHF
12,607 million in 1999 to CHF 16,703 million in 2000. This was principally the
result of high levels of brokerage fees, due to increased client activity in
strong markets, especially in the first quarter of 2000, and the
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addition of PaineWebber. In addition, two other new businesses, Global Asset
Management (GAM), acquired at the end of 1999, and O'Connor, created in June
2000, contributed to the increase, as did the strong performance of UBS's
investment banking business during 2000.
Credit-related fees and commissions decreased CHF 62 million in 2000 mainly as a
result of the sale of UBS's international Global Trade Finance business in 1999.
Underwriting fees increased by 58% over 1999 with strong results in both fixed
income and equity underwriting, despite UBS's relatively limited involvement in
the Technology, Media and Telecoms (TMT) sector, which led to lower equity
league table rankings in 2000 than in 1999. Corporate Finance fees grew 37%, or
CHF 474 million, from CHF 1,298 million in 1999 to CHF 1,772 million in 2000,
reflecting good results in Europe and a strong performance in Mergers and
Acquisitions, where our league table rankings improved compared to 1999.
Net brokerage fees were 50% higher in 2000 than in 1999 as a result of high
levels of client activity in the exuberant markets of the early part of the
year, and the inclusion of two months of results from PaineWebber. The increase
of 47% in Investment fund fees from 1999 to 2000 resulted from higher average
volumes in 2000 and a shift in the product mix, with a higher proportion of
assets under management invested in higher margin equity funds. In addition,
Investment fund fees in 2000 benefited from the inclusion of GAM and
PaineWebber's contribution in the last two months. Custodian fees and portfolio
and other management and advisory fees increased by a total of CHF 921 million,
or 22%, from 1999, due to higher asset-related fees in 2000 and the inclusion of
PaineWebber and the new O'Connor business.
Net trading income increased CHF 2,234 million, or 29%, to CHF 9,953 million for
2000, compared to CHF 7,719 million for 1999, driven by strong growth in equity
trading income as a result of increased global market activity, especially in
the first quarter of 2000, and the increasing strength of UBS Warburg's
secondary client franchise.
Net trading income from foreign exchange increased CHF 179 million, or 16%, from
1999 to 2000 despite difficult trading conditions at the start of the year, with
lower levels of market activity and narrowing margins on derivative products,
compared to 1999.
This income statement line does not fully capture the revenues of UBS Group's
foreign exchange business, which is amongst the largest in the world. The
revenues generated by all business areas of the UBS Group from sales and trading
of foreign exchange, precious metals, and banknotes products in 2000 were CHF
1,519 million as compared to CHF 1,155 million in 1999.
Net trading income from fixed income decreased CHF 1,691 million, or 65%, from
CHF 2,603 million in 1999 to CHF 912 million in 2000. Fixed income net trading
income does not reflect the full picture of trading-related income in the Fixed
Income business, which also includes a considerable contribution from coupon
income, which is managed as an integral part of the trading portfolio and is
reported as part of net interest income. 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 of the
portfolio. In 2000, while fixed income trading income fell, net coupon income,
which is reported in net interest income, rose from CHF 2,918 million to CHF
5,545 million.
Net trading income from equities increased CHF 3,746 million, or 93%, from 1999
to 2000. Positive markets led to an exceptionally good first quarter of 2000,
with record client volumes. Performance in subsequent quarters of 2000 fell
slightly in more varied market conditions, but was still well ahead of the same
periods in 1999.
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Net gains from disposal of associates and subsidiaries fell 95% from CHF 1,821
million to CHF 83 million. 1999 included gains from the sales of our holdings in
SwissLife/Rentenanstalt and Julius Baer registered shares.
NET TRADING INCOME
CHF million % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- --------------------------------------------------------------------------------------------------
Foreign exchange 1,287 1,108 1,992 16
Fixed income 912 2,603 162 (65)
Equities 7,754 4,008 1,159 93
- --------------------------------------------------------------------------------------------------
NET TRADING INCOME 9,953 7,719 3,313 29
- --------------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
Other income increased CHF 78 million, or 6%, from CHF 1,325 million in 1999 to
CHF 1,403 million in 2000, with income from investments in associates lower,
following sales in 1999, more than offset by higher income from the sale of
private equity investments and a reduction of losses on property sales.
OPERATING EXPENSES
Total operating expenses increased 28% from CHF 20,532 million to CHF 26,203
million in 2000. Adjusted for significant financial events, total operating
expenses increased 25% to CHF 25,763 million from CHF 20,534 million in 1999.
The increase was principally due to increased personnel expenses, reflecting
higher performance-related pay driven by UBS's excellent results in 2000, the
inclusion of PaineWebber and the cost of retention payments for PaineWebber
staff.
The principal significant financial events affecting the comparison of operating
expenses are the CHF 150 million additional provision for the US Global
Settlement of World War II related claims, recorded in 2000 in General and
administrative expenses, and CHF 290 million of costs from the integration of
PaineWebber, also recorded in 2000. Of this CHF 290 million, CHF 118 million
were charged to Personnel expenses and amortization, CHF 93 million to General
and administrative expenses and CHF 79 million to Depreciation.
The various significant financial events affecting expenses in 1999, described
in "--Information for Readers" above, resulted in an increase in expense of CHF
2 million, made up of a CHF 456 million increase to personnel expenses and a
decrease of CHF 454 million in General and administrative expenses.
Personnel expenses increased CHF 4,586 million, or 36%, from CHF 12,577 million
in 1999 to CHF 17,163 million in 2000. This increase was driven by increased
bonus compensation, in line with the Group's excellent results, and CHF 1,083
million resulting from the inclusion of PaineWebber. Approximately 48% of the
annual total represented bonus and other variable compensation.
As part of the merger, UBS agreed to make retention payments to PaineWebber
financial advisors, senior executives and other staff, subject to these
employees' continued employment and other restrictions. These payments are
expected to amount to a total of USD 875 million (CHF 1,541 million), the vast
majority of which will be paid in the form of UBS shares. The payments will vest
over periods of up to four years from the merger. USD 76 million (CHF 128
million) was charged in fourth quarter 2000, and approximately USD 280 million
(CHF 458 million at year-end 2000 rates) is
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expected to be charged in 2001. Because they are a regular and continuing cost
of the business, these payments are not treated as significant financial events.
UBS's headcount grew 45% over the year from 31 December 1999, to 71,076. The
vast majority of this change was due to the inclusion of 23,000 PaineWebber
staff.
HEADCOUNT(1)
(FULL-TIME EQUIVALENTS) 31.12.00 31.12.99 CHANGE IN %
- --------------------------------------------------------------------------------------------
UBS SWITZERLAND 28,785 31,354 (8)
Private and Corporate Clients 21,100 24,098 (12)
Private Banking 7,685 7,256 6
- --------------------------------------------------------------------------------------------
UBS ASSET MANAGEMENT 2,860 2,576 11
Institutional Asset Management 1,728 1,653 5
Investment Funds / GAM 1,132 923 23
- --------------------------------------------------------------------------------------------
UBS WARBURG 38,445 14,266 169
Corporate and Institutional Clients 15,262 12,694 20
UBS Capital 129 116 11
US Private Clients 21,490
e-services 410 70 486
International Private Clients 1,154 1,386 (17)
- --------------------------------------------------------------------------------------------
CORPORATE CENTER 986 862 14
- --------------------------------------------------------------------------------------------
GROUP TOTAL 71,076 49,058 45
- --------------------------------------------------------------------------------------------
(1) The Group headcount does not include the Klinik Hirslanden AG headcount of
1,839 as of 31 December 2000 and 1,853 as of 31 December 1999.
General and administrative expenses increased CHF 667 million, or 11%, from CHF
6,098 million in 1999 to CHF 6,765 million in 2000.
General and administrative expenses in 2000 included a final provision of CHF
150 million related to the US Global Settlement of World War II related claims,
and CHF 93 million of PaineWebber integration costs, which were both treated as
significant financial events. General and administrative expenses in 1999
included a provision of CHF 154 million related to the US global settlement of
World War II related claims, and CHF 300 million of additional provisions in
respect of the 1998 merger of Union Bank of Switzerland and Swiss Bank
Corporation.
Adjusting for these effects, General and administrative costs rose 16%,
reflecting the incremental costs from the inclusion of PaineWebber offset by the
success of UBS's continued efforts to control non-revenue driven costs.
Depreciation and amortization expenses increased CHF 418 million, or 23%, from
CHF 1,857 million in 1999 to CHF 2,275 million in 2000, mainly due to the
PaineWebber merger.
Tax expense increased CHF 634 million, or 38%, from CHF 1,686 million in 1999 to
CHF 2,320 million in 2000, principally due to increased operating profit. The
effective tax rate of 22.8% in 2000 is slightly higher than the 21.4% effective
tax rate in 1999, reflecting increased income in higher taxation jurisdictions.
UBS GROUP'S PERFORMANCE WITHOUT THE IMPACT OF PAINEWEBBER
There are limitations to our ability to track the effect of the PaineWebber
merger on the Group's performance. Principally this is because of the full
integration of PaineWebber's capital markets
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business into the Corporate and Institutional Clients unit. This was carried out
very soon after the merger was completed on 3 November 2000, with staff and
revenues completely integrated into the existing UBS Warburg structure. It is
therefore not possible to identify clearly the specific impact of the capital
markets business on results. However, the remaining PaineWebber businesses are
reported as a separate business unit: US Private Clients. It is possible
therefore to distinguish their contribution to Group profits. If additional
adjustments are made for
- goodwill amortization,
- funding costs,
- the share issuance, borrowing and subsequent repurchase,
- restructuring costs, and
- retention payments,
it is possible to make an approximate estimate of the underlying performance of
UBS for 2000.
Although this analysis should not be relied on as a definitive indication of the
performance of the continuing UBS businesses during the year, it demonstrates
the very positive underlying performance of the Group in 2000.
EARNINGS ADJUSTED FOR SIGNIFICANT FINANCIAL EVENTS AND THE ESTIMATED IMPACT OF
THE PAINEWEBBER MERGER
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.99
- -------------------------------------------------------------------------------------
Operating income 35,309 26,587 33
Operating expenses 24,319 20,534 18
Operating profit before tax 10,990 6,053 82
Net profit 8,403 4,665 80
- -------------------------------------------------------------------------------------
Cost / income ratio before goodwill (%) 67.6 73.3
Basic earnings per share before goodwill (CHF) 22.44 12.37 81
Diluted earnings per share before goodwill (CHF) 22.16 12.26 81
- -------------------------------------------------------------------------------------
RETURN ON SHAREHOLDERS' EQUITY BEFORE GOODWILL (%) 27.5 18.2
- -------------------------------------------------------------------------------------
DIVIDEND AND DISTRIBUTION BY PAR VALUE REDUCTION
In October 2000, UBS paid a dividend of CHF 4.50 per share in respect of the
first three quarters of 2000, as part of the arrangements for the merger with
PaineWebber. The Board of Directors recommended a distribution in respect of the
fourth quarter of 2000 of CHF 1.60 per share, in the form of a par value
reduction. This brings the total distribution for the year to CHF 6.10 per
share, compared to the dividend of CHF 5.50 per share for 1999.
Until this year, the minimum par value allowed under law for a Swiss share was
CHF 10. The share split that UBS implemented in May last year brought the par
value of its share down to this level, removing any further opportunity to split
the share.
Under new regulations, which are currently passing through the Swiss legislative
process and are expected to become effective on 1 May 2001, the minimum par
value is expected to be reduced to CHF 0.01. UBS intends to utilize this change
to lower the market price per share to a level more in line with that of its
global peer group, and to make a payment to its shareholders in the form of a
reduction in the nominal value of its shares.
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If shareholder approval is granted, and the legislation becomes effective, the
distribution of CHF 1.60 per share, in respect of the fourth quarter 2000, will
be paid in the form of a par value reduction. This is treated in Switzerland as
a return of capital to shareholders, not as income, and is therefore tax
efficient for shareholders who pay tax in Switzerland. Treatment in other
jurisdictions will vary, although under US tax regulations the distribution will
be treated as income. However, the par value reduction does still have
advantages for shareholders outside Switzerland, as no Swiss withholding tax is
payable. Each shareholder should consult with a tax advisor for applicable tax
implications of this distribution.
The distribution will reduce the par value of the share to CHF 8.40. UBS then
intends to split its share 3 for 1, resulting in a new par value of 2.80 per
share.
Because of the legal and regulatory processes involved, the distribution is
expected to take place on 18 July 2001, for holders of record on 13 July 2001.
The shares are expected to start trading at the new par value on 16 July 2001.
BALANCE SHEET
Total assets increased CHF 191 billion, or 21%, from CHF 897 billion at 31
December 1999 to CHF 1,088 billion at 31 December 2000, including CHF 99 billion
as a result of the merger with PaineWebber. The remainder of the increase was
principally a result of the unwinding of precautionary measures taken at the end
of 1999 in preparation for the millennium, and the currency impact of the
weakness of the Swiss franc. The increase in cash collateral on securities
borrowed, reverse repurchase agreements and trading portfolio assets was
partially offset by decreases in cash and balances with central banks and money
market paper, as liquidity levels were adjusted following Y2K, and a reduction
in positive replacement values due to netting, thanks to improved systems and
new reporting practices. Goodwill and intangible assets increased CHF 16
billion, due to goodwill and intangible assets resulting from the PaineWebber
merger.
Total liabilities increased 20%, from CHF 866 billion at 31 December 1999, to
CHF 1,040 billion at 31 December 2000, reflecting the unwinding of millennium
related precautions. The increase in amounts due under repurchase agreements,
cash collateral on securities lent and trading portfolio liabilities and an
increase in money market paper issued, was offset in part by a decrease in
negative replacement values, again principally due to netting.
UBS's long-term debt portfolio decreased from CHF 56.3 billion at 31 December
1999 to CHF 54.8 billion at 31 December 2000. During this year CHF 14.9 billion
of long-term securities were issued while CHF 24.6 billion matured. UBS believes
the maturity profile of the long-term debt portfolio is well balanced with a
slight bias towards shorter-term maturities to match the maturity profile of
UBS's assets.
Shareholders' equity increased CHF 14 billion, or 46%, from 31 December 1999 to
31 December 2000, reflecting the increase in capital required for the
PaineWebber merger, increased retained earnings and the reduced holding of
treasury shares.
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 without adversely affecting UBS's ability to
conduct its ongoing businesses, in order to meet short-term funding needs.
Collateralized receivables include reverse repurchase agreements and cash
collateral on securities borrowed, 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
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components of UBS's total assets, including the proportion of liquid assets, may
vary significantly from period to period due to changing client needs, economic
and market conditions and trading strategies.
CONSOLIDATED CASH FLOWS
In the twelve-month period to December 2000, cash equivalents decreased by CHF
8,907 million, principally as a result of investment activities, which generated
negative cash flow of CHF 19,135 million. This was mainly due to CHF 10,722
million of cash required for the PaineWebber merger and the purchase of CHF
8,770 million of financial investments.
The positive cash flow of CHF 11,697 million from operating activities
principally resulted from net profit of CHF 7,792 million, a net increase in
amounts due to customers and amounts due from customers of CHF 12,381 million,
CHF 11,553 million from an increase in the size of the trading portfolio and a
net cash inflow of CHF 10,236 million from other assets and liabilities and
accrued income and expenses. These were partially offset by a net cash outflow
of CHF 30,292 million for repurchase and reverse repurchase agreements and cash
collateral on securities borrowed and lent.
Financing activities generated net cash outflow of CHF 1,581 million. CHF 10,125
million from the issuance of money market paper. CHF 14,884 million from
long-term debt and CHF 2,594 million from the issuance of trust preferred
securities was offset by CHF 24,640 million for repayment of long-term debt and
CHF 3,928 million for dividend payments.
GROUP RESULTS 1999
UBS's current performance targets were first implemented at the beginning of
2000. Performance against targets is not therefore discussed in relation to
1999.
OPERATING INCOME
Net interest income before credit loss expense increased by CHF 891 million, or
18%, 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 derived 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 recorded 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%.
Credit-related fees and commissions decreased in 1999 in line with reduced
emerging market exposures and the sale of UBS's international Global Trade
Finance operations. Underwriting and corporate finance fees increased 3%
relative to exceptionally strong performance in 1998. Brokerage fees were higher
in 1999 than in 1998 mainly due to strong volumes in the UK, US 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.
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Net trading income increased CHF 4,406 million, or 133%, from CHF 3,313 million
in 1998 to CHF 7,719 million in 1999.
Net trading income from foreign exchange decreased CHF 884 million, or 44%, 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 CHF 162
million in 1998 to CHF 2,603 million in 1999. During 1998, net trading income
from fixed income was negatively impacted by the pre-tax CHF 793 million
write-down of UBS's trading position in Long Term Capital Management, L.P. 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 or 246% from 1998,
to CHF 4,008 million in 1999. During 1998, net trading income was negatively
impacted by pre-tax CHF 762 million in losses from the Global Equities
Derivatives business area. In 1999, net trading income benefited from very
strong customer volumes in equity products globally.
Other income, including net gains from disposal of associates and subsidiaries,
increased CHF 905 million, or 40%, from CHF 2,241 million in 1998 to CHF 3,146
million in 1999. Total net gains on disposal of associates and subsidiaries 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
lower income from investments in associates as a result of the divestments as
well as lower income from other properties. The CHF 367 million portion of the
Long Term Capital Management write-down negatively impacted other income in
1998.
OPERATING EXPENSES
Personnel expenses increased CHF 2,761 million, or 28%, 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 Long Term Capital Management and the Global Equity Derivatives
portfolio. Adjusting the prior year for the CHF 1,007 million, personnel
expenses in 1999 increased by 16%, which was primarily attributable to higher
performance-related compensation based on the good investment banking result in
1999. Personnel expense in 1999 was reduced by the recognition of CHF 456
million in pre-paid employer pension contributions.
General and administrative expenses decreased CHF 637 million, or 9%, from CHF
6,735 million in 1998 to CHF 6,098 million in 1999. General and administrative
expenses in 1998 include the
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provision of CHF 842 million for the US Global Settlement of World War II
related claims. In 1999, the following were included:
- the additional restructuring provision of CHF 300 million;
- an additional provision of CHF 154 million for the US Global Settlement
of World War II 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% year-on-year, reflecting stringent cost reduction
programs.
Depreciation and amortization increased CHF 32 million, or 2%, from CHF 1,825
million in 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 87%, 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 effective rate in 1998,
primarily due to the utilization of tax loss carry forwards.
OUTLOOK FOR 2001
The year 2000 was an outstanding one for UBS, and a good one overall for the
markets. Moving into 2001, the prospects for markets and for the international
credit environment are particularly difficult to predict. The recent upswing in
the economic cycle in Switzerland may, however, afford UBS some protection.
We believe that our credit business is well positioned, thanks to our avoidance
of balance sheet-led earnings growth, although we do not expect to see the net
credit loss write-backs we experienced this year. UBS Asset Management is
cautiously optimistic about prospects for growth as its core price/value
investment style demonstrates its strengths in less bullish markets, and UBS
Warburg has already demonstrated the quality and sustainability of its earnings
in the less positive conditions of the second half of 2000.
The biggest opportunity for UBS in 2001 lies in realizing the full transforming
value of the PaineWebber merger, not only in the US, but through leveraging the
marketing and client skills, product innovation and energy of our new partners
to build the best wealth management firm in the world.
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Review of Business Group Performance
Principles
MANAGEMENT ACCOUNTING PRINCIPLES
The following discussion reviews the 1999 and 2000 results by Business Group and
business unit.
UBS's management reporting system and policies determine the revenues and
expenses directly attributable to each business unit. Internal charges and
transfer pricing adjustments are reflected in the performance of each business
unit.
Inter-business unit revenues and expenses include transfers between business
units and between geographical locations. Revenue sharing agreements are used to
allocate external customer revenues to Business Groups on a reasonable basis.
Transactions between Business Groups are conducted at arms length.
Inter-business unit 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.
Interest revenues are apportioned to business units based on the opportunity
costs of funding their activities. Accordingly, all assets and liabilities are
refinanced with the Group Treasury based on market rates. Revenues relating to
balance sheet products are calculated on a fully-funded basis. As a result,
business units are additionally credited with the risk-free return on the
average equity used.
Commissions are credited to the business unit with the corresponding customer
relationship.
Regulatory equity is allocated to business units based on the average regulatory
capital requirement during the period. Only utilized equity is taken into
account, and a buffer of 10% is added. The remaining equity, mainly covering
real estate, and any unallocated equity, remains in Corporate Center.
Assets under management are defined as third-party on- and off-balance sheet
assets for which the Group has investment responsibility. This includes both
discretionary assets, where the Group has a mandate to invest and manage the
assets, as well as assets where the Group advises clients on their investment
decisions. Where two business units share responsibility for management of funds
(such as UBS investment funds held within private client portfolios), the assets
under management are included in both business segments. Wholesale custody-only
assets are excluded.
During 2001, UBS expects to introduce a new way of defining and measuring the
client assets it has responsibility for, replacing assets under management with
a new concept, distinguishing those assets held with UBS for investment
purposes.
Net new money is defined as the net inflow or outflow of assets under management
during a period, excluding interest and dividend income and the effects of
market or currency movements.
Headcount includes trainees and staff in management development programs, but
not contractors.
CREDIT LOSS EXPENSE
Credit loss expense represents the charges to the profit and loss account
relating to amounts due to UBS from loans and advances or other off-balance
sheet products, including OTC derivatives, that have had to be written-down
because they are impaired or uncollectable.
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UBS determines the amounts of Credit loss expense in its financial accounts and
in the business unit reporting on different bases. In the Group financial
accounts, UBS reports its results according to International Accounting
Standards (IAS) definitions. Under these rules, Credit loss expense is the total
of net new allowances and direct write-offs less recoveries. Losses are
recognized and charged to the financial accounts in the period when they arise.
In contrast, in its segment and business unit reporting, UBS applies a different
approach to the measurement of credit risk which reflects the average annual
cost that UBS anticipates will arise from transactions that become impaired. In
order to manage exposure to credit risk more effectively, UBS prices
transactions with a view to earning - over time - sufficient income to
compensate for the losses that are expected to be caused by value adjustments
for impaired assets. The basis for measuring these inherent risks in the credit
portfolios is the concept of "Expected Loss" (see "Risk--Risk Analysis--Credit
Risk" below). UBS therefore quantifies the Credit loss expense at business unit
level based on the Expected Loss rather than the actual loss reported in its
financial accounts.
As each business unit is ultimately responsible for its credit decisions, the
difference between the actual credit losses and the annual expected credit loss
calculated for management reporting purposes will be charged or credited back to
the business units over a three-year period, so that the risks and rewards of
credit decisions are fully reflected in their results.
CREDIT LOSS
Expected credit loss IAS Actual credit expense
------------------------------ ------------------------------
CHF MILLION 31.12.00 31.12.99 31.12.98 31.12.00 31.12.99 31.12.98
- -------------------------------------------------------------------------------------------------
UBS Switzerland 784 1,071 1,186 (695) 965 445
UBS Asset Management 0 0 0 0 0 0
UBS Warburg 247 333 510 565 0 506
Corporate Center 0 (9) 0
- -------------------------------------------------------------------------------------------------
TOTAL 1,031 1,404 1,696 (130) 956 951
- -------------------------------------------------------------------------------------------------
Balancing item in Corporate (1,161) (448) (745)
Center
- -------------------------------------------------------------------------------------------------
UBS reconciles the difference between the Credit loss expense in its financial
accounts and the Expected Loss shown in business unit reporting with a balancing
item in the Corporate Center. UBS also shows the allocation of actual Credit
loss expense to the business units in the footnotes to Note 3a of the financial
statements.
KEY PERFORMANCE INDICATORS
UBS reports carefully chosen key performance indicators for each of its business
units. These do not carry explicit targets, but are intended as indicators of
the business units' success in creating value for shareholders. They include
both financial metrics, such as the cost/income ratio, and non-financial
metrics, such as Assets under management.
The key performance indicators are used for internal performance measurement as
well as external reporting. This ensures that management have a clear
responsibility to lead their businesses towards achieving success in the Group's
key value drivers and reduces any risk of managing to purely internal
performance measures.
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BUSINESS GROUP TAX RATES
The Business Groups of UBS do not represent separate legal entities. Business
Group results are prepared through the application of UBS's management
accounting policies to the results of the entities through which they operate.
Indicative business unit tax rates are calculated on an annual basis based on
the results and statutory tax rates of the previous financial year. These rates
are approximate calculations, based upon the application to the year's adjusted
earnings of statutory tax rates for the locations in which the Business Groups
operated. These tax rates therefore give guidance on the tax cost to each
Business Group of doing business during 2000 and on a standalone basis, without
the benefit of tax losses brought forward from earlier years:
UBS SWITZERLAND 21%
Private and Corporate Clients 21%
Private Banking 22%
UBS ASSET MANAGEMENT 22%
Institutional Asset Management 23%
Investment Funds/GAM 22%
UBS WARBURG 22%
Corporate and Institutional Clients 23%
UBS Capital 26%
US Private Clients 37%
International Private Clients 32%
e-services 30%
These tax rates are not necessarily indicative of future tax rates for the
businesses or UBS Group as a whole.
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UBS Switzerland
BUSINESS GROUP REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99 (1) 31.12.98 (1) 31.12.99
- ----------------------------------------------------------------------------------------------------
Income 14,182 12,761 13,958 11
Credit loss expense (2) (784) (1,071) (1,186) (27)
- ----------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 13,398 11,690 12,772 15
- ----------------------------------------------------------------------------------------------------
Personnel expenses 4,759 4,691 4,448 1
General and administrative expenses 2,394 2,308 2,226 4
Depreciation 508 460 771 10
Amortization of goodwill and other
intangible assets 62 23 4 170
- ----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 7,723 7,482 7,449 3
- ----------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 5,675 4,208 5,323 35
- ----------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION
Assets under management (CHF billion) 1,121 1,110 1,013 1
- ----------------------------------------------------------------------------------------------------
Cost / income ratio (%) (3) 54 59 53
Cost / income ratio before goodwill
(%) (3, )(4) 54 58 53
- ----------------------------------------------------------------------------------------------------
% change from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- -------------------------------------------------------------------------------------------
Regulatory equity used (avg) 10,500 10,059 9,519 4
Headcount (full time equivalents) 28,785 31,354 30,589 (8)
- -------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) In management accounts, statistically derived adjusted expected loss rather
than net IAS credit loss (expense) / recovery is reported in the business
units (see Note 3a).
(3) Operating expenses / operating income before credit loss expense.
(4) The amortization of goodwill and other intangible assets is excluded from
this calculation.
COMPONENTS OF OPERATING INCOME
Private and Corporate Clients derives its operating income principally from
- net interest income from its loan portfolio and customer deposits;
- fees for investment management services; and
- transaction fees.
As a result, Private and Corporate Clients' operating income is affected by
movements in interest rates, fluctuations in assets under management, client
activity levels, investment performance and changes in market conditions.
Private Banking derives its operating income from
- fees for financial planning and wealth management services;
- fees for investment management 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.
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Private and Corporate Clients
BUSINESS UNIT REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- -----------------------------------------------------------------------------------------------
Individual clients 5,026 4,553 4,785 10
Corporate clients 1,975 1,855 1,728 6
Risk transformation and capital
management 307 330 0 (7)
Operations 205 313 448 (35)
Other (70) 142 64
- -----------------------------------------------------------------------------------------------
Income 7,443 7,193 7,025 3
Credit loss expense(2) (759) (1,050) (1,170) (28)
- -----------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 6,684 6,143 5,855 9
- -----------------------------------------------------------------------------------------------
Personnel expenses 3,187 3,363 3,238 (5)
General and administrative expenses 1,058 1,123 1,025 (6)
Depreciation 419 384 680 9
Amortization of goodwill and other
intangible assets 27 2 4
- -----------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 4,691 4,872 4,947 (4)
- -----------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 1,993 1,271 908 57
- -----------------------------------------------------------------------------------------------
KPI'S
Assets under management (CHF
billion)(3) 440 439 434 0
Net new money (CHF billion) 0.4
- -----------------------------------------------------------------------------------------------
Cost/income ratio (%)(4) 63 68 70
Cost/income ratio before goodwill
(%)(4,5) 63 68 70
- -----------------------------------------------------------------------------------------------
Non-performing loans/Gross loans
outstanding (%) 5.0 6.6
- -----------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION % change from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- -------------------------------------------------------------------------------------------
Regulatory equity used (avg) 8,550 8,550 8,250 0
Headcount (full time equivalents) 21,100 24,098 24,043 (12)
- -------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) In management accounts, statistically derived adjusted expected loss rather
than net IAS credit loss (expense) / recovery is reported in the business
units (see Note 3a).
(3) Bank transaction accounts are included.
(4) Operating expenses / operating income before credit loss expense.
(5) The amortization of goodwill and other intangible assets is excluded from
this calculation.
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2000
There were no significant financial events that affected this business unit in
1999 or 2000.
KEY PERFORMANCE INDICATORS
Assets under management increased slightly by CHF 1 billion from CHF 439 billion
in 1999 to CHF 440 billion during 2000, including net new money of CHF 0.4
billion. Market performance was slightly positive over the year, offsetting
transfers of CHF 5 billion to other business units.
The pre-goodwill cost / income ratio in 2000, at 63%, improved significantly
from 68% in 1999. This was principally due to lower operating expenses resulting
from continuing strict cost control, as the benefits of the 1998 merger between
Union Bank of Switzerland and Swiss Bank Corporation continued to be realized.
The quality of the Private and Corporate Clients' loan portfolio improved
considerably during the year, resulting in a non-performing loans / total loans
ratio of 5.0% at 31 December 2000, compared to 6.6% at the end of 1999. This
improvement was due in part to the unexpected strengthening of the Swiss
economy, and also to Private and Corporate Clients' efforts to further enhance
the risk/return profile of its loan portfolio through selective origination,
secondary market transactions, the disposal of subsidiaries, and the continued
work-out of the recovery portfolio, which decreased from CHF 21 billion to CHF
15 billion during the year.
Although UBS Switzerland's non-performing loans ratio is somewhat higher than
some comparable banks particularly in the US, the comparison reflects different
structural practices rather than underlying asset quality. In general, Swiss
practice is to write off loans entirely only on final settlement of bankruptcy
proceedings, the sale of the underlying assets or a formal debt forgiveness. In
contrast, US practice is to write off non-performing loans much sooner, reducing
the amount of such loans and corresponding provisions recorded at any given
date.
RESULTS
Record pre-tax profit for the year, at CHF 1,993 million, was an increase of CHF
722 million, or 57%, over 1999, clearly demonstrating the substantial benefits
of the merger between UBS and SBC for the combined domestic banking franchise.
OPERATING INCOME
Private and Corporate Clients' operating income in 2000 was CHF 6,684 million,
CHF 541 million, or 9%, higher than in 1999. This improved performance primarily
reflected higher fee income, particularly in the first half of the year, and
reduced expected loss as the quality of the loan portfolio improved.
Both of Private and Corporate Clients' two main operating business areas
recorded increases in their operating income in 2000 as compared to 1999.
- Individual Clients: Operating income in 2000 was CHF 5,026 million, an
increase of CHF 473 million, or 10%, from CHF 4,553 million in 1999.
This was primarily due to increases in brokerage and investment fund
fees resulting from increased investment activity, and minor gains on
sales of subsidiaries and participations.
- Corporate Clients: Operating income in 2000 was CHF 1,975 million, an
increase of CHF 120 million, or 6%, from CHF 1,855 million in 1999,
primarily due to higher interest income resulting from improved margins
as well as increased fee and commission income.
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On the other hand, the two support areas saw their incomes reduce.
- Risk Transformation and Capital Management: Income was CHF 307 million
in 2000. This was a decrease of CHF 23 million, or 7%, from the CHF 330
million recorded in 1999, primarily as a result of the reduced average
size of the recovery loan portfolio, managed by this unit.
- Operations: Revenues in 2000 were CHF 205 million, a decrease of CHF 108
million, or 35%, from CHF 313 million in 1999. Operations revenues were
affected by lower interest revenues as a result of reduced correspondent
bank overdraft balances, partially offset by small one-off revenues from
the revaluation of minority holdings in other companies.
OPERATING EXPENSES
Full year operating expenses in 2000 were CHF 4,691 million, down 4%, or CHF 181
million, from 1999. This was primarily due to falling personnel costs as
headcount was reduced.
OPERATING INCOME BEFORE CREDIT LOSS EXPENSE BY BUSINESS AREA
CHF million
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.98
- -----------------------------------------------------------------------------------------------
Individual Clients 5,026 4,553 4,785
Corporate Clients 1,975 1,855 1,728
Risk transformation and Capital Management 307 330
Operations 205 313 448
Other (70) 142 64
- -----------------------------------------------------------------------------------------------
TOTAL 7,443 7,193 7,025
- -----------------------------------------------------------------------------------------------
Personnel expense fell by CHF 176 million, or 5%, from CHF 3,363 million in 1999
to CHF 3,187 million in 2000. Increased performance-related compensation,
reflecting the good results, was more than offset by a substantial reduction in
headcount during the year.
General and administrative expenses fell 6% over the year, despite our continued
investments in online services, reflecting continued cost control efforts.
Depreciation expense increased by CHF 35 million, or 9%, to CHF 419 million,
primarily due to the implementation of IAS 38, relating to the capitalization of
software costs.
Amortization of goodwill and other intangible assets increased CHF 25 million,
from CHF 2 million in 1999 to CHF 27 million in 2000. This increase was
primarily due to the acquisition of a credit card portfolio during second
quarter 2000.
HEADCOUNT
Private and Corporate Clients' headcount declined by almost 3,000 in 2000 from
24,098 at the end of 1999 to 21,100 at 31 December 2000. This reduction includes
948 staff transferred with Systor, which became an independent company at the
start of 2000, 413 staff of Solothurner Bank, which was sold during 2000, and
the transfer of 148 financial planning and wealth management staff to Private
Banking. The remaining reduction of 1,489 staff demonstrates UBS's continued
success in realizing UBS/SBC merger-related synergies.
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1999
OPERATING INCOME
Operating income before credit loss expense increased CHF 168 million, or 2%,
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.
Private and Corporate Clients' expected loss decreased CHF 120 million, or 10%,
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 expected loss primarily
resulting from the transfer of the remainder of the Swiss Global Trade Finance
business from UBS Warburg during 1999.
OPERATING EXPENSES
Personnel, general and administrative expenses increased CHF 223 million, or 5%,
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 Global
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 44%, from
CHF 684 million in 1998 to CHF 386 million in 1999, primarily due to reduced
assets employed subsequent to the 1998 merger.
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- --------------------------------------------------------------------------------
Private Banking
BUSINESS UNIT REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- ---------------------------------------------------------------------------------------------------
Income 6,739 5,568 6,933 21
Credit loss expense(2) (25) (21) (16) 19
- ---------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 6,714 5,547 6,917 21
- ---------------------------------------------------------------------------------------------------
Personnel expenses 1,572 1,328 1,210 18
General and administrative expenses 1,336 1,185 1,201 13
Depreciation 89 76 91 17
Amortization of goodwill and other
intangible assets 35 21 0 67
- ---------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,032 2,610 2,502 16
- ---------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 3,682 2,937 4,415 25
- ---------------------------------------------------------------------------------------------------
KPI'S
Assets under management (CHF billion) 681 671 579 1
- ---------------------------------------------------------------------------------------------------
Net new money (CHF billion)(3) (0.7) 0.7
Gross AuM margin (bps) 98 90 9
- ---------------------------------------------------------------------------------------------------
Cost / income ratio (%)(4) 45 47 36
Cost / income ratio before goodwill (%)(4,
5) 44 46 36
- ---------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION % change from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- -------------------------------------------------------------------------------------------
Regulatory equity used (avg) 1,950 1,509 1,269 29
Headcount (full time equivalents) 7,685 7,256 6,546 6
- -------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) In management accounts, statistically derived adjusted expected loss rather
than net IAS credit loss (expense) / recovery is reported in the business
units (see Note 3a).
(3) Excludes dividend and interest income.
(4) Operating expenses / operating income before credit loss expense.
(5) The amortization of goodwill and other intangible assets is excluded from
this calculation.
2000
There were no significant financial events that affected this business unit in
1999 or 2000.
KEY PERFORMANCE INDICATORS
Assets under management increased slightly by CHF 10 billion, or 1%, from CHF
671 billion to CHF 681 billion during 2000, primarily reflecting market
performance and currency effects. Net new money during the year was
disappointing, with net outflows of CHF 0.7 billion.
Gross margin for the year, at 98 basis points, partly reflects the very strong
performance in the exceptional markets of the first quarter. The more recent
rates of 95 basis points in second and fourth
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- --------------------------------------------------------------------------------
quarters, and 94 basis points in third quarter, represent a solid improvement
over the average of 90 basis points recorded in 1999, as we introduce more
value-added products to our client base.
The pre-goodwill cost / income ratio of 44% improved slightly from 46% in 1999,
principally due to significantly higher revenues.
RESULTS
Net profit before tax for the year increased significantly, by CHF 745 million,
or 25%, to CHF 3,682 million, from CHF 2,937 million in 1999. This reflects
strong markets in the early part of 2000, and the margin-enhancing benefits of
introducing more added-value products during the year.
OPERATING INCOME
The increase in gross margin to 98 basis points resulted in operating income of
CHF 6,714 million, which was 21%, or CHF 1,167 million, higher than in 1999.
Revenue quality has also improved with asset-based fees growing faster over the
year than transaction-based fees.
OPERATING EXPENSES
Full year operating expenses were CHF 3,032 million, CHF 422 million or 16%
higher than in 1999.
Personnel expenses increased CHF 244 million, or 18%, partly due to increased
hiring in client-focused areas, the transfer of financial planning and wealth
management staff from the Private and Corporate Clients unit, as well as higher
performance-related compensation.
General and administrative expenses increased CHF 151 million, or 13%, primarily
due to recruitment and training expenses, volume-driven transaction processing
costs, as well as project-related technology costs.
Depreciation expense increased by CHF 13 million, or 17%, due to increased
investments in both software and the refurbishment of premises.
HEADCOUNT
Headcount at year end 2000 was 7,685, representing an increase of 429 during the
year. This was mainly the result of the transfer of 148 financial planning and
wealth management staff from the Private and Corporate Clients business unit and
the completion in first quarter 2000 of previous initiatives to strengthen
product capabilities.
It is Private Banking's policy to shift the balance of its staff towards
client-facing roles, reducing the number of support staff. During the year there
were net increases of 302 staff in client-focused market areas and 127 in
product areas, such as financial planning, Active Advisory, and portfolio
management.
1999
OPERATING INCOME
Operating income decreased CHF 1,370 million, or 20%, from CHF 6,917 million in
1998 to CHF 5,547 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 Banca
della Svizzera Italiana (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.
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- --------------------------------------------------------------------------------
Notwithstanding the decrease in operating income, assets under management
increased during 1999 by CHF 92 billion, or 16%. Strong markets, especially in
Europe, in the United States, and in the technology sector, as well as the
stronger US 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 inter-business
unit 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
Operating expenses, adjusted for CHF 125 million in divestiture-related
operating expenses, increased 4%, 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%,
from CHF 2,411 million in 1998 to CHF 2,513 million 1999. Personnel costs
increased 10%, 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%, from CHF 91 million in 1998 to
CHF 6 million in 1999.
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- --------------------------------------------------------------------------------
UBS Asset Management
BUSINESS GROUP REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- ------------------------------------------------------------------------------------------------------
Income 1,953 1,369 1,358 43
Credit loss expense 0 0 0
- ------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 1,953 1,369 1,358 43
- ------------------------------------------------------------------------------------------------------
Personnel expenses 880 516 515 71
General and administrative expenses 439 271 228 62
Depreciation 49 32 35 53
Amortization of goodwill and other intangible
assets 263 113 78 133
- ------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,631 932 856 75
- ------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 322 437 502 (26)
- ------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION
Assets under management (CHF billion) 522 598 532 (13)
- ------------------------------------------------------------------------------------------------------
Cost / income ratio (%)(2) 84 68 63
Cost / income ratio before goodwill (%)(2, 3) 70 60 57
- ------------------------------------------------------------------------------------------------------
% change from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- ------------------------------------------------------------------------------------------------
Regulatory equity used (avg) 1,250 162 102 672
Headcount (full time equivalents) 2,860 2,576 1,863 11
- ------------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) Operating expenses / operating income before credit loss expense.
(3) The amortization of goodwill and other intangible assets is excluded from
this calculation.
COMPONENTS OF REVENUE
UBS Asset Management generates most of its revenue from the asset management
services it provides to institutional clients, and from the distribution of
investment funds. 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 levels as well as flows
of client funds.
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Institutional Asset Management
BUSINESS UNIT REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- --------------------------------------------------------------------------------------------------
Institutional 1,103 906 968 22
Non-institutional 198 193 195 3
- --------------------------------------------------------------------------------------------------
Income 1,301 1,099 1,163 18
Credit loss expense 0 0 0
- --------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 1,301 1,099 1,163 18
- --------------------------------------------------------------------------------------------------
Personnel expenses 631 458 465 38
General and administrative expenses 243 178 154 37
Depreciation 27 25 29 8
Amortization of goodwill and other
intangible assets 173 113 78 53
- --------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,074 774 726 39
- --------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 227 325 437 (30)
- --------------------------------------------------------------------------------------------------
KPI'S
Assets under management (CHF billion) 496 574 531 (14)
Net new money (CHF billion)(2) (66.6) (50.1)
Gross AuM margin (bps)(3) 33 25 32
- --------------------------------------------------------------------------------------------------
Cost / income ratio (%)(4) 83 70 62
Cost / income ratio before goodwill
(%)(4, 5) 69 60 56
- --------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION % change from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- --------------------------------------------------------------------------------------------
Regulatory equity used (avg) 500 160 100 213
Headcount (full time equivalents) 1,728 1,653 1,497 5
- --------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) Excludes dividend and interest income.
(3) Revenues divided by average assets under management, for the institutional
portion of the business only.
(4) Operating expenses / operating income before credit loss expense.
(5) The amortization of goodwill and other intangible assets is excluded from
this calculation.
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2000
There were no significant financial events that affected this business unit in
1999 or 2000.
KEY PERFORMANCE INDICATORS
Assets under management decreased 14%, or CHF 78 billion, from CHF 574 billion
at 31 December 1999 to CHF 496 billion at 31 December 2000, with the majority of
the decline due to client losses in the institutional business, particularly in
the earlier part of the year.
Net new money for the year saw a net outflow of CHF 66.6 billion. Net new money
outflows moderated as the year progressed, as losses of equity mandates
continued to decline. Client losses continued to be concentrated primarily
within US and to a lesser degree UK mandates, reflecting past investment
performance issues.
The gross margin in 2000 was 33 basis points, an increase of 8 basis points over
1999. This rise reflects the contributions from two new higher margin
businesses: O'Connor, created in June 2000, and UBS Realty Investors (formerly
Allegis), purchased in December 1999.
The cost/income ratio before goodwill increased to 69% in 2000 from 60% in 1999,
principally as a result of the inclusion of O'Connor and UBS Realty Investors
(which generate higher gross margins than the rest of the business, but at
higher cost), spending on strategic initiatives to expand global reach, and
lower asset-based revenues towards the end of the year.
INVESTMENT PERFORMANCE IN 2000
The return of global equity markets towards fundamental values was the
predominant development during 2000. This trend accelerated during the fourth
quarter as the US economy began to slow, and many companies within the
Technology, Media and Telecommunications (TMT) sector posted disappointing
earnings. Within this challenging environment, strategic positions benefiting
from the decline in the TMT sector, the associated drop in equity markets, the
under-performance of the very largest capitalization equities, and the year-end
turnaround in the euro, helped Institutional Asset Management deliver the best
relative annual investment performance in its history.
US equity strategies outperformed benchmarks by wide margins. Global,
international and UK equity strategies were also significantly positive.
Phillips & Drew was ranked the top-performing pension fund manager in Britain
for the year 2000 by Combined Actuarial Performance Services (CAPS), the leading
UK performance measurement consultancy. Phillips & Drew's flagship Managed
Exempt fund (equities mixed with property) outperformed the average fund manager
by more than 10% for the full year. Phillips & Drew's strong performance in 2000
also benefited their balanced fund's three and five year records, moving its
ranking up from fourth quartile at the end of 1999 to second quartile at the end
of 2000.
RESULTS
The full year pre-tax profit of CHF 227 million was 30% lower than 1999. Despite
asset losses in the core institutional business, income increased as a result of
the launch of the O'Connor business and the acquisition of Allegis; but this was
more than offset by higher performance-related personnel expenses, goodwill
amortization relating to Allegis and increased general and administrative
expenses.
OPERATING INCOME
Operating income increased CHF 202 million, or 18%, from CHF 1,099 million in
1999 to CHF 1,301 million in 2000. Despite the decrease in assets under
management, operating income increased
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- --------------------------------------------------------------------------------
as a result of the acquisition of Allegis and the creation of the new O'Connor
alternative asset management business, partially offset by lost revenue from
client losses.
OPERATING EXPENSES
Full year expenses increased by CHF 300 million, to CHF 1,074 million. Personnel
expenses increased 38%, or CHF 173 million, from CHF 458 million in 1999 to CHF
631 million in 2000 and General and administrative expenses increased 37%, or
CHF 65 million, over 1999 to CHF 243 million in 2000. Both categories of expense
increased as a result of the acquisition of Allegis, the addition of the new
O'Connor business and currency movements.
Depreciation and amortization expense increased CHF 62 million, or 45%, from CHF
138 million in 1999 to CHF 200 million in 2000, including CHF 46 million from
the acquisition of Allegis.
HEADCOUNT
Headcount increased 5% from 1,653 at 31 December 1999 to 1,728 at 31 December
2000, primarily as a result of the creation of the new O'Connor business in June
2000.
1999
OPERATING INCOME
Operating income decreased CHF 64 million, or 6%, from CHF 1,163 million in 1998
to CHF 1,099 million in 1999. Assets under management increased 8%, or CHF 43
billion, to CHF 574 billion at 31 December 1999 from CHF 531 at 31 December
1998, with increases in both institutional and non-institutional categories
year-on-year. Despite the 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 906 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 16% during 1999; however, non-institutional revenues declined
slightly to CHF 193 million as a result of new interbusiness unit fee
arrangements with UBS Private Banking.
OPERATING EXPENSES
Personnel, general and administrative expenses increased CHF 17 million, or 3%,
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 16% from CHF 154 million in 1998 to CHF 178 million in 1999 as a
result of revisions in cost-sharing arrangements between Institutional Asset
Management and other business units 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.
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- --------------------------------------------------------------------------------
Investment Funds/GAM
BUSINESS UNIT REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- -------------------------------------------------------------------------------------------------------
Income 652 270 195 141
Credit loss expense 0 0 0
- -------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 652 270 195 141
- -------------------------------------------------------------------------------------------------------
Personnel expenses 249 58 50 329
General and administrative expenses 196 93 74 111
Depreciation 22 7 6 214
Amortization of goodwill and other intangible assets 90 0 0
- -------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 557 158 130 253
- -------------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 95 112 65 (15)
- -------------------------------------------------------------------------------------------------------
KPI'S
Assets under management (CHF billion) 219 225 176 (3)
Net new money (CHF billion)(2) 4.4 1.3
Gross AuM margin (bps)(3) 38 24 58
- -------------------------------------------------------------------------------------------------------
Cost/income ratio (%)(4) 85 59 67
Cost/income ratio before goodwill(%)(4,5) 72 59 67
- -------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION % change from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- -------------------------------------------------------------------------------------------------------
Regulatory equity used (avg) 750 2 2
Headcount (full time equivalents) 1,132 923 366 23
- -------------------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) Excludes dividend and interest income.
(3) All non-institutional revenues, including those booked in Institutional
Asset Management, divided by average assets under management.
(4) Operating expenses/operating income before credit loss expense.
(5) The amortization of goodwill and other intangible assets is excluded from
this calculation.
2000
There were no significant financial events that affected this business unit in
1999 or 2000.
KEY PERFORMANCE INDICATORS
Assets under management decreased 3% from CHF 225 billion at 31 December 1999 to
CHF 219 billion at year end 2000, largely a result of currency and market
movements, partly offset by net new money of CHF 4.4 billion.
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- --------------------------------------------------------------------------------
The cost/income ratio before goodwill increased from 59% to 72% mainly as a
result of the inclusion of Global Asset Management (GAM), but also reflecting
spending on new business initiatives, chiefly targeted at marketing investment
funds outside UBS's own client base.
The gross margin for the year, at 38 basis points, is significantly higher than
the 24 basis points recorded in 1999, principally due to the contribution from
GAM.
RESULTS
Net profit for 2000 fell 15%, or CHF 17 million, to CHF 95 million in 2000,
reflecting the additional costs of spending on new business initiatives, chiefly
targeted at marketing investment funds outside UBS.
OPERATING INCOME
Operating income increased CHF 382 million, or 141%, from CHF 270 million in
1999 to CHF 652 million in 2000, primarily as a result of the GAM acquisition.
OPERATING EXPENSES
Personnel expenses increased 329%, or CHF 191 million, from CHF 58 million in
1999 to CHF 249 million in 2000 due to the acquisition of GAM, and increased
headcount for growth initiatives in the Investment Funds area. General and
administrative expenses increased 111%, from CHF 93 million in 1999 to CHF 196
million in 2000, as a result of the acquisition of GAM and marketing and
distribution initiatives in the Investment Funds area.
Depreciation and amortization expense increased CHF 105 million, from CHF 7
million in 1999 to CHF 112 million in 2000, reflecting goodwill amortization
following the acquisition of GAM.
HEADCOUNT
Headcount increased 23% from 923 at 31 December 1999 to 1,132 at 31 December
2000, primarily a result of an increase of staff to support distribution
initiatives in the Investment Funds area.
1999
OPERATING INCOME
Operating income increased CHF 75 million, or 38%, 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 significantly impact income or
expenses in 1999.
Assets under management increased 28%, or CHF 49 billion, to CHF 225 billion at
31 December 1999 from CHF 176 billion at 31 December 1998. 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.
OPERATING EXPENSES
Personnel, general and administrative expenses increased CHF 27 million, or 22%,
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
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- --------------------------------------------------------------------------------
expenses increased 16% from CHF 50 million in 1998 to CHF 58 million in 1999 in
line with the increase in headcount. General and administrative expenses
increased 26% 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 17%, 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.
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- --------------------------------------------------------------------------------
UBS Warburg
BUSINESS GROUP REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99( 1) 31.12.98( 1) 31.12.99
- -----------------------------------------------------------------------------------------------------
Income 19,779(4) 13,241 7,691 49
Credit loss expense( 2) (247) (333) (510) (26)
- -----------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 19,532 12,908 7,181 51
- -----------------------------------------------------------------------------------------------------
Personnel expenses 11,002 7,278 4,641 51
General and administrative expenses 3,501 2,680 2,625 31
Depreciation 731 659 549 11
Amortization of goodwill and other
intangible assets 298(4) 154 173 94
- -----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 15,532 10,771 7,988 44
- -----------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 4,000 2,137 (807) 87
- -----------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION
Assets under management (CHF billion)( 6) 827 36 27
- -----------------------------------------------------------------------------------------------------
Cost / income ratio (%)( 7) 79 81 104
Cost / income ratio before goodwill (%)( 7,
8) 77 80 102
- -----------------------------------------------------------------------------------------------------
% change from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- ---------------------------------------------------------------------------------------------
Regulatory equity used (avg) 24,900 10,679 13,779 133
Headcount (full time equivalents) 38,445 14,266 14,638 169
- ---------------------------------------------------------------------------------------------
BUSINESS GROUP REPORTING ADJUSTED FOR SIGNIFICANT FINANCIAL EVENTS
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99( 1) 31.12.98( 1) 31.12.99
- -----------------------------------------------------------------------------------------------------
Income 19,779(4) 13,041(5) 7,691 52
Credit loss expense( 2) (247) (333) (510) (26)
- -----------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 19,532 12,708 7,181 54
- -----------------------------------------------------------------------------------------------------
Personnel expenses 10,916(3) 7,278 4,641 50
General and administrative expenses 3,408(3) 2,680 2,625 27
Depreciation 652(3) 659 549 (1)
Amortization of goodwill and other
intangible assets 298(4) 154 173 94
- -----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 15,274 10,771 7,988 42
- -----------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 4,258 1,937 (807) 120
- -----------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------------------------------
Cost / income ratio (%)( 7) 77 83 104
Cost / income ratio before goodwill
(%)( 7, 8) 76 81 102
- -----------------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) In management accounts, statistically derived adjusted expected loss rather
than net IAS credit loss (expense) / recovery is reported in the business
units (see Note 3a).
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(3) The year ended 31 December 2000 Personnel, General and administrative
expenses and Depreciation were adjusted for the significant financial
events in respect of the PaineWebber integration costs by CHF 86 million,
CHF 93 million and CHF 79 million, respectively.
(4) Goodwill funding costs of CHF 132 million and amortization of goodwill and
other intangible assets of CHF 138 million in respect of the PaineWebber
acquisition are included in UBS Warburg results but are not reflected in
any of the individual business units.
(5) Year ended 31 December 1999 has been adjusted for the Significant Financial
Event of CHF 200 million for the sale of the international Global Trade
Finance business.
(6) US Private Clients' Client Assets at 3 November 2000 were CHF 890 billion.
(7) Operating expenses / operating income before credit loss expense.
(8) The amortization of goodwill and other intangible assets is excluded from
this calculation.
GOODWILL COSTS
UBS Warburg's Business Group operating expenses include CHF 138 million
amortization of goodwill and intangible assets and CHF 132 million of goodwill
funding costs relating to the merger with PaineWebber which are recorded at the
Business Group level, but are not allocated to the individual business units.
In particular, the results of the US Private Clients business unit, which
includes the former PaineWebber private client businesses, do not reflect
goodwill amortization or funding costs relating to the merger.
COMPONENTS OF OPERATING INCOME
The Corporate and Institutional Clients unit generates operating income from
- commissions on agency transactions and spreads or markups on principal
transactions;
- fees from debt and equity capital markets transactions, leveraged
finance, and the structuring of derivatives and complex transactions;
- mergers and acquisitions and other 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' 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 have had and may in the future
have a significant impact on results of operations from year to year.
UBS Capital's primary source of operating income is capital gains from the
disposal 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 disposals that
take place during the year.
The private clients business units, US Private Clients and International Private
Clients, principally derive their operating income from
- fees for financial planning and wealth management services;
- fees for discretionary services; and
- transaction-related fees.
These fees are based on the market value of assets under management and the
level of transaction-related activity. As a result, 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.
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Corporate and Institutional Clients
BUSINESS UNIT REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99( 1) 31.12.98( 1) 31.12.99
- ----------------------------------------------------------------------------------------------------
Corporate Finance 2,701 2,054 1,665 31
Equities 10,429 5,724 3,253 82
Fixed income 2,969 2,464 (267) 20
Treasury products 1,653 1,805 2,351 (8)
Non-core business 281 482(2) (96) (42)
- ----------------------------------------------------------------------------------------------------
Income 18,033 12,529(2) 6,906 44
Credit loss expense( 3) (243) (330) (500) (26)
- ----------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 17,790 12,199 6,406 46
- ----------------------------------------------------------------------------------------------------
Personnel expenses 9,284(4,5) 6,861 4,333 35
General and administrative expenses 2,779(4) 2,429 2,483 14
Depreciation 555(4) 629 535 (12)
Amortization of goodwill and other
intangible assets 149 134 157 11
- ----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 12,767 10,053 7,508 27
- ----------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 5,023 2,146 (1,102) 134
- ----------------------------------------------------------------------------------------------------
KPI'S
Compensation / income (%) 51 55 63
- ----------------------------------------------------------------------------------------------------
Cost / income ratio (%)( 6) 71 80 109
Cost / income ratio before goodwill
(%)( 6, 7) 70 79 106
- ----------------------------------------------------------------------------------------------------
Non-performing loans / Gross loans
outstanding (%) 3.4 2.2 1.5
Average VaR (10-day 99%) 242 213 295(8)
- ----------------------------------------------------------------------------------------------------
LEAGUE TABLE RANKINGS( 9)
FOR THE YEAR ENDED 31.12.00 31.12.99
- --------------------------------------------------------------------------------------------
Global Mergers and Acquisitions
completed( 10)
Rank 6 6
Market share 16.7 20.3
International Equity New Issues( 11)
Rank 7 11
Market share 5.1 3.8
International Bonds( 11)
Rank 5 5
Market share 7.9 8.0
Eurobonds( 11)
Rank 1 1
Market share 8.8 8.7
- --------------------------------------------------------------------------------------------
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ADDITIONAL INFORMATION % change from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- --------------------------------------------------------------------------------------------
Regulatory equity used (avg) 10,000 10,050 13,300 0
Headcount (full time equivalents) 15,262 12,694 13,794 20
- --------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) Year ended 31 December 1999 income was adjusted for the Significant
Financial Event of CHF 200 million related to the sale of the international
Global Trade Finance business.
(3) In management accounts, statistically derived adjusted expected loss rather
than net IAS credit loss (expense) / recovery is reported in the business
units (see Note 3a).
(4) The year ended 31 December 2000 Personnel, General and administrative
expenses and Depreciation were adjusted for the Significant Financial
Events in respect of the PaineWebber integration by CHF 86 million, CHF 13
million and CHF 7 million, respectively.
(5) The year ended 31 December 2000 Personnel expenses include CHF 11 million
of the CHF 128 million retention payments in respect of the PaineWebber
acquisition.
(6) Operating expenses / operating income before credit loss expense.
(7) The amortization of goodwill and other intangible assets is excluded from
this calculation.
(8) VaR average for 1998 is from the date of the UBS / SBC merger, 26 June
1998, until 31 December 1998.
(9) The league table rankings reflect recent industry consolidation.
(10) Source: Thomson Financial Securities data.
(11) Source: Capital Data Bondware.
2000
The results for Corporate and Institutional Clients include the costs and
revenues for November and December 2000 of the former PaineWebber capital
markets businesses, which were integrated into this business unit from the
completion of the merger on 3 November 2000.
PaineWebber integration costs were treated as a significant financial event, and
are not shown in the table. The amounts involved were: personnel expenses CHF 86
million, general and administrative expenses CHF 13 million and depreciation CHF
7 million.
In addition, a CHF 200 million gain on the sale of UBS's international Global
Trade Finance business in 1999 was treated as a significant financial event and
is not reflected in the operating income shown in the table.
KEY PERFORMANCE INDICATORS
UBS Warburg measures its expense base primarily in terms of percentage of
revenues, looking at both personnel costs and non-personnel costs on this basis.
Continued strong revenue performance and active cost management led to a
pre-goodwill cost/income ratio of 70%, from 79% in the previous year,
representing the result of significant cost management efforts on both personnel
and non-personnel expenses.
Corporate and Institutional Clients' ratio of personnel cost to income fell to
51% in 2000, from 55% last year. UBS Warburg continues to invest in top quality
professionals to help expand its capabilities and client reach and aims to
compensate its employees at similar levels to its global competitors.
Changes in non-personnel costs are less directly related to changes in income
than personnel costs.
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As a percentage of income, non-personnel costs decreased to 19% in 2000, from
25% in 1999. Improvements in overall cost management were offset by increased
expenditure on technology and professional fees and the incremental costs of the
PaineWebber capital markets business.
The value of Corporate and Institutional Clients' non-performing loans rose CHF
933 million, or 59%, from CHF 1,586 million at 31 December 1999 to CHF 2,519
million at 31 December 2000, reflecting the weaker credit environment in the US.
At the same time, the gross loans outstanding rose from CHF 72,717 million at 31
December 1999 to CHF 74,253 million at 31 December 2000. As a result, the ratio
of non-performing loans to total loans increased to 3.4% at the end of 2000 from
2.2% at the end of 1999. UBS Warburg does not believe that extensive lending is
critical to the expansion of its client franchise and does not intend to engage
in balance sheet led earnings growth.
Market risk utilization, as measured by average Value at Risk, continued to
remain well within the limit of CHF 450 million, although increasing from an
average of CHF 213 million in 1999 to an average of CHF 242 million in 2000,
reflecting the exceptional trading opportunities in the early part of 2000.
RESULTS
UBS Warburg's Corporate and Institutional Clients business unit delivered record
financial results in 2000, with each quarter performing significantly above the
levels in the comparable quarter of 1999. Pre-tax profit of CHF 5,023 million
was more than double the CHF 2,146 million achieved in 1999, itself a good year.
OPERATING INCOME
Corporate and Institutional Clients generated revenues of CHF 18,033 million in
2000, an increase of 44% over 1999.
Equities revenues during 2000 were CHF 10,429 million, or 82% higher than
1999's revenues of CHF 5,724 million reflecting the strength of UBS Warburg's
global client franchise and increased market share in significantly stronger
secondary markets, and strong market-making and trading revenues. UBS Warburg's
secondary equity sales business continues to be ranked as one of the global
leaders, and the leading non-US equities house.
Fixed Income experienced an exceptionally strong 2000, driven by strong
markets, significant principal finance activity and a strong government bond and
derivatives business, contributing to overall revenues for the year 2000 of CHF
2,969 million, an improvement of 20%, or CHF 505 million over 1999's revenues of
CHF 2,464 million.
OPERATING INCOME BEFORE CREDIT LOSS EXPENSE BY BUSINESS AREA
For the year ended
CHF MILLION 31.12.00 31.12.99 31.12.98
- -------------------------------------------------------------------------------------------
Equities 10,429 5,724 3,253
Fixed income 2,969 2,464 (267)
Corporate finance 2,701 2,054 1,665
Treasury products 1,653 1,805 2,351
Non-core business 281 482 (96)
- -------------------------------------------------------------------------------------------
Total 18,033 12,529 6,906
- -------------------------------------------------------------------------------------------
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Despite commoditization of products and the continuing pressure on margins
across its businesses, the Treasury Products business area recorded a slight
increase in underlying revenues, reflecting the recovery of euro trading as the
currency strengthened, and a growing client franchise. The business area also
increased market share through extensive use of e-channels to extend client
reach. Revenues for 1999 included revenues relating to exchange-traded
derivatives and alternative asset management, which were transferred to the
Equities business area in 2000. Full year performance reflected this transfer,
with revenues of CHF 1,653 million in 2000, down 8% on the previous year.
Market conditions for mergers and acquisitions, advisory work and primary
underwriting continued to be strong, driving Corporate Finance's excellent
performance. UBS Warburg's corporate client franchise continued to develop, with
strong performance in critical sectors in 2000, particularly Telecommunications
and Consumer Goods. Productivity per head also increased in comparison to prior
years. Overall, 2000 was a year of very strong growth in this area for UBS
Warburg, with revenues of CHF 2,701 million, 31% ahead of 1999.
The Corporate Finance business area within Corporate and Institutional Clients
provides both advisory services and financing services. Financing services
include both equity and fixed-income offerings undertaken in cooperation with
the Equities and Fixed income business areas. Accordingly, a portion of
operating income associated with these services is allocated to those areas.
Non-core revenues in 2000, which include income from the work-out of the Global
Equity Derivatives portfolio and the non-core loan portfolio (described below)
fell 42% compared to 1999, to CHF 281 million.
OPERATING EXPENSES
Corporate and Institutional Clients continues to carefully manage its cost base,
with the pre-goodwill cost/income ratio remaining well below 1999 levels at 70%.
Personnel expenses increased 35% from 1999, to CHF 9,284 million, reflecting
increased headcount and growth in performance-related compensation in line with
the excellent results. Personnel expenses include CHF 11 million of retention
payments made to former PaineWebber staff.
General and administrative expenses increased 14% compared to 1999, as a result
of increased expenditure on technology outsourcing, professional fees and the
incremental costs of the PaineWebber capital markets business.
Overall costs grew at a significantly slower rate than revenues, delivering
continued strong pre-tax profit growth.
HEADCOUNT
Corporate and Institutional Clients' headcount rose 20% during the year, to
15,262, mainly due to business growth in the Corporate Finance and Equities
areas, including the impact of the integration of 1,628 staff from the
PaineWebber capital markets businesses.
1999
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
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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 were
- 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 65 billion, or 61%, from approximately CHF
106 billion as of 31 December 1998 to CHF 41 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.
OPERATING INCOME
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 482
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
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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 793 million in the business unit's Long Term Capital
Management trading position.
Operating income from Corporate Finance increased CHF 389 million, or 23%, from
CHF 1,665 million in 1998 to CHF 2,054 million in 1999. Strong performance in
mergers and acquisitions in 1999, resulting in higher advisory fees, and
contributions from UBS's Equity and Debt Capital Management Groups were the
primary drivers of the increase.
Operating income from Treasury Products decreased CHF 546 million, or 23%, 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 businesses identified above increased CHF 578
million, from CHF (96) million in 1998 to CHF 482 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 74
million in positive revenues. The losses recognized in 1998 were partially
offset by CHF 498 million in revenues generated by Global Trade Finance. In
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%, from CHF 500 million in
1998 to CHF 330 million in 1999. This reflected a decrease in Expected 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. The section
entitled "UBS Switzerland - Private and Corporate Clients" includes 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.
OPERATING EXPENSES
Personnel, general and administrative expenses increased CHF 2,474 million, or
36%, 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%, to CHF 6,861 million in 1999, due primarily to performance-related
compensation tied directly to the strong business unit results for the year. In
addition, in 1998, CHF 1,007 million of accrued payments to personnel was
charged against the restructuring reserve relating to the 1998 merger of Union
Bank of Switzerland and Swiss Bank Corporation. The shortfall in profits in 1998
was aggravated by losses associated with Long Term Capital Management and the
Global Equity Derivatives portfolio. After adjusting 1998 for the amount charged
to the restructuring reserve, personnel expenses in 1999 increased 28% 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%, from CHF 692
million in 1998 to CHF 763 million in 1999, primarily reflecting accelerated
amortization of the goodwill on a Latin-American subsidiary.
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UBS Capital
BUSINESS UNIT REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- -------------------------------------------------------------------------------------------------
Income 368 315 585 17
Credit loss expense 0 0 0
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 368 315 585 17
- -------------------------------------------------------------------------------------------------
Personnel expenses 142 105 121 35
General and administrative expenses 49 46 35 7
Depreciation 2 2 0 0
Amortization of goodwill and other
intangible assets 2 5 1 (60)
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 195 158 157 23
- -------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 173 157 428 10
- -------------------------------------------------------------------------------------------------
KPI'S
- -------------------------------------------------------------------------------------------------
Value creation (CHF billion) 0.6 0.6 0.8
- -------------------------------------------------------------------------------------------------
% change
from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- ----------------------------------------------------------------------------------------------
Portfolio book value (CHF billion) 5.5 3.0 1.8 83
- ----------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ----------------------------------------------------------------------------------------------
Regulatory equity used (avg) 600 340 250 76
Headcount (full time equivalents) 129 116 122 11
- ----------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
2000
There were no significant financial events that affected this business unit in
1999 or 2000.
KEY PERFORMANCE INDICATORS
The book value of UBS Capital's private equity investments has grown from CHF
3.0 billion at the end of 1999 to CHF 5.5 billion at 31 December 2000. New
investments of CHF 2.1 billion were made during the full year, including new
shareholdings across a diverse range of sectors. In addition, CHF 0.8 billion of
investments made by PaineWebber were added to UBS Capital's private equity
portfolio in December 2000. The portfolio value was reduced by certain
write-downs in investments in second and fourth quarters 2000.
UBS Capital accounts for its private equity investments at cost less permanent
impairments, showing only realized gains or losses in the profit and loss
statement. The portfolio review and valuation at 31 December 2000 resulted in an
approximate current fair value of CHF 6.9 billion, compared to CHF 4.2 billion
at 31 December 1999. This equates to unrealized gains of approximately CHF 1.3
billion, compared to CHF 1.2 billion at year-end 1999. The value creation during
the year 2000,
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including realized gains since 1 January 2000, and the increase in the
portfolio's unrealized gains, is approximately CHF 0.6 billion.
RESULTS
In 2000, net profit was CHF 173 million, up CHF 16 million or 10% from CHF 157
million in 1999.
OPERATING INCOME
Operating income increased 17% to CHF 368 million in 2000, from CHF 315 million
in 1999. This reflects the realized gains from sales of investments in the year,
partially offset by write-downs of the value of several under-performing
companies in different sectors of the portfolio.
OPERATING EXPENSES
Personnel, general and administrative expenses were CHF 191 million in 2000, an
increase from the previous year of CHF 40 million, or 26%, driven mainly by
bonus expenses. Bonuses are accrued when an investment is successfully exited,
so personnel expenses move in line with divestments.
1999
OPERATING INCOME
Operating income decreased CHF 270 million, or 46%, 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.
OPERATING EXPENSES
Personnel, general and administrative expenses decreased slightly by CHF 5
million, or 3%, 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 the 1998 merger, one team from UBS Capital moved to
Corporate and Institutional Clients 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% from CHF 121 million in 1998 to CHF 105 million in
1999. General and administrative expenses increased CHF 11 million, or 31%, 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.
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US Private Clients
BUSINESS UNIT REPORTING
CHF million, except where indicated
FOR THE YEAR ENDED 31.12.00(1)
- -------------------------------------------------------------------------
Income 1,225
Credit loss expense 0
- -------------------------------------------------------------------------
TOTAL OPERATING INCOME 1,225
- -------------------------------------------------------------------------
Personnel expenses(2) 955
General and administrative expenses 258
Depreciation 30
Amortization of goodwill and other intangible assets 1
- -------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,244
- -------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX (19)
- -------------------------------------------------------------------------
KPI'S
Client assets (CHF billion)(3) 794
- -------------------------------------------------------------------------
Net new money (CHF billion)(4) 8.3
Gross AuM margin (bps) 86
- -------------------------------------------------------------------------
Cost/income ratio (%)(5) 102
Cost/income ratio before goodwill (%)(5, 6) 101
Cost/income ratio before goodwill and retention payments
(%)(5, 6) 92
- -------------------------------------------------------------------------
Recurring fees(7) 430
Financial advisors (full time equivalents) 8,871
- -------------------------------------------------------------------------
ADDITIONAL INFORMATION
AS OF 31.12.00
- -----------------------------------------------------------------------
Regulatory equity used (avg) 2,450
Headcount (full time equivalents) 21,490
- -----------------------------------------------------------------------
(1) The US Private Clients results cover the period from the date of
acquisition of PaineWebber, 3 November 2000.
(2) Includes CHF 117 million of the CHF 128 million retention payments in
respect of the PaineWebber acquisition.
(3) Corresponds to UBS's current definition of Assets under management. Client
assets at 3 November 2000 were CHF 890 billion.
(4) Excludes interest and dividend income.
(5) Operating expenses/operating income before credit loss expense.
(6) The amortization of goodwill and other intangible assets is excluded from
this calculation.
(7) Asset based and advisory revenues including fees from mutual funds, wrap
fee products, insurance products and institutional asset management
products.
The merger between UBS and PaineWebber was completed on 3 November 2000 and was
accounted for using purchase accounting. Accordingly, the results shown for US
Private Clients are for the period from that date until 31 December 2000.
Results for prior periods are not shown.
The business unit represents the former PaineWebber businesses, excluding the
PaineWebber capital markets business transferred to the Corporate and
Institutional Clients business unit. Although the US businesses of the former
UBS Warburg Private Clients business unit were integrated into
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PaineWebber's management structure soon after completion of the merger, their
results are still included in the International Private Clients unit for 2000.
2000
There were no significant financial events that affected this business unit in
2000.
KEY PERFORMANCE INDICATORS
At the end of the fourth quarter 2000, US Private Clients had CHF 794 billion of
client assets. This represents a fall of CHF 96 billion from the level at
completion of the merger on 3 November 2000, reflecting the decline in equity
markets, particularly in the US, and the effect of the fall of the US dollar
against the Swiss franc.
PaineWebber's asset gathering continues successfully, with net new money flows
averaging CHF 202.3 million (USD 119.0 million) per day in November and December
2000, comparing very favorably to the average rate for the third quarter of CHF
172.5 million (USD 103.3 million) per day, despite the effects of the holiday
season.
RESULTS
US Private Clients recorded a net loss for November and December 2000 of CHF 19
million. Adjusting for the effect of retention payments of CHF 117 million, this
represents a pre-tax operating profit of CHF 98 million for the two months.
PaineWebber's strong asset gathering performance during November and December
was in contrast to the seasonal slow down in transactional business, compounded
this year by the delay in the results of the US Presidential election, which had
a negative effect on client confidence and investment activity. As a result, net
profit per month was about 39% lower than the rate in PaineWebber's individual
client segment in third quarter 2000, after adjusting for the benefit of
PaineWebber's invested equity. (Within UBS's management accounts, the net
benefit of invested equity is reflected in Corporate Center.)
OPERATING INCOME
Total revenues for November and December were CHF 1,225 million, including
approximately CHF 430 million of recurring fee revenue. This represents an
overall decline of 2% from the run-rate recorded in PaineWebber's individual
client business in the third quarter, reflecting the effects of the seasonal
slow-down.
OPERATING EXPENSES
Total expenses for November and December were CHF 1,244 million. Personnel
expenses were CHF 955 million, including CHF 117 million of retention payments
for PaineWebber staff. Excluding these payments, overall expenses rose slightly
from prior levels, reflecting investments in the development of wrap fee
products and the new Corporate Employee Financial Services business.
HEADCOUNT
Total headcount at 31 December 2000 was 21,490, including 8,871 financial
advisors, up from 8,688 financial advisors at 30 September 2000.
147
149
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS WARBURG
- --------------------------------------------------------------------------------
International Private Clients
BUSINESS UNIT REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- --------------------------------------------------------------------------------------------------------
Income 286 197 200 45
Credit loss expense(2) (4) (3) (10) 33
- --------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 282 194 190 45
- --------------------------------------------------------------------------------------------------------
Personnel expenses 385 294 187 31
General and administrative expenses 188 187 107 1
Depreciation 30 25 14 20
Amortization of goodwill and other intangible
assets 7 15 15 (53)
- --------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 610 521 323 17
- --------------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX (328) (327) (133) 0
- --------------------------------------------------------------------------------------------------------
KPI'S
Assets under management (CHF billion) 33 36 27 (8)
Net new money (CHF billion)(3) 10.4 3.6
Gross AuM margin (bps) 75 67 12
- --------------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION % change from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- ----------------------------------------------------------------------------------------------------
Regulatory equity used (avg) 350 289 229 21
Headcount (full time equivalents) 1,154 1,386 722 (17)
- ----------------------------------------------------------------------------------------------------
(1 )The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) In management accounts, statistically derived adjusted expected loss rather
than net IAS credit loss (expense) / recovery is reported in the business
units (see Note 3a).
(3) Excludes interest and dividend income.
2000
There were no significant financial events that affected this business unit in
1999 or 2000.
KEY PERFORMANCE INDICATORS
Assets under management decreased from CHF 36 billion at the end of 1999 to CHF
33 billion at 31 December 2000, reflecting poor performance in world equity
markets during the year, particularly in the technology sector.
Net new money of CHF 10.4 billion and the increase in the gross margin from 67
bps in 1999 to 75 bps in 2000 reflect the successful efforts to build
International Private Clients client franchise.
RESULTS
OPERATING INCOME
Operating income increased CHF 88 million, or 45%, from CHF 194 million in 1999
to CHF 282 million in 2000. Revenues have increased as average assets under
management have grown, a wider range of products and services has been offered
to clients and new staff and offices have built their client franchises.
International Private Clients' businesses are generally in a relatively early
stage of development and its client relationships will continue to build towards
their full revenue potential.
148
150
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS WARBURG
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Operating expenses increased 17%, or CHF 89 million, from CHF 521 million in
1999 to CHF 610 million in 2000, mainly due to the expansion of offices early in
2000. This total included restructuring costs of CHF 93 million related to
integration of the International Private Clients businesses into UBS Warburg in
February 2000.
Excluding this restructuring charge, expenses fell 1% compared to 1999.
HEADCOUNT
Headcount fell from 1,386 to 1,154, as a result of the restructuring undertaken
in 2000, matching staffing levels more exactly to market opportunities.
1999
OPERATING INCOME
Results for the year ended 31 December 1998 were driven by a business that
consisted 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
Operating expenses increased 61%, or CHF 198 million, to CHF 521 million in 1999
from CHF 323 million in 1998, 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.
149
151
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS WARBURG
- --------------------------------------------------------------------------------
e-services
BUSINESS UNIT REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.99
- -------------------------------------------------------------------------------------------------
Income (1) 0
Credit loss expense 0 0
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME (1) 0
- -------------------------------------------------------------------------------------------------
Personnel expenses 150 18 733
General and administrative expenses 134(1) 18 644
Depreciation 35(1) 3
Amortization of goodwill and other intangible assets 1 0
- -------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 320 39 721
- -------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX (321) (39) (723)
- -------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION % change from
AS OF 31.12.00 31.12.99 31.12.99
- -------------------------------------------------------------------------------------------------
Headcount (full time equivalents) 410 70 486
- -------------------------------------------------------------------------------------------------
(1) The year ended 31 December 2000 General and administrative expenses and
Depreciation were adjusted for Significant Financial Events in respect of
the PaineWebber integration by CHF 80 million and CHF 72 million,
respectively.
2000
UBS Group established the e-services project in the third quarter of 1999.
Following the merger with PaineWebber, the e-services strategy was re-assessed
and focus shifted to more upscale clients than those originally targeted.
The multi-currency and multi-entity core banking systems developed by the
e-services initiative will be integrated into the core of UBS's new wealth
management strategy in Europe.
Those parts of the infrastructure that were relevant to the mass affluent
market, such as telephone call-centers, have been closed and the investment in
them has been written off. This has resulted in a charge of CHF 80 million to
General and administrative expenses. In addition, capitalized software costs
relating to parts of the systems which will not now be used have been written
off, resulting in a CHF 72 million charge to depreciation. These two amounts
form part of the PaineWebber integration costs, treated as a significant
financial event, and as a result these costs do not appear in the adjusted
business unit results above.
OPERATING EXPENSES
Operating expenses were CHF 320 million in 2000, mainly related to
infrastructure-related investments in core technologies. Personnel expenses were
CHF 150 million in 2000 and CHF 18 million in 1999. General and administrative
expenses were CHF 134 million in 2000 and CHF 18 million in 1999.
These increases were primarily the result of the establishment of operations
infrastructure, the installation and testing of systems platforms, and the
testing of marketing concepts.
As explained above, the restructuring costs associated with the end of the
e-services initiative were treated as a significant financial event and are
therefore not included in these figures.
150
152
UBS
- --------------------------------------------------------------------------------
Corporate Center
BUSINESS GROUP REPORTING
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(2) 31.12.98(2) 31.12.99
- --------------------------------------------------------------------------------------------------
Income 358 2,010 191 (82)
Credit loss recovery(3) 1,161 448 745 159
- --------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 1,519 2,458 936 (38)
- --------------------------------------------------------------------------------------------------
Personnel expenses 522 92 212 467
General and administrative expenses 431 839 1,656 (49)
Depreciation 320 366 128 (13)
Amortization of goodwill and other
intangible assets 44 50 87 (12)
- --------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,317 1,347 2,083 (2)
- --------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 202 1,111 (1,147) (82)
- --------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION % change from
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- --------------------------------------------------------------------------------------------
Regulatory equity used (avg) 8,450 7,850 6,350 8
Headcount (full time equivalents) 986 862 921 14
- --------------------------------------------------------------------------------------------
BUSINESS GROUP REPORTING ADJUSTED FOR SIGNIFICANT FINANCIAL EVENTS(1)
CHF million, except where indicated % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(2) 31.12.98(2) 31.12.99
- --------------------------------------------------------------------------------------------------
Income 358 372 191 (4)
Credit loss recovery(3) 1,161 448 745 159
- --------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 1,519 820 936 85
- --------------------------------------------------------------------------------------------------
Personnel expenses 490 548 212 (11)
General and administrative expenses 281 385 1,656 (27)
Depreciation 320 366 128 (13)
Amortization of goodwill and other
intangible assets 44 50 87 (12)
- --------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,135 1,349 2,083 (16)
- --------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 384 (529) (1,147)
- --------------------------------------------------------------------------------------------------
(1) Figures have been adjusted for the significant financial events. Year ended
31 December 1999 income has been adjusted for the CHF 38 million income
from the Long Term Capital Management (LTCM) fund, CHF 1,490 million for
the sale of our 25% stake in Swiss Life / Rentenanstalt and CHF 110 million
for the sale of Julius Baer registered shares. Year ended 31 December 2000
Personnel expenses were adjusted for the PaineWebber integration costs of
CHF 32 million. Year ended 31 December 2000 General and administrative
expenses have been adjusted for the net additional CHF 150 million
provision relating to the US Global Settlement. Year ended 31 December 1999
Personnel expenses have been adjusted for CHF 456 million for the Pension
Fund Accounting Credit. Year ended 31 December 1999 General and
administrative expenses have been adjusted for CHF 300 million for the
UBS/SBC Restructuring Provision and CHF 154 million for the increase in the
provision for the US Global Settlement.
(2) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(3) In management accounts, statistically derived adjusted expected loss rather
than net IAS credit loss (expense) / recovery is reported in the business
units (see Note 3a).
151
153
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--CORPORATE CENTER
- --------------------------------------------------------------------------------
2000
Significant financial events booked in Corporate Center in 1999 and 2000 were:
- Personnel expenses of CHF 32 million relating to the integration of
PaineWebber into UBS in 2000.
- Operating income of CHF 1,490 million from the sale of UBS's 25% stake
in Swiss Life/ Rentenanstalt, CHF 110 million from the sale of Julius
Baer registered shares, and CHF 38 million from UBS's residual holding
in Long Term Capital Management L.P., all in 1999.
- A credit to Personnel expenses in 1999 of CHF 456 million in connection
with excess pension fund employer pre-payments.
- Costs of CHF 154 million in 1999 and CHF 150 million in 2000 in General
and administrative expenses in connection with the US Global Settlement
of World War II related claims.
- Costs of CHF 300 million in General and administrative expenses in
respect of an additional restructuring charge relating to the 1998
merger between UBS and SBC.
RESULTS
OPERATING INCOME
Adjusted for significant financial events, operating income before credit loss
expense decreased CHF 14 million, or 4%, from CHF 372 million in 1999 to CHF 358
million in 2000. 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 activities.
Credit loss expense in Corporate Center reconciles the difference between
management accounting and financial accounting, that is between the adjusted
statistically calculated expected losses charged to the business units and the
actual credit loss expense recognized in the Group financial accounts. The Swiss
economy has been strong in 2000, leading to credit loss expenses below the
statistically calculated expected level, and to a net write back of credit loss
provisions of CHF 695 million, resulting in a credit of CHF 130 million at the
Group level. Corporate Center's credit loss expense of CHF 1,161 million
reflects the balancing item between this amount and the CHF 1,031 million
Expected Loss charged to the business units.
OPERATING EXPENSES
Operating expenses decreased from CHF 1,349 million to CHF 1,135 million.
HEADCOUNT
Headcount in Corporate Center increased 124 during the year, reflecting the
addition of staff from PaineWebber, and expansion in our Corporate Language
Services subsidiary.
1999
OPERATING INCOME
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 UBS's 25% interest in 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.
152
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UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--CORPORATE CENTER
- --------------------------------------------------------------------------------
- Approximately CHF 380 million due to the consolidation of Klinik
Hirslanden AG for the first time in 1999.
- The negative impact on 1998 operating income due to the loss of CHF 367
million from Long Term Capital Management.
In addition, revenues attributable to Corporate Center arise from funding,
capital and balance sheet management, and the management of foreign currency
earnings activities undertaken by Group Treasury.
OPERATING EXPENSES
Personnel, general and administrative expenses decreased CHF 937 million, or
50%, from CHF 1,868 million in 1998 to CHF 931 million in 1999.
Personnel costs decreased 57% 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 consolidation of
Klinik Hirslanden AG for the first time in 1999.
General and administrative expenses decreased CHF 817 million, or 49%, to CHF
839 million in 1999 from CHF 1,656 million in 1998, primarily as a result of a
charge of CHF 842 million for the US global settlement of World War II-related
claims 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
World War II-related claims in the United States.
- An additional pre-tax restructuring charge of CHF 300 million in respect
of the 1998 merger.
- Expenses of Klinik Hirslanden AG as a result of the consolidation of
this entity for the first time 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%, 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.
153
155
UBS
- --------------------------------------------------------------------------------
SELECTED STATISTICAL INFORMATION
The tables below set forth selected statistical information extracted from the
financial statements regarding the Group's banking operations. Unless otherwise
indicated, average balances for the year ended 31 December 2000 and 1999 are
calculated from monthly data, and averages for the year ended 31 December 1998
are calculated from quarterly data. Certain prior year balances and figures have
been reclassified to conform to current year presentation. 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 year ended 31 December
1996, where applicable, are presented for Union Bank of Switzerland and Swiss
Bank Corporation individually. Combined data is not presented for this period
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.
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 2000, 1999 and 1998.
31.12.00 31.12.99
------------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
CHF MILLION, EXCEPT WHERE INDICATED BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%)
- ----------------------------------------------------------------------------------------------------
ASSETS
Money market paper
Domestic.... 1,175 46 3.9 2,798 27 1.0
Foreign..... 63,752 2,924 4.6 48,179 1,144 2.4
Due from banks
Domestic.... 13,366 1,273 9.5 19,451 1,757 9.0
Foreign..... 16,994 2,280 13.4 28,999 2,739 9.4
Securities borrowed and reverse
repurchase agreements
Domestic.... 8,383 558 6.7 3,265 117 3.6
Foreign..... 348,395 18,530 5.3 223,962 11,305 5.0
Trading portfolio
Domestic.... 20,407 243 1.2 36,269 72 0.2
Foreign..... 208,076 8,829 4.2 124,564 4,439 3.6
Loans
Domestic.... 181,646 10,985 6.0 200,111 8,750 4.4
Foreign..... 67,528 3,813 5.6 58,634 3,485 5.9
Financial Investments
Domestic.... 2,658 60 2.3 2,066 74 3.6
Foreign..... 7,306 142 1.9 3,737 86 2.3
Net interest on swaps... 2,062 1,609
--------- ------ ------- ------
TOTAL INTEREST-EARNING ASSETS... 939,686 51,745 5.5 752,035 35,604 4.7
------ ------
31.12.98
-------------------------------
AVERAGE AVERAGE
CHF MILLION, EXCEPT WHERE INDICATED BALANCE INTEREST RATE (%)
- ----------------------------------- -------------------------------
ASSETS
Money market paper
Domestic.... 4,002 70 1.7
Foreign..... 20,679 741 3.6
Due from banks
Domestic.... 22,703 1,600 7.0
Foreign..... 43,705 4,724 10.8
Securities borrowed and reverse
repurchase agreements
Domestic.... 7,751 89 1.1
Foreign..... 275,549 10,291 3.7
Trading portfolio
Domestic.... 78,211 78 0.1
Foreign..... 119,629 3,823 3.2
Loans
Domestic.... 207,937 8,839 4.3
Foreign..... 72,445 5,440 7.5
Financial Investments
Domestic.... 2,363 104 4.4
Foreign..... 7,070 268 3.8
Net interest on swaps... 1,375
--------- ------
TOTAL INTEREST-EARNING ASSETS... 862,044 37,442 4.3
------
154
156
UBS
- --------------------------------------------------------------------------------
31.12.00 31.12.99
------------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
CHF MILLION, EXCEPT WHERE INDICATED BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%)
- ----------------------------------------------------------------------------------------------------
Non-interest-earning assets
Positive replacement values... 135,762 146,036
Fixed assets... 9,660 8,824
Other....... 32,925 34,957
--------- -------
TOTAL AVERAGE ASSETS... 1,118,033 941,852
========= =======
31.12.98
-------------------------------
AVERAGE AVERAGE
CHF MILLION, EXCEPT WHERE INDICATED BALANCE INTEREST RATE (%)
- ----------------------------------- -------------------------------
Non-interest-earning assets
Positive replacement values... 164,708
Fixed assets... 11,316
Other....... 35,050
---------
TOTAL AVERAGE ASSETS... 1,073,118
=========
31.12.00 31.12.99 31.12.98
------------------------------- ----------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE
CHF MILLION, EXCEPT WHERE AVERAGE RATE AVERAGE RATE AVERAGE RATE
INDICATED BALANCE INTEREST (%) BALANCE INTEREST (%) BALANCE INTEREST (%)
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Money market paper issued
Domestic.................... 79 0 0 146 1 0.7 255 2 0.8
Foreign..................... 78,075 4,338 5.6 57,956 2,246 3.9 51,435 2,557 5.0
Due to banks
Domestic.................... 31,133 2,397 7.7 37,581 3,254 8.7 69,140 2,422 3.5
Foreign..................... 57,258 3,758 6.6 41,583 2,261 5.4 51,209 5,783 11.3
Securities lent and repurchase
agreements
Domestic.................... 12,700 478 3.8 12,830 106 0.8 12,261 71 0.6
Foreign..................... 284,220 14,437 5.1 144,837 8,340 5.8 186,819 7,472 4.0
Trading portfolio
Domestic.................... 1,078 4 0.4
Foreign..................... 66,597 5,305 8.0 48,560 2,070 4.3 65,677 1,741 2.7
Due to customers
Domestic.................... 143,809 2,202 1.5 155,887 1,931 1.2 161,688 2,613 1.6
Foreign..................... 143,432 7,303 5.1 122,411 6,399 5.2 132,338 7,277 5.5
Long-term debt
Domestic.................... 15,490 778 5.0 16,241 951 5.9 21,267 1,138 5.4
Foreign..................... 38,020 2,615 6.9 37,963 2,136 5.6 31,024 1,348 4.3
--------- ------ ------- ------ --------- ------
TOTAL INTEREST-BEARING
LIABILITIES................. 871,891 43,615 5.0 675,995 29,695 4.4 783,113 32,424 4.1
------ ------ ------
Non-interest-bearing
liabilities
Negative replacement
values.................... 157,668 171,800 187,934
Other....................... 53,049 60,946 69,184
--------- ------- ---------
Total liabilities............. 1,082,608 908,741 1,040,231
Shareholders' equity.......... 35,425 33,111 32,887
--------- ------- ---------
Total average liabilities and
shareholders' equity........ 1,118,033 941,852 1,073,118
========= ======= =========
NET INTEREST INCOME........... 8,130 5,909 5,018
====== ====== ======
NET YIELD ON INTEREST-EARNING
ASSETS...................... 0.9 0.8 0.6
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 are also
affected by changes in the currency mix included in
155
157
UBS
- --------------------------------------------------------------------------------
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, tax exempt income is considered to be insignificant
and therefore the impact from such income is negligible.
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 2000
compared to the year ended 31 December 1999, and for the year ended 31 December
1999 compared to the year ended 31 December 1998. 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.
2000 COMPARED TO 1999 1999 COMPARED TO 1998
------------------------------ ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
-------------------- --------------------
AVERAGE AVERAGE NET AVERAGE AVERAGE NET
CHF MILLION VOLUME RATE CHANGE VOLUME RATE CHANGE
- ---------------------------------------------------------------------------------------------------
INTEREST INCOME FROM INTEREST-
EARNING ASSETS:
Money market paper
Domestic....................... (16) 35 19 (21) (22) (43)
Foreign........................ 370 1,410 1,780 985 (582) 403
Due from banks
Domestic....................... (550) 66 (484) (229) 386 157
Foreign........................ (1,134) 675 (459) (1,590) (395) (1,985)
Securities borrowed and reverse
repurchase agreements
Domestic....................... 183 258 441 (52) 80 28
Foreign........................ 6,281 944 7,225 (1,926) 2,941 1,015
Trading portfolio
Domestic....................... (31) 202 171 (42) 36 (6)
Foreign........................ 2,976 1,414 4,390 158 458 616
Loans
Domestic....................... (807) 3,042 2,235 (333) 244 (89)
Foreign........................ 529 (201) 328 (1,037) (918) (1,955)
Financial Investments
Domestic....................... 21 (35) (14) (13) (17) (30)
Foreign........................ 82 (26) 56 (126) (57) (183)
------ ------ ------ ------ ------ ------
Interest Income
Domestic....................... (1,200) 3,568 2,368 (690) 707 17
Foreign........................ 9,104 4,216 13,320 (3,536) 1,447 (2,089)
------ ------ ------ ------ ------ ------
TOTAL INTEREST INCOME FROM
INTEREST-EARNING ASSETS:....... 7,904 7,784 15,688 (4,226) 2,154 (2,072)
====== ====== ====== ======
Net interest on swaps............ 453 234
------ ------
TOTAL INTEREST INCOME............ 16,141 (1,838)
====== ======
156
158
UBS
- --------------------------------------------------------------------------------
2000 COMPARED TO 1999 1999 COMPARED TO 1998
------------------------------ ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
-------------------- --------------------
AVERAGE AVERAGE NET AVERAGE AVERAGE NET
CHF MILLION VOLUME RATE CHANGE VOLUME RATE CHANGE
- ---------------------------------------------------------------------------------------------------
INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES:
Money market paper issued
Domestic....................... (1) 0 (1) (1) (0) (1)
Foreign........................ 780 1,312 2,092 324 (635) (311)
Due to banks
Domestic....................... (558) (299) (857) (1,106) 1,938 832
Foreign........................ 852 645 1,497 (1,087) (2,435) (3,522)
Securities lent and repurchase
agreements
Domestic....................... (1) 373 372 3 32 35
Foreign........................ 8,026 (1,929) 6,097 (1,679) 2,547 868
Trading portfolio
Domestic....................... 4 4
Foreign........................ 769 2,466 3,235 (454) 783 329
Due to customers
Domestic....................... (150) 421 271 (94) (588) (682)
Foreign........................ 1,099 (195) 904 (546) (332) (878)
Long-term debt
Domestic....................... (44) (129) (173) (269) 82 (187)
Foreign........................ 3 476 479 302 486 788
------ ------ ------ ------ ------ ------
Interest expense
Domestic....................... (750) 366 (384) (1,467) 1,464 (3)
Foreign........................ 11,529 2,775 14,304 (3,140) 414 (2,726)
------ ------ ------ ------ ------ ------
TOTAL INTEREST EXPENSE........... 10,779 3,141 13,920 (4,607) 1,878 (2,729)
====== ====== ====== ====== ====== ======
157
159
UBS
- --------------------------------------------------------------------------------
DEPOSITS
The following table analyzes average deposits and the average rates on each
deposit category listed below at and for the years ended 31 December 2000, 1999
and 1998. The geographic allocation is based on the location of the office or
branch where the deposit is made.
31.12.00 31.12.99 31.12.98
----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
CHF MILLION, EXCEPT WHERE INDICATED DEPOSIT RATE (%) DEPOSIT RATE (%) DEPOSIT RATE (%)
- ------------------------------------------------------------------------------------------------
BANKS
Domestic offices:
Demand deposits 4,649 1.9 12,736 0.9 11,890 0.6
Time deposits 8,717 8.7 6,715 12.6 10,813 4.1
- ------------------------------------------------------------------------------------------------
Total domestic offices 13,366 6.3 19,451 5.0 22,703 2.3
Foreign offices:
Interest-bearing deposits(1) 16,994 6.6 28,999 5.4 43,705 11.3
- ------------------------------------------------------------------------------------------------
TOTAL DUE TO BANKS 30,360 6.5 48,450 5.2 66,408 8.2
- ------------------------------------------------------------------------------------------------
CUSTOMER ACCOUNTS
Domestic offices:
Demand deposits 44,403 1.3 49,261 0.6 44,569 0.7
Savings deposits 72,207 1.1 80,543 1.1 82,561 1.6
Time deposits 27,199 3.0 26,083 2.8 34,558 2.9
- ------------------------------------------------------------------------------------------------
Total domestic offices 143,809 1.5 155,887 1.2 161,688 1.6
Foreign offices:
Demand deposits 143,432 5.1 122,411 5.2 132,338 5.5
- ------------------------------------------------------------------------------------------------
TOTAL DUE TO CUSTOMERS 287,241 3.3 278,298 3.0 294,026 3.4
- ------------------------------------------------------------------------------------------------
(1) Mainly time deposits.
As of 31 December 2000, the maturity of time deposits exceeding CHF 150,000, or
an equivalent amount in other currencies, was as follows:
31.12.00
-------------------
CHF MILLION DOMESTIC FOREIGN
- ---------------------------------------------------------------------------------
Within 3 months 33,439 74,277
3 to 12 months 5,371 4,703
1 to 5 years 1,018 6,128
Over 5 years 231 497
- ---------------------------------------------------------------------------------
TOTAL TIME DEPOSITS 40,059 85,605
- ---------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
The following table presents period-end, average and maximum month-end
outstanding amounts for short-term borrowings, along with the average rate and
period-end rates at and for the years ended 31 December 2000, 1999 and 1998.
158
160
UBS
- --------------------------------------------------------------------------------
MONEY MARKET PAPER ISSUED DUE TO BANKS REPURCHASE AGREEMENTS
---------------------------- ---------------------------- ----------------------------
CHF MILLION, EXCEPT WHERE INDICATED 31.12.00 31.12.99 31.12.98 31.12.00 31.12.99 31.12.98 31.12.00 31.12.99 31.12.98
- -----------------------------------------------------------------------------------------------------------------------------
Period-end balance 74,780 64,655 51,527 51,245 40,580 10,361 330,857 217,736 137,617
Average balance 78,154 58,102 51,690 58,031 30,714 53,941 278,601 149,071 177,298
Maximum month-end balance 89,821 76,368 53,710 73,355 64,562 89,072 342,427 217,736 202,062
Average interest rate during
the period (%) 5.6 3.9 5.0 7.0 9.7 5.1 4.8 4.8 3.6
Average interest rate at
period-end (%) 6.0 4.6 4.6 4.1 4.8 4.4 4.8 3.9 4.9
LOANS
Loans are widely dispersed over customer categories both within and outside of
Switzerland. With the exceptions of private households (foreign and domestic)
and banks and financial institutions outside Switzerland, there is no material
concentration of loans. For further discussion of the loan portfolio, see
"Risk--Risk Analysis--Credit Risk" below. The following table illustrates the
diversification of the loan portfolio among customer categories at 31 December
2000, 1999, 1998, 1997 and 1996. The industry categories presented are
consistent with the classification of loans for reporting to the Swiss Federal
Banking Commission and Swiss National Bank.
159
161
UBS
- --------------------------------------------------------------------------------
31.12.96
----------------
CHF MILLION 31.12.00 31.12.99 31.12.98 31.12.97 UBS SBC
- --------------------------------------------------------------------------------------------------
DOMESTIC:
Banks 2,896 5,802 4,543 17,751 15,039 2,532
Construction 4,870 6,577 7,897 9,627 6,022 4,556
Financial institutions 5,725 9,387 10,240 11,371 14,465 6,752
Hotels and restaurants 3,526 4,259 4,129 4,668 4,815 2,200
Manufacturing(1) 9,577 11,377 13,505 16,440 9,650 9,019
Private households 91,667 93,846 97,664 109,044 55,088 59,098
Public authorities 5,658 5,277 5,858 6,354 3,271 4,972
Real estate and rentals 16,673 19,835 21,231 22,915
Retail and wholesale 9,635 10,904 8,912 10,512 7,220 6,602
Services(2) 11,767 14,862 11,582 13,083 7,841 6,383
Other(3) 2,651 1,818 1,662 1,862 1,156 694
- --------------------------------------------------------------------------------------------------
Total domestic 164,645 183,944 187,223 223,627 124,567 102,808
- --------------------------------------------------------------------------------------------------
FOREIGN:
Banks 27,168 24,983 65,000 49,559 25,048 70,758
Chemicals 1,423
Construction 773
Electricity, gas and water supply 1,584
Financial institutions 20,348
Manufacturing 4,596
Mining 2,070
Private households 29,470
Public authorities 11,754
Real estate and rentals 5,077
Retail and wholesale 1,862
Services 1,585
Transport, storage and communication 993
Other 11,168 69,087 78,741 80,054 33,412 34,758
- --------------------------------------------------------------------------------------------------
Total foreign 119,871 94,070 143,741 129,613 58,460 105,516
- --------------------------------------------------------------------------------------------------
TOTAL GROSS 284,516 278,014 330,964 353,240 183,027 208,324
- --------------------------------------------------------------------------------------------------
(1) Includes chemicals.
(2) Includes transportation, communication, health and social work, education
and other social and personal service activities.
(3) Includes mining and electricity, gas and water supply.
160
162
UBS
- --------------------------------------------------------------------------------
The following table analyzes the Group's mortgage portfolio by geographic origin
of customer and type of mortgage at 31 December 2000, 1999, 1998, 1997 and 1996.
Mortgages are included in the aforementioned industry categories.
31.12.96
--------------
CHF MILLION 31.12.00 31.12.99 31.12.98 31.12.97 UBS SBC
- ---------------------------------------------------------------------------------------------------
Mortgages:
Domestic 116,348 126,677 138,306 142,919 68,534 70,966
Foreign 4,206 1,310 2,479 3,883 1,657 2,266
- ---------------------------------------------------------------------------------------------------
TOTAL GROSS MORTGAGES 120,554 127,987 140,785 146,802 70,191 73,232
- ---------------------------------------------------------------------------------------------------
Mortgages:
Residential 96,181 91,408 106,093 105,926 48,508 49,794
Commercial 24,373 36,579 34,692 40,876 21,683 23,438
- ---------------------------------------------------------------------------------------------------
TOTAL GROSS MORTGAGES 120,554 127,987 140,785 146,802 70,191 73,232
- ---------------------------------------------------------------------------------------------------
LOAN MATURITIES
The following table discloses loans by maturities at 31 December 2000. The
determination of maturities is based on contract terms. Information on interest
rate sensitivities can be found in Note 32 to the Financial Statements.
CHF MILLION WITHIN 1 YEAR 1 TO 5 YEARS OVER 5 YEARS TOTAL
- ---------------------------------------------------------------------------------------------------
Domestic:
Banks 2,073 794 29 2,896
Mortgages 68,619 43,664 4,065 116,348
Other loans 33,444 9,461 2,496 45,401
- ---------------------------------------------------------------------------------------------------
TOTAL DOMESTIC 104,136 53,919 6,590 164,645
- ---------------------------------------------------------------------------------------------------
Foreign:
Banks 26,616 353 199 27,168
Mortgages 3,107 869 230 4,206
Other loans 82,827 4,313 1,357 88,497
- ---------------------------------------------------------------------------------------------------
TOTAL FOREIGN 112,550 5,535 1,786 119,871
- ---------------------------------------------------------------------------------------------------
TOTAL GROSS LOANS 216,686 59,454 8,376 284,516
- ---------------------------------------------------------------------------------------------------
IMPAIRED, NON-PERFORMING AND RESTRUCTURED LOANS
The Group classifies a loan as impaired when it is determined that there is a
high probability that it 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, interest or commission are in arrears for 90 days or more. After
the 90-day period, interest income is no longer recognized on the loan and a
charge is taken for the unpaid and accrued interest or commission receivable.
Unrecognized interest related to non-performing loans amounted to CHF 182
million, CHF 409 million, CHF 423 million and CHF 450 million for the years
ended 31 December 2000, 1999, 1998 and 1997, respectively.
161
163
UBS
- --------------------------------------------------------------------------------
The table below provides an analysis of the Group's non-performing and
restructured loans. For further discussion of impaired and non-performing loans,
see "Risk--Risk Analysis--Credit Risk" below.
31.12.96
---------------
CHF MILLION 31.12.00 31.12.99 31.12.98 31.12.97 UBS SBC
- -----------------------------------------------------------------------------------------------------
Non-performing loans:
Domestic 7,588 11,435 14,023 15,238 7,171 9,587
Foreign 2,864 1,638 2,091 1,426 414 1,446
- -----------------------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS 10,452 13,073 16,114 16,664 7,585 11,033
- -----------------------------------------------------------------------------------------------------
FOREIGN RESTRUCTURED LOANS()1 179 287 449 638 473 289
- -----------------------------------------------------------------------------------------------------
(1) Amounts presented for 2000, 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 foreign restructured loans was
not material to the results of operations during these periods.
In addition to the data above analyzing non-performing loans, the Group had CHF
8,042 million, CHF 9,383 million and CHF 10,333 million in "other impaired
loans" for the years ended 31 December 2000, 1999 and 1998, respectively. These
are loans that are current, or less than 90 days in arrears, with respect to
payment of principal or interest; however, the Group's credit officers have
expressed doubts as to the ability of the borrowers to repay the loans. As of 31
December 2000 specific allowances of CHF 2,835 million have been established
against these loans, which 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 and control 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 are supervised by the Swiss Federal Banking Commission.
The following tables list those countries for which the cross-border
outstandings exceeded 0.75% of total assets at 31 December 2000, 1999 and 1998.
At 31 December 2000, there were no outstandings that exceeded 0.75% of total
assets in any country currently facing liquidity problems that the Group expects
would materially impact the country's ability to service its obligations.
For more information on cross-border outstandings, see "Risk--Risk
Analysis--Credit Risk" below.
162
164
UBS
- --------------------------------------------------------------------------------
31 DECEMBER 2000
------------------------------------------------------------------------
BANKING PRODUCTS
CHF MILLION, ------------------- TRADED TRADEABLE % OF TOTAL
EXCEPT WHERE INDICATED BANKS NON-BANKS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
- ----------------------------------------------------------------------------------------------------
United States 1,826 958 21,796 64,077 88,657 8.2
Japan 123 895 6,378 58,779 66,175 6.1
United Kingdom 1,795 1,224 9,037 22,440 34,496 3.2
Germany 2,686 3,720 13,198 5,085 24,689 2.3
Italy 1,293 931 3,629 9,700 15,553 1.4
France 1,085 1,900 3,956 5,987 12,928 1.2
Netherlands 910 1,480 6,092 3,803 12,285 1.1
Australia 27 370 3,113 7,508 11,018 1.0
31 DECEMBER 1999
------------------------------------------------------------------------
BANKING PRODUCTS
CHF MILLION, ------------------- TRADED TRADEABLE % OF TOTAL
EXCEPT WHERE INDICATED BANKS NON-BANKS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
- ----------------------------------------------------------------------------------------------------
United States 3,202 2,508 41,970 48,012 95,692 10.7
Japan 1,117 965 7,153 69,194 78,429 8.8
United Kingdom 3,417 3,193 11,273 58,300 76,183 8.5
Germany 4,455 3,174 41,422 8,181 57,232 6.4
Italy 2,462 762 6,803 8,708 18,735 2.1
Netherlands 1,932 1,149 6,648 4,993 14,722 1.6
France 1,200 1,395 7,324 4,379 14,298 1.6
Australia 2,688 409 6,342 3,735 13,174 1.5
Canada 866 492 5,233 807 7,398 0.8
31 DECEMBER 1998
------------------------------------------------------------------------
BANKING PRODUCTS
CHF MILLION, ------------------- TRADED TRADEABLE % OF TOTAL
EXCEPT WHERE INDICATED BANKS NON-BANKS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
- ----------------------------------------------------------------------------------------------------
United States 13,882 2,292 27,922 65,543 109,639 12.7
United Kingdom 4,006 2,583 10,912 32,348 49,849 5.8
Japan 1,633 768 7,879 38,133 48,413 5.6
Germany 7,850 2,500 20,666 15,903 46,919 5.5
France 2,490 1,420 10,037 8,521 22,468 2.6
Italy 2,174 1,201 8,236 9,394 21,005 2.4
Australia 6,749 543 3,097 4,760 15,149 1.8
Netherlands 1,221 1,086 6,134 6,363 14,804 1.7
Sweden 449 812 3,710 8,091 13,062 1.5
Canada 755 549 5,162 3,479 9,945 1.2
Austria 769 82 1,513 5,436 7,800 0.9
Spain 913 350 2,495 3,701 7,459 0.9
Belgium 1,248 162 2,393 3,599 7,402 0.9
Luxembourg 1,212 2,130 1,723 2,195 7,260 0.9
- ------------
(1) Traded products consist of derivative instruments and repurchase
agreements. In 2000 unsecured OTC derivatives exposure is reported based on
the Potential Credit Exposure measurement methodology and is therefore not
directly comparable to the exposure in the prior years, which were measured
based on Gross Replacement Values plus Add-On.
(2) Tradeable assets consist of equity and fixed income financial instruments
held for trading purposes, which are marked to market on a daily basis.
163
165
UBS
- --------------------------------------------------------------------------------
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.
As a result of the Swiss bankruptcy laws, banks will 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.
31.12.96
---------------
CHF MILLION 31.12.00 31.12.99 31.12.98 31.12.97 UBS SBC
- --------------------------------------------------------------------------------------------------------
Balance at beginning of year 13,398 14,978 16,213 18,135 6,413 6,700
-------- -------- -------- -------- ------ ------
WRITE-OFFS:
Domestic:
Banks (4) (2) (5)
Construction (261) (296) (228) (408) (103) (140)
Financial institutions (178) (92) (66) (226) (32) (284)
Hotels and restaurants (193) (137) (98) (138) (28) (37)
Manufacturing(1) (264) (242) (214) (514) (179) (111)
Private households (640) (598) (534) (1,214) (306) (389)
Public authorities ( 2) (19) (3)
Real estate and rentals (729) (823) (610) (871) (561) (263)
Retail and wholesale (160) (210) (178) (227) (108) (46)
Services(2) (227) (315) (116) (229) (220) (54)
Other(3) (30) (41) (15) (29) (85) (35)
-------- -------- -------- -------- ------ ------
TOTAL DOMESTIC WRITE-OFFS (2,682) (2,758) (2,063) (3,880) (1,622) (1,362)
-------- -------- -------- -------- ------ ------
Foreign(4):
Banks (15)
Chemicals
Construction (13)
Electricity, gas and water supply (3)
Financial institutions (33)
Manufacturing (11)
Mining
Private households
Public authorities (4)
Real estate and rentals
Retail and wholesale (160)
Services (8)
Transport, storage and communication (11)
Other (55)
--------
TOTAL FOREIGN WRITE-OFFS (313) (517) (261) (240) (49) (350)
-------- -------- -------- -------- ------ ------
TOTAL WRITE-OFFS (2,995) (3,275) (2,324) (4,120) (1,671) (1,712)
-------- -------- -------- -------- ------ ------
164
166
UBS
- --------------------------------------------------------------------------------
31.12.96
---------------
CHF MILLION 31.12.00 31.12.99 31.12.98 31.12.97 UBS SBC
- --------------------------------------------------------------------------------------------------------
RECOVERIES:
Domestic 124 54 59 406 438 71
Foreign 39 11 36 25 20
-------- -------- -------- -------- ------ ------
TOTAL RECOVERIES 163 65 59 442 463 91
-------- -------- -------- -------- ------ ------
NET WRITE-OFFS (2,832) (3,210) (2,265) (3,678) (1,208) (1,621)
-------- -------- -------- -------- ------ ------
Increase (decrease) in credit loss
allowances (130) 956 951 1,432 1,272 1,018
Special provisions(5) 2,289 2,480
Other adjustments(6) 145 674 79 324 140 652
-------- -------- -------- -------- ------ ------
BALANCE AT END OF YEAR 10,581 13,398 14,978 16,213 8,906 9,229
======== ======== ======== ======== ====== ======
(1) Includes chemicals.
(2) Includes transportation, communication, health and social work, education
and other social and personal service activities.
(3) Includes mining and electricity, gas and water supply.
(4) For years prior to 2000, no detailed industry classifications are
available.
(5) 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.
(6) Includes the following for 2000, 1999, 1998 and 1997:
CHF million 31.12.00 31.12.99 31.12.98 31.12.97
- ------------------------------------------------------------------------------------------------
Doubtful interest 182 409 423 450
Net foreign exchange 23 351 (98) 91
Subsidiaries sold and other (60) (86) (246) (217)
-------- -------- -------- --------
Total adjustments 145 674 79 324
======== ======== ======== ========
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 2000, 1999, 1998, 1997 and 1996. For a description of procedures
with respect to allowances and provisions for credit losses, see "Risk--Risk
Analysis--Credit Risk" below.
165
167
UBS
- --------------------------------------------------------------------------------
31.12.96
--------------
CHF MILLION 31.12.00 31.12.99 31.12.98 31.12.97 UBS SBC
- ------------------------------------------------------------------------------------------------------
DOMESTIC:
Banks 41 49 34 9 39
Construction 843 1,247 1,671 1,449 716 539
Financial institutions 328 342 668 510 152 403
Hotels and restaurants 454 690 657 512 172 135
Manufacturing(1) 863 1,223 1,331 1,036 603 438
Private households 1,570 2,350 2,741 2,264 970 1,459
Public authorities 40 107 59 1 66
Real estate and rentals 1,635 2,696 3,333 2,591 1,286 1,335
Retail and wholesale 629 779 825 723 371 263
Services(2) 419 934 766 661 429 160
Other(3) 413 141 71 52 40 19
-------- -------- -------- -------- ----- -----
TOTAL DOMESTIC 7,154 10,483 12,219 9,891 4,749 4,856
-------- -------- -------- -------- ----- -----
FOREIGN(8):
Banks(4) 32
Chemicals
Construction 11
Electricity, gas and water supply 107
Financial institutions 262
Manufacturing 547
Mining 586
Private households 72
Public authorities
Real estate and rentals 82
Retail and wholesale 41
Services 126
Transport, storage and communication 2
Other(5) 267
--------
TOTAL FOREIGN, NET OF COUNTRY PROVISIONS 2,135 1,539 1,309 1,399 353 1,286
Country provisions 1,292 1,376 1,450 1,175 804 404
-------- -------- -------- -------- ----- -----
TOTAL FOREIGN(6) 3,427 2,915 2,759 2,574 1,157 1,690
Unallocated allowances(7) 3,748 3,000 2,683
-------- -------- -------- -------- ----- -----
TOTAL ALLOWANCES AND PROVISIONS FOR
CREDIT LOSSES 10,581 13,398 14,978 16,213 8,906 9,229
======== ======== ======== ======== ===== =====
- ------------
(1) Includes chemicals.
(2) Includes transportation, communication, health and social work, education
and other social and personal service activities.
(3) Includes mining and electricity, gas and water supply.
(4) Counterparty allowances and provisions only. Country provisions with
banking counterparties amounting to CHF 885 million are disclosed under
country provisions.
(5) Includes hotels and restaurants.
(6) The 2000, 1999 and 1998 amounts include CHF 54 million, CHF 149 million and
CHF 435 million of provisions and commitments for contingent liabilities,
respectively.
166
168
UBS
- --------------------------------------------------------------------------------
(7) 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.
(8) For years prior to 2000, no detailed industry classifications are
available.
The following table presents the percentage of loans in each category to total
loans. 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.
31.12.96
------------
IN % 31.12.00 31.12.99 31.12.98 31.12.97 UBS SBC
- -------------------------------------------------------------------------------------------------------
DOMESTIC:
Banks 1.0 2.1 1.4 5.0 8.2 1.2
Construction 1.7 2.4 2.4 2.7 3.3 2.2
Financial institutions 2.0 3.4 3.1 3.2 7.9 3.2
Hotels and restaurants 1.2 1.5 1.2 1.3 2.6 1.0
Manufacturing 3.4 4.1 4.1 4.7 5.3 4.3
Private households 32.2 33.8 29.5 30.9 30.1 28.4
Public authorities 2.0 1.9 1.8 1.8 1.8 2.4
Real estate and rentals 5.9 7.1 6.4 6.5 0.0 0.0
Retail and wholesale 3.4 3.9 2.7 3.0 3.9 3.2
Services 4.1 5.3 3.5 3.7 4.3 3.1
Other 1.0 0.7 0.5 0.5 0.6 0.3
-------- -------- -------- -------- ----- -----
TOTAL DOMESTIC 57.9 66.2 56.6 63.3 68.0 49.3
-------- -------- -------- -------- ----- -----
FOREIGN:
Banks 9.5 9.0 19.6 14.0 13.7 34.0
Chemicals 0.5
Construction 0.3
Electricity, gas and water supply 0.6
Financial institutions 7.2
Manufacturing 1.6
Mining 0.7
Private households 10.4
Public authorities 4.1
Real estate and rentals 1.8
Retail and wholesale 0.7
Services 0.6
Transport, storage and communication 0.3
Other 3.8 24.8 23.8 22.7 18.3 16.7
-------- -------- -------- -------- ----- -----
TOTAL FOREIGN 42.1 33.8 43.4 36.7 32.0 50.7
-------- -------- -------- -------- ----- -----
TOTAL GROSS LOANS 100.0 100.0 100.0 100.0 100.0 100.0
======== ======== ======== ======== ===== =====
167
169
UBS
- --------------------------------------------------------------------------------
LOSS HISTORY STATISTICS
The following is a summary of the Group's loan loss history.
31.12.96
----------------
CHF MILLION, EXCEPT WHERE INDICATED 31.12.00 31.12.99 31.12.98 31.12.97 UBS SBC
- --------------------------------------------------------------------------------------------------
Gross loans 284,516 278,014 330,964 353,240 183,027 208,324
Impaired loans 18,494 22,456 26,447
Non-performing loans 10,452 13,073 16,114 16,664 7,585 11,033
Allowances and provisions for credit
losses 10,581 13,398 14,978 16,213 8,906 9,229
Net write-offs 2,832 3,210 2,265 3,678 1,208 1,621
Credit loss (recovery)/expense (130) 956 951 1,432 1,272 1,018
RATIOS:
Impaired loans as a percentage of
gross loans 6.5 8.1 8.0
Non-performing loans as a percentage
of gross loans 3.7 4.7 4.9 4.7 4.1 5.3
Allowance and provisions for credit
losses as a percentage of:
Gross loans 3.7 4.8 4.5 4.6 4.9 4.4
Impaired loans 57.2 59.7 56.6
Non-performing loans 101.2 102.5 93.0 97.3 117.4 83.6
Allocated allowances(1) as a
percentage of impaired loans 52.4 55.5 51.4
Allocated allowances(2) as a
percentage of non-performing loans 65.5 66.3 62.1
Net write-offs as a percentage of:
Gross loans 1.0 1.2 0.7 1.0 0.7 0.8
Allowance and provisions for
credit losses 26.8 24.0 15.1 22.7 13.6 17.6
Allowance and provisions for credit
losses as a multiple of net
write-offs 3.74 4.17 6.61 4.41 7.37 5.69
- ------------
(1) Allowances relating to impaired loans only
(2) Allowances relating to non-performing loans only
168
170
UBS
- --------------------------------------------------------------------------------
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 our asset and liability management and capital management, including our
capital resources, please see "Risk--Asset and Liability Management--" below.
For comments on UBS Group's balance sheet and consolidated cash flows, please
see "Operating Review--Group Financial Review--Balance Sheet" and "Operating
Review--Group Financial Review--Consolidated Cash Flows" above.
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. For
details of UBS Group's long term credit ratings, please see "Selected Financial
Data" above.
Each of these ratings reflects only the view of the applicable rating agency at
the time the rating was issued, and any explanation of the significance of such
rating may be obtained only from such rating agency. There is no assurance that
any such credit rating will remain in effect for any given period of time or
that such rating will not be lowered, suspended or withdrawn entirely by the
applicable rating agency, if in such rating agency's judgment, circumstances so
warrant. Moody's announced on 28 April 2000 that it had changed its outlook for
its long-term rating of UBS AG from stable to negative.
169
171
UBS
- --------------------------------------------------------------------------------
Risk
Risk Management and Control
Risk is an integral part of all our activities. Excellence in risk management
and control is a key success factor and therefore requires everyone's commitment
within our organization.
RISK MANAGEMENT AND CONTROL PRINCIPLES
UBS's approach to risk management and control has evolved over a number of
years, and has been reviewed and refined in 2000, resulting in a statement of
the Risk Management and Control Principles, which lay the foundations on which
UBS builds its risk culture and risk process:
Business Management Accountability: The management of UBS's businesses owns the
risks assumed throughout the Group and is responsible for the continuous and
active management of all risk exposures so that risk and return are balanced.
Independent Controls: An independent control process is implemented when
required by the nature of the risks and the fundamental incentive structure of
the business processes. The control functions are responsible for providing an
independent and objective check on risk taking activities to safeguard the
integrity of the entire risk process.
Risk Disclosure: Comprehensive, transparent and objective risk reporting and
disclosure to senior management and to shareholders is the cornerstone of the
risk control process, reflecting the fundamental values of intellectual honesty
and transparency.
Earnings Protection: Operating limits are set to quantify risk appetite and
allocated among business lines to control normal periodic adverse results, in an
attempt to limit such losses relative to the potential profit of each business.
The Group's risk capacity is expressed through stress loss limits with the aim
of protecting the Group from unacceptable damage to its annual earnings
capacity, its dividend paying ability and, ultimately, its reputation and
ongoing business viability.
Reputation Protection: Failure to manage and control any of the risks incurred
in the course of its business could result in damage to UBS's reputation. For
this reason:
- UBS continues to develop potential stress loss measures for credit and
market risk;
- UBS will not take any extreme positions in tax, regulatory and accounting
sensitive transactions;
- UBS aspires to the highest standards in protecting the confidentiality
and integrity of its internal information; and
- UBS aims to maintain the highest ethical standards in all its businesses.
Every employee, but in particular those involved in risk decisions, must make
UBS's reputation an overriding concern. Responsibility for the risk of
reputation damage cannot be delegated or syndicated.
AN INTEGRATED APPROACH TO RISK MANAGEMENT AND CONTROL
Risk management and control are an integral part of UBS's commitment to
providing consistent, high quality returns for its shareholders. UBS believes
that delivery of superior shareholder returns depends on achieving the
appropriate balance between risk and return, both in day-to-day business and in
the strategic management of the balance sheet and capital. UBS recognizes that
risk is integral to its business, but the approach to risk management and
control seeks to limit the scope for adverse
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- --------------------------------------------------------------------------------
variations in earnings and, in particular, to protect UBS from the risk of
severe loss in the event of unlikely, but plausible, stress scenarios arising
from any of the material risks it faces.
UBS has an integrated, Group-wide function at the Corporate Center addressing
all aspects of finance, strategic planning, risk control, and balance sheet and
capital management. The independent risk control organization is mirrored in the
Business Groups. Excellence in risk management is, however, most fundamentally
based upon a business management team that makes risk identification, management
and control critical components of their processes and plans.
KEY RESPONSIBILITIES
The Board of Directors is responsible for the Group's fundamental approach to
risk (the Risk Management and Control Principles), for the establishment and
annual review of the Group's principal risk limits and for the determination of
its risk capacity.
The Group Executive Board (GEB) is responsible for implementing the Risk
Management and Control Principles, for approving core risk policies, for
allocating risk limits to the Business Groups, and for managing the risk profile
of the Group as a whole.
The Chief Credit Officer (CCO) is responsible for formulating credit risk
policies, for determining methodologies to measure credit risks, and for setting
and monitoring credit, settlement and country risk limits.
The Chief Risk Officer (CRO) is responsible for the policies, methodologies and
limits for all other risk categories, and for aggregating and assessing the
total risk exposure of the Group.
Business Group Risk Management Committees monitor all risks taken by the
business units and are the primary risk management bodies. They are chaired by
the Business Group Chief Executive Officers and include heads of business areas
and delegates of the Group CRO and CCO.
The Business Group CEOs are responsible for all risk exposures within their
business units and must take corrective action where appropriate, given the
aggregate risk profile of the portfolio or the risks of specific positions.
The Business Group Risk Control Functions, headed by Chief Risk and Chief Credit
Officers (CROs and CCOs), are empowered to enforce the Risk Management and
Control Principles and are responsible for the implementation of independent
control processes within their business units.
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[UBS Risk Management and Control Framework]
THE RISK CONTROL PROCESS
There are five critical elements in the independent risk control process:
- risk identification, particularly in new businesses and in complex or
unusual transactions but also in response to external events and in the
continuous monitoring of the portfolio;
- risk measurement, using approved methodologies and models which have been
independently validated;
- risk policies, covering all risk categories, both at Group level and in
the Business Groups, consistent with evolving business requirements and
international best practice;
- comprehensive risk reporting to management at all levels against an
approved risk limit framework, for all primary and consequential risk
categories; and
- risk control, to enforce compliance with the Principles, and with
policies, limits and regulatory requirements.
There are co-ordinated processes covering all risk categories which are applied
before commencement of any new business or significant change, and before the
execution of any transaction which is complex or unusual in its structure or
motivation, to ensure that all these critical elements are addressed, including
the assurance that transactions can be booked in a way that will permit
appropriate ongoing risk measurement, reporting and control.
The risk control process extends beyond the independent risk control functions
to Financial Control and the Logistics Areas, notably Operations, which are
critical to establishing an effective control environment. Given their
responsibility for the booking, settlement, and financial reporting processes,
comprehensive control by these functions creates a powerful defense against
improper activity.
Group Internal Audit provides an independent view to the Board of Directors of
the effectiveness of the Risk Management and Control Principles and their
enforcement, and of the effectiveness of the independent control units.
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RISK CONTROL DEVELOPMENTS
UBS has continued, in 2000, to strengthen, formalize and enhance the risk
control process. Principles, policies and processes are reinforced through a
"risk awareness" education program which will be disseminated to all employees
during 2001, including a series of recorded presentations by UBS risk control
professionals covering all aspects of risk control for all categories of risk.
The program will be extended and enhanced as the approach to risk management and
control evolves.
UBS monitors regulatory developments and strives to maintain good relationships
with its lead regulator, the Swiss Federal Banking Commission, and other major
regulators. This as an important aspect of the risk control process and UBS will
continue to work closely with them to ensure a mutual understanding of the
Group's control structure and the regulators' requirements.
HOW UBS MEASURES RISK
Potential loss is measured at three levels - expected loss, statistical loss and
stress loss.
Expected loss is the loss that is expected to arise on average in connection
with an activity. It is the inherent cost of such activity, and should be
budgeted and deducted from revenues directly. An example of expected loss is the
valuation adjustments for liquidity or position size made in mark-to-market
books. UBS is extending its expected loss framework to encompass all measurable
risk categories.
Statistical loss (also known as "unexpected loss") is the estimated loss in a
typical adverse period, as statistically defined by a given confidence interval.
UBS's tolerance for such adverse results - the Group's risk appetite, as
determined by the Board of Directors - is the basis for the main operating
limits. Formal statistical loss measures in the form of Value-at-Risk limits
have been in place for market risk in UBS for a number of years, and are the
basis of the market risk regulatory capital charge. Comparable portfolio
measures are being developed for other risk categories, and the revision to the
Basel Capital Accord, currently under discussion, is expected, ultimately, to
extend the use of statistical loss measures for regulatory capital purposes.
Stress loss is the loss that could arise from an extreme, but plausible, stress
or "tail" event (an event that falls in the tail of the probability distribution
of potential events, beyond the level of confidence applied in the statistical
loss measure). Risk capacity is defined as the maximum loss that the Board of
Directors considers UBS could withstand in such stress events without
unacceptable damage to earnings, dividend paying ability and, ultimately,
reputation and ongoing business viability. It is formalized in stress loss
limits. Stress loss measures are most extensively implemented for our trading
activities and for country risk, but default stress loss measures have also been
introduced for the UBS Warburg loan portfolio, with particular emphasis on lower
rated borrowers. The stress loss framework will continue to be enhanced and
progressively extended to all risk categories. The identification and
quantification of potential tail risk, on a macro scale (affecting the Group in
general or selected parts of the business or portfolio) and on a micro level
(arising from individual transactions), is perhaps the most important function
of the independent risk control units.
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[RISK MEASUREMENT GRAPHIC]
THE RISKS UBS TAKES
Business risks - the risks associated with the chosen business strategy,
including business cycles, industry cycles, and technological change are the
sole responsibility of the business, and are not subject to an independent
control process. They are, however, factored into the Group planning and
budgeting process.
Inherent risks are the risks inherent in our business activities, which are
subject to independent risk control. A distinction is made between primary and
consequential risks.
Primary risks are the exposures deliberately entered into for business reasons
and which are actively traded and managed:
- credit risk is the risk of loss resulting from client or counterparty
default and arises on exposure to clients and counterparties in all
forms, including settlement risk;
- market risk is the exposure to observable market variables such as
interest rates, exchange rates and equity markets;
- liquidity and funding risk is the risk that the Group is unable to fund
assets or meet obligations at a reasonable price or, in extreme
situations, at any price. These risks are managed at the Group level,
rather than in the business units, and are discussed in "Asset and
Liability Management" below.
Consequential risks (also known as operational risks) are exposures that are not
actively taken, but which are incurred as a consequence of business undertaken:
- transaction processing risk arises from errors, failures or shortcomings
at any point in the transaction process, from deal execution and capture
to final settlement;
- compliance risk is the risk of financial loss due to regulatory fines or
penalties, restriction or suspension of business, or costs of mandatory
corrective action. Such risks may be incurred by not adhering to
applicable laws, rules, and regulations, local or international best
practice (including ethical standards), and UBS's own internal standards;
- legal risk is the risk of financial loss resulting from the
unenforceability of a contract due to inadequate or inappropriate
contractual arrangements or other causes;
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- liability risk is the risk of financial loss arising from a legal or
equitable claim against the Group;
- security risk is the risk of loss of confidentiality, integrity, or
availability of information or assets, through accident or crime, and
includes both IT and physical security; and
- tax risk is the risk of financial loss due to tax authorities opposing
the Group's position on tax matters.
A failure to adequately identify, manage or control any of these risks,
including business risks, may result not only in financial loss but also in loss
of reputation. Reputation risk is not directly quantifiable and cannot be
managed and controlled independently of the other risks. Each of the inherent
risks, if inadequately managed, has the potential to damage UBS's reputation,
and repeated or widespread failure compounds the impact.
Credit and market risk are well established risk categories for which management
and control processes, although constantly evolving, are widely established and
understood in the industry. These risks are the basis of the Basel Capital
Accord, which determines regulatory capital requirements for internationally
active banks and which is currently under review. The shortcomings of the
current treatment of credit risk are recognized by both regulators and
practitioners, and it is critical that the present round of revision to the
Basel Capital Accord establishes a more flexible framework which can adapt to
changing markets and reduce the scope for regulatory capital arbitrage.
The Basel Capital Accord reform has also focused attention on consequential (or
operational) risks. As the discussions have highlighted, risk categories are not
insulated from each other (for example, an unenforceable contract or a
transaction processing error can lead to unforeseen credit or market risk), nor
is UBS's current categorization definitive. UBS will therefore continue to
review the way risks are categorized. Stability of definition and approach is,
however, critical to the establishment of a sound risk management and control
process and to the creation of a loss database from which risks can be better
understood and quantified.
[RISK CATEGORIES GRAPHIC]
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Risk Analysis
CREDIT RISK
Credit risk represents the loss which UBS would suffer if a counterparty or
issuer failed to meet its contractual obligations. It is inherent in traditional
banking products - loans, commitments to lend and other contingent liabilities,
such as letters of credit - and in foreign exchange and derivatives contracts,
such as swaps and options ("traded products"). Positions in tradable assets such
as bonds and equities, including both direct holdings and synthetic positions
through derivatives, also carry credit risk, but where they are held for trading
and are marked to market they fall under the market risk limits and controls
described in the Market Risk section below. They are, however, included in the
credit risk exposures reported in the Composition of Credit Risk section below.
Credit risk management and control at UBS is governed by a Group Credit Policy
Framework, and by detailed credit policies and procedures developed within the
Business Groups.
To ensure a consistent and unified approach, with appropriate checks and
balances, all Business Groups where material credit risk is taken have
independent credit risk control (CRC) functions headed by chief credit officers
(CCOs) reporting to the Group CCO and Business Group CEOs. Disciplined processes
are in place, within the Business Groups and centrally, to promptly identify,
accurately assess, properly approve and consistently monitor credit risk. Senior
business management, the GEB and the Chairman's Office are provided with
regular, standardized reports of aggregate Business Group credit risk exposure
by the CRC organization.
The approval and monitoring of new counterparties, and of new transactions
giving rise to credit risk plays a central part in the risk control process.
Credit approval authority is exercised within the independent CRC functions by
authorized credit officers. The notional amount of their authority is dependent
on the quality of the counterparty, the size and tenor of the exposure and any
security, and on the experience and seniority of the credit officer.
The CRC function continuously monitors the credit quality of counterparties and
UBS's exposure to them, and the credit risk profile of the Business Group
portfolios. CRC has sole authority over counterparty rating, credit risk
assessment and approval, and the establishment of allowances and provisions.
RISK MEASUREMENT
UBS determines the amounts of credit loss expenses in its financial accounts and
in the business unit reporting on a different basis. In the Group financial
accounts, UBS reports its results according to International Accounting
Standards (IAS) definitions. Under these rules, losses are recognized and
charged to the financial accounts in the period when they arise (see the
Provisioning Policies subsection below). In contrast, in its segment and
business unit reporting, UBS applies a different approach to the measurement of
credit risk, which reflects the average annual cost that UBS anticipates will
arise from transactions that become impaired. The following discussion describes
this approach.
UBS's approach to the measurement of credit risk is based on the premise that
this risk exists in every credit engagement and that credit loss expenses must
be expected as an inherent cost of the business.
The occurrence of actual credit losses is erratic in both timing and amount and
those that arise usually relate to transactions entered into in previous
accounting periods. In order to manage credit risk effectively by earning, over
time, sufficient income to compensate for intermittent losses caused by
impairment, UBS uses the concept of "expected loss" to encourage appropriate
pricing of transactions and income recognition.
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Expected loss, for UBS, is a statistical measure intended to reflect the average
annual costs that it anticipates will arise from transactions that become
impaired. The observed frequency of such events is expressed as counterparty
default probability. The size of credit losses is determined from the exposure
at default and the likely severity of the final loss, taking into account the
seniority of the claim, collateral and other credit mitigation where available.
Within UBS Switzerland, a model is used to project expected loss based on
historical performance and an assessment of the economic outlook over the medium
term. By contrast, the expected loss of the UBS Warburg portfolio is estimated
primarily on the basis of market information including rating agencies, other
default predicting models, and credit spreads. Once the expected loss has been
estimated at business unit level, statistical methods are used to allocate the
total to individual transactions in proportion to their stand-alone loss risk.
UBS RATING SCALE AND MAPPING TO EXTERNAL RATINGS
MOODY'S STANDARD
INVESTOR AND
UBS SERVICES POOR'S
RATING Description EQUIVALENT EQUIVALENT
- ------------------------------------------------------------------------------------------------------------------------------
1 Aaa AAA
2 Investment Aa1 to Aa3 AA+ to AA-
3 grade A1 to A3 A1 to A3
4 Baa1 to Baa2 BBB+ to BBB
5 Baa3 BBB-
- ------------------------------------------------------------------------------------------------------------------------------
6 Ba1 BB+
7 Ba2 BB
8 Sub-investment Ba3 BB-
9 grade B1 B+
10 B2 B
11 B3 B-
12 Caa to C Ccc to C
- ------------------------------------------------------------------------------------------------------------------------------
13 Impaired and D D
14 defaulted D D
- ------------------------------------------------------------------------------------------------------------------------------
The default probabilities of individual counterparties are assessed by means of
rating tools that are tailored to the various categories of counterparty. For
the major part of the business within UBS Switzerland, UBS uses a statistical
approach or "score card" to form groups of clients with similar propensity to
default. UBS Warburg, with its less homogeneous client base, uses an approach
under which credit officers review counterparties and assess their credit
standing, based on guidelines and an analytical format or "template" to ensure
consistency across the Group. In all cases, the analysis is founded on an
assessment of both financial ratios and qualitative factors. The result of this
counterparty specific analysis is expressed in a rating. UBS allocates a defined
probability of default to each rating category, which allows the transaction
specific expected loss to be calculated.
Clients are segmented into 14 rating classes, two being reserved for assets that
are already impaired or defaulted. The UBS rating scale, which is based on
probability of default, is shown in the table above. For information, comparable
ratings by the major rating agencies are also shown, although there is not a
direct match between UBS's categories and those of the rating agencies. The
mapping is based on comparison of the probability of default attached to each
UBS rating and the default observations published by the agencies. These
represent long-term averages and it should be noted that the mappings might not
be borne out by experience in any given period.
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The reports in the following section, Composition of Credit Risk, that show the
rating distribution of UBS's counterparties refer to the probability of default
only. Whether or not UBS benefits from collateral has no influence on these
ratings.
Once an expected probability of default has been assigned to a counterparty, the
resulting expected loss at the transaction and counterparty level is determined
from the credit exposure and an estimate of loss severity based on a set of
assumptions.
The concept of expected loss is employed within UBS for various business
applications: individual credit policies refer to counterparty rating classes to
determine, for example, the maximum tenor allowed for OTC derivative
transactions; the rating concept is used to define credit authorities granted to
individual credit officers across the Group and for some business processes
within Private and Corporate Clients; and expected loss is used as an
approximation for valuing the OTC derivative books and, thereby, accounting for
the credit risk assumed on counterparties in these trades. UBS's internal
measurement framework is consistent with the concepts emerging in the current
review of the Basel Capital Accord which sets the rules under which banks
determine minimum regulatory capital requirements.
UBS is developing internal models for the comprehensive measurement of
statistical loss and stress loss for credit risk at the portfolio level. In the
meantime, limits and controls are being applied to certain segments of the
portfolio, where credit quality is low or counterparty concentrations are high.
COMPOSITION OF CREDIT RISK
Credit risk is assumed, as an integral part of their businesses, by UBS
Switzerland's Private and Corporate Clients business unit and by UBS Warburg's
Corporate and Institutional Clients business unit and, to a lesser extent, by
the private banking businesses of these Business Groups. The table Status of
Total Credit Risk Exposure provides an overview of the aggregate credit risk
exposure of the UBS Group.
STATUS OF TOTAL CREDIT RISK EXPOSURE
UBS Switzerland UBS Warburg Other (1) UBS Group
CHF million ------------------ ------------------ ------------------ ----------------------------
FOR THE YEAR ENDING 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.98
- ---------------------------------------------------------------------------------------------------------------
Loans utilization
(gross) 183,943 199,960 99,787 77,151 786 903 284,516 278,014 330,964
Contingent claims 10,613 9,465 11,440 15,136 0 0 22,053 24,601 32,259
Unutilized committed
lines 3,574 3,444 47,402 60,412 0 0 50,976 63,856 82,311
- ---------------------------------------------------------------------------------------------------------------
Total banking
products 198,130 212,869 158,629 152,699 786 903 357,545 366,471 445,534
- ---------------------------------------------------------------------------------------------------------------
Unsecured OTC
products 883 2,415 61,340 107,898 0 11 62,223 110,324 121,433
Other derivatives
(secured exchange-
traded) 2,288 2,338 8,994 8,133 0 0 11,282 10,471
Securities lending 2,193 32 12,159 11,732 0 0 14,352 11,764 12,195
Repo 0 11 22,183 12,287 0 2 22,183 12,300
- ---------------------------------------------------------------------------------------------------------------
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UBS Switzerland UBS Warburg Other (1) UBS Group
CHF million ------------------ ------------------ ------------------ ----------------------------
FOR THE YEAR ENDING 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.98
- ---------------------------------------------------------------------------------------------------------------
Total traded
products(2) 5,364 4,796 104,676 140,050 0 13 110,040 144,859 133,628
- ---------------------------------------------------------------------------------------------------------------
Total tradable
assets(3) 2,626 2,785 219,070 219,019 136 471 221,832 222,275 86,288
- ---------------------------------------------------------------------------------------------------------------
Total credit risk
exposure, gross 206,120 220,450 482,375 511,768 922 1,387 689,417 733,605 665,450
- ---------------------------------------------------------------------------------------------------------------
Total credit risk
exposure, net of
allowances 198,839 210,003 479,134 508,972 917 1,381 678,890 720,356 650,902
- ---------------------------------------------------------------------------------------------------------------
(1) Includes Corporate Center and UBS Asset Management.
(2) Traded products valuation: valued based on internal valuation methodology.
(3) Tradable assets valuation: net long, maximum default exposure.
UBS Warburg's total gross credit exposure of CHF 482 billion includes exposure
not only in the Corporate and Institutional Clients business unit, but also CHF
25.5 billion in the International Private Clients and US Private Clients
business units. In the following analysis, only the Corporate and Institutional
Clients business is considered since almost all other lending within UBS Warburg
is secured.
A substantial majority of UBS Warburg Corporate and Institutional Clients'
counterparties fall into the investment grade category (internal counterparty
rating grades 1 to 5) for both banking products (82%) and the traded products
portfolio (96%). These counterparties are primarily sovereigns, insurance
companies, financial institutions, multinational corporate clients and
investment funds. Exposure to lower rated counterparties is generally
collateralized or otherwise structurally supported.
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[TWO BAR CHARTS]
In order to allow pro-active management of counterparty credit risk, UBS Warburg
launched Alpine Partners, L.P., the first ever synthetic securitization of
counterparty credit exposure in a portfolio of OTC derivatives covered by ISDA
master agreements. The issue, which met stringent rating agency and regulatory
requirements, transferred USD 750 million of credit exposure on positive
replacement values to the market, to the extent they exceed the subordinated
layer retained by UBS.
UBS Warburg Corporate and Institutional Clients' banking products portfolio is
widely diversified across industry sectors. At 31 December 2000, the largest
exposure (35%) was to the Finance sector. The 6% exposure to the Transport,
storage and communication sector includes CHF 8 billion exposure to the
telecommunication industry.
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- --------------------------------------------------------------------------------
21 19 14 13 6 5 5 5 4 8
- -- -- -- -- - - - - - -
Of UBS Switzerland's loans to customers of CHF 175 billion, 69% or CHF 121
billion are secured by mortgages. The graph shows that UBS's exposure to the
real estate sector is well diversified with 42% of its loans being secured on
owner-occupied houses (single-family homes). The exposure on residential
multi-family homes of 42% consists of owner occupied apartments and rented
apartment buildings. In particular, the owner-occupied dwellings exhibit a low
risk profile both in terms of individual assets and at portfolio level. Loans
and other credit engagements with individual clients, excluding mortgages, are
predominately extended against the pledge of marketable securities where UBS
applies conservative standards to determine the advance value of the collateral.
42 42 16
- -- -- --
The remainder of the Private and Corporate Clients' portfolio, excluding
mortgages, consists of exposures to corporate and individual clients. These
clients are fairly widely spread across rating categories and industry sectors,
which reflects UBS's position as a major lender to this segment of
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- --------------------------------------------------------------------------------
predominantly small to medium sized enterprises in Switzerland. The continued
improvement in the Swiss economy and property markets has aided the overall
improvement in the quality of this portfolio.
18 17 16 14 12 9 6 4 2 2
- -- -- -- -- -- - - - - -
[BAR CHART]
At the end of the second quarter 2000, Helvetic Asset Trust AG, an independent
special purpose vehicle, was used by UBS Switzerland to securitize credit risk
attached to a CHF 2.5 billion reference portfolio consisting primarily of Swiss
corporate loans, whereby part of the credit risk, but not the loans themselves,
was transferred to the capital markets.
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- --------------------------------------------------------------------------------
UBS WARBURG CORPORATE AND INSTITUTIONAL CLIENTS BANKING PRODUCTS
CHF BILLION 31.12.00 31.12.99 31.12.98
- -------------------------------------------------------------------------------------------------
Loans (gross) 74.3 72.7 134.7
Commitments 47.4 60.4 73.8
Contingent liabilities 11.4 15.0 24.7
- -------------------------------------------------------------------------------------------------
Total banking products 133.1 148.1 233.2
- -------------------------------------------------------------------------------------------------
TOTAL LOAN PORTFOLIO EXPOSURE BY BUSINESS GROUP
UBS Switzerland UBS Warburg Other (1) UBS Group
CHF million ------------------ ------------------ ------------------ ----------------------------
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.98
- -----------------------------------------------------------------------------------------------------------------
Loans to banks (gross) 8,482 8,780 21,038 21,481 544 524 30,064 30,785 69,543
Loans to customers
(gross) 175,461 191,180 78,749 55,670 242 379 254,452 247,229 261,421
Loans (gross) 183,943 199,960 99,787 77,151 786 903 284,516 278,014 330,964
- -----------------------------------------------------------------------------------------------------------------
Counterparty allowance 7,281 10,447 1,962 1,550 5 6 9,248 12,003 13,093
Country allowance 0 0 1,280 1,246 0 0 1,280 1,246 1,450
- -----------------------------------------------------------------------------------------------------------------
ALLOWANCES FOR LOAN
LOSSES(2) 7,281 10,447 3,242 2,796 5 6 10,528 13,249 14,543
- -----------------------------------------------------------------------------------------------------------------
LOANS, NET OF
ALLOWANCES 176,662 189,513 96,545 74,355 781 897 273,988 264,765 316,421
- -----------------------------------------------------------------------------------------------------------------
Counterparty provision
for contingent claims 22 0 19 19 0 0 41 19 435
Country provision for
contingent claims 0 0 12 130 0 0 12 130 0
- -----------------------------------------------------------------------------------------------------------------
TOTAL PROVISIONS(3) 22 0 31 149 0 0 53 149 435
- -----------------------------------------------------------------------------------------------------------------
SUMMARY
Allowances and
provisions for
counterparty risk 7,303 10,447 1,981 1,569 5 6 9,289 12,022 13,528
Allowances and
provisions for
country risk 0 0 1,292 1,376 0 0 1,292 1,376 1,450
- -----------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCES AND
PROVISIONS 7,303 10,447 3,273 2,945 5 6 10,581 13,398 14,978
- -----------------------------------------------------------------------------------------------------------------
(1) Includes Corporate Center and UBS Asset Management.
(2) Deducted from assets.
(3) Booked as liabilities.
LOAN PORTFOLIO
The UBS Group loan portfolio increased by CHF 6.5 billion to a total of CHF
284.5 billion at year end 2000. UBS Switzerland's portfolio continued to shrink,
partly due to the sale of Solothurner Bank, a Swiss retail subsidiary, and
partly due to continuing work-out of impaired loans. UBS Warburg's portfolio, by
contrast, increased, predominantly as a result of the integration of UBS
PaineWebber's primarily secured loan portfolio of some CHF 20 billion. UBS
Warburg's Corporate and Institutional Clients business unit continued the
strategy, begun immediately after the 1998 merger between Union Bank of
Switzerland and Swiss Bank Corporation, of reducing international banking
products exposure (loans, unfunded commitments and contingent liabilities), with
the aim of improving the risk/reward
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UBS
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- --------------------------------------------------------------------------------
profile of the international lending business. It included a shift in focus away
from emerging markets and into high quality credit in the major OECD countries.
The table above highlights this reduction.
OVER-THE-COUNTER (OTC) 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 involving the use of derivative products is a core service
offered by UBS. Derivative products, by their nature, are sensitive to changes
in market prices and UBS pays close attention to the management and control of
these risks.
Counterparty exposure on most OTC derivatives is measured by modeling the
potential evolution of the value of the portfolio of trades with each
counterparty over its life (potential credit exposure), taking into account
legally enforceable close out netting agreements where applicable. Credit limits
for individual counterparties are applied to the "maximum likely exposure",
derived from this analysis, a 95% confidence statistical measure of the exposure
in each counterparty portfolio. These measures will continue to be enhanced and
their coverage is to be extended to include all market sensitive products and
associated collateral.
UBS's credit standards for entering into unsecured derivative contracts are
high. Particular emphasis is placed on the maturity profile, and transactions
with counterparties of lower quality are generally conducted only on a secured
basis. In line with general market trends, UBS Warburg is increasingly entering
into bilateral collateral agreements with other major banks to mitigate the
potential concentrations of exposure arising from industry consolidation and the
ongoing increase in volumes of OTC derivatives traded.
7 30 1 10 0
- - -- - -- -
13 8.00 1.00 5.00 0.00
21 2.00 0.00 1.00 0.00
SETTLEMENT RISK
UBS is exposed to settlement risk as a consequence of its international
transactional businesses. Settlement risk arises in transactions involving the
exchange of values between counterparties when they must honor their obligation
to deliver cash or securities without first being able to determine that they
have received the counter-value. This risk is particularly significant in
relation to foreign exchange and precious metals transactions. UBS limits and
monitors the risk on a continuous basis against settlement tolerances set for
each of its counterparties based on their credit standing as determined by UBS.
Settlement risk reduction is a high priority for CRC, Operations and business
units. They work
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UBS
RISK--RISK ANALYSIS
- --------------------------------------------------------------------------------
together to achieve shorter settlement cycles from payment release to
reconciliation, and to reduce the amount of exposure by establishing risk
reduction arrangements with counterparties, such as payment netting and covered
settlements.
UBS participates in payment and securities clearing houses, and continues to
play a major role in the Continuous Linked Settlement (CLS) project, an industry
initiative to establish a global clearing house, CLS Bank, to settle foreign
exchange transactions on a delivery versus payment basis. CLS is currently
scheduled to go live at the end of 2001 and will substantially reduce both
settlement and systemic risks faced by UBS and other major foreign exchange
trading banks.
COUNTRY RISK
UBS's definition of country risk covers all crossborder exposures from banking
products and traded products, including its own intra-Group cross-border
positions, and exposure to issuers of tradable assets such as bonds and
equities.
The CRC function at the Corporate Center assigns ratings to all major countries
based on internal analysis of size and economic fundamentals and on external
information. Smaller economies to which UBS has little exposure are rated based
on external information only. Like the counterparty ratings, the sovereign
ratings express the probability of the occurrence of a country risk event that
leads to an impairment of UBS's exposures. The default probabilities and the
mapping to the ratings of the major rating agencies are the same as for
counterparty credit risks (see "UBS Rating Scale and Mapping to External
Ratings" table above). Country ratings are classified as industrialized (2 and
better), emerging markets (3 to 11) and distressed (12 to 14).
At 31 December 2000, CHF 1,058 billion or 98.5% of UBS's country risk exposure
was to industrialized countries, where the risk of default is judged to be
negligible and, of this, CHF 593 billion, or 56% were intra-Group cross-border
money market positions.
The remaining 1.5%, or CHF 16.3 billion, of UBS's country risk exposure is to
emerging markets and distressed countries. This exposure has continued to
decrease during 2000 in line with the strategy of limiting exposure to these
sectors. Total exposure to emerging markets and distressed countries fell by CHF
8.3 billion between 31 December 1999 and 31 December 2000, a reduction of 34%.
In view of the higher risk associated with emerging markets, UBS closely and
continuously monitors this exposure, within the country ceilings approved by the
Chairman's Office.
The country risk ceiling is a primary limit for all transactions with
counterparties in these countries, and extension of credit may be denied on the
basis of a country risk ceiling even if there are adequate counterparty limits
available. The table below analyzes the emerging markets and distressed
countries exposures by major geographical areas at 31 December 2000 compared to
31 December 1999.
Counterparty default resulting from multiple insolvencies (systemic risk) or
general prevention of payments by authorities (transfer risk) is the most
significant long-term effect of a country crisis. In its internal measurement
and control of country risk, however, UBS seeks to also consider the probable
financial impact of market disruption arising during and following a country
crisis: severe falls in the country's markets and assets, longer-term
devaluation of the currency and potential immobilization of currency balances.
As an enhancement to this wider measurement concept, UBS has started measuring
country risk internally not only in nominal terms, but also on a stress loss
basis covering market and credit risk, both at the country level, where
individual country ceilings are applied, and across the portfolio, based on
economic scenarios determined by country economists. Stress loss-based measures
were first
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RISK--RISK ANALYSIS
- --------------------------------------------------------------------------------
introduced at the country level in 2000 and will continue to be developed in the
light of experience and changing market conditions.
EMERGING MARKETS EXPOSURES BY MAJOR GEOGRAPHICAL AREAS
Total Banking products Traded products (1) Tradable assets (2)
CHF million ---------------------------- ------------------ -------------------- --------------------
REGION 31.12.00 31.12.99 31.12.98 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99
- -------------------------------------------------------------------------------------------------------------------
Emerging Europe 1,612 1,586 1,755 809 919 395 248 408 419
Emerging Asia 7,642 10,055 14,406 4,053 5,003 1,355 3,873 2,234 1,179
Latin America 4,268 9,647 11,528 2,352 8,169 1,025 665 891 813
Africa/Middle East 2,736 3,314 4,740 1,564 2,539 669 659 503 116
- -------------------------------------------------------------------------------------------------------------------
Total 16,258 24,602 32,429 8,778 16,630 3,444 5,445 4,036 2,527
- -------------------------------------------------------------------------------------------------------------------
(1) Traded products consist of derivative instruments and repurchase agreements.
(2) Tradable assets consist of equity and fixed income financial instruments
held for trading purposes, which are marked to market on a daily basis.
PROVISIONING POLICIES
UBS classifies a claim as impaired if the book value of the claim exceeds the
present value of the cash flows actually expected in future periods interest
payments, scheduled principal repayments, or other payments due (for example on
derivatives transactions), and including liquidation of collateral where
available. Within this category, loans are also classified as non-performing
where payment of interest, principal or fees is overdue by more than 90 days.
UBS has established policies to determine the carrying values of impaired claims
are determined on a consistent and fair basis, especially for impaired loans for
which no market estimate or benchmark for the likely recovery value is
available. Each case is assessed on its merits, and the work-out strategy and
estimation of cash flows considered recoverable are independently approved by
the CRC function. The recovery value of mortgage loans is determined by
capitalizing an economically sustainable rental yield, adjusted for the discount
generally observed in forced liquidations and related costs, if the strategy is
based on a foreclosure. For commercial exposures, enterprise value is determined
from an assessment of expected cash flows from future operations, if recovery is
likely to be successful, or of the liquidation value of the assets, if
bankruptcy proceedings are to be initiated against the borrower. All future cash
flows considered recoverable are discounted to present value on the basis of the
principles of International Accounting Standard 39. A provision is then made for
the probable loss on the loan in question and charged to the income statement as
credit loss expense.
Allowances and provisions for credit losses also include a component for country
risk. UBS's approach to country risk provisioning follows the guidelines of the
Swiss Bankers' Association, which allow 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 provisions are then determined by evaluating the
type of credit exposure and the loss severities that have been attributed to
each exposure type. Furthermore UBS has specific allowances against exposures in
countries that are subject to a moratorium or have been rescheduled. The amount
of such allowances is determined case-by-case from an assessment of the amounts
that UBS deems to be irrecoverable.
In general, Swiss practice is to write off loans entirely only on final
settlement of bankruptcy proceedings, sale of the underlying assets, or formal
debt forgiveness. By contrast, US practice is generally to write off
non-performing loans much sooner, reducing the amount of such loans and
186
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RISK--RISK ANALYSIS
- --------------------------------------------------------------------------------
corresponding provisions recorded at any given date. A consequence of this
practice is that, for UBS, recoveries of amounts written off in prior accounting
periods tend to be small.
SUMMARY OF BANKING PRODUCTS EXPOSURE AND CREDIT RISK RESULTS
UBS Switzerland UBS Warburg Other (1) UBS Group
CHF million ------------------- ------------------- ------------------- ------------------------------
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.98
- -----------------------------------------------------------------------------------------------------------------------
Loans (gross) 183,943 199,960 99,787 77,151 786 903 284,516 278,014 330,964
Contingent claims 10,613 9,465 11,440 15,136 0 0 22,053 24,601 32,259
Unutilized committed
lines 3,574 3,444 47,402 60,412 0 0 50,976 63,856 82,311
- -----------------------------------------------------------------------------------------------------------------------
TOTAL BANKING
PRODUCTS EXPOSURE 198,130 212,869 158,629 152,699 786 903 357,545 366,471 445,534
ANNUAL EXPECTED LOSS 784 1,071 247 333 0 0 1,031 1,404 1,696
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CREDIT LOSS
(RECOVERY)/EXPENSE (695) 965 565 0 0 (9) (130) 956 951
- -----------------------------------------------------------------------------------------------------------------------
CORPORATE CENTER
BALANCING ITEMS (1,161) (448) (745)
- -----------------------------------------------------------------------------------------------------------------------
(1) Includes Corporate Center and UBS Asset Management.
CREDIT LOSS EXPENSE
UBS reports its results according to IAS, under which credit loss expense
charged to the financial accounts in any period are the sum of net allowances
minus recoveries arising in that period, i.e. the credit losses actually
incurred. In 2000, provisions on new impaired loans were more than offset by the
effect of re-evaluating provisions on existing impaired loans resulting in a net
credit to the income statement of CHF 130 million. This compares to a net credit
loss expense charge in 1999 of CHF 956 million.
This positive result was due to the strong economy in Switzerland combined with
successful recovery efforts. Previous provisions had been established against a
background of several years of relatively low growth in the Swiss economy and
relatively high credit losses. During the year 2000, the Swiss economy expanded
at the fastest rate in a decade. The growth was broadly based, especially in the
domestic sector, and was markedly higher than could have been foreseen in 1999.
This turnaround has positively affected real estate values and the real estate
construction market, which has led to reductions in existing provisions against
loans in these portfolios and a decreased level of new defaults and impairments.
In view of its significant exposure to the Swiss market, UBS's overall credit
quality is highly dependent on economic developments in Switzerland. As the
graph shows, the better performance of the Swiss economy has translated into a
sustained reduction in the bankruptcy rate since 1999.
187
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UBS
RISK--RISK ANALYSIS
- --------------------------------------------------------------------------------
0.45
----
0.41
0.47
0.37
0.37
0.42
0.65
1.12
1.29
1.21
1.08
1.11
1.19
1.11
1.04
0.93
By contrast, mounting signs of a trend of increasing defaults in the
international credit markets and particularly the US, required additional loan
loss provisions to be taken on UBS Warburg's loan portfolio. Over the last few
years UBS has pursued a strategy of active reduction of international and
emerging markets credit exposures and has increasingly used credit derivatives
to hedge credit exposures. Despite the increase in provisions, this strategy,
coupled with a reluctance to engage in balance sheet led earnings growth, has
positioned UBS relatively well for the less positive outlook in the
international credit markets.
The development of the total credit loss expense in 1998 and 1999 included the
effect of allocations from the special reserve pools that had been established
in 1996, 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
remaining balance of CHF 300 million was applied 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.
ALLOWANCES AND PROVISIONS FOR CREDIT RISK
UBS Asset
UBS Switzerland Management UBS Warburg Corporate Center UBS Group
CHF million ------------------ ------------------ ------------------ ------------------ ------------------
AS OF 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99
- ---------------------------------------------------------------------------------------------------------------------------
Loans (gross) 183,943 199,960 561 213 99,787 77,151 225 690 284,516 278,014
- ---------------------------------------------------------------------------------------------------------------------------
Impaired loans(1) 13,671 19,166 - - 4,797 3,226 26 64 18,494 22,456
Allowances for impaired
loans 7,281 10,447 - - 2,399 2,018 5 6 9,685 12,471
- ---------------------------------------------------------------------------------------------------------------------------
of which:
Non-performing loans 7,872 11,416 - - 2,554 1,594 26 63 10,452 13,073
Allowances for non-
performing loans 4,702 7,315 - - 2,143 1,341 5 5 6,850 8,661
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCES FOR
IMPAIRED AND
NON-PERFORMING LOANS 7,281 10,447 - - 2,399 2,018 5 6 9,685 12,471
- ---------------------------------------------------------------------------------------------------------------------------
188
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UBS
RISK--RISK ANALYSIS
- --------------------------------------------------------------------------------
UBS Asset
UBS Switzerland Management UBS Warburg Corporate Center UBS Group
CHF million ------------------ ------------------ ------------------ ------------------ ------------------
AS OF 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99 31.12.00 31.12.99
- ---------------------------------------------------------------------------------------------------------------------------
Other allowances and
provisions for credit
and country risk 22 - - - 874 927 - - 896 927
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCES AND
PROVISIONS 7,303 10,447 - - 3,273 2,945 5 6 10,581 13,398
- ---------------------------------------------------------------------------------------------------------------------------
of which country
allowances and
provisions - - - - 1,292 1,376 - - 1,292 1,376
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS
Impaired loans as a %
of gross loans(1) 7.4 9.6 - - 4.8 4.2 11.6 9.3 6.5 8.1
- ---------------------------------------------------------------------------------------------------------------------------
Non-performing loans
as a % of gross
loans 4.3 5.7 - - 2.6 2.1 11.6 9.1 3.7 4.7
- ---------------------------------------------------------------------------------------------------------------------------
Allowances and
provisions for credit
loss as a % of gross
loans 4.0 5.2 - - 3.3 3.8 2.2 0.9 3.7 4.8
- ---------------------------------------------------------------------------------------------------------------------------
Allocated allowances as
a % of impaired
loans(1) 53.3 54.5 - - 50.0 62.6 19.2 9.4 52.4 55.5
- ---------------------------------------------------------------------------------------------------------------------------
Allocated allowances
as a % of
non-performing loans 59.7 64.1 - - 83.9 84.1 19.2 7.9 65.5 66.3
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes non-performing loans.
IMPAIRED LOANS, ALLOWANCES AND PROVISIONS
As shown in the table above, the allowances and provisions for credit losses
decreased by CHF 2,817 million, or 21%, from CHF 13,398 million at 31 December
1999 to CHF 10,581 million at 31 December 2000 (see also note 12b to the
Financial Statements.) UBS believes that the probable losses in its portfolio
are adequately covered by its allowances and provisions.
The component of provisions and allowances for emerging market-related exposures
stood at CHF 1,292 million at 31 December 2000, compared with CHF 1,376 million
at 31 December 1999 and CHF 1,450 million at 31 December 1998. The reduction is
a consequence of the overall size of UBS's emerging market exposures and the
improved outlook for the major emerging market economies since the crisis of
1998. The country risk scenarios used to assess portfolio provisions have
changed over the three years with the focus shifting to some extent from Asia to
Latin America.
Impaired loans have decreased to CHF 18,494 million at 31 December 2000 from CHF
22,456 million at 31 December 1999. Over the same period, the sub-set of
non-performing loans has also decreased, to CHF 10,452 million from CHF 13,073
million and the non-performing loans ratio improved to 3.7% from 4.7%. This
positive result was due in part to the unexpectedly strong performance of the
economy in Switzerland, described above, which produced fewer new impaired and
non-performing loans than in previous years, and in part to continuing efforts
to conclude proceedings and reach settlement on existing nonperforming loans.
UBS Switzerland's portfolio therefore saw decreases in the impaired and
nonperforming loans of CHF 5,495 million and CHF 3,544 million, respectively.
189
191
UBS
RISK--RISK ANALYSIS
- --------------------------------------------------------------------------------
UBS Warburg's portfolio, on the other hand, saw an increase in impaired loans of
CHF 1,571 million and in non-performing loans of CHF 960 million, in line with
the trends in the international credit markets and especially the US. Although
UBS's non-performing loans ratio is somewhat higher than that of comparable US
banks, the comparison reflects different charge-off practices rather than
underlying asset quality.
MARKET RISK
Market risk is the risk of loss arising from movements in observable market
variables such as interest rates, exchange rates and equity markets. In addition
to these and other general market risk factors, the risk of price movements
specific to an individual issuer of securities or an individual issue are
included in the measurement of market risk.
UBS's market risk is incurred principally through the trading activities of UBS
Warburg. It arises primarily from market making and client facilitation activity
in equities, fixed income and interest rate products and in foreign exchange and
precious metals. Activity is mainly in OECD markets, with some business in
emerging markets. Proprietary positions based on market views are also taken.
Group Treasury assumes market risk in the management of the Group's balance
sheet where long-term interest rate risk is transferred from other Business
Groups, and through the Group's structural foreign exchange positions. Group
Treasury's activities are described in "Risk--Asset and Liability Management"
below.
Further market risks arise, but to a much lesser extent, in other businesses,
again, primarily from the facilitation of customer business, but also in the
form of interest rate risk in the banking books of the private label banks of
UBS Switzerland.
Market risk measures are applied to all the trading books of UBS Warburg, to all
foreign exchange and precious metals exposures, to interest rate risk in the
banking book taken by the private label banks and Group Treasury, and to any
other material market risk arising.
RISK MEASUREMENT
The expected, statistical and stress loss framework is applied to market risk as
follows:
- Expected loss is reflected in the valuation adjustments made to the
portfolio. These cover price uncertainties resulting from a lack of
market liquidity or the absence of a reliable market price for an
instrument or position, and model risk in more complex models.
- Statistical loss is measured using a Value-at-Risk (VaR) methodology. VaR
expresses the potential loss on the current portfolio assuming a
specified time horizon before positions can be adjusted (holding period),
and measured to a specified level of confidence. UBS measures VaR on both
a one-day and a ten-day holding period, in both cases to a 99% confidence
level. Estimates are based on historical simulation, assessing the impact
of historical market movements on today's portfolio, based on five years
of historical data. One day VaR exposure expresses the maximum daily mark
to market loss that UBS is likely to incur on the current portfolio under
normal market conditions with a larger loss being statistically likely
only once in a hundred times.
- Stress loss is measured based on extreme but plausible market scenarios,
approved by the Board of Directors, using stress moves in market
variables which are regularly reviewed and approved by the Group CRO.
Scenarios may be derived from severe historical events or based on
prospective crisis scenarios developed from the current economic
situation and perceived market trends.
190
192
UBS
RISK--RISK ANALYSIS
- --------------------------------------------------------------------------------
The Board of Directors has set limits on market risk at the Group level in terms
of both ten-day VaR (risk appetite) and stress loss (risk capacity). The Group
VaR limit is allocated by the GEB among the Business Groups, the largest limit
being in UBS Warburg, and within the Business Groups to lower organizational
levels as necessary. The internal ten-day VaR measure is also the basis of UBS's
market risk regulatory capital requirement.
All VaR models, while forward-looking, are based on past events and are
dependent upon the quality of available market data. In order to enhance the
continuing accuracy and effectiveness of the VaR model, actual revenues arising
from closing positions are compared with the risk calculated on those positions,
in a process known as backtesting. If the revenue, whether positive or negative,
exceeds the one-day VaR, a "backtesting exception" is considered to have
occurred. When VaR is measured at a 99% confidence level, a backtesting
exception is expected, on average, one day in a hundred. A higher rate of
occurrence may indicate that the VaR model (the combination of the inputs and
the calculations) is not fully capturing all risks. UBS conducts backtesting
daily at a number of organizational levels down to individual trading portfolios
and investigates all backtesting exceptions to establish the cause and take
remedial action where necessary.
Backtesting is also a regulatory requirement, and negative backtesting
exceptions (where revenue is negative and greater than the previous one-day VaR)
must be reported to the regulators.
The VaR and market risk stress loss limits are the principal controls on UBS's
exposure to day-to-day movements in market prices, but complementary controls
are also applied to prevent undue concentrations, including limits on exposure
to individual market risk variables and limits on positions in the securities of
individual issuers. These controls are set at levels which reflect variations in
market depth and liquidity.
SUMMARY OF 10-DAY 99% CONFIDENCE VALUE AT RISK
UBS WARBURG
12 MONTHS ENDING 29.12.00 (1) 12 months ending 31.12.99
---------------------------------- -----------------------------------
CHF MILLION MIN. MAX. AVERAGE 29.12.00 MIN. MAX. AVERAGE 31.12.99
- -------------------------------------------------------------------------------------------------------
RISK TYPE
Equities 144.7 245.9 199.4 146.5 121.8 207.6 162.5 172.8
Interest rates 113.8 202.3 149.8 132.8 87.7 187.6 140.2 140.1
Foreign exchange 7.6 97.5 32.5 31.6 9.5 144.7 57.5 76.1
Precious metals 2.1 27.4 9.7 5.3 5.3 35.8 21.0 27.8
Diversification effect -2 -2 (148.3) (129) -(2) -(2) (168.2) (193.2)
- -------------------------------------------------------------------------------------------------------
TOTAL UBS WARBURG 186.8 296.1 243.0 187.1 176.6 275.7 213.1 223.6
- -------------------------------------------------------------------------------------------------------
(1) Positions from PaineWebber are included from legal merger date 3 November
2000 onwards.
(2) As the minimum and maximum occur on different days for different risk types,
it is not meaningful to calculate a portfolio diversification effect.
191
193
UBS
RISK--RISK ANALYSIS
- --------------------------------------------------------------------------------
SUMMARY OF 10-DAY 99% CONFIDENCE VALUE AT RISK FOR UBS GROUP
UBS GROUP VAR(1)
Utilization
---------------------------
CHF million Limit 29.12.00 31.12.99
- ----------------------------------------------------------------------------------------------
BUSINESS GROUPS
UBS Warburg 450.0 187.1 223.6
UBS Switzerland 50.0 3.7 4.3
Corporate Center 350.0 45.3 59.8
Reserves 100.0
Diversification effect n/a (46.5) (55.5)
- ----------------------------------------------------------------------------------------------
UBS GROUP 600.0 189.6 232.2
- ----------------------------------------------------------------------------------------------
(1) Remark: VaR numbers include interest rate exposures in the banking books of
the Private Label Banks and Group Treasury.
INVESTMENT POSITIONS
Investment positions, such as private equity, require different risk measures
from those applied to trading positions, because their intended holding period
and the time scale over which they can be hedged or liquidated is longer than
the holding periods assumed in the trading book measures. They are not,
therefore, included in the market risk measures described above, but are
controlled through limits to prevent undue concentration in individual
investments or sectors, and through close monitoring and management of
exposures.
MARKET RISK DEVELOPMENTS
The table above shows average, minimum, maximum and year end market risk
exposure for UBS Warburg, as measured by 10-day 99% confidence VaR exposure.
Market risk in UBS Warburg, as measured by average VaR exposure, increased in
2000 compared with 1999, although the year end position was lower for 2000 than
for 1999. The variations in VaR through the year can be seen in the graph below.
As in 1999, the major VaR exposures arose in the equity and interest rate risk
classes. Average VaR increased for both, but most noticeably in equities where
there were particularly good trading opportunities. UBS Warburg has kept direct
price exposure to the new economy stocks deliberately low and, as a consequence,
has not suffered exceptional P&L swings from these highly volatile stocks, as
can be seen from the revenue line in the graph below. The overall reduction in
UBS Warburg's VaR at year end was caused largely by reductions in equities
positions.
- -111.473 -226.3180 10.8000
- -111.96 -214.6210 26.5000
- -116.02 -224.2820 82.6000
- -119.9 -224.2510 51.9000
- -120.84 -224.4500 89.9000
- -124.03 -227.4040 81.7000
- -102.97 -216.1250 32.0000
- -99.68 -215.9430 43.9000
- -107.26 -226.4290 -54.6000
- -107.22 -223.6410 -15.4000
- -106.72 -227.5670 -9.6000
- -108.51 -229.7040 0.9000
- -110.28 -242.9280 118.9000
- -113.44 -245.9670 85.9000
- -111.33 -250.7930 -32.4000
- -112.35 -255.4770 43.5000
- -113.37 -264.3810 51.7000
- -111.87 -265.4930 27.8000
- -115.54 -261.9640 144.6000
- -121.75 -258.3790 -6.3000
- -124.48 -266.0910 29.6000
- -123.62 -275.2650 0.0000
- -127.29 -270.1930 92.0000
- -125.46 -264.0540 49.6000
- -123.24 -260.2860 52.3000
- -122.34 -260.6640 32.4000
- -124.45 -262.9780 -28.6000
- -119.16 -249.8360 55.9000
- -111.97 -239.9300 36.6000
- -116.09 -259.0540 75.0000
- -116.66 -266.2320 93.3000
- -117.28 -264.9400 -32.6000
- -119.02 -266.2890 47.6000
- -117.54 -245.2460 49.8000
- -116.27 -256.1410 -2.4000
- -120.89 -281.8670 -11.0000
- -122.67 -291.0450 18.1000
- -123.21 -281.7910 16.7000
- -123.3 -274.2300 -48.4000
- -133.87 -285.7520 80.6000
- -131.36 -296.0860 124.7000
- -134.01 -282.8110 46.1000
- -132.15 -267.4740 -56.3000
- -128.61 -261.3110 49.8000
- -134.46 -268.2920 45.1000
- -127.65 -259.7460 -13.7000
- -127.99 -264.8480 60.7000
- -133.68 -268.6250 90.4000
- -134.31 -274.9760 113.6000
- -133.52 -271.6370 -14.0000
- -131.31 -272.8580 27.8000
- -128.72 -258.5080 43.8000
- -127.56 -267.1700 86.8000
- -127.65 -263.3330 42.3000
- -129.74 -268.2390 16.7000
- -126.79 -271.6690 34.3000
- -127.54 -273.5290 51.8000
- -131.44 -279.5850 39.3000
- -129.93 -273.5890 -24.4000
- -129.42 -273.3640 81.4000
- -128.1 -267.9920 7.4000
- -130.64 -278.3100 17.8000
- -132.59 -278.7810 66.7000
- -134.54 -279.7140 -10.7000
- -134.29 -277.0320 35.0000
- -132.9 -271.2620 -2.7000
- -131.8 -270.9320 76.8000
- -134.1 -272.9320 51.8000
- -135.3 -273.6770 49.1000
- -138.6 -272.8550 7.2000
- -138.2 -273.7350 49.4000
- -137.6 -265.8580 2.9000
- -134.1 -271.8210 33.7000
- -134.6 -275.8080 3.3000
- -138 -275.7410 -23.5000
- -132.1 -266.5440 163.8000
- -125.9 -253.3760 75.2000
- -131.4 -266.4200 36.9000
- -130.2 -263.5190 24.7000
- -129.8 -271.1420 63.0000
- -133.1 -265.6800 90.7000
- -140.4 -284.0630 6.4000
- -135.1 -268.0420 32.8000
- -138.6 -279.6600 5.4000
- -140.6 -270.7890 68.5000
- -128.6 -267.6240 16.7000
- -133.8 -271.7270 36.6000
- -129.9 -262.9960 5.0000
- -138.5 -272.3050 31.8000
- -137.3 -269.5500 48.1000
- -133.2 -265.2330 61.7000
- -130.2 -263.2500 28.2000
- -132.3 -266.6310 46.8000
- -135.5 -260.6290 44.1000
- -132.5 -263.3010 24.6000
- -136.3 -268.5040 19.0000
- -138.6 -276.9930 15.6000
- -135.2 -271.6870 -31.8000
- -136.6 -268.2340 76.5000
- -128.2 -262.5970 18.4000
- -126.3 -261.4980 -24.2000
- -126.1 -254.4290 10.5000
- -124.2 -254.3090 10.1000
- -122.6 -243.1130 9.9000
- -122.1 -237.9130 3.4000
- -125.3 -245.7150 52.7000
- -126.9 -251.3840 34.7000
- -127.5 -252.7350 1.7000
- -124.6 -253.2650 19.7000
- -123.3 -251.9070 32.1000
- -111.4 -227.0030 38.6000
- -111.4 -231.8990 19.7000
- -112.4 -227.1000 53.7000
- -110.8 -224.9130 6.0000
- -109.8 -222.2360 -4.3000
- -114.6 -226.9370 39.4000
- -112.8 -229.7190 36.7000
- -109.7 -225.0670 57.7000
- -107.4 -219.3150 55.7000
- -109.1 -221.2570 -1.2000
- -101 -220.0490 67.8000
- -99.7 -221.9380 37.8000
- -98.6 -222.4600 64.9000
- -101.6 -238.8760 12.3000
- -101.7 -229.2120 -13.4000
- -100.6 -226.4940 -13.6000
- -99.7 -218.1980 7.5000
- -101.4 -225.9560 9.8000
- -99 -220.9230 19.8000
- -98.34 -231.0240 -5.9000
- -107.74 -227.9440 29.0000
- -108.77 -225.5830 7.0000
- -102.62 -213.1610 45.4000
- -105.52 -220.8820 -10.7000
- -106.96 -216.4100 48.6000
- -108.46 -216.2800 11.5000
- -107.45 -216.7450 46.2000
- -103.11 -213.5110 42.6000
- -107.61 -218.6510 37.8000
- -108.6 -218.2250 38.8000
- -108.3 -224.4090 32.7000
- -108.66 -225.7680 -1.3000
- -107.53 -215.1140 4.3000
- -107.92 -221.7870 31.4000
- -110.13 -224.4430 -17.5000
- -113.19 -234.5670 19.5000
- -110.31 -228.0100 2.8000
- -118.94 -247.2480 26.0000
- -119.64 -244.4130 47.8000
- -116.9 -236.2310 79.0000
- -120.23 -243.8550 1.6000
- -118.09 -240.3290 71.7000
- -120.47 -247.1640 48.8000
- -116.48 -239.6820 -1.1000
- -115.44 -231.4610 13.4000
- -115.77 -231.8460 24.0000
- -113.98 -232.1470 -15.3000
- -119.25 -243.6670 43.6000
- -121.39 -244.1240 21.5000
- -120.09 -249.7100 0.0000
- -119.95 -245.3940 21.0000
- -119.13 -242.8190 8.8000
- -122.35 -243.7400 37.3000
- -122 -248.1120 12.6000
- -121.27 -241.1410 -10.3000
- -118.89 -241.9530 12.4000
- -119.64 -247.0280 -6.8000
- -119.87 -242.1450 39.7000
- -115.56 -236.7040 -0.1000
- -119.17 -242.2000 18.3000
- -118.63 -243.0120 -2.9000
- -124.64 -257.6930 27.0000
- -122.11 -248.8040 -7.0000
- -127.78 -247.5290 -4.6000
- -128.9 -250.8810 -16.7000
- -130.94 -253.9540 49.6000
- -133.29 -261.6420 27.7000
- -133.38 -260.8560 40.6000
- -130.57 -260.9710 30.2000
- -129.3 -255.0760 49.2000
- -130.98 -253.6650 9.2000
- -127.73 -246.9840 48.1000
- -122.53 -239.5310 83.1000
- -126.28 -247.1530 79.3000
- -124.03 -250.4400 -12.8000
- -122.51 -253.7310 -3.9000
- -125.61 -255.4620 33.2000
- -124.05 -242.3790 17.1000
- -117.26 -232.7970 -20.0000
- -117.07 -232.0730 35.7000
- -117.07 -236.4460 21.0000
- -117.08 -229.5430 23.7000
- -119.97 -238.2730 59.9000
- -122.14 -245.5510 81.0000
- -120.609 -224.9000 9.4000
- -118.941 -224.3840 27.1465
- -115.72 -219.4110 31.3723
- -115.218 -229.2500 19.6453
- -116.933 -224.6660 3.2557
- -114.636 -222.1810 18.6806
- -118.067 -222.9060 1.4067
- -111.226 -214.4600 -25.2001
- -110.841 -213.4580 -26.6283
- -110.871 -212.3810 -24.1481
- -106.284 -207.1600 31.4820
- -104.281 -202.6160 9.0821
- -105.119 -203.9720 -17.4668
- -102.372 -194.4870 57.4974
- -104.826 -198.7620 28.9875
- -116.784 -207.4550 -25.6252
- -111.662 -206.2790 31.7360
- -107.468 -201.3860 -23.7490
- -107.84 -201.7570 44.6726
- -110.675 -203.1790 40.4690
- -110.668 -211.4170 26.6740
- -119.284 -217.0780 36.7430
- -117.078 -224.9310 -10.3207
- -121.917 -225.5640 34.7734
- -121.437 -233.7400 29.0673
- -129.74 -234.6250 30.1189
- -140.286 -266.1010 13.0715
- -140.189 -264.6930 46.9891
- -136.177 -254.4320 -14.4263
- -135.463 -244.2250 18.6365
- -138.339 -247.6130 15.0431
- -136.964 -247.4420 6.7143
- -139.966 -248.3200 25.9266
- -135.832 -238.0900 22.3331
- -135.087 -236.5340 -4.5284
- -130.485 -235.3580 34.6810
- -135.602 -231.8680 -5.2382
- -135.734 -236.0920 19.4294
- -132.679 -235.7940 8.7896
- -126.149 -227.9640 34.7868
- -130.718 -230.3910 -7.5863
- -132.034 -233.8980 10.1924
- -131.49 -231.3690 14.1267
- -124.475 -222.6870 63.4924
- -123.107 -216.2990 25.1773
- -135.029 -237.7380 -21.5780
- -129.117 -225.1370 18.2671
- -126.292 -225.2940 26.9170
- -115.902 -223.5730 -10.9073
- -119.16 -221.6390 7.1745
- -120.852 -221.6990 17.9867
- -118.604 -219.8080 15.7354
- -119.782 -220.2550 -21.8544
- -119.218 -212.9020 -5.8296
- -114.395 -219.3190 -23.4014
- -117.543 -218.0580 -11.1943
- -120.392 -228.4700 40.0576
- -121.301 -231.1770 -65.7748
- -114.506 -204.7470 -48.1052
- -109.363 -196.8450 15.7775
- -106.21 -190.3790 -2.7584
- -108.944 -195.8340 30.5081
- -105.618 -187.1970 -16.5592
- -103.928 -186.8270 17.8922
- -104.474 -187.1470 13.5844
- -113.8 -224.5120 -20.4954
192
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UBS
RISK--RISK ANALYSIS
- --------------------------------------------------------------------------------
The PaineWebber merger did not cause a significant change in UBS Warburg's total
VaR exposure.
Market risk positions in UBS Switzerland and Corporate Center have only a
marginal impact on total VaR at Group level, the main contribution being from
UBS Warburg.
UBS has had no regulatory backtesting exceptions in 2000.
CONSEQUENTIAL RISKS
The consequential risk (or operational risk) categories are transaction
processing risk, liability risk, legal risk, compliance risk, security risk and
tax risk.
UBS is continuing to develop both qualitative and quantitative approaches to the
management and control of consequential risks. A measurement framework has been
formulated, but full implementation depends upon the existence of multiperiod
exposure and loss data. Current efforts are therefore centered on building this
history and on the qualitative aspects of risk management and control -
identification and recording of risks and exposures, establishment of policies,
standards and procedures, close monitoring and management of identified risks,
and initiation of corrective action where necessary in response to incidents.
By identifying and recording these risks and tracking their evolution, UBS will
establish the basis from which the quantitative framework can be realized.
The consideration of consequential risks is an important element in the
assessment of new businesses and of transactions with unusual structure.
CONSEQUENTIAL RISK DEVELOPMENTS
Under the Group and Business Group CROs, all consequential risks are now
formally integrated into the independent risk control process.
With information security assuming ever increasing importance in today's banking
environment, UBS has separated information security risk control from IT
development and production functions by creating independent information
security risk control units, reporting to the Group CRO. The successful parrying
of recent virus attacks against UBS has shown the expertise and strength of the
information security risk control and management organization in protecting the
confidentiality and integrity of our client data and assets.
UBS, as the largest Private Bank in the world, initiated and achieved
international agreement with 11 major banks and Transparency International, the
leading international organization dedicated to combating corruption, on global
anti-money laundering guidelines for private banking - the "Wolfsberg Anti-Money
Laundering Principles". Their purpose is to try to prevent the use of banks'
worldwide operations for criminal purposes. Banks adopting these principles will
endeavor to accept only those clients whose source of wealth and funds can be
reasonably established to be legitimate. The principles deal with "know your
customer" policies and the identification and follow-up of unusual or suspicious
activities. UBS is committed to following these principles.
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UBS
- --------------------------------------------------------------------------------
Asset and Liability Management
UBS's Asset and Liability Management processes are designed to manage all
balance-sheet related risks on a co-ordinated Group-wide basis. Group Treasury
is responsible for the management of these risks so that the financial resources
of the Group are efficiently used.
The primary mission of our asset and liability management activities is to
contribute to the maximization of UBS's shareholder value through the optimal
management of the Group's financial resources. The individual goals of these
processes are:
- Efficient management and control of the Group's non-trading interest rate
and foreign exchange exposures.
- Sustainable and cost-efficient funding of the Group's balance sheet.
- Optimal liquidity management in order to generate cash when required.
- Efficient management of capital, while maintaining strategic flexibility,
sound capitalization and strong ratings.
- Compliance with all applicable legal and regulatory requirements.
Group Treasury is governed by the Group's Risk Management and Control
Principles, with its own specific processes and policies, tailored to the types
of risk it manages: Group liquidity risk, Group funding risk and non-trading
related foreign exchange and interest rate risk.
PRINCIPLES
The Group's approach to interest rate risk management is based on a
comprehensive framework in which only a limited number of business areas are
allowed to actively manage interest rate risk. All non-trading interest rate
risk is transferred, as it is incurred, to either Group Treasury or to UBS
Warburg's Cash and Collateral Trading book (CCT), depending on the maturity and
currency of the underlying transaction.
These two business areas manage these risks centrally, within pre-defined risk
limits, exploiting the Group-wide netting potential. If appropriate, Group
Treasury transfers some of its risk to CCT which, in turn, interacts with the
external market.
These processes aim to immunize the originating business unit from all interest
rate risk, providing them with an interest rate risk-free margin.
UBS's liquidity management ensures that the Group can at all times fulfil its
payment obligations, without compromising its ability to take advantage of
market opportunities as they arise. Liquidity management is based on an
integrated system which encompasses all known cash flows within the Group, and
takes account of the availability of high-grade collateral. The liquidity
position is managed using scenario-based analysis taking stress factors into
consideration.
Group Treasury and CCT operate an integrated collateral management process which
both provides collateral for CCT's securities lending activities and constitutes
a key element of the Group's liquidity management. CCT is able to generate
substantial revenues for the Group and its clients through securities lending
transactions.
Group Treasury co-ordinates all funding activities in order to ensure that the
Group's businesses are funded at the lowest possible costs. It also seeks to
maintain a well diversified portfolio of funding sources and to preserve a
balanced liability structure.
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RISK--ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
UBS's currency management seeks to shield UBS's equity and expected future cash
flows from adverse currency fluctuations against the Swiss franc.
Currency translation risk management ensures that UBS's equity is always
invested in Swiss francs, while currency transaction risk management proactively
hedges recognized future foreign currency exposures against the Swiss franc. The
hedging process is centered on the use of a cost-efficient option strategy,
designed to retain the upside potential of any favorable currency movements.
UBS's capital management aims to guarantee sound capitalization, strong credit
ratings and compliance with regulatory requirements, while maximizing
shareholder value. UBS's capital needs are constantly analyzed to ensure that
the individual business areas are always supplied with sufficient capital to
meet their anticipated requirements. Where excess capital is identified, UBS is
committed to the innovative use of capital management techniques to return
surplus funds to shareholders.
INTEREST RATE RISK MANAGEMENT
Interest rate risk is inherent to many 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, because 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 the relevant
pairs of floating rate indices, such as the savings rate and six months LIBOR.
In addition, certain products have embedded options that affect their pricing
and their effective maturity.
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 CCT or to the Group Treasury through a
Group-wide transfer pricing mechanism. The risk is then managed centrally either
by Group Treasury or by CCT in accordance with the relevant risk policies and
limits. (The private label banks of UBS Switzerland, while subject to the same
transfer prices, are an exception to this rule, and manage their own interest
rate risk separately.)
INTERNAL HEDGING PROCESS
In the case of client businesses which have no contractual maturity date or
directly market-linked customer rate, such as savings accounts or current
accounts, the interest rate risk is transferred from the business areas by
pooled transactions to Group Treasury's Bank Book. Since these products
effectively contain embedded options in respect of withdrawal/pre-payment and
rate setting, they cannot be economically hedged by single back-to-back
transactions. Group Treasury therefore manages the inherent interest rate risk
in these products through the establishment of replicating portfolios of
revolving fixed-rate transactions of predefined maturities which approximate the
average cash flow behavior of these positions.
Until the end of 2000, the interest rate risk of long-term Swiss franc
transactions with fixed maturities beyond 1 year was transferred by single
back-to-back transactions from the originating business area to CCT. In this way
the originating business area was immunized from any residual interest rate risk
and thus locked in an interestrate-risk-free margin on these products. Since the
start of 2001 these back-to-back transactions have been carried out with Group
Treasury rather than with CCT. This allows UBS to benefit directly from the
netting potential between these transactions and the replicating portfolios.
Group Treasury then economically hedges all remaining risks (after netting)
through internal transactions with CCT.
195
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UBS
RISK--ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
Short-term (fixed maturity below 1 year) and non-Swiss franc transactions
continue to be transferred directly into the trading book of 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 Group's real estate,
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 which implicitly create nontrading
interest rate exposures. The interest rate risks inherent in these balance sheet
items are managed by Group Treasury by representing them as replicating
portfolios, on the basis of decisions taken by the Group Executive Board as to
the appropriate effective maturities.
All the replicating portfolios in the Bank Book are updated monthly by replacing
maturing tranches with new aggregate tranches which reflect the changes in the
balance sheet over the period. By their nature, the staggered tranches, making
up each replicating portfolio, reduce the volume that must be economically
hedged by the Bank Book at each monthly rollover. Even so, the new aggregate
tranches are of such a size that they cannot be offset instantly. The Bank Book
therefore assumes intra-month interest rate exposure while it executes the
necessary offsetting hedges with CCT. The exposure in the Bank Book therefore
tends to fluctuate between monthly rollovers.
Within its risk limits, CCT decides whether the internal hedge transactions will
be offset with the external market or remain in its trading book.
INTEREST RATE SENSITIVITY OF THE BANK BOOK
WITHIN 1 1 TO 3 3 TO 12 1 TO 5 OVER
CHF THOUSAND PER BASIS POINT MONTH MONTHS MONTHS YEARS 5 YEARS TOTAL
- ----------------------------------------------------------------------------------------------------
CHF (11) 60 239 493 (37) 744
USD 13 58 11 (342) (183) (443)
EUR 0 9 1 82 177 269
GBP 0 0 (36) 270 585 819
JPY 0 0 0 (1) (4) (5)
Others 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------
TOTAL 2 127 215 502 538 1,384
- ----------------------------------------------------------------------------------------------------
of which equity replicating portfolio
- ----------------------------------------------------------------------------------------------------
CHF 28 11 288 7,295 2,981 10,603
- ----------------------------------------------------------------------------------------------------
Bank Book without equity replicating
portfolio
- ----------------------------------------------------------------------------------------------------
TOTAL (26) 116 (73) (6,793) (2,443) (9,219)
- ----------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY OF THE BANK BOOK
The Group Executive Board has approved risk management policies, risk limits and
a control framework for the entire interest rate risk management process,
including the establishment of a Value-at-Risk (VaR) limit for the interest rate
exposure of the Bank Book. The Market Risk Control function monitors the risk in
both CCT and Group Treasury on a daily basis as part of UBS's overall market
risk in order to ensure the integrity of the interest rate risk management
process and its compliance with the defined risk limits.
UBS's approach to managing the interest rate risks in the Bank Book follows the
regulatory framework recently introduced by Swiss Federal Banking Commission
(FBC). In the course of 2000, it became mandatory for all Swiss banks to report
to the Swiss National Bank the interest rate sensitivity of the
196
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UBS
RISK--ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
Bank Book on a quarterly basis. Additionally, the specific composition of the
underlying replicating portfolios used to manage individual balance sheet items
must be disclosed in order to assist the regulators to identify "outliers" in
terms of interest rate risk profiles - profiles which are not typical of a bank
or the part of its business that is being monitored.
The table above shows the interest rate sensitivity of the Bank Book as at 31
December 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.
The most significant component of the Bank Book sensitivity stems from the
investment of the Group's equity. At 31 December 2000, the Group's equity was
invested in a portfolio of fixed-rate CHF deposits with an average duration of
2.5 years and a sensitivity of CHF 10.6 million per basis point, in line with
the strategic investment targets set by the Group Executive Board. In order to
ensure that these targets are met, the Group's equity is offset by a liability
position represented as a replicating portfolio reflecting this target bench
mark. The Group's equity is thus automatically invested according to the
strategic targets so as to offset the interest rate risk associated with this
equity replicating portfolio. The interest rate sensitivity of these investments
indicates the extent to which their fair value would be affected by a move in
interest rates. This in turn is directly related to the chosen investment
duration. However, when measured against the offsetting equity replicating
portfolio, the residual interest rate risk is not significant. Moreover, any
reduction in 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 in the Group's interest earnings.
In addition to the standard sensitivity measure shown above, UBS uses the
following two measures to help 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. Since all client business
with fixed maturities is "match funded", the product margins of these
transactions are not affected by changes in interest rates. Therefore
only net interest income positions resulting from replicating portfolios
are exposed to market changes. The net interest income at risk figure
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 where
current market rates are held constant for the next twelve months.
- Economic value sensitivity, which is the potential change in market value
of the Bank Book resulting from large changes in interest rates. This
estimates the effect of an immediate interest rate shock on the net
position in the Bank Book.
The net interest income at risk measure on the Bank Book considers such
variables as:
- Re-pricing characteristics of assets and liabilities.
- The effect of rate barrier, such as caps and floors, on assets and
liabilities.
- Maturity effects of replicating portfolios.
- Behavior of competitors.
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 predictor of
future net interest income.
Both measures are based on the Bank Book's interest rate position excluding the
liability position relating to the "equity replicating portfolio".
197
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UBS
RISK--ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
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 from all
maturing positions over the next twelve months. The table below shows the change
in risk under both measures between 31 December 1999 and 31 December 2000.
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 1999, the difference to the constant
market rate scenario represented -5.6% of the year's total net interest income
and -3.0% at 31 December 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 the Group's equity.
The economic value sensitivity shows the effect of a 100 basis point adverse
interest rate shock, implying that UBS had an exposure of CHF -555 million to
that degree of rising rates at 31 December 1999 and CHF -908 million at 31
December 2000.
The substantial increase in the economic value sensitivity in the course of 2000
was primarily due to the decision to lengthen the duration of the Group's equity
investment. The other main contribution to the increase resulted from the USD
refinancing of the PaineWebber acquisition, which lead to a negative sensitivity
to USD rates.
CHANGE IN RISK UNDER TWO METHODOLOGIES
For the year ended
------------------------------
CHF MILLION 31.12.00 31.12.99 31.12.98
- --------------------------------------------------------------------------------------
Net interest income at risk (247) (355) (265)
Economic value sensitivity (908) (555) (493)
- --------------------------------------------------------------------------------------
OTHER EFFECTS OF INTEREST RATE CHANGES ON UBS'S PROFITABILITY
Neither of these two methodologies gives a complete picture of the effect of
interest rate changes on the Group's revenues and costs. In principle, higher
rates give UBS opportunities to improve loan pricing and deposit margins. Income
from invested equity also increases, particularly where the yield curve is
steep, although as it is mostly invested long term the average rate only rises
slowly. However, rising interest rates also cost the Group money, through the
cost of funding its trading portfolios, especially if the yield curve is
inverted. Loan demand may also reduce and deterioration in credit quality is
likely, especially if rates rise towards the end of the yield cycle. At the same
time, increased rates may reduce the prospects for growth in equity markets,
leading to lower net new money and lower transaction volumes, both of which
would impact our fee income. Furthermore, changes in rates in different
currencies have stronger or weaker effects on different aspects of the overall
picture - trading related revenues are more exposed to changes in USD rates, but
loans and deposit margins to changes in CHF rates.
A similarly complicated picture would apply to a reduction in interest rates.
So, although the sensitivity of UBS's income to changes in the rates applied to
its current balance sheet positions gives some indication of interest rate risk,
the overall effect of a change in interest rates on the whole of the Group's
business is much harder to model. It will partly depend on other factors, such
as the shape of the yield curve, the position in the credit cycle and market
perceptions of the progress of key economies.
198
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UBS
RISK--ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
LIQUIDITY AND FUNDING MANAGEMENT
The Group Executive Board (GEB) has approved a policy which 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 (for example a net overnight funding limit). The risk limits are set by
the GEB and monitored by the Group Treasury Committee which is chaired by the
Group Treasurer and meets on a monthly basis to assess the Group's liquidity
exposure. A second set of principles concentrates on liquidity crisis management
for which detailed contingency plans have been developed. Regional committees
constantly monitor the markets in which UBS operates for potential threats and
regularly report their findings to the GTC. In the event of a liquidity crisis
regional crisis task forces will perform all necessary contingency actions under
the direction of senior management.
The liquidity management process is undertaken jointly by Group Treasury and
CCT. Group Treasury's function is to establish a comprehensive framework of
policies and risk limits, while CCT undertakes operational cash and collateral
management transactions within the established parameters. UBS's centralized
cash and collateral management structure permits a tight control on both its
global cash position and the stock of highly liquid and rediscountable
securities.
LIQUIDITY MANAGEMENT APPROACH
UBS's approach to liquidity management seeks to ensure that the Group will
always have sufficient liquidity to meet its liabilities when due, without
compromising its ability to respond quickly to 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 the Group and the availability of
high-grade collateral, which could be used to secure additional funding if
required. The liquidity position is prudently managed under a variety of
potential scenarios, taking stress factors into due consideration. The range of
scenarios analyzed encompasses both normal market conditions and stressed
conditions, including both bank-specific and general market crises. For each
scenario considered, the short-term liquidity position arising out of nontrading
activities is determined by matching liabilities running off against maturing
assets repaid. This gap is then augmented by that of the trading book by
ascertaining the value of assets which could be liquidated as compared to the
liabilities which would have to be repaid. Here, due account is also taken of
UBS's large stock of high-quality collateral.
BENEFITS OF CENTRALIZATION
Being a globally integrated financial services firm, UBS's range of business
activities naturally generate asset and liability portfolios which are highly
diversified with respect to market, product and currency. This lowers UBS's
exposure to individual funding sources, and also provides a broader range of
investment opportunities, which in turn reduces liquidity risk. The centralized
approach to liquidity management adopted at UBS allows these advantages to be
exploited. Group Treasury is, furthermore, instrumental in implementing an
integrated collateral management process on a Group-wide basis to ensure that
the large, high-quality pool of collateral gathered across the Group is made
accessible to UBS Warburg's CCT activities. Through securities lending
transactions, CCT creates additional revenues for both UBS Group and its
clients. These activities also generate substantial funding on a secured basis
and provide an additional liquidity cushion which could be crucial in crisis
situations.
FUNDING MANAGEMENT APPROACH
UBS's funding strategy seeks to ensure that business activities are funded at
the lowest possible cost. With a broad diversification of funding sources (by
market, product and currency), UBS maintains a well-balanced portfolio of
liabilities which generates a stable flow of financing and additionally
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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.
DEVELOPMENT DURING 2000
In the course of 2000, UBS's long-term debt portfolio has decreased from CHF
56.3 billion at 31 December 1999 to CHF 54.9 billion at 31 December 2000 as
maturing issues were not fully replaced. The maturity profile of the long-term
debt portfolio is well balanced with a slight bias towards shorter-term
maturities. See Note 21 to the Financial Statements for further information
concerning long-term debt.
CURRENCY MANAGEMENT
UBS reports its results in Swiss francs (CHF), the currency of the country in
which it is incorporated. UBS's corporate currency management activities are
designed to protect the Group's equity and 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. While
managing this risk the following overarching principles are adhered to
- Equity must be invested in Swiss francs.
- Currency management processes must be designed to minimize exposures
against the Swiss franc.
- Core currency exposures must be actively managed to protect them against
adverse currency movements.
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. Foreign currency assets are therefore 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 the Group's equity is always fully invested in Swiss
francs.
TRANSACTION (REVENUES/COSTS) CURRENCY RISK
From 1 January 2001, a new process has been implemented to improve and
streamline the process of transforming foreign currency results into Swiss
francs, creating greater transparency for the currency risk management,
budgeting and performance measurement processes.
The new process involves the regular conversion of each month's profits or
losses from the original transaction currencies directly into Swiss francs at
month end instead of the previous, annual, two-step process initially involving
a conversion into the local reporting currency and only then into Swiss francs.
Foreign currency exposures will be translated into Swiss francs at prevailing
month end foreign exchange rates rather than at the yearly average rates
previously used. The benefits of the new transaction currency risk management
process are
- the monthly sell-down into Swiss francs will reduce volatility in the
Group's earnings due to currency fluctuations;
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- the visibility of the break-down into the underlying original transaction
currencies enables UBS to more effectively manage the currency exposures
inherent in the Group's cost and revenue flows;
- the foreign exchange rates used in the financial accounts will be the
same as those used in management accounting.
While the new process will reduce the susceptibility of annual earnings to
adverse currency movements, it will not completely immunize the Group against
them. Group Treasury will therefore proactively hedge significant currency
exposures (mainly USD, EUR and GBP), in accordance with the instructions of the
Group Executive Board and subject to the VaR limit which has been established
for this risk. Hedging strategies employed include a cost-efficient option
strategy, providing a safety net against unfavorable currency fluctuations while
preserving the upside potential.
PROCESS IN USE DURING 2000
The transaction currency risk management process in use during 2000 was designed
to protect the budgeted annual foreign currency net profits against adverse
currency movements during the year. Foreign currency net profits in each
currency were actively managed by Group Treasury on behalf of the Group. The
non-trading foreign currency exposures were mainly hedged with foreign exchange
forward contracts, although foreign exchange options were also used,
particularly where there was a measure of uncertainty about the magnitude of the
underlying income. During the year, actual results were continuously monitored,
and major budget deviations were communicated to Group Treasury for potential
additional hedge transactions.
The table below summarizes the VaR usage in relation to transaction currency
risk in the course of 2000.
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.
The principal contributors to non-trading currency exposure are operations in
the UK and the US. In general under this previous process, the VaR position was
highest at the beginning of the year when the budgeted net profits were
transferred to Group Treasury and was gradually reduced during the year,
depending on the exact hedge strategy being used. The underlying policy was to
keep the VaR of the non-trading currency position as low as practicable.
Non-trading currency risk VaR exposure in 2001 is expected to be lower, thanks
to the new currency management process.
NON-TRADING CURRENCY RISK VAR
LAST VALUE
CHF MILLION MINIMUM MAXIMUM AVERAGE OF PERIOD
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1999 1.4 77.8 37.1 59.7
2000 11.6 113.4 33.7 12.7
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CAPITAL ADEQUACY
CHF MILLION, EXCEPT RATIOS 31.12.00 31.12.99 31.12.98
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BIS Tier 1 capital 31,892 28,952 28,220
BIS Tier 1 and Tier 2 capital 42,860 39,682 40,306
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BIS Tier 1 capital ratio (%) 11.7 10.6 9.3
BIS Tier 1 and Tier 2 capital ratio (%) 15.7 14.5 13.2
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Balance sheet assets 223,528 214,012 237,042
Off balance sheet and other positions 39,002 48,282 50,659
Market risk positions 10,760 10,813 16,018
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Total BIS risk-weighted assets 273,290 273,107 303,719
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CAPITAL MANAGEMENT
Capital management is undertaken by Group Treasury as an integral part of the
Group's asset and liability management function. UBS's overall capital needs are
continually reviewed to ensure that our capital base can appropriately support
the anticipated needs of business units as well as regulatory capital
requirements.
As the table above shows, UBS is very well capitalized. In the course of 2000,
the BIS Tier 1 ratio increased from 10.6% at 31 December 1999 to 11.7% at 31
December 2000. This improvement was possible despite the merger with PaineWebber
thanks to the increase in retained earnings and the issuance of new equity and
hybrid capital (a share capital increase of 12 million new shares to help fund
the PaineWebber merger and the issuance of USD 1.5 billion Trust Preferred
Securities) and a substantial decrease from UBS's in risk-weighted assets
excluding the effect of adding PaineWebber business.
The table above shows the key capital figures and ratios as of 31 December 2000
and 31 December 1999.
The ratios measure capital adequacy by comparing UBS's eligible capital with its
risk-weighted assets, which include balance sheet assets, 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.
The calculation of capital requirements applicable to UBS under Swiss Federal
Banking Commission 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 equity investments);
- where the BIS guidelines apply 20% risk weighting to obligations of OECD
banks, the Swiss Federal Banking Commission's regulations apply risk
weightings of 25% to 75% (depending on maturities) to debts from OECD
banks.
As a result of these differences, UBS's risk-weighted assets are higher, and its
ratios of total capital and Tier 1 capital are lower when calculated under the
Swiss Federal Banking Commission regulations as compared to BIS guidelines.
Nevertheless, 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, since the regulations and guidelines were
first implemented in 1988.
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INITIATIVES IN 2000
UBS's capital management is primarily driven by shareholder value
considerations, respecting the need to maintain strategic flexibility, sound
capitalization and strong ratings. During the course of 2000 several major
measures were taken to achieve these goals.
Share buy back and cancellation
In view of the continuous increase of capital from retained earnings experienced
during 1999, the Group introduced a share buy-back program in January 2000, in
order to reduce the number of issued shares and enhance earnings per share. The
program ran until June 2000, during which time a total of 18.4 million shares
were repurchased at an average price of CHF 217, representing a total
expenditure of CHF 4 billion and repurchase of about 4.3% of shares outstanding.
These shares will be cancelled in July 2001, following the approval of
shareholders at the Annual General Meeting on 26 April 2001.
Stock Split
At the Annual General Meeting in April 2000, shareholders approved a 2-for-1
stock split, effective 8 May 2000, reducing the par value of the share to the
minimum of CHF 10 then permissible under Swiss law. The motivation behind the
split was that, in absolute terms, the UBS share was of relatively high value
per share compared to stocks of other European, and particularly US financial
services providers.
New York Stock Exchange (NYSE) listing
On 16 May 2000 our shares were listed on the NYSE in the form of global
registered shares creating one global share traded in Zurich, New York and
Tokyo. As the first Swiss company to list a global share in New York, UBS
contributed to a significant enhancement in clearing and settlement
infrastructure, most notably the creation of a link between the US and Swiss
securities depositories to facilitate cross-border settlement.
EQUITY FUNDING OF THE PAINEWEBBER MERGER
UBS merged with Paine Webber Group Inc. on 3 November 2000. Half of the
consideration was paid in UBS shares, requiring a total of 41 million shares.
At an extraordinary general meeting on 7 September 2000, UBS shareholders
approved the creation of 38 million new shares in the form of authorized capital
for the merger with PaineWebber and 17 million new shares in the form of
conditional capital for PaineWebber options outstanding beyond the merger date.
In order to minimize the dilutive effects of the merger to existing
shareholders, UBS issued only 12 million new shares from authorized capital on
the completion date. 7 million shares were re-issued out of the Group's Treasury
holdings and 22 million shares were borrowed.
On 6 November 2000 a new share buy-back program was launched, which ran until 2
March 2001. Unlike the program which ran in the first half of 2000 it was not
designed to result in cancellation of the repurchased shares. 22 million shares
were purchased under this program between November 2000 and January 2001, at an
average price of CHF 262, and used to repay the shares borrowed to pay the
PaineWebber merger consideration. The remaining 8 million shares purchased under
this program will primarily be used to cover the requirements of UBS's employee
share schemes.
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CAPITAL MANAGEMENT PLANS FOR 2001
NEW SECOND-LINE BUY-BACK PROGRAM
Given its continuing strong capital generation, UBS intends again to repurchase
shares for capital reduction purposes under a "second-line" buyback program,
aimed at institutional investors, allowing tax efficient cancellation of shares.
This new second-line program becomes available from 5 March 2001 and may run
until 5 March 2002. A maximum of CHF 5 billion worth of shares may be
repurchased under the program. These shares will be cancelled following approval
by the Annual General Meeting in April 2002.
[Share Buy-back and Tier 1 Ratio Graphic]
SHARE SPLIT AND DISTRIBUTION BY PAR VALUE REDUCTION
The minimum par value allowed under law for a Swiss share is CHF 10. The share
split that UBS implemented in May last year brought the par value of its share
down to this level, removing any further opportunity to split the share.
Under new regulations, which are currently passing through the Swiss legislative
process and are expected to become effective on 1 May 2001, the minimum par
value is expected to be reduced to CHF 0.01. UBS intends to utilize this change
to lower the market price per share to a level more in line with that of its
global peer group, and to make a tax efficient payment to its shareholders in
the form of a reduction in the nominal value of its shares.
If shareholder approval is granted, a distribution of CHF 1.60, in respect of
the fourth quarter 2000, will be paid in the form of a par value reduction. This
is treated in Switzerland as a return of capital to shareholders, not as income,
and is therefore tax efficient for shareholders who pay tax in Switzerland. The
par value reduction also has advantages for shareholders outside Switzerland, as
no Swiss withholding tax is payable on it. Holders outside of Switzerland should
consult their tax advisors in determining the tax implications in their country.
The distribution will reduce the par value of the share to CHF 8.40. UBS will
then split its share 3 for 1, resulting in a new par value of CHF 2.80 per
share.
Because of the legal and regulatory processes involved, the par value reduction
is expected to take place on 16 July 2001, for payment on 18 July 2001 to
holders of record on 13 July 2001 if the relevant legislation has come into
force. The share split will also be implemented on 16 July 2001.
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PROPOSED CHANGES TO PAR VALUE
CHF
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PAR VALUE AT 01.01.01 10.0
Proposed distribution in the form of par value reduction 1.6
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New par value 8.4
Proposed stock split 3 for 1
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NEW PAR VALUE AFTER PROPOSED DISTRIBUTION AND STOCK SPLIT 2.8
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DIRECTORS AND SENIOR MANAGEMENT
Alex Krauer and Alberto Togni, the Chairman and Vice Chairman of the Board of
Directors, have entered into contracts with UBS AG in connection with their
service in those capacities. The compensation payable to them under those
contracts is included in the compensation arrangements described in Notes 35 and
36 to the UBS Group Financial Statements. There are no service contracts with
any of the other members of the Board of Directors.
SHARE OWNERSHIP
No member of the Board of Directors or the Group Executive Board is the
beneficial owner of more than 1% of the company's shares.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
As far as UBS is aware, UBS is neither directly nor indirectly owned nor
controlled by another corporation or any government, there are no arrangements
in place the operation of which may result in a change in control and UBS has no
shareholders whose beneficial ownership exceeds 5% of the total shares issued.
At 31 December 2000, Chase Nominees Ltd., London was entered in UBS's
shareholder register as a trustee/nominee holding 6.3% of all shares issued.
RELATED PARTY TRANSACTIONS
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.
For 2000 and 1999, please see Note 36 to the UBS Group Financial Statements.
Total remuneration of related parties during 1998 amounted to CHF 102.8 million.
Total loans and advances receivable were CHF 27.1 million at 31 December 1998.
The number of long-term stock options outstanding from equity plans was 127,500
at 31 December 1998.
The total number of shares held by members of the Board of Directors, Group
Executive Board and Group Managing Board was 4,635,804 as of 31 December 1998.
ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
DESCRIPTION OF SHARES
Set forth below is a summary of the material provisions of our Articles of
Association, which we call the "Articles" throughout this document, and the
Swiss Code of Obligations relating to our shares. This description does not
purport to be complete and is qualified in its entirety by reference to Swiss
law, including, Swiss company law, and to the Articles, copies of which are
available at our offices.
The shares are registered shares with a par value of CHF 10 per share. The
shares are fully paid-up and non-assessable.
Each share carries one vote at our shareholders' meetings. Voting rights may be
exercised only after a shareholder has been recorded in our share register as a
shareholder with voting rights. Registration with voting rights is subject to
certain restrictions. See "--Transfer of Shares" and "--Shareholders' Meeting".
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The Articles provide that we may elect not to print and deliver certificates in
respect of registered shares. Shareholders may, however, request at any time
that we print and deliver such certificates free of charge.
TRANSFER OF SHARES
The transfer of shares is effected by corresponding entry in the books of a bank
or depositary institution following an assignment in writing by the selling
shareholder and notification of such assignment to us by the bank or depository
institution. The transfer of shares further requires that the purchaser file a
share registration form in order to be registered in our share register as a
shareholder. Failing such registration, the purchaser may not vote at or
participate in shareholders' meetings.
A purchaser of shares will be recorded in our share register with voting rights
upon disclosure of its name, citizenship and address. However, we may decline a
registration with voting rights if the shareholder does not declare that it has
acquired the shares in its own name and for its own account. If the shareholder
refuses to make such declaration, it will be registered as a shareholder without
voting rights.
There is no limitation under Swiss law or our Articles on the right of non-Swiss
residents or nationals to own or vote our shares.
SHAREHOLDERS' MEETING
Under Swiss law, annual ordinary shareholders' meetings must be held within six
months after the end of our fiscal year, which is 31 December. Shareholders'
meetings may be convened by the Board of Directors or, if necessary, by the
statutory auditors, with twenty-days' advance notice. The Board of Directors is
further required to convene an extraordinary shareholders' meeting if so
resolved by a shareholders' meeting or if so requested by shareholders holding
in aggregate at least 10% of our nominal share capital. Shareholders holding
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. 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 Articles do not require a minimum number of shareholders to be present in
order to hold a shareholders' meeting.
Resolutions 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
- 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
- the ordering of an independent investigation into the specific matters
proposed to the shareholders' meeting
Under the Articles, 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
- remove one-fourth or more of the members of the Board of Directors
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- 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 in our stated purpose in the Articles
- the creation of shares with privileged voting rights
- a restriction of transferability
- an increase in authorized capital
- an increase of capital out of equity against contribution in kind, for
the purpose of acquisition and granting of special rights
- changes to pre-emptive rights
- a change of domicile of the company
- a dissolution of the company without liquidation
At shareholders' meetings, shareholders can be represented by proxy, but only by
another shareholder, a proxy appointed by us, an independent representative
nominated by us, 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 such ballot is ordered by the Chairman of the meeting.
NET PROFITS AND DIVIDENDS
Swiss law requires that at least 5% of the annual net profits of a corporation
must be retained as general reserves for so long as these reserves amount to
less than 20% of the corporation's nominal share capital. Any net profits
remaining are at the disposal of the shareholders' meeting, except that, if an
annual dividend exceeds 5% of the nominal share capital, then 10% of such 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.
In either event, dividends may be paid out only after approval by the
shareholders' meeting. The Board of Directors may propose that a dividend be
paid out, but cannot itself set the dividend. The auditors must confirm that the
dividend proposal of the Board conforms with statutory law. In practice, the
shareholders' meeting usually approves the dividend proposal of the Board of
Directors.
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.
U.S. holders of shares will receive dividend payments in dollar denominations,
unless they provide notice to our U.S. transfer agent, The Bank of New York,
that they wish to receive dividend payments in Swiss francs. The Bank of New
York will be responsible for paying the U.S. dollars or Swiss francs to
registered holders, and for withholding any required amounts for taxes or other
governmental charges. If The Bank of New York determines, after consultation
with us, that in its judgement any foreign currency received by it cannot be
converted into dollars or transferred to U.S. holders, it may distribute the
foreign currency received by it, or an appropriate document evidencing the right
to receive such currency, or in its discretion hold such foreign currency for
the accounts of U.S. holders.
PREEMPTIVE RIGHTS
Under Swiss law, any share issue, whether for cash or non-cash consideration or
for no consideration, is subject to the prior approval of the shareholders'
meeting. Shareholders of a Swiss corporation have
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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 preemptive rights in
certain limited circumstances.
BORROWING POWER
Neither Swiss law nor the Articles restrict in any way our power to borrow and
raise funds. No shareholders' resolution is required.
CONFLICTS OF INTEREST
Swiss law does not have a general provision on conflicts of interests. However,
the Swiss Code of Obligations requires Directors and members of senior
management to safeguard the interests of the corporation and, in this
connection, imposes a duty of care and a duty of loyalty on directors and
officers. This rule is generally understood as disqualifying directors and
senior officers from participating in decisions that directly affect them.
Directors and officers are personally liable to the corporation for any breach
of these provisions. In addition, Swiss law contains a provision under which
payments made to a shareholder or a director or any person associated therewith,
other than at arm's length, must be repaid to us if the shareholder or director
was acting in bad faith.
REPURCHASE OF SHARES
Swiss law limits a corporation's ability to hold or repurchase its own shares.
We and our subsidiaries may only repurchase shares if we have sufficient free
reserves to pay the purchase price, and if the aggregate nominal value of the
shares does not exceed 10% of our nominal share capital. Furthermore, we must
create a special reserve on our balance sheet in the amount of the purchase
price of the acquired Shares. Such shares held by us or our subsidiaries do not
carry any rights to vote at shareholders' meetings.
NOTICES
Notices to shareholders are made by publication in the Swiss Official Gazette of
Commerce. The Board of Directors may designate further means of communication
for publishing notices to shareholders.
Notices required under the listing rules of the Swiss Exchange will be published
in two Swiss newspapers in German and French. We or the Swiss Exchange may also
disseminate the relevant information on the online exchange information systems.
REGISTRATION AND BUSINESS PURPOSE
We are registered as a corporation in the commercial register and have
registered offices in Zurich and Basel, Switzerland.
Our business purpose, as set forth in our Articles, is the operation of a bank,
with a scope of operations extending to all types of banking, financial,
advisory, trading and service activities in Switzerland and abroad.
DURATION, LIQUIDATION AND MERGER
Our duration is unlimited.
Under Swiss law, we may be dissolved at any time by a shareholders' resolution
which must be passed by (1) an absolute majority of the shares represented at
the meeting in the event we are to be dissolved by way of liquidation, or (2) 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
events (for example in a merger where we are not the surviving entity).
Dissolution by court order is possible if we become bankrupt.
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Under Swiss law, any surplus arising out of a liquidation (after the settlement
of all claims of all creditors) is distributed to shareholders in proportion to
the paid-up nominal value of shares held.
DISCLOSURE OF PRINCIPAL SHAREHOLDERS
Under the applicable provisions of the new Swiss Stock Exchange Act,
shareholders and shareholders acting in concert with third parties who reach,
exceed or fall below 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 Swiss Exchange on which such shares are listed of such holdings, whether or
not the voting rights can be exercised. Following receipt of such notification,
the corporation has the obligation to inform the public. The company must
disclose in an attachment to the balance sheet the identity of any shareholders
who own in excess of 5% of our shares.
MANDATORY TENDER OFFER
Under the Swiss Stock Exchange Act, shareholders and groups of shareholders
acting in concert who acquire more than 33 1/3% of the voting rights of a listed
Swiss company will have to submit a takeover bid to all remaining shareholders.
A waiver from the mandatory bid rule may be granted by our supervisory
authority. If no waiver is granted, the mandatory takeover bid must be made
pursuant to the procedural rules set forth in the Swiss Stock Exchange Act and
implementing ordinances.
EXCHANGE CONTROLS
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 to vote UBS's securities freely in matters put
to a vote of UBS security holders generally. 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.
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UBS Preferred Funding Trust I
UBS Preferred Funding Trust I is a statutory business trust that UBS AG created
under the Delaware Business Trust Act, as amended, on 18 September 2000 pursuant
to an initial trust agreement entered into by UBS AG and by the filing of a
certificate of trust with the Secretary of State of the State of Delaware. The
initial trust agreement was amended and restated as the Amended and Restated
Trust Agreement between UBS Preferred Funding Company, as grantor, and
Wilmington Trust Company, as trustee. We have qualified the Amended and Restated
Trust Agreement as an indenture under the Trust Indenture Act of 1939, as
amended. UBS Preferred Funding Trust will be treated as a grantor trust for U.S.
federal income tax purposes, meaning that investors in trust preferred
securities will generally be treated as if they owned their proportionate shares
of the company preferred securities owned by UBS Preferred Funding Trust.
We have formed UBS Preferred Funding Trust for the purpose of:
- issuing the trust preferred securities,
- investing the proceeds of the trust preferred securities in the company
preferred securities, which benefit from the related UBS AG subordinated
guarantee, and
- engaging in any related or incidental activities.
The only assets of UBS Preferred Funding Trust will be the company preferred
securities and the related rights of UBS Preferred Funding Trust under the UBS
AG subordinated guarantee. The Amended and Restated Trust Agreement does not
permit UBS Preferred Funding Trust to acquire any other assets, issue any other
equity securities or any debt securities, or engage in any other activities. All
expenses and liabilities of UBS Preferred Funding Trust will be paid by the
Stamford branch of UBS AG, except that if the trustee of UBS Preferred Funding
Trust incurs fees, charges or expenses at the request of a holder of trust
preferred securities or other person for which UBS Preferred Funding Trust is
not otherwise liable under the Amended and Restated Trust Agreement, that holder
or other person will be liable for such fees, charges and expenses.
The total pro forma capitalization of UBS Preferred Funding Trust, as adjusted
to give effect to the offering of the trust preferred securities (based on
proceeds of USD1,500,000,000 before deduction of expenses) and the use of the
proceeds from the offering, is USD1,500,000,000. Upon completion of the
offering, the authorized and issued capital of UBS Preferred Funding Trust
consists of trust preferred securities having an aggregate liquidation amount of
USD1,500,000,000, issuable in denominations of USD1,000 liquidation amount per
trust preferred security and integral multiples of USD1,000.
The Amended and Restated Trust Agreement provides that, to the fullest extent
permitted by law, without the need for any other action of any person, including
the trustee or any other holder of trust preferred securities, each holder of
trust preferred securities will be entitled to enforce, in the name of UBS
Preferred Funding Trust, the rights of UBS Preferred Funding Trust under the
company preferred securities and the UBS AG subordinated guarantee represented
by the trust preferred securities held by such holder. A holder of trust
preferred securities may at any time upon written notice withdraw and hold
directly the underlying company preferred securities represented by such trust
preferred securities, in which case such holder will be entitled to directly
enforce its rights under the UBS AG subordinated guarantee.
The principal executive offices of UBS Preferred Funding Trust are c/o
Wilmington Trust Company, 1100 North Market Street, Wilmington, DE 19890.
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UBS Preferred Funding Company LLC I
INTRODUCTION
UBS Preferred Funding Company LLC I is a limited liability company that UBS AG
formed under the Delaware Limited Liability Company Act, as amended, on 18
September 2000 pursuant to an initial limited liability company agreement
entered into by UBS AG and by filing a certificate of formation with the
Secretary of State of the State of Delaware. The initial limited liability
company agreement was amended and restated as the Amended and Restated Limited
Liability Company Agreement, which we sometimes refer to as the LLC Agreement.
UBS Preferred Funding Company will be treated as a partnership for U.S. federal
income tax purposes.
We have formed UBS Preferred Funding Company for the purpose of:
- issuing the company common securities to UBS AG,
- issuing the company preferred securities, initially to UBS Preferred
Funding Trust,
- investing the proceeds of the company common securities and the company
preferred securities in (1) initially, subordinated notes issued by the
Cayman Islands branch of UBS AG with an aggregate principal amount of
USD1,500,000,000 and (2) other securities issued by UBS AG acting
through a branch, agency or other office located outside of the United
States or by a non-U.S. branch of a non-U.S. subsidiary of UBS AG
(together, "eligible investments"), and
- engaging in any related or incidental activities.
The total pro forma capitalization of UBS Preferred Funding Company, as adjusted
to give effect to the offering of the company preferred securities (based on
proceeds of USD1,500,000,000 before deduction of expenses) and the use of
proceeds from the offering, is USD1,500,002,000. Upon completion of the
offering, the authorized and issued capital of UBS Preferred Funding Company
consists of company common securities representing securityholders' equity of
USD2,000 and company preferred securities with an aggregate liquidation
preference of USD1,500,000,000, issuable in denominations of USD1,000
liquidation preference per company preferred security and integral multiples of
USD1,000. UBS Preferred Funding Company has no outstanding debt after giving
effect to the offering and the use of the proceeds from the offering.
UBS Preferred Funding Company will apply the income generated by the
subordinated notes and other eligible investments to pay dividends to UBS
Preferred Funding Trust, as holder of company preferred securities, and UBS AG,
as holder of the company common securities. UBS Preferred Funding Trust will
then pass the dividends it receives on the company preferred securities through
to the holders of trust preferred securities as distributions on the trust
preferred securities.
UBS AG purchased all of the company common securities for USD2,000. UBS treats
the company preferred securities as Tier 1 capital for purposes of the relevant
regulatory capital guidelines of the Swiss Federal Banking Commission. UBS AG
has agreed with UBS Preferred Funding Company in the LLC Agreement that, as long
as any company preferred securities are outstanding, UBS AG will continue to
own, directly or indirectly, 100% of the outstanding company common securities.
UBS Preferred Funding Company has also covenanted to maintain "UBS" as part of
its name for as long as any trust preferred securities of UBS Preferred Funding
Trust remain outstanding unless, because of a merger or other business
combination involving UBS AG or a change by UBS AG of its own name, inclusion of
"UBS" as part of UBS Preferred Funding Company's name is no longer appropriate.
UBS AG has also agreed in the LLC Agreement that it will from time to time
either (i) contribute (or cause others, including the Stamford branch of UBS AG,
to contribute) to UBS Preferred Funding
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Company such additional funds as are necessary in order to enable UBS Preferred
Funding Company to pay its operating expenses on or before any date when any
such operating expenses are due or (ii) directly pay UBS Preferred Funding
Company's operating expenses then due and payable and not otherwise paid.
"Operating expenses" generally means all expenses and obligations of UBS
Preferred Funding Company, but does not include any payments on the company
preferred securities or company common securities.
The principal executive offices of UBS Preferred Funding Company are located at
The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801.
ACTIVITIES OF UBS PREFERRED FUNDING COMPANY
GENERAL
UBS Preferred Funding Company's principal business objective is to acquire and
hold eligible investments, which include:
- initially, subordinated notes issued by the Cayman Islands branch of UBS
AG with an aggregate principal amount of USD1,500,000,000, and
- other securities issued by UBS AG acting through a branch, agency or
other office located outside of the United States or by a non-U.S.
branch of a non-U.S. subsidiary of UBS AG.
UBS Preferred Funding Company will apply the net income generated by the
subordinated notes and other eligible investments to pay dividends to UBS
Preferred Funding Trust, as holder of company preferred securities, and UBS AG,
as holder of the company common securities. UBS Preferred Funding Trust will
then pass through the dividends it receives on the company preferred securities
to the holders of trust preferred securities as distributions on the trust
preferred securities. Although UBS Preferred Funding Company may (with the
consent of the holders of two-thirds (based on the aggregate liquidation
preference) of the company preferred securities and company parity preferred
securities, voting together as a single class) issue additional preferred
securities as described under "Description of Company Preferred Securities," UBS
Preferred Funding Company has no present intention to do so.
DIVIDENDS
UBS Preferred Funding Company currently expects to pay an aggregate amount of
dividends with respect to its outstanding company common securities and company
preferred securities equal to approximately 100% of the interest and other
income it receives on the subordinated notes and any other eligible investments.
The LLC Agreement of UBS Preferred Funding Company:
- precludes UBS Preferred Funding Company from incurring any indebtedness
for borrowed money (and UBS Preferred Funding Company does not
anticipate having any material liabilities), and
- requires approval of holders of at least 66 2/3% of the outstanding
company preferred securities and any outstanding company parity
preferred securities (based on the aggregate liquidation preference),
voting together as a single class, before dividends on the company
preferred securities can be paid out of any source other than interest
income received on the subordinated notes or interest or dividend income
received on other eligible investments.
Under the Delaware Limited Liability Company Act, UBS Preferred Funding Company
may not pay dividends or other distributions on company common securities or
company preferred securities--even if such payments are "mandatory"--if, after
making the distributions, UBS Preferred Funding
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Company's liabilities would exceed the fair value of its assets. However, UBS
Preferred Funding Company does not expect to have any material liabilities, so
UBS Preferred Funding Company does not anticipate that this restriction will
affect its ability to pay dividends on the company preferred securities.
Dividends on the company preferred securities will in any event be required to
be paid up to the mandatory dividend payment amount on any mandatory dividend
payment date, unless there is a capital limitation on such date. See
"Description of Company Preferred Securities--Dividends--Mandatory Dividends."
INVESTMENT POLICIES
UBS Preferred Funding Company's initial investment policies were established
pursuant to the LLC Agreement. Under its investment policies, UBS Preferred
Funding Company may not hold or invest in any securities other than eligible
investments as described above under "--Introduction."
The investment policies require that:
- the terms of any eligible investments other than the subordinated notes
purchased by UBS Preferred Funding Company be established in good faith
and, to the extent deemed advisable by UBS AG, reflect arm's-length
terms at the time of purchase, and the purchase by UBS Preferred Funding
Company of such eligible investments be approved by the affirmative vote
of a majority of its entire board of directors, and
- UBS Preferred Funding Company maintain its assets in a manner that will
not require UBS Preferred Funding Company to be registered as an
investment company under the Investment Company Act of 1940.
The investment policies of UBS Preferred Funding Company may be amended only by
the affirmative vote of holders of at least 66 2/3% of the outstanding company
preferred securities and any outstanding company parity preferred securities
(based on the aggregate liquidation preference), voting together as a single
class. Although UBS AG and UBS Preferred Funding Company do not anticipate that
UBS Preferred Funding Company will sell the subordinated notes (and no market
for them is expected to develop), were UBS Preferred Funding Company to do so,
UBS Preferred Funding Company would be required to invest the proceeds of the
sale in accordance with UBS Preferred Funding Company's investment policies as
they exist at the time of such sale.
ADMINISTRATION AGREEMENT
Before issuing the company preferred securities, UBS Preferred Funding Company
entered into an administration agreement with the Stamford branch of UBS AG,
under which the Stamford branch provides (or causes others to provide)
accounting, legal, tax and other support services to UBS Preferred Funding
Company, assists UBS Preferred Funding Company in complying with pertinent U.S.
and Swiss local, state and federal laws, and provides administrative, record
keeping and secretarial services to UBS Preferred Funding Company. Under the
administration agreement, UBS Preferred Funding Company has agreed to reimburse
the provider of these services for the value of services provided by such
provider to UBS Preferred Funding Company on an arm's-length basis.
UBS Preferred Funding Company maintains company records that are separate from
those of UBS AG or any of its affiliates. None of the officers, employees or
directors of UBS Preferred Funding Company has any direct or indirect pecuniary
interest in any security to be acquired or disposed of by UBS Preferred Funding
Company or in any transaction in which UBS Preferred Funding Company has an
interest.
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MANAGEMENT OF UBS PREFERRED FUNDING COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The LLC Agreement of UBS Preferred Funding Company provides that its board of
directors will at all times include not less than three and not more than five
members. The board of directors includes three members. The directors are
designated as "managers" of UBS Preferred Funding Company within the meaning of
the Delaware Limited Liability Company Act. The directors will serve until their
successors are duly elected and qualified. UBS Preferred Funding Company has no
present intention to alter the number of directors comprising the board of
directors.
UBS Preferred Funding Company has three officers. The directors and executive
officers of UBS Preferred Funding Company are:
NAME POSITION AND OFFICES HELD
- -------------------------------------------------------------
Robert Mills Managing Director and President
Per Dyrvik Director and Treasurer
Robert Dinerstein Director and Secretary
Each of the initial directors and officers of UBS Preferred Funding Company is
an individual who is an officer or employee of UBS AG or its affiliates. UBS
Preferred Funding Company currently anticipates that all officers of UBS
Preferred Funding Company will also be officers or employees of UBS AG or its
affiliates.
ADDITIONAL DIRECTORS
If at any time the aggregate of unpaid dividends on the company preferred
securities or any company parity preferred securities equals or exceeds an
amount equal to three semi-annual dividend payments, the holders of company
preferred securities and any company parity preferred securities, voting
together as a single class, will have the exclusive right to elect two
additional directors. Holders of a majority (based on the aggregate liquidation
preference) of company preferred securities and company parity preferred
securities may exercise this right by written consent or at a meeting of such
holders called for such purpose. The LLC Agreement of UBS Preferred Funding
Company provides that this meeting may be called at the request of any holder of
company preferred securities or company parity preferred securities. This right
will continue either until all unpaid dividends have been paid in full or until
full dividends have been paid on the company preferred securities for two
consecutive dividend periods. While this right continues, any vacancy in the
office of the additional directors may be filled only by the holders of company
preferred securities and company parity preferred securities voting as described
above.
INDEMNIFICATION AND INSURANCE FOR DIRECTORS
The LLC Agreement of UBS Preferred Funding Company provides that:
- its directors have no personal liability to UBS Preferred Funding
Company or the holders of company common securities or company preferred
securities for monetary damages (i) for voting not to take enforcement
action with respect to the subordinated notes or any other eligible
investments owned by UBS Preferred Funding Company, or (ii) at any time
for breach of any such director's fiduciary duty, if any, except for
such director's gross negligence or willful misconduct,
- UBS Preferred Funding Company will indemnify any director or officer for
any liability and related expenses, including reasonable counsel's fees,
arising out of such director's or officer's status as a director or
officer of UBS Preferred Funding Company, except for liability
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determined by a court of competent jurisdiction to have arisen out of
such director's or officer's gross negligence or willful misconduct,
- the right to indemnification is a contract right and the LLC Agreement
will set forth certain procedural and evidentiary standards applicable
to the enforcement of a claim under the LLC Agreement of UBS Preferred
Funding Company, and
- UBS Preferred Funding Company may purchase and maintain insurance to
protect any director or officer against any liability asserted against,
or incurred by, him or her, arising out of his or her status as a
director or officer.
COMMON SECURITIES OF UBS PREFERRED FUNDING COMPANY
Holders of company common securities will receive dividends out of interest
payments received by UBS Preferred Funding Company on the subordinated notes and
other eligible investments, if any, not required to be applied to fund dividends
with respect to the company preferred securities or expenses of UBS Preferred
Funding Company. However, as long as the company preferred securities or the
company parity preferred securities are outstanding, no dividends or other
distributions (including redemptions and purchases) may be made with respect to
company common securities unless full dividends on all series of the company
preferred securities have been paid (except as otherwise described under
"Description of Company Preferred Securities--Ranking and Liquidation
Preference"). See "Description of Company Preferred Securities--Dividends."
Subject to the rights, if any, of the holders of company preferred securities
(to the limited extent described herein) and any other series of the company
parity preferred securities, all voting rights are vested in the company common
securities. Holders of company common securities are entitled to vote in
proportion to the stated amounts represented by their company common securities.
All issued and outstanding shares of company common securities are held by UBS
AG.
If UBS Preferred Funding Company dissolves, liquidates or winds up (whether
voluntary or involuntary) after all debts and liabilities of UBS Preferred
Funding Company have been satisfied and there have been paid or set aside for
the holders of company preferred securities the full preferential amounts to
which such holders are entitled, the holders of the company common securities
will be entitled to share equally and ratably in any assets remaining.
PREFERRED SECURITIES OF UBS PREFERRED FUNDING COMPANY
Subject to limitations prescribed by Delaware law and UBS Preferred Funding
Company's LLC Agreement, the board of directors of UBS Preferred Funding Company
or, if then constituted, a duly authorized committee of the board of directors
is authorized to issue (with the consent of the holders of two-thirds (based on
the aggregate liquidation preference) of the company preferred securities and
company parity preferred securities, voting together as a single class), from
the authorized but unissued capital shares of UBS Preferred Funding Company,
additional series of preferred securities of the UBS Preferred Funding Company
ranking on a parity with the company preferred securities in such series as the
board of directors (or committee) may determine and to establish, from time to
time, the number or amount by aggregate liquidation preference of shares (if
applicable) of such series to be included in any such series and to fix the
designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the securities of any such series, and such other
subjects or matters as may be fixed by resolution of the board of directors.
However, UBS Preferred Funding Company's LLC Agreement precludes:
- the issuance of any other classes or series of equity securities that
are senior to the company preferred securities, either as to dividends
or as to rights upon dissolution, liquidation or
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winding up of UBS Preferred Funding Company, without the approval of
each holder of company preferred securities, and
- the issuance of any company parity preferred securities without the
approval of 66 2/3% of the holders of company preferred securities and
unless the UBS AG subordinated guarantee is amended so that such
additional company parity preferred securities benefit from the UBS AG
subordinated guarantee in substantially the same manner as the company
preferred securities without any adverse effect on the holders of
company preferred securities. See "Description of Company Preferred
Securities--Voting Rights."
No additional payments will be required pursuant to the Delaware Limited
Liability Company Act for the company parity preferred securities to represent
limited liability company interests in UBS Preferred Funding Company upon
issuance against full payment of the purchase price for the company parity
preferred securities. The specific terms of a particular series of the company
parity preferred securities are described in the certificate of designation (as
defined in UBS Preferred Funding Company's LLC Agreement) incorporated into UBS
Preferred Funding Company's LLC Agreement relating to that series, except in the
case of shares of the company preferred securities where the terms thereof are
set forth in UBS Preferred Funding Company's LLC Agreement.
LEGAL PROCEEDINGS
UBS Preferred Funding Company is not the subject of any litigation. None of UBS
Preferred Funding Company, UBS AG or any of its affiliates is currently involved
in nor, to UBS Preferred Funding Company's knowledge, currently threatened with
any litigation with respect to the subordinated notes or any aspect of UBS
Preferred Funding Company's operations.
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Use of Proceeds
UBS Preferred Funding Trust used the net proceeds of USD1,500,000,000 from the
sale of the trust preferred securities to purchase the company preferred
securities.
UBS Preferred Funding Company used the net proceeds of USD1,500,000,000 from the
sale of the company preferred securities to UBS Preferred Funding Trust to
acquire USD1,500,000,000 aggregate principal amount of subordinated notes issued
by the Cayman Islands branch of UBS AG. See "UBS Preferred Funding Company LLC
I--Activities of UBS Preferred Funding Company."
UBS AG used the net proceeds of USD1,500,000,000 from the sale of the
subordinated notes issued by its Cayman Island branch for general corporate
purposes, including paying certain expenses related to the offering and possibly
funding a portion of the purchase price of PaineWebber.
All of the sales of securities under this prospectus will be market-making
transactions--that is, transactions in which UBS AG, UBS Warburg LLC, UBS
PaineWebber Inc., or one of UBS AG's other affiliates, resells securities that
the seller, or one of its affiliates, has previously bought from another party.
Only the entity that carries out a particular market-making transaction will
receive any of the proceeds from the resale of the securities. In general, we
expect that the entity that resells any particular securities will retain the
proceeds of its market-making resales and will not pay the proceeds to UBS
Preferred Funding Trust, UBS Preferred Funding Company or, when the resales are
not made by UBS AG, to UBS AG.
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Description of Trust Preferred Securities
UBS Preferred Funding Trust issued the trust preferred securities under the
terms of its Amended and Restated Trust Agreement. We have qualified the Amended
and Restated Trust Agreement as an indenture under the Trust Indenture Act. The
terms of the trust preferred securities include both those stated in the Amended
and Restated Trust Agreement and the Delaware Business Trust Act and those made
part of the Amended and Restated Trust Agreement by the Trust Indenture Act. The
following summary of the material terms and provisions of the trust preferred
securities is not complete and is subject to, and qualified in its entirety by
reference to, the Amended and Restated Trust Agreement, the Delaware Business
Trust Act and the Trust Indenture Act. We have filed a copy of the Amended and
Restated Trust Agreement as an exhibit to the registration statement of which
this prospectus is a part.
GENERAL
The trust preferred securities are certificates of beneficial interest in the
assets of UBS Preferred Funding Trust, the terms of which are set forth in the
Amended and Restated Trust Agreement.
The trust preferred securities may be issued in denominations of USD1,000
liquidation amount and whole-number multiples of USD1,000. The aggregate
liquidation amount of the trust preferred securities offered by this prospectus
is USD1,500,000,000. Each trust preferred security represents a corresponding
amount of the company preferred securities, together with related rights under
the UBS AG subordinated guarantee.
The trustee of UBS Preferred Funding Trust will hold the company preferred
securities and the related rights under the UBS AG subordinated guarantee
deposited in UBS Preferred Funding Trust for the benefit of the holders of trust
preferred securities. The Amended and Restated Trust Agreement provides that, to
the fullest extent permitted by law, without the need for any other action of
any person, including the trustee or any other holder of trust preferred
securities, each holder of trust preferred securities will be entitled to
enforce, in the name of UBS Preferred Funding Trust, the rights of UBS Preferred
Funding Trust under the company preferred securities and the related rights
under the UBS AG subordinated guarantee represented by the trust preferred
securities held by such holder. The trust preferred securities may be exchanged
for the underlying company preferred securities as described under "--Withdrawal
of the Company Preferred Securities."
The funds of UBS Preferred Funding Trust available for distribution to the
holders of trust preferred securities will be limited to payments received from
UBS Preferred Funding Company as dividends, redemption payments and liquidation
payments on the company preferred securities and to payments received from UBS
AG pursuant to the UBS AG subordinated guarantee of those payments. See
"Description of Company Preferred Securities." UBS Preferred Funding Trust will
distribute such payments, upon their receipt, to the holders of trust preferred
securities on a pro rata basis. If UBS Preferred Funding Company does not pay
any semi-annual dividend on the company preferred securities when it is required
to and UBS AG does not perform its obligations under the UBS AG subordinated
guarantee, UBS Preferred Funding Trust will not have sufficient funds to make
the related semi-annual distribution payment on the trust preferred securities.
We have applied to list the trust preferred securities on the Luxembourg Stock
Exchange in accordance with its rules.
DISTRIBUTIONS
Each trust preferred security represents a corresponding amount of the company
preferred securities, together with the related rights under the UBS AG
subordinated guarantee. UBS Preferred Funding
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Trust will make semi-annual or quarterly distributions or other mandatory
distributions on the trust preferred securities concurrently with, and in the
same amount as, the semi-annual or quarterly dividends or special dividends on
the company preferred securities. See "Description of Company Preferred
Securities--Dividends." Accordingly, to the extent that dividends are paid on
the company preferred securities, distributions on the trust preferred
securities will accrue from the date of original issue and be paid on the
liquidation amount of the trust preferred securities as follows:
- semi-annually in arrears on the dividend payment dates regularly
scheduled to occur in April and October of each year, commencing 1 April
2001, for each dividend period through the dividend period ending on the
dividend payment date in October 2010, at a fixed rate per annum equal to
8.622% (calculated on the basis of a 360-day year consisting of twelve
30-day months), and
- thereafter, quarterly in arrears on the dividend payment dates regularly
scheduled to occur in January, April, July and October of each year, at a
floating rate per annum equal to 3.07% above three-month LIBOR
(calculated on the basis of the actual number of days elapsed in a
360-day year).
For details on the calculation and payment of dividends see "Description of
Company Preferred Securities--Dividends." Whenever, and to the extent, UBS
Preferred Funding Trust receives any cash payments representing a semi-annual
dividend, special dividend or redemption payment on the company preferred
securities, UBS Preferred Funding Trust will distribute such amounts to the
holders of trust preferred securities in proportion to their liquidation
amounts. Each semi-annual, quarterly or special distribution on the trust
preferred securities will be payable to holders of record as they appear on the
securities register of UBS Preferred Funding Trust on the corresponding record
date. The record dates for the trust preferred securities will be the fifteenth
day (whether or not a business day) prior to the relevant semi-annual, quarterly
or other distribution date.
If any distribution would be payable on a day that is not a business day, that
distribution will instead be made on the next business day. No interest or other
payment will be due as a result of any such delay.
If dividends are not payable on company preferred securities on any dividend
payment date for the reasons described in "Description of Company Preferred
Securities--Dividends," then the holders of trust preferred securities will not
be entitled to receive a distribution on that date.
REDEMPTION
The trust preferred securities can be redeemed only upon redemption of the
company preferred securities.
If UBS Preferred Funding Company redeems the company preferred securities in
accordance with its LLC Agreement as described under "Description of Company
Preferred Securities--Redemption," then UBS Preferred Funding Company must give
the trustee at least 30 days' prior notice before doing so. The trustee will
mail the notice of redemption not less than 25 days prior to the date fixed for
redemption of the company preferred securities to the holders of trust preferred
securities as provided under "--Notices."
On the date of redemption of the company preferred securities, so long as UBS
Preferred Funding Company or UBS AG has deposited with Wilmington Trust Company,
the paying agent, on behalf of UBS Preferred Funding Trust the aggregate amount
payable upon redemption of all the company preferred securities held by UBS
Preferred Funding Trust to be redeemed, the paying agent on behalf of UBS
Preferred Funding Trust will irrevocably deposit with The Depository Trust
Company ("DTC") funds sufficient to pay the redemption price and give DTC
irrevocable instructions to pay the redemption price to the holders of trust
preferred securities to be redeemed. See "Book-Entry Issuance of Trust Preferred
Securities." Once the paying agent has received this deposit, all rights of the
holders
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of trust preferred securities called for redemption will end, except their right
to receive the redemption price, without interest. If any date fixed for
redemption of the trust preferred securities is not a business day, then the
redemption price will instead be paid on the next business day, except that if
that business day falls in the next calendar year, the redemption price will be
paid on the preceding business day. No interest or other payment will be due as
a result of any such adjustment.
If only some of the outstanding trust preferred securities are to be redeemed,
the trust preferred securities to be redeemed will be selected in accordance
with DTC's procedures. See "Book-Entry Issuance of Trust Preferred
Securities--DTC's Procedures for Notices, Voting and Payments." If the trust
preferred securities do not remain registered in the name of DTC or its nominee
and only some of the outstanding trust preferred securities are to be redeemed,
the trust preferred securities will be redeemed proportionately or selected for
redemption pursuant to the rules of any securities exchange on which the trust
preferred securities are listed at that time. UBS Preferred Funding Company will
promptly notify the registrar and transfer agent for the trust preferred
securities, in writing, of the trust preferred securities selected for
redemption. In addition, for so long as the rules of the Luxembourg Stock
Exchange so require, notice will be given to the Luxembourg Stock Exchange of
trust preferred securities selected for redemption and published in a daily
newspaper of general circulation in Luxembourg (which is expected to be the
Luxemburger Wort).
WITHDRAWAL OF THE COMPANY PREFERRED SECURITIES
Any beneficial owner of the trust preferred securities may withdraw all, but not
less than all, of the company preferred securities represented by such trust
preferred securities by providing a written notice to the trustee, with evidence
of beneficial ownership in form satisfactory to the trustee and providing to UBS
Preferred Funding Company such documents or information as UBS Preferred Funding
Company may request for tax reporting purposes. The holder's notice will also be
deemed to be such beneficial owner's agreement to be subject to the terms of UBS
Preferred Funding Company's LLC Agreement applicable to the rights of the
holders of company preferred securities.
Within a reasonable period after such a request has been properly made, the
trustee must instruct DTC to reduce the trust preferred securities represented
by the global certificate by the corresponding amount of the company preferred
securities to be so withdrawn by the withdrawing owner. UBS Preferred Funding
Company will issue to the withdrawing owner a certificate representing the
amount of the company preferred securities withdrawn, and the trustee will
reduce the amount of the trust preferred securities represented by the global
certificate accordingly. The company preferred securities will be issued only in
certificated fully-registered form and will not be eligible to be held through
DTC, Euroclear or Clearstream. Under U.S. tax reporting rules, holders of
company preferred securities will thereafter receive an annual Form K-1 instead
of the Form 1099 that holders of trust preferred securities will receive. See
"Certain U.S. Tax Considerations--Information Reporting and Backup Withholding
Tax."
Any holder of company preferred securities may redeposit withdrawn company
preferred securities by delivering to the trustee the certificates for the
company preferred securities to be deposited, which are (i) if required by the
trustee, properly endorsed or accompanied by a properly executed instrument of
transfer or endorsement in form satisfactory to the trustee and in compliance
with the terms of UBS Preferred Funding Company's LLC Agreement and (ii)
accompanied by all such certifications as may be required by the trustee in its
sole discretion and in accordance with the provisions of the Amended and
Restated Trust Agreement. Within a reasonable period after such deposit is
properly made, the trustee will instruct DTC to increase the amount of the trust
preferred securities represented by the global certificate accordingly.
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VOTING RIGHTS
If at any time the holders of company preferred securities are entitled to vote
under UBS Preferred Funding Company's LLC Agreement, the trustee will:
- notify the holders of trust preferred securities of such right,
- request specific direction from each holder of trust preferred
securities as to the vote with respect to the company preferred
securities represented by such trust preferred securities, and
- vote the relevant company preferred securities only in accordance with
such specific direction.
Upon receiving notice of any meeting at which the holders of company preferred
securities are entitled to vote, the trustee will, as soon as practicable, mail
to the holders of trust preferred securities a notice as provided under
"--Notices." UBS Preferred Funding Company will provide the form of notice to
the trustee to be forwarded to the holders of trust preferred securities. The
notice will contain:
- all the information that is contained in the notice announcing the
meeting of the company preferred securities,
- a statement that the holders of trust preferred securities will be
entitled, subject to any applicable provision of law, to direct the
trustee specifically as to the exercise of the voting rights pertaining
to the number of the company preferred securities represented by their
respective trust preferred securities, and
- a brief description of the manner in which the holders may give such
specific directions.
If the trust receives a written direction from a holder of trust preferred
securities, the trustee will vote, or cause to be voted, the amount of the
company preferred securities represented by such trust preferred securities in
accordance with the instructions set forth in the direction. If the trustee does
not receive specific instructions from the holder of any trust preferred
securities, the trustee will abstain from voting the company preferred
securities represented by those trust preferred securities.
UBS Preferred Funding Company and the trustee may, without the consent of the
holders of the trust preferred securities, enter into one or more agreements
supplemental to the Amended and Restated Trust Agreement, in form satisfactory
to the trustee, for any of the following purposes:
- to evidence the succession of another partnership, corporation or other
entity to UBS Preferred Funding Company and the assumption by any such
successor of the covenants of UBS Preferred Funding Company under the
Amended and Restated Trust Agreement,
- to add to the covenants of UBS Preferred Funding Company for the benefit
of the holders of the trust preferred securities, or to surrender any
right or power herein conferred upon UBS Preferred Funding Company,
- to correct or supplement any provision of the Trust Agreement which may
be defective or inconsistent with any other provision therein,
- to make any other provisions with respect to matters or questions
arising under the Amended and Restated Trust Agreement, provided that
any such action does not materially adversely affect the interests of
the holders of the trust preferred securities, or
- to cure any ambiguity or correct any mistake.
Any other amendment or agreement supplemental to the Amended and Restated Trust
Agreement must be in writing and approved by holders of 66 2/3% of the then
outstanding trust preferred securities.
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TRANSFER AND ISSUE OF DEFINITIVE TRUST PREFERRED SECURITIES
TRANSFER, ISSUE AND DELIVERY
If trust preferred securities are issued in definitive form ("definitive trust
preferred securities") in the limited circumstances described in "Book-Entry
Issuance of Trust Preferred Securities--Termination of and Changes to Depositary
Arrangements," those trust preferred securities may be transferred in any
whole-number multiples of USD1,000 by surrendering the definitive trust
preferred securities certificates together with the form of transfer endorsed on
it, duly completed and executed at the office of the transfer agent. The initial
transfer agent will be Wilmington Trust Company. If only part of a definitive
trust preferred securities certificate is transferred, a new definitive trust
preferred securities certificate representing the securities that are not
transferred will be issued to the transferor within three business days after
the transfer agent receives the certificate. The new certificate representing
the trust preferred securities that were not transferred will be delivered to
the transferor by uninsured mail at the risk of the transferor, to the address
of the transferor that appears in the records of UBS Preferred Funding Trust.
The new certificate representing the trust preferred securities that were
transferred will be sent to the transferee within three business days after the
trustee receives the certificate transferred, by uninsured mail at the risk of
the holder entitled to the trust preferred securities represented by the
certificate, to the address specified in the form of transfer.
FORMALITIES FREE OF CHARGE
Registration of transfers of definitive trust preferred securities will be made
without charge by UBS Preferred Funding Trust, but the transferor must pay any
tax or other governmental charges that may be imposed in relation to the
transfer, together with any indemnity that UBS Preferred Funding Trust, UBS AG
or the transfer agent may require.
CLOSED PERIODS
No holder may require the transfer of the trust preferred securities to be
registered during the period of 15 days ending on the due date for any payment
of principal on the trust preferred securities.
UBS Preferred Funding Trust will not be required to register, or cause others to
register, the transfer of trust preferred securities after such trust preferred
securities have been called for redemption.
REGULATIONS CONCERNING TRANSFER AND REGISTRATION
All transfers of definitive trust preferred securities and entries must be made
as provided in the agency agreement relating to the trust preferred securities.
The provisions of this agreement that govern transfers may be changed by UBS
Preferred Funding Trust with the prior written approval of the trustee.
REGISTRAR AND TRANSFER AGENT
Wilmington Trust Company will act as registrar and transfer agent for the trust
preferred securities. As long as the trust preferred securities are listed on
the Luxembourg Stock Exchange, UBS Preferred Funding Trust will also maintain a
transfer agent in Luxembourg. The initial Luxembourg transfer agent will be BNP
Paribas.
PAYMENTS AND PAYING AGENT
As long as the trust preferred securities are in book-entry form, payments of
interest and principal on the trust preferred securities will be made to DTC,
which will credit the relevant accounts at DTC on the scheduled payment dates.
The payments of interest and principal will be distributed to participants,
indirect participants and beneficial owners of the trust preferred securities as
described under "Book-Entry Issuance of Trust Preferred Securities--DTC's
Procedures for Notices, Voting and Payments."
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If definitive trust preferred securities are issued in the limited circumstances
described above, payments of interest and principal on the trust preferred
securities will be made by check mailed to the address of the holder entitled to
receive the payment, as the address appears in UBS Preferred Funding Trust's
register.
UBS Preferred Funding Trust will maintain a paying agent with respect to the
trust preferred securities which will initially be Wilmington Trust Company. The
paying agent will be permitted to resign as paying agent upon 30 days' written
notice to the trustee. If Wilmington Trust Company resigns as paying agent, the
trustee will appoint another bank or trust company to act as paying agent. As
long as the trust preferred securities are listed on the Luxembourg Stock
Exchange, UBS Preferred Funding Trust will also maintain a paying agent in
Luxembourg. The initial Luxembourg paying agent will be BNP Paribas.
TERMINATION OF AMENDED AND RESTATED TRUST AGREEMENT
The Amended and Restated Trust Agreement will terminate upon the earliest to
occur of the redemption of all of the trust preferred securities, the delivery
of a final distribution of the company preferred securities to the holders of
trust preferred securities, withdrawal of all the company preferred securities
from UBS Preferred Funding Trust (as described under "--Withdrawal of the
Company Preferred Securities") or dissolution of UBS Preferred Funding Trust as
described in the following paragraph.
UBS Preferred Funding Company may instruct the trustee to dissolve UBS Preferred
Funding Trust and distribute the company preferred securities on a pro rata
basis to the holders of trust preferred securities in the case of either a Tax
Event as to UBS Preferred Funding Trust or an Investment Company Act Event as to
UBS Preferred Funding Trust, as each is defined under "Description of Company
Preferred Securities--Redemption."
Any company preferred securities held in definitive fully registered form will
not be eligible to be held through DTC, Euroclear or Clearstream.
EXPENSES OF UBS PREFERRED FUNDING TRUST
All charges or expenses of UBS Preferred Funding Trust, including the charges
and expenses of the trustee, will be paid by the Stamford branch of UBS AG,
except that, if the trustee incurs fees, charges or expenses, for which it is
not otherwise liable under the Amended and Restated Trust Agreement, at the
request of a holder of trust preferred securities or other person, such holder
or other person will be liable for such fees, charges and expenses.
RESIGNATION AND REMOVAL OF THE TRUSTEE
UBS Preferred Funding Trust will at all times have a trustee that is a bank that
has its principal place of business in the State of Delaware and a combined
capital and surplus of USD50,000,000. If the trustee ceases to be eligible, it
must resign.
The trustee may resign as trustee under the Amended and Restated Trust Agreement
at any time by giving notice of its resignation to UBS Preferred Funding
Company. The trustee may be removed by UBS Preferred Funding Company at any time
by notice of such removal delivered to the trustee. Any resignation or removal
of the trustee will take effect upon the appointment of a qualified successor
trustee and the successor's acceptance of such appointment.
If the trustee shall resign or be removed, UBS Preferred Funding Company shall,
within 45 days after the delivery of the notice of resignation or removal, as
the case may be, appoint a successor trustee, which shall be a bank or trust
company, or an affiliate of a bank or trust company, having its
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principal office in the State of Delaware and having a combined capital and
surplus of at least USD50,000,000.
INFORMATION CONCERNING THE TRUSTEE
Wilmington Trust Company is the trustee. The trustee is required to perform only
those duties that are specifically set forth in the Amended and Restated Trust
Agreement, except when a default has occurred and is continuing with respect to
the trust preferred securities. After a default, the trustee must exercise the
same degree of care a prudent person would exercise under the circumstances in
the conduct of his or her own affairs. Subject to these requirements, the
trustee is under no obligation to exercise any of the powers vested in it by the
Amended and Restated Trust Agreement at the request of any holder of trust
preferred securities, unless the holder offers the trustee reasonable indemnity
against the costs, expenses and liabilities that might be incurred by exercising
those powers.
NOTICES
Notices to the holders of trust preferred securities will be given by delivery
of the relevant notice to DTC, Euroclear, Clearstream and any other relevant
securities clearing system for communication by each of them to entitled
participants, and, as long as the trust preferred securities are listed on one
or more stock exchanges and the rules of such stock exchange(s) so require,
notices will also be published in the manner that the rules of such stock
exchange(s) may require. In addition, notices will be published in one English
language daily newspaper of general circulation in London (which is expected to
be the Financial Times) and, for as long as the rules of the Luxembourg Stock
Exchange so require, in a daily newspaper of general circulation in Luxembourg
(which is expected to be the Luxemburger Wort).
If the trust preferred securities are no longer held in the name of DTC or its
nominee, notice to the holders of trust preferred securities will also be mailed
by first-class mail, postage prepaid, to the holders' addresses appearing in the
records of UBS Preferred Funding Trust.
GOVERNING LAW
The Trust Agreement and the trust preferred securities are governed by the laws
of the State of Delaware.
NATURE OF THE TRADING MARKET
The company preferred securities are not listed on any national exchange or
traded in any established market. We have applied to list the trust preferred
securities on the Luxembourg Stock Exchange in accordance with its rules. The
Luxembourg Stock Exchange is not a trading market.
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Description of Company Preferred Securities
UBS Preferred Funding Company will issue the company preferred securities under
the terms of its Amended and Restated Limited Liability Company Agreement. The
following summary of the material terms and provisions of the company preferred
securities is not complete and is subject to and qualified in its entirety by
reference to the LLC Agreement of UBS Preferred Funding Company and the Delaware
Limited Liability Company Act. We have filed a copy of the LLC Agreement of UBS
Preferred Funding Company as an exhibit to the registration statement of which
this prospectus is a part.
GENERAL
The company preferred securities are preferred limited liability company
interests in UBS Preferred Funding Company, the terms of which are set forth in
UBS Preferred Funding Company's LLC Agreement.
The company preferred securities are intended to provide holders with rights to
distributions and redemption and liquidation payments that are similar to those
to which holders would be entitled if they had purchased the most senior ranking
noncumulative perpetual preferred shares issued directly by UBS AG that have
financial terms equivalent to those of the company preferred securities.
The company preferred securities are validly issued, and no additional payments
will be required for such securities to represent limited liability company
interests in UBS Preferred Funding Company. Holders of company preferred
securities will have no preemptive rights with respect to any other securities
of UBS Preferred Funding Company. The company preferred securities will not be
convertible into company common securities or any other interests in UBS
Preferred Funding Company and will not be subject to any sinking fund or other
obligation of UBS Preferred Funding Company for their repurchase or retirement.
The company preferred securities are issued in certificated form only in
denominations of USD1,000 liquidation preference and whole-number multiples of
USD1,000. The aggregate liquidation preference of the company preferred
securities offered pursuant to this prospectus is USD1,500,000,000.
UBS Preferred Funding Company has the power to create and issue additional
preferred limited liability company interests (i) that are junior to the company
preferred securities as to payment of dividends and payments of amounts upon
dissolution, liquidation or winding up of UBS Preferred Funding Company
("company junior securities") or (ii) that are on a parity with the company
preferred securities as to those payments ("company parity preferred
securities"). As long as any company preferred securities remain outstanding, no
company parity preferred securities may be issued unless the holders of at least
66 2/3% of the outstanding company preferred securities and company parity
preferred securities, if any (based on the aggregate liquidation preference),
voting together as a single class, approve or unless the UBS AG subordinated
guarantee is amended so that such company parity preferred securities benefit
from the UBS AG subordinated guarantee in the same manner as the company
preferred securities without any adverse effect on the holders of company
preferred securities. See "--Voting Rights."
The LLC Agreement of UBS Preferred Funding Company precludes UBS Preferred
Funding Company from issuing, without the consent of each holder of company
preferred securities, any company parity preferred securities or any other
classes or series of equity securities that are senior to the company preferred
securities as to dividend rights or rights upon dissolution, liquidation or
winding up of UBS Preferred Funding Company.
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DESCRIPTION OF COMPANY PREFERRED SECURITIES
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DIVIDENDS
GENERAL
Dividends on the company preferred securities will be payable from the date of
initial issuance on a noncumulative basis, semi-annually in arrears on 1 April
and 1 October of each year through October 2010 and thereafter quarterly in
arrears on 1 January, 1 April, 1 July and 1 October each year (each a "dividend
payment date") for the dividend period then ending, but only if UBS Preferred
Funding Company has legally available funds for such purpose and satisfies the
other qualifications described below. Each period from and including a dividend
payment date or the date of initial issuance, as applicable, to but not
including the next dividend payment date is a "dividend period".
Dividends will be payable on the liquidation preference:
- for each dividend period through the dividend period ending on the
dividend payment date in October 2010, at a fixed rate per annum equal to
8.622% (calculated on the basis of a year of twelve 30-day months), and
- for each dividend period commencing on such dividend payment date and
thereafter, at a floating rate per annum equal to 3.07% above three-month
LIBOR (calculated on the basis of the actual number of days elapsed in a
360-day year).
Dividends will be mandatorily due and payable on a dividend payment date with
respect to the related dividend period and special dividends will be mandatorily
due and payable on other dates in the circumstances described under "--Mandatory
Dividends," except that dividends will never be mandatorily due and payable or
be paid when the capital limitation (described below under "--Capital
Limitation") applies. If dividends are neither mandatorily due and payable on a
dividend payment date nor prohibited by application of the capital limitation,
then:
- payment of dividends on the company preferred securities will be limited
by UBS AG's available distributable profits (see "--Distributable Profits
Limitation"), and
- if UBS AG delivers, on or before the tenth business day immediately
preceding the dividend payment date, an instruction (a "no dividend
instruction") to UBS Preferred Funding Company not to pay dividends on
that dividend payment date or to pay less than full dividends on that
dividend payment date, dividends payable on the related dividend payment
date will be limited as provided in the no dividend instruction (see
"--No Dividend Instruction").
If any dividends will be payable on the company preferred securities on a day
that is not a business day, those dividends will instead be paid on the next
business day. No interest or other payment will be due as a result of any such
adjustment.
LIBOR, with respect to a determination date (as defined below), means the rate
(expressed as a percentage per annum) for deposits in U.S. dollars for a
three-month period commencing on the second London banking day (as defined
below) immediately following that determination date that appears on Telerate
Page 3750 (as defined below) as of 11:00 a.m. (London time) on that
determination date. If such rate does not appear on Telerate Page 3750, LIBOR
will be determined on the basis of the rates which deposits in U.S. dollars for
a three-month period commencing on the second London banking day immediately
following that determination date and in a principal amount of not less than
USD1,000,000 are offered to prime banks in the London interbank market by four
major banks in the London interbank market selected by the calculation agent (as
defined below), after consultation with UBS Preferred Funding Company, at
approximately 11:00 a.m., London time, on that determination date.
The calculation agent will request the principal London office of each of such
banks to provide a quotation at its rate. If at least two such quotations are
provided, LIBOR with respect to that determination date will be the arithmetic
mean of such quotations. If fewer than two quotations are provided, LIBOR with
respect to that determination date will be the arithmetic mean of the rates
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quoted by three major money center banks in New York City selected by the
calculation agent, after consultation with UBS Preferred Funding Company, at
approximately 11:00 a.m., New York City time, on that determination date for
loans in U.S. dollars to leading European banks for a three-month period
commencing on the second London banking day immediately following that
determination date and in a principal amount of not less than USD1,000,000.
However, if the banks selected by the calculation agent to provide quotations
are not quoting as described in this paragraph, LIBOR for the applicable period
will be the same as LIBOR as determined on the previous determination date.
As used in this prospectus:
"calculation agent" means the London branch of UBS AG.
"determination date" for a dividend period or interest period (as
applicable) means two London banking days preceding the first day of that
dividend period or interest period (as applicable).
"London banking day" means a day on which dealings in deposits in U.S.
dollars are transacted in the London interbank market.
"Telerate Page 3750" means the display designated as "Page 3750" on the
Bridge/Telerate Service (or such other page as may replace Page 3750) on
that service or such other service or services as may be nominated by the
British Bankers' Association as the information vendor for the purpose of
displaying London interbank offered rates for U.S. dollar deposits.
All percentages resulting from any calculations on the company preferred
securities will be rounded, if necessary, to the nearest one hundred-thousandth
of a percentage point, with five one-millionths of a percentage point rounded
upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)),
and all dollar amounts used in or resulting from such calculation will be
rounded to the nearest cent (with one-half cent being rounded upward).
MANDATORY DIVIDENDS
UBS Preferred Funding Company will be required to pay dividends on the company
preferred securities in three circumstances, as follows:
(i) If UBS AG declares or pays dividends or makes any other payment or
distribution on any UBS AG junior obligations, and provided that the
capital limitation does not apply, then UBS Preferred Funding Company
will be required to pay full dividends on the company preferred
securities during the one-year period beginning on and including the
earlier of the date on which such dividend was declared or the date on
which such dividend or other payment was made.
(ii) If UBS AG or any of its subsidiaries redeems, repurchases or
otherwise acquires any UBS AG parity securities or UBS AG junior
obligations for any consideration, except by conversion into or
exchange for shares of UBS AG or UBS AG junior obligations and except
as described below (and provided that the capital limitation does not
apply), then UBS Preferred Funding Company will be required to pay
dividends on the company preferred securities during the one-year
period beginning on and including the date on which such redemption,
repurchase or other acquisition occurred.
(iii) If (x) UBS AG or any of its subsidiaries pays any dividends or makes
any other payment or distribution on any UBS AG parity securities on
any date and (y) during the relevant period (as defined below) ending
on and including that date there occurred a dividend payment date as
to which UBS Preferred Funding Company paid no dividends or less than
full dividends on the company preferred securities, and provided that
the capital limitation does not apply, then on that date UBS
Preferred Funding Company will be required to pay a special dividend
on the company preferred securities. The special dividend will be
payable on that date whether
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or not that date is otherwise a dividend payment date and, if it is a
dividend payment date, will be in addition to any other dividends
required to be paid on that dividend payment date. The special dividend
will be in an amount that, when taken together with dividends previously
paid on the company preferred securities during the relevant period,
represents the same proportion of full dividends on the company
preferred securities for all dividend payment dates during the relevant
period that the dividend on UBS AG parity securities paid during that
relevant period bears to full dividends on such UBS AG parity securities
for that relevant period.
Notwithstanding paragraph (ii) above, UBS Preferred Funding Company will not be
required to pay dividends solely as a result of:
- repurchases, redemptions or other acquisitions of UBS AG parity
securities or UBS AG junior obligations in connection with any
employment contract, benefit plan or other similar arrangement with or
for the benefit of any one or more employees, officers, directors or
consultants, in connection with a dividend reinvestment or shareholder
share purchase plan or in connection with the issuance of UBS AG parity
securities or UBS AG junior obligations (or securities convertible into
or exercisable for such UBS AG parity securities or UBS AG junior
obligations) as consideration in an acquisition transaction,
- market-making in the UBS AG parity securities or UBS AG junior
obligations as part of the securities business of UBS AG or any of its
subsidiaries,
- the purchase of fractional interests in UBS AG parity securities or UBS
AG junior obligations pursuant to the conversion or exchange provisions
of such UBS AG parity securities or UBS AG junior obligations or the
security being converted or exchanged,
- any declaration of a dividend in connection with any shareholder's
rights plan, or the issuance of rights, shares or other property under
any shareholder's rights plan, or the redemption or repurchase of rights
pursuant to any such plan, or
- any dividend in the form of shares, warrants, options or other rights
where the dividend shares or the shares issuable upon exercise of such
warrants, options or other rights are the same shares as that on which
the dividend is being paid or ranks equally with or junior to such
shares.
Any dividend payment date or other date on which dividends on the company
preferred securities are required to be paid as described in clause (i), (ii) or
(iii) of the second paragraph above is a "mandatory dividend payment date." The
amount of dividends required to be paid on any mandatory dividend payment date
(after giving effect to the capital limitation, if applicable) is called the
"mandatory dividend payment amount." If a dividend payment date or other date is
a mandatory dividend payment date, UBS Preferred Funding Company will be
required to pay the mandatory dividend payment amount as dividends on that date
whether or not there are available distributable profits and whether or not
interest is paid on the subordinated notes.
For purposes of this prospectus:
"UBS AG junior obligations" means (i) ordinary shares of UBS AG, (ii) each
class of preferred or preference shares or similar securities of UBS AG
that ranks junior to the most senior ranking preferred or preference shares
or similar securities of UBS AG, and (iii) any indebtedness, guarantee or
support agreement or similar undertaking of UBS AG in respect of any
subsidiary securities that rank junior to the UBS AG subordinated
guarantee.
"UBS AG parity securities" means (i) each class of preferred or preference
shares or similar securities of UBS AG that ranks equally with the most
senior ranking preferred or preference
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shares or similar securities of UBS AG and (ii) any securities issued by
any subsidiaries of UBS AG and entitled to the benefit of any guarantee or
support agreement or similar undertaking of UBS AG that ranks equally with
the UBS AG subordinated guarantee.
"relevant period" means (i) in the case of UBS AG parity securities that
pay dividends less frequently than semi-annually, one year and (ii) in the
case of UBS AG parity securities that pay dividends semi-annually or more
frequently than semi-annually, six months (in each case ending on or
including the date on which the related dividend on a parity security is
paid but not including the corresponding day in the month that is twelve or
six months prior thereto).
CAPITAL LIMITATION
The prohibition on the payment of dividends on the company preferred securities
as described below is called the "capital limitation."
Unless the Swiss Federal Banking Commission expressly permits otherwise, UBS
Preferred Funding Company will not pay dividends on the company preferred
securities on any dividend payment date (whether or not it is a mandatory
dividend payment date) if on such date UBS AG is not in compliance, or because
of a distribution by UBS AG or any of its subsidiaries of profits of UBS AG
(including a payment of dividends on the company preferred securities) would not
be in compliance, with the Swiss Federal Banking Commission's minimum capital
adequacy requirements applicable to UBS AG as then in effect. For a discussion
of UBS's capital resources relative to applicable guidelines, see
"UBS--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources."
DISTRIBUTABLE PROFITS LIMITATION
The limitation or prohibition on the payment of dividends on the company
preferred securities as described below is called the "distributable profits
limitation." The distributable profits limitation will not limit or prohibit
payment of mandatory dividends on a mandatory dividend payment date. The effect
of the distributable profits limitation is to limit the amount of non-mandatory
dividends that UBS Preferred Funding Company may pay on the company preferred
securities to the amount of dividends that UBS AG would have been legally able
to pay on such securities had they been issued directly by UBS AG as
non-cumulative preference shares of UBS AG.
On or before the dividend payment date in April of each year, UBS AG will
deliver a certificate to UBS Preferred Funding Company (a "distributable profits
limitation certificate") specifying:
- the distributable profits (as defined below) of UBS AG for the financial
year ending on the preceding 31 December, and
- the available distributable profits (as defined below) for payment of
dividends on the company preferred securities on the dividend payment
dates in the then current year.
Unless UBS Preferred Funding Company is required to pay mandatory dividends:
- the aggregate amount of dividends on the company preferred securities
that UBS Preferred Funding Company may pay on the dividend payment date
in April of the current year may not exceed the lesser of full dividends
and the available distributable profits set forth in such distributable
profits limitation certificate, and
- the aggregate amount of dividends on the company preferred securities
that UBS Preferred Funding Company may pay on any subsequent dividend
payment date in the current year (or in January of the following year in
the case of dividend payment dates occurring after October 2010) may not
exceed the lesser of full dividends and the remaining amount of such
available
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distributable profits (after giving effect to the payment of dividends
pursuant to this bullet point or the bullet point immediately above).
For purposes of this prospectus:
"distributable profits" means, for any financial year of UBS AG, profit
that may be distributed in accordance with Swiss law then applicable.
Currently, for any financial year of UBS AG, distributable profits are
equal to profit brought forward, plus profit for the period, minus
appropriation to general statutory reserve, plus other reserves, each as
shown in the audited unconsolidated balance sheet and statement of
appropriation of retained earnings of UBS AG and as determined in
accordance with accounting standards applicable under Swiss law. The
"appropriation to general statutory reserve" is equal to up to 5% of annual
profit to the extent the general reserves of UBS AG do not equal 20% of the
paid-in share capital plus 10% of the amount distributed as a dividend from
profit for the period in excess of 5% of the par value of the UBS common
shares. UBS AG's distributable profits for 2000 were approximately CHF 16
billion.
"available distributable profits" means, for any financial year of UBS AG:
- if there are no UBS AG parity securities outstanding, distributable
profits for the immediately preceding financial year of UBS AG, and
- if there are UBS AG parity securities outstanding, then an amount
determined as the product of:
(x) distributable profits for the immediately preceding financial year
of UBS AG, and
(y) a ratio (I) the numerator of which is the aggregate amount of full
dividends on the company preferred securities to be paid on the
dividend payment dates that occur during the then current financial
year (but excluding dividends paid on January of the current year
and including dividends to be paid on January of the following
year, in the case of calculations occurring after October 2010) and
(II) the denominator of which is equal to the amount determined
pursuant to clause (I) plus the aggregate amount of full dividends
on the UBS AG parity securities to be paid on dividend payment
dates which occur during the then current financial year.
NO DIVIDEND INSTRUCTION
Except for the mandatory dividend payment amounts required to be paid on
mandatory dividend payment dates:
- dividends on the company preferred securities will not be payable on a
dividend payment date if, on or before the tenth business day
immediately preceding such dividend payment date, UBS AG delivers a no
dividend instruction to UBS Preferred Funding Company instructing it not
to pay dividends on that dividend payment date, and
- if, on or before the tenth business day immediately preceding such
dividend payment date, UBS AG delivers a no dividend instruction to UBS
Preferred Funding Company limiting but not prohibiting the payment of
dividends on such dividend payment date, dividends on the company
preferred securities will be payable on that dividend payment date only
to the extent permitted by such no dividend instruction.
If a no dividend instruction is given, then UBS Preferred Funding Company must
promptly give notice to the holders of company preferred securities in the
manner described under "--Notices" of the fact that it has received a no
dividend instruction and the amount of dividends, if any, that will be paid on
the related dividend payment date.
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ADDITIONAL AMOUNTS
If UBS Preferred Funding Company or UBS Preferred Funding Trust is required to
withhold any taxes, duties or other governmental charges with respect to any
dividend payment on the trust preferred securities or the company preferred
securities, UBS Preferred Funding Company will be required to pay, as additional
amounts included in the dividend payment (and UBS AG will be required to include
in any related payment made by it under the UBS AG subordinated guarantee), an
amount sufficient that the net amount received by the holder of company
preferred securities or trust preferred securities, as applicable, after the
withholding, will not be less than the dividend payment amount. However, UBS
Preferred Funding Company will not be required to pay any such additional
amounts to the extent that the taxes, duties or other governmental charges are
imposed or levied by Switzerland or the Cayman Islands because the holder or
beneficial owner of trust preferred securities or company preferred securities:
- has some connection with Switzerland or the Cayman Islands, as
applicable, other than being a holder or beneficial owner of those trust
preferred securities or company preferred securities, or
- has not made a declaration of non-residence in, or other lack of
connection with, Switzerland or the Cayman Islands, as applicable, or
any similar claim for exemption, if UBS Preferred Funding Company has
given the beneficial owner of those trust preferred securities or
company preferred securities or its nominee at least 60 days' prior
notice of an opportunity to make the declaration or claim.
RANKING AND LIQUIDATION PREFERENCE
The company preferred securities ordinarily will rank senior to the company
common securities as to the payment of dividends. However, UBS AG has the right
to shift the dividend preference of the company preferred securities to the
company common securities on any dividend payment date to the extent that the
mandatory dividend payment amount then required to be paid as dividends on the
company preferred securities (if any) is less than full dividends on the company
preferred securities. If UBS AG shifts the dividend preference to the company
common securities, the interest payment received by UBS Preferred Funding
Company on the subordinated notes will be returned as dividends to UBS AG, as
the holder of company common securities, before any dividends are paid on the
company preferred securities.
As long as any company preferred securities are outstanding, UBS AG has agreed
in UBS Preferred Funding Company's LLC Agreement that it will take no voluntary
action to cause UBS Preferred Funding Company to dissolve or liquidate unless
UBS AG also liquidates. UBS Preferred Funding Company's LLC Agreement provides
that UBS Preferred Funding Company will be liquidated if UBS AG is liquidated.
If UBS Preferred Funding Company dissolves, liquidates or winds up, then after
the claims of any creditors of UBS Preferred Funding Company are satisfied, the
holders of company preferred securities will be entitled to receive, before any
distribution of assets is made to the holders of company common securities or
any other class of shares ranking junior to the company preferred securities
upon liquidation, liquidating distributions in respect of the company preferred
securities in the amount of:
- the liquidation preference of the company preferred securities, plus
- an amount equal to unpaid dividends, if any, on the company preferred
securities with respect to the current dividend period accrued on a
daily basis to the date of liquidation, plus
- an amount equal to unpaid definitive dividends for any prior dividend
period, without interest and without accumulation of unpaid
nondefinitive dividends for any prior dividend period.
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For purposes of this prospectus:
"definitive dividends" means, as to a dividend payment date and related
dividend period, dividends that are due and payable because (i) they are not
limited by the capital limitation and (ii) either (x) they are mandatory
dividends or (y) a no dividend instruction was not delivered and they are
not limited by the distributable profit limitation.
"nondefinitive dividends" means, as to a dividend payment date and related
dividend period, dividends that are not definitive dividends.
If UBS AG is liquidated, whether voluntarily or involuntarily, (i) UBS Preferred
Funding Company will be liquidated and (ii) under the UBS AG Subordinated
Guarantee Agreement, the holders of company preferred securities (whether
through UBS Preferred Funding Trust or as direct holders who have withdrawn
their company preferred securities from UBS Preferred Funding Trust) will have a
claim entitling them to substantially the same liquidating distributions in the
liquidation of UBS AG that they would have been entitled to if they had
purchased preferred shares of UBS AG having an aggregate liquidation preference
equal to the aggregate liquidation preference of the company preferred
securities and bearing dividends at the rate of dividends applicable to the
company preferred securities. The UBS AG Subordinated Guarantee Agreement and
UBS Preferred Funding Company's LLC Agreement, taken together, provide that the
holders of company preferred securities may not receive liquidating
distributions in a liquidation of UBS Preferred Funding Company and payments
under the UBS AG subordinated guarantee that, taken together, exceed the
liquidating distributions to which they would have been entitled had they
instead owned preferred shares of UBS AG with equivalent terms as described
above.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated below,
the holders of company preferred securities will not be entitled to vote. If the
holders of company preferred securities are entitled to vote as indicated below,
each USD1,000 liquidation preference of the company preferred securities will be
entitled to one vote on matters on which the holders of company preferred
securities are entitled to vote.
If at any time the aggregate of unpaid dividends equals or exceeds an amount
equal to three semi-annual dividend payments, the holders of company preferred
securities and any company parity preferred securities, voting together as a
single class, will have the exclusive right to elect two additional directors of
their choosing. Holders of a majority (based on the aggregate liquidation
preference) of the company preferred securities and any company parity preferred
securities may exercise this right by written consent or at a meeting of such
holders called for such purpose. This right will continue either until all
unpaid dividends have been paid in full or until full dividends have been paid
on the company preferred securities for two consecutive dividend periods. While
this right continues, any vacancy in the office of the additional directors may
be filled only by the holders of company preferred securities and company parity
preferred securities voting as described above.
UBS Preferred Funding Company's LLC Agreement provides that a meeting will be
called at the request of holders of 25% (based on the aggregate liquidation
preference) of the company preferred securities and any company parity preferred
securities.
As long as any company preferred securities are outstanding, UBS Preferred
Funding Company may not, without the consent or vote of holders of at least
66 2/3% of the outstanding company preferred
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securities and company parity preferred securities, if any (based on the
aggregate liquidation preference), voting together as a single class:
- change or remove any provision of UBS Preferred Funding Company's LLC
Agreement (including the terms of the company preferred securities),
issue any company parity preferred securities, redeem or repurchase any
company common securities, or consent to a change in the booking
location of the issuance of the subordinated notes to a branch or other
office of UBS AG other than the Cayman Islands branch of UBS AG, in each
case, if such action would materially and adversely affect the rights,
preferences, powers or privileges of the company preferred securities
and such company parity preferred securities,
- to the fullest extent permitted by law, liquidate, dissolve or terminate
UBS Preferred Funding Company without the concurrent liquidation of UBS
AG,
- amend or modify UBS Preferred Funding Company's investment policies, or
- merge, convert, consolidate, reorganize or effect any other business
combination involving UBS Preferred Funding Company, unless the
resulting entity will have no class or series of equity securities
either authorized or outstanding that ranks ahead of the company
preferred securities as to dividends or as to the distribution of assets
upon liquidation, dissolution or winding up, except the same number of
shares of such equity securities with the same preferences, conversion
or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications or terms or conditions
or redemption as the shares of equity securities of UBS Preferred
Funding Company that are authorized and outstanding immediately prior to
such transaction, and each holder of company preferred securities
immediately prior to such transaction shall receive securities with the
same preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions or redemption of the resulting
entity as the company preferred securities held by such holder
immediately prior to the transaction.
As long as any company preferred securities are outstanding, UBS Preferred
Funding Company may not, without the consent of the holders of each outstanding
company preferred security, authorize, create or increase the authorized amount
of, or issue any class or series of, any equity securities of UBS Preferred
Funding Company, or any warrants, options or other rights convertible or
exchangeable into any class or series of any equity securities of UBS Preferred
Funding Company, ranking prior to the company preferred securities, either as to
dividend rights or rights on dissolution, liquidation or winding up of UBS
Preferred Funding Company.
Notwithstanding any of the foregoing, without consent of any holder of company
preferred securities, UBS AG may amend or supplement the UBS AG Subordinated
Guarantee Agreement to correct or supplement any provision in the UBS AG
Subordinated Guarantee Agreement which may be defective or inconsistent with any
other provision therein, or to make any other provisions with respect to matters
or questions arising under the UBS AG Subordinated Guarantee Agreement, so long
as any such action shall not materially adversely affect the interests of the
holders of company preferred securities. See "Description of UBS AG Subordinated
Guarantee--Amendments."
Notwithstanding the foregoing, without the consent of any holder of company
preferred securities, UBS AG may amend or supplement the UBS Preferred Funding
Company's LLC Agreement:
- to correct or supplement any provision in the UBS Preferred Funding
Company's LLC Agreement which may be defective or inconsistent with any
other provision therein, or to make any other provisions with respect to
matters or questions arising under the UBS Preferred Funding Company's
LLC Agreement, so long as any such action shall not materially adversely
affect the interests of the holders of company preferred securities, or
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- to cure any ambiguity or correct any mistake.
REDEMPTION
The company preferred securities may not be redeemed before the dividend payment
date scheduled to occur in October 2010 unless a Tax Event, an Investment
Company Act Event or a Capital Event occurs, in which case UBS Preferred Funding
Company may redeem the company preferred securities in whole (but not in part)
at any time on not less than 30 nor more than 60 days' notice. On or after the
dividend payment date regularly scheduled to occur in October 2010, UBS
Preferred Funding Company may redeem the company preferred securities on any
dividend payment date for cash, in whole or in part, on not less than 30 nor
more than 60 days' notice.
The redemption price for such redemptions on or after the regularly scheduled
dividend payment date in October 2010 will be:
- 100% of the liquidation preference of the company preferred securities
being redeemed, plus
- an amount equal to unpaid dividends, if any, on the company preferred
securities with respect to the current dividend period (whether or not
declared) accrued on a daily basis to the date fixed for redemption, plus
- an amount equal to unpaid definitive dividends for any prior dividend
period, without interest and without accumulation of unpaid nondefinitive
dividends for any prior dividend period.
UBS Preferred Funding Company will also have the right to redeem the company
preferred securities in whole (but not in part) at any time prior to the
dividend payment date regularly scheduled to occur in October 2010, upon the
occurrence of a Tax Event, an Investment Company Act Event or a Capital Event.
The redemption price for a redemption arising out of a Tax Event resulting from
a Change in Tax Law (as defined below) and relating to the:
- imposition of tax on UBS Preferred Funding Trust or UBS Funding Company,
or
- the imposition of withholding tax on UBS Preferred Funding Company's
payment of dividends on the company preferred securities, on UBS
Preferred Funding Trust's payment of dividends on the trust preferred
securities, on UBS AG's payment of interest on the subordinated notes or
on UBS AG's payment under the subordinated guarantee
(which are the events described in clauses (A), (B) and (C) of the definition of
"Tax Event") will be the redemption price described above for optional
redemptions. Otherwise, the redemption price for such redemptions will be:
- the Make Whole Amount (as defined below), plus
- an amount equal to unpaid dividends, if any, on the company preferred
securities with respect to the current dividend period (whether or not
declared) accrued on a daily basis to the date fixed for redemption,
plus
- an amount equal to unpaid definitive dividends for any prior dividend
period, without interest and without accumulation of unpaid
nondefinitive dividends for any prior dividend period.
UBS Preferred Funding Company will have until the dividend payment date
regularly scheduled to occur in October 2010 after the occurrence of a Tax
Event, an Investment Company Act Event or a Capital Event to exercise its right
to redeem the company preferred securities.
Any redemption of the company preferred securities must comply with applicable
regulatory requirements, including the prior approval of the Swiss Federal
Banking Commission if then required under applicable guidelines or policies of
the Swiss Federal Banking Commission. The Swiss Federal
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Banking Commission in its discretion may impose conditions on its approval of
any proposed redemption of the company preferred securities. If dividends on any
company preferred securities are unpaid, no company preferred securities may be
redeemed unless all outstanding company preferred securities are redeemed, and
UBS Preferred Funding Company may not purchase or otherwise acquire any company
preferred securities, except pursuant to a purchase or exchange offer made on
the same terms to the holders of all outstanding company preferred securities.
The company preferred securities will not be subject to any sinking fund or
mandatory redemption and will not be convertible into any other securities of
UBS Preferred Funding Company or any securities of UBS AG.
As long as any company preferred securities are outstanding, other company
parity preferred securities may not be redeemed or repurchased unless UBS
Preferred Funding Company concurrently redeems an approximately equal proportion
of the aggregate liquidation preference of the outstanding company preferred
securities or each rating agency then rating the company preferred securities
informs UBS Preferred Funding Company in writing that the redemption or
repurchase of such company parity preferred securities would not result in a
reduction or withdrawal of the rating then assigned by that rating agency to the
company preferred securities.
If fewer than all outstanding company preferred securities are to be redeemed,
the amount of the company preferred securities to be redeemed will be determined
by the board of directors of UBS Preferred Funding Company, and the securities
to be redeemed will be determined by lot or pro rata as the board of directors
in its sole discretion determines to be equitable. UBS Preferred Funding Company
will promptly notify the registrar and transfer agent for the company preferred
securities in writing of the securities selected for redemption and, in the case
of any partial redemption, the liquidation preference to be redeemed.
Any company preferred securities redeemed will be canceled. There will be no
prescription period in respect of uncollected dividends on the company preferred
securities.
As used in this prospectus:
"administrative action" means any judicial decision, official
administrative pronouncement, published or private ruling, regulatory
procedure, notice or announcement (including any notice or announcement of
intent to adopt such procedures or regulations) by any legislative body,
court, governmental authority or regulatory body having appropriate
jurisdiction.
"Capital Event" means the determination by UBS AG after consultation with
the Swiss Federal Banking Commission that the company preferred securities
cannot be included in calculating the Tier 1 capital of UBS AG on a
consolidated basis.
"Change in Tax Law" means the receipt by UBS AG of an opinion of a
nationally recognized law firm or other tax advisor (which may be an
accounting firm) in Switzerland, the United States or the Cayman Islands,
as appropriate, experienced in such matters to the effect that an event of
the type described in clause (A), (B) or (C) of the definition of "Tax
Event" has occurred or will occur as a result of (i) any amendment to,
clarification of, or change (including any announced prospective change)
in, the laws or treaties (or any regulations under any laws or treaties) of
the United States, Switzerland or the Cayman Islands or any political
subdivision or taxing authority of or in the United States, Switzerland or
the Cayman Islands affecting taxation or (ii) any administrative action or
any amendment to, clarification of, or change in the official position of
or UBS AG interpretation of any administrative action or any interpretation
or pronouncement that provides for a position with respect to any
administrative action that differs from the previously generally accepted
position, in each case, by any legislative body, court, governmental
authority or regulatory body, regardless of the manner in which such
amendment, clarification, change,
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DESCRIPTION OF COMPANY PREFERRED SECURITIES
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interpretation or pronouncement is made known, which amendment,
clarification, change or administrative action is effective or which
interpretation or pronouncement is announced on or after the date of
issuance of the company preferred securities.
"Investment Company Act Event" means the receipt by UBS AG of an opinion of
a nationally recognized law firm in the United States experienced in such
matters to the effect that there is more than an insubstantial risk that
UBS Preferred Funding Company or UBS Preferred Funding Trust is an
"investment company" within the meaning of the Investment Company Act of
1940.
"Make Whole Amount" as applied to a redemption of the company preferred
securities means the greater of (i) 100% of the liquidation preference of
the company preferred securities and (ii) as determined by a quotation
agent (as defined below), the sum of the present value of the liquidation
preference of the company preferred securities together with the present
values of scheduled payments of dividends accrued from the date of
redemption to the dividend payment date in October 2010 (the "remaining
life"), in each case discounted to the date of redemption on a semi-annual
basis (assuming a 360-day year consisting of twelve 30-day months) at the
adjusted treasury rate.
For purposes of determining the Make Whole Amount:
"adjusted treasury rate" means, with respect to any redemption date, the
treasury rate plus .75.
"comparable treasury issue" means with respect to any redemption date
the United States Treasury security selected by the quotation agent as
having a maturity comparable to the remaining life that would be
utilized, at the time of selection and in accordance with customary
financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the remaining life. If no United States
Treasury security has a maturity that is within a period from three
months before to three months after the interest payment date and
dividend payment date in October 2010, the two most closely
corresponding United States Treasury securities will be used as the
comparable treasury issue, and the treasury rate will be interpolated or
extrapolated on a straight-line basis, rounding to the nearest month
using such securities.
"comparable treasury price" means (A) the average of five reference
treasury dealer quotations for such redemption date, after excluding the
highest and lowest of such reference treasury dealer quotations, or (B)
if the quotation agent obtains fewer than five such reference treasury
dealer quotations, the average of all such quotations.
"quotation agent" means UBS Warburg LLC and its successors, except that
if UBS Warburg LLC ceases to be a primary U.S. Government securities
dealer in New York City (a "primary treasury dealer"), UBS Preferred
Funding Company will designate another primary treasury dealer.
"reference treasury dealer" means (i) the quotation agent and (ii) any
other primary treasury dealer selected by the quotation agent after
consultation with UBS Preferred Funding Company.
"reference treasury dealer quotations" means, with respect to each
reference treasury dealer and any redemption date, the average, as
determined by the quotation agent, of the bid and asked prices for the
comparable treasury issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the quotation agent by such
reference treasury dealer at 5:00 p.m., New York City time, on the third
business day preceding such redemption date.
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DESCRIPTION OF COMPANY PREFERRED SECURITIES
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"treasury rate" means (i) the yield, under the heading which represents
the average for the week immediately prior to the redemption date,
appearing in the most recently published statistical release designated
"H.15(519)" or any successor publication which is published weekly by
the Federal Reserve and which establishes yields on actively traded
United States Treasury securities adjusted to constant maturity under
the caption "Treasury Constant Maturities," for the maturity
corresponding to the remaining life (or, if no maturity is within three
months before or after the remaining life, yields for the two published
maturities most closely corresponding to the remaining life will be
determined and the treasury rate will be interpolated or extrapolated
from such yields on a straight-line basis, rounding to the nearest
month) or (ii) if such release (or any successor release) is not
published during the week preceding the calculation date or does not
contain such yields, the rate per annum equal to the semi-annual
equivalent yield to maturity of the comparable treasury issue,
calculated using a price for the comparable treasury issue (expressed as
a percentage of its principal amount) equal to the comparable treasury
price for such redemption date. The treasury rate will be calculated on
the third business day preceding the redemption date.
"Tax Event" means the receipt by UBS AG of an opinion of a nationally recognized
law firm or other tax advisor (which may be an accounting firm) in Switzerland
or the United States, as appropriate, experienced in such matters to the effect
that there is more than an insubstantial risk that (A) UBS Preferred Funding
Company or UBS Preferred Funding Trust is or will be subject to more than a de
minimis amount of additional taxes, duties or other governmental charges, (B)
UBS AG is or will be required to pay any additional amounts in respect of any
taxes, duties or other governmental charges with respect to payments of interest
or principal on the subordinated notes and with respect to any payments on the
trust preferred securities, (C) UBS Preferred Funding Company is or will be
required to pay any additional amounts in respect of any taxes, duties or other
governmental charges with respect to payments of dividends on the company
preferred securities or UBS Preferred Funding Trust is or will be required to
pay any additional amounts in respect of any taxes, duties or other governmental
charges with respect to distributions on the trust preferred securities, or (D)
the treatment of any of UBS Preferred Funding Company's items of income, gain,
loss, deduction or expense, or the treatment of any item of income, gain, loss,
deduction or expense of UBS AG related to the subordinated notes or its
ownership of UBS Preferred Funding Company, in each case as reflected on the tax
returns (including estimated returns) filed (or to be filed) by UBS Preferred
Funding Company or UBS AG, will not be respected by a taxing authority, as a
result of which UBS Preferred Funding Company or UBS AG is or will be subject to
more than a de minimis amount of additional taxes, duties or other governmental
charges or civil liabilities, the effect of which cannot be avoided by UBS
Preferred Funding Company or UBS AG taking reasonable measures available to it
without any adverse effect on or material cost to UBS AG or UBS Preferred
Funding Company (as determined by UBS AG in its sole discretion).
REGISTRAR AND TRANSFER AGENT
Wilmington Trust Company, or any other entity that UBS AG designates, will act
as registrar and transfer agent for the company preferred securities.
Registration of transfers of the company preferred securities will be effected
without charge by or on behalf of UBS Preferred Funding Company, but upon
payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. UBS Preferred Funding Company will not
be required to register or cause to be registered the transfer of the company
preferred securities after such company preferred securities have been called
for redemption.
The LLC Agreement of UBS Preferred Funding Company provides that, in the event
of a partial redemption of the company preferred securities that would result in
a delisting of the trust preferred
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DESCRIPTION OF COMPANY PREFERRED SECURITIES
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securities from any securities exchange on which the trust preferred securities
are then listed, UBS Preferred Funding Company will redeem the company preferred
securities in whole.
NOTICES
Notices to the holders of company preferred securities will be mailed by
first-class mail, postage prepaid, to the holders' addresses appearing in UBS
Preferred Funding Company's records.
GOVERNING LAW
The LLC Agreement of UBS Preferred Funding Company and the company preferred
securities are governed by the laws of the State of Delaware.
NATURE OF THE TRADING MARKET
The company preferred securities are not listed on any national exchange or
traded in any established market. We have applied to list the trust preferred
securities on the Luxembourg Stock Exchange in accordance with its rules. The
Luxembourg Stock Exchange is not a trading market.
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Book-Entry Issuance of Trust Preferred Securities
The trust preferred securities were initially issued to investors only in
book-entry form. The total aggregate amount of the trust preferred securities
are represented by a permanent global security in fully registered form (a
"global certificate") and deposited with a custodian for, and registered in the
name of The Depository Trust Company ("DTC") or its nominee. The global
certificate was initially deposited with Wilmington Trust Company, as the
custodian for DTC, and registered in the name of Cede & Co., as the nominee of
DTC.
Except as described below, the global certificate may be transferred, in whole
and not in part, only to another nominee of DTC or a successor of DTC or its
nominee. Beneficial interests in the global certificate may not be exchanged for
the trust preferred securities in certificated form except in the limited
circumstances described below.
Persons that acquire beneficial ownership interests in the global certificate
will hold their interests through either (i) DTC in the United States or (ii)
Clearstream Banking or Euroclear System in Europe if such persons are
participants of systems, or indirectly through organizations that are
participants in those systems. Clearstream and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Clearstream's and Euroclear's names on the books of their respective
depositaries, which in turn will hold those positions in customers' securities
accounts in the depositaries' names on the books of DTC. Unless and until
certificated securities are issued, the only "holder" of trust preferred
securities will be Cede & Co., as nominee of DTC, or the nominee of a successor
depositary. Beneficial owners will be permitted to exercise their rights only
indirectly through DTC, Clearstream, Euroclear and their participants.
WITHDRAWAL OF THE COMPANY PREFERRED SECURITIES REPRESENTED BY THE TRUST
PREFERRED SECURITIES
Any beneficial owner of the trust preferred securities may withdraw and hold
directly a corresponding amount of the company preferred securities as described
under "Description of Trust Preferred Securities--Withdrawal of the Company
Preferred Securities." Within a reasonable period after such request has been
properly made, the trustee of UBS Preferred Funding Trust will instruct DTC to
reduce the number of trust preferred securities represented by the global
certificate by the amount of the company preferred securities to be so withdrawn
by the withdrawing owner.
The company preferred securities that are withdrawn will be issued only in
definitive, fully-registered form and will not be eligible to be held through
DTC, Euroclear or Clearstream, and the holders of such company preferred
securities will receive an annual Form K-1 instead of the Form 1099 that is
received by the holders of trust preferred securities. See "Certain U.S. Tax
Considerations--Information Reporting and Backup Withholding Tax."
Any holder of company preferred securities may redeposit, the company preferred
securities as described under "Description of Trust Preferred
Securities--Withdrawal of the Company Preferred Securities." Within a reasonable
period after such deposit is properly made, the trustee of UBS Preferred Funding
Trust will instruct DTC to increase the number of trust preferred securities
represented by the global certificate accordingly.
THE DEPOSITORY TRUST COMPANY
The Depository Trust Company, or DTC, is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York
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Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934.
DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among its participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in its participants' accounts, eliminating the
need for physical movement of securities certificates. Participants in DTC
include Clearstream and Euroclear, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations.
DTC is owned by a number of its participants and by the New York Stock Exchange,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to DTC is also available to others, such as securities
brokers and dealers, banks and trust companies, that clear through or maintain a
custodial relationship with a DTC participant, either directly or indirectly.
The rules applicable to DTC and its participants are on file with the SEC. In
March 1999, DTC announced plans to merge with the National Securities Clearing
Corporation, subject to regulatory approvals. Upon consummation of the merger,
DTC is expected to be managed as a separate operating subsidiary.
CLEARSTREAM BANKING
Clearstream Banking, societe anonyme, or Clearstream, is incorporated under the
laws of Luxembourg as a professional depositary. Clearstream holds securities
for its participating organizations and facilitates the clearance and settlement
of securities transactions between its participants through electronic
book-entry changes in accounts of its participants, eliminating the need for
physical movement of certificates. Transactions may be settled in Clearstream in
any of 28 currencies, including United States dollars.
Clearstream provides to its participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream interfaces with
domestic markets in several countries. As a professional depositary, Clearstream
is subject to regulation by the Luxembourg Monetary Institute. Clearstream
participants are recognized financial institutions around the world, including
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to Clearstream is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream
participant, either directly or indirectly.
EUROCLEAR SYSTEM
Euroclear System, or Euroclear, was created in 1968 to hold securities for its
participants and to clear and settle transactions between its participants
through simultaneous electronic book-entry delivery against payment, eliminating
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in this prospectus.
Euroclear is operated by Euroclear Bank S.A./N.V., the Euroclear Operator, under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation, which we refer to as the cooperative. All operations are conducted
by the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
cooperative. The cooperative establishes policy for Euroclear on behalf of
Euroclear participants.
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Euroclear participants include banks, including central banks, securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly. The Euroclear Operator is the Belgian branch of a New York trust
company that is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Federal Reserve and the New York State Banking
Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System, collectively, the Euroclear Terms
and Conditions, and applicable Belgian law. The Euroclear Terms and Conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Euroclear Terms and
Conditions only on behalf of Euroclear participants, and has no record of or
relationship with persons holding through Euroclear participants.
PARTICIPANTS AND BENEFICIAL OWNERS
Purchases of the trust preferred securities within the DTC system must be made
by or through DTC participants, which will receive a credit for the trust
preferred securities on DTC's records and on the records of Clearstream or
Euroclear, if applicable. The ownership interest of each actual purchaser of the
trust preferred securities, which is that of a beneficial owner of an interest
in a global certificate, is in turn to be recorded on the DTC participants' and
indirect participants' records.
Beneficial owners of interests in a global certificate will not receive written
confirmation from DTC of their purchases, but beneficial owners of an interest
in a global certificate are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the DTC participants or indirect participants through which the beneficial
owners of an interest in a global certificate purchased their ownership
interests in the trust preferred securities. Transfers of ownership interests in
the trust preferred securities will be accomplished by entries made on the books
of DTC participants and indirect participants acting on behalf of beneficial
owners of an interest in a global certificate. Beneficial owners of interests in
a global certificate will not receive certificates representing their ownership
interests in the trust preferred securities, unless use of the book-entry system
for the trust preferred securities is discontinued.
TRANSFERS AMONG DTC, CLEARSTREAM AND EUROCLEAR
Transfers between DTC participants will occur in accordance with the rules of
DTC. Transfers between Clearstream and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through Clearstream or
Euroclear participants, on the other, will be effected in DTC in accordance with
the rules of DTC on behalf of the relevant European international clearing
system by the relevant European depositary. However, those cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines, European
time. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
relevant European depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same-day funds settlement
applicable to DTC. Clearstream and Euroclear participants may not deliver
instructions directly to the European depositaries.
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Because of time zone differences, credits of the trust preferred securities
received in Clearstream or Euroclear as a result of a transaction with a person
that does not hold the trust preferred securities through Clearstream or
Euroclear will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. Those credits or any
transactions in those securities settled during that processing will be reported
to the relevant Euroclear or Clearstream participants on that business day. Cash
received in Clearstream or Euroclear as a result of sales of the trust preferred
securities by or through a Clearstream or Euroclear participant to a DTC
participant will be received with value on the DTC settlement date, but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC.
LIMITATIONS ON RESPONSIBILITIES OF DTC, CLEARSTREAM AND EUROCLEAR
DTC, Clearstream and Euroclear have no knowledge of the actual beneficial owners
of interests in a global certificate representing the trust preferred
securities. DTC's records reflect only the identity of the DTC participants,
including Clearstream and Euroclear, to whose accounts those trust preferred
securities are credited, which may or may not be the beneficial owners of
interests in a global certificate. Similarly, the records of Clearstream and
Euroclear reflect only the identity of the Clearstream or Euroclear participants
to whose accounts those trust preferred securities are credited, which also may
or may not be the beneficial owners of interests in a global certificate. DTC,
Clearstream and Euroclear participants and indirect participants will remain
responsible for keeping account of their holdings on behalf of their customers.
DTC'S PROCEDURES FOR NOTICES, VOTING AND PAYMENTS
So long as DTC, or its nominee, is the registered owner or holder of a global
certificate, DTC or that nominee, as the case may be, will be considered the
sole owner or holder of trust preferred securities represented by the global
certificate for all purposes under the Amended and Restated Trust Agreement. No
beneficial owner of an interest in a global certificate will be able to transfer
that interest except in accordance with DTC's applicable procedures, in addition
to those provided for under the Amended and Restated Trust Agreement.
DTC has advised UBS AG, as provider of the UBS AG subordinated guarantee, that
it will take any action permitted to be taken by a holder of trust preferred
securities, including the presentation of the trust preferred securities for
exchange as described below, only at the direction of one or more of its
participants to whose account the DTC interests in the global certificates are
credited and only in respect of that portion of the aggregate liquidation amount
of the trust preferred securities as to which that participant or participants
has or have given the direction.
Conveyance of notices and other communications by DTC to its participants, by
those participants to its indirect participants, and by participants and
indirect participants to beneficial owners of interests in a global certificate
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
The trustee will send redemption notices in respect of the trust preferred
securities held in book-entry form to Cede & Co., and will also give those
notices in the manner indicated under "Description of Trust Preferred
Securities--Notices." If less than all the trust preferred securities are being
redeemed, DTC will determine the amount of the interest of each DTC participant
to be redeemed in accordance with its procedures.
Although voting with respect to the trust preferred securities is limited, in
those cases where a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to the trust preferred securities. Under its usual
procedures, DTC will mail an Omnibus Proxy to UBS Preferred Funding Trust as
soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting
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BOOK-ENTRY ISSUANCE OF TRUST PREFERRED SECURITIES
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or voting rights of those participants to whose accounts the trust preferred
securities are allocated on the record date identified in a listing attached to
the Omnibus Proxy.
Distributions on the trust preferred securities held in book-entry form will be
made to DTC in immediately available funds. DTC's practice is to credit its
participants' accounts on the relevant payment date in accordance with their
respective holdings shown on DTC's records unless DTC has reason to believe that
it will not receive payments on that payment date. Payments by DTC's
participants and indirect participants to beneficial owners of interests in a
global certificate will be governed by standing instructions and customary
practices. Such payments will be the responsibility of those participants and
indirect participants and not of DTC, UBS Preferred Funding Trust or UBS AG, as
the guarantor, subject to any statutory or regulatory requirements that may be
in effect from time to time. Payment of any dividends or other amounts to DTC is
the responsibility of UBS Preferred Funding Trust, disbursement of such payments
to participants is the responsibility of DTC, and disbursement of those payments
to the beneficial owner of an interest in a global certificate is the
responsibility of participants and indirect participants.
Except as described in this prospectus, a beneficial owner of an interest in a
global certificate will not be entitled to receive physical delivery of the
trust preferred securities. Accordingly, each beneficial owner of an interest in
a global certificate must rely on the procedures of DTC to exercise any rights
under the trust preferred securities.
TERMINATION OF AND CHANGES TO DEPOSITARY ARRANGEMENTS
A global certificate is exchangeable for the trust preferred securities in
registered certificated form if DTC:
- notifies UBS Preferred Funding Trust that it is unwilling or unable to
continue as depositary for the global certificates and UBS Preferred
Funding Trust does not appoint a successor depositary, or
- has ceased to be a clearing agency registered under the Securities
Exchange Act of 1934.
Although DTC, Clearstream and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of interests in the global certificates among
participants, none is under any obligation to perform or continue to perform
those procedures, and those procedures may be discontinued at any time. Neither
UBS AG nor UBS Preferred Funding Trust will have any responsibility for the
performance by DTC, Clearstream, Euroclear or their participants or indirect
participants under the rules and procedures governing them. DTC, Clearstream and
Euroclear may discontinue providing their services as securities depositary with
respect to the trust preferred securities at any time by giving notice to UBS
Preferred Funding Trust. Under those circumstances, definitive trust preferred
security certificates would be delivered as described under "Description of
Trust Preferred Securities--Transfer and Issue of Definitive Trust Preferred
Securities."
LIMITATIONS ON RIGHTS RESULTING FROM BOOK-ENTRY FORM
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive form. These laws may impair
the ability to transfer beneficial interests in the global trust preferred
securities as represented by a global certificate.
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Description of UBS AG Subordinated Guarantee
UBS AG and Wilmington Trust Company, as guarantee trustee, have executed the UBS
AG Subordinated Guarantee Agreement. We have qualified the UBS AG Subordinated
Guarantee Agreement as an indenture under the Trust Indenture Act. The terms of
the UBS AG subordinated guarantee include both those stated in the UBS AG
Subordinated Guarantee Agreement and those made part of the UBS AG Subordinated
Guarantee Agreement by the Trust Indenture Act. The following summary of the
material terms and provisions of the UBS AG subordinated guarantee is not
complete and is subject to, and qualified in its entirety by reference to, the
UBS AG Subordinated Guarantee Agreement and the Trust Indenture Act. We have
filed a copy of the UBS AG Subordinated Guarantee Agreement as an exhibit to the
registration statement of which this prospectus is a part.
GUARANTEED OBLIGATIONS
In the UBS AG Subordinated Guarantee Agreement, UBS AG unconditionally
guarantees, on a subordinated basis, the payment by UBS Preferred Funding
Company of the following, without duplication:
- any dividends on the company preferred securities that are due and
payable on any mandatory dividend payment date in an amount equal to the
mandatory dividend payment;
- any discretionary dividends on the company preferred securities that
become definitive because UBS AG does not deliver a no dividend
instruction;
- the redemption price payable with respect to any company preferred
securities called for redemption by UBS Preferred Funding Company;
- the liquidating distribution on each company preferred security payable
upon liquidation of UBS Preferred Funding Company; and
- any additional amounts payable by UBS Preferred Funding Company as
described under "Description of Company Preferred Securities--Additional
Amounts".
Subject to the subordination provisions described below, UBS AG will be
obligated to make such payments as and when due, regardless of any defense,
right of set-off or counterclaim that UBS Preferred Funding Company may have or
assert, other than the defense of payment, and whether or not UBS Preferred
Funding Company has legally available funds for the guaranteed payments. UBS
AG's obligations under the UBS AG Subordinated Guarantee Agreement are several
and independent of the obligations of UBS Preferred Funding Company with respect
to the company preferred securities.
See "Description of Company Preferred Securities--Dividends" for a description
of circumstances when dividend on the company preferred securities are
mandatory, "Description of Company Preferred Securities--Redemption" for a
description of the company preferred securities' redemption provisions, and
"Description of Company Preferred Securities--Ranking and Liquidation
Preference" for a description of the liquidation claim to which the holders are
entitled in a liquidation of UBS Preferred Funding Company.
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DESCRIPTION OF UBS AG SUBORDINATED GUARANTEE
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SUBORDINATION
The UBS AG subordinated guarantee is a general and unsecured obligation of UBS
AG and, in liquidation of UBS AG, will rank, both as to payment and in
liquidation:
- - subordinate and junior to all deposits and other liabilities (including those
in respect of bonds, notes and debentures of UBS AG) that do not expressly
rank equally with the obligations of UBS AG under the UBS AG Subordinated
Guarantee Agreement, and
- - senior to the ordinary shares of UBS AG and any other securities or shares of
UBS AG expressed to rank junior to the most senior preference shares of UBS
AG (if any) from time to time outstanding.
The foregoing liabilities that rank senior to the UBS AG subordinated guarantee
are collectively called "UBS AG senior liabilities."
Payments under the UBS AG subordinated guarantee (other than payments upon a
winding-up or dissolution, by bankruptcy or otherwise, in Switzerland of UBS AG
as provided below) are conditional upon UBS AG not being in default in the
payment of UBS AG senior liabilities and being solvent at the time of payment. A
report as to the insolvency of UBS AG by two persons, each being a managing
director, director or other authorized officer or agent of UBS AG or employees
of the independent accountants of UBS AG will, in the absence of manifest error
be treated and accepted by UBS AG, the holders of company preferred securities
and all other interested parties as correct and sufficient evidence thereof.
If UBS AG is liquidated, whether voluntarily or involuntarily, (i) UBS Preferred
Funding Company will be liquidated and (ii) under the UBS AG Subordinated
Guarantee Agreement, the holders of company preferred securities (whether
through UBS Preferred Funding Trust or as direct holders who have withdrawn
their company preferred securities from UBS Preferred Funding Trust) will have a
claim entitling them to substantially the same liquidating distributions in the
liquidation of UBS AG that they would have been entitled to if they had
purchased preferred shares of UBS AG having an aggregate liquidation preference
equal to the aggregate liquidation preference of the company preferred
securities and bearing dividends at the rate of dividends applicable to the
company preferred securities. The UBS AG Subordinated Guarantee Agreement and
UBS Preferred Funding Company's LLC Agreement, taken together, provide that the
holders of company preferred securities will not receive liquidating
distributions in a liquidation of UBS Preferred Funding Company and payments
under the UBS AG subordinated guarantee that, taken together, exceed the
liquidating distributions to which they would have been entitled had they
instead owned non-cumulative perpetual preferred shares of UBS AG with
equivalent terms as described above.
The subordination provisions set out above are irrevocable. UBS AG may not
create or permit to exist any charge or other security interest over its assets
to secure its obligations in respect of the UBS AG subordinated guarantee.
The obligations of UBS AG in respect of the UBS AG subordinated guarantee are,
prior to the winding up or dissolution of UBS AG, conditional upon UBS AG being
solvent immediately before and after payment by the Cayman Islands branch. If
this condition is not satisfied, any amounts that might otherwise have been
allocated in or towards payment in respect of the UBS AG subordinated guarantee
may be used to absorb losses of UBS AG.
If a capital loss (as defined below) occurs, the board of directors of UBS AG is
required by Article 725 paragraph 1 of the Swiss Code of Obligations to call a
general meeting of the shareholders of UBS AG and propose at such meeting
measures for a financial reorganization of UBS AG. Holders of trust preferred
securities and company preferred securities will not have any right to attend or
take any action at any such meeting because they are not shareholders of UBS AG.
Neither the calling of such a
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meeting nor the proposal of such financial organization will itself affect the
obligations of UBS AG under the UBS AG Subordinated Guarantee Agreement.
If at any time UBS AG's unconsolidated unsubordinated liabilities exceed its
unconsolidated total assets (valued at the higher of their going-concern and
their liquidation value), as calculated based on the most recent unconsolidated
interim balance sheet of UBS AG, the board of directors of UBS AG is required by
Article 725 paragraph 2 of the Swiss Code of Obligations to notify the competent
court of such excess, unless unsubordinated creditors of UBS AG agree to
subordinate their claims to the extent that such unsubordinated liabilities
exceed such assets. Upon any such notification, such court must declare the
bankruptcy of UBS AG in accordance with Article 725a paragraph 1 of the Swiss
Code of Obligations and Article 35 paragraph 2 of the Swiss Banking Law. In the
past, however, the Swiss Federal Banking Commission has usually exercised the
broad discretion granted to it under Swiss banking law before the occurrence of
such an excess when it has perceived the interests of creditors of a Swiss bank
to be at risk. In such cases, the Swiss Federal Banking Commission has generally
withdrawn the banking license of the affected bank, which has then been required
to go into liquidation (pursuant to Article 23 quinquies of the Swiss Banking
Law).
As used in this prospectus:
"assets" means the consolidated gross assets of UBS AG.
A "capital loss" is deemed to occur if UBS AG's assets are less than the
sum of (i) its liabilities and (ii) one-half of its share capital and
statutory reserves, each as shown on and as calculated based on the latest
published annual unconsolidated balance sheet of UBS AG. The sum of UBS
AG's unconsolidated share capital and statutory reserves at 31 December
2000 was CHF 22.5 million.
"liabilities" means the consolidated gross liabilities of UBS AG, all as
shown by the latest published audited consolidated balance sheet of UBS AG
as adjusted for contingencies and for subsequent events, all valued in such
manner as UBS AG or any liquidator (as the case may be) may determine and
calculated in accordance with IAS.
"solvent" means (i) UBS AG is able to pay its debts as they fall due and
(ii) UBS AG's assets exceed its liabilities (other than its liabilities to
persons who are not senior creditors).
Subject to applicable law, no beneficiary of the UBS AG subordinated guarantee
may exercise, claim or plead any right of set-off, compensation or retention in
respect of any amount owed to it by UBS AG arising under or in connection with
the UBS AG subordinated guarantee and each beneficiary of the UBS AG
subordinated guarantee shall, by virtue of being a beneficiary of the UBS AG
subordinated guarantee, be deemed to have waived all such rights to set-off,
compensation or retention.
ADDITIONAL AMOUNTS
UBS AG will make all payments under the UBS AG subordinated guarantee without
withholding or deducting for, or on account of, any present or future tax,
duties, assessments or governmental charges imposed or levied by Switzerland or
the jurisdiction of residence of the issuer of any subordinated notes held by
UBS Preferred Funding Company or from which any payment on such notes is made or
any authority of any of those jurisdictions that has the power to tax, unless
UBS AG is required by law to withhold or deduct the present or future tax,
duties, assessments or governmental charges. If UBS AG is required to withhold
or deduct any portion of a payment, UBS AG will pay additional amounts in order
to cause the net amounts received by the holders of trust preferred securities
and company preferred securities to be the same as the holders would have
received in the absence of the withholding or deduction, subject to the same
limitations or additional amounts payable by UBS
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DESCRIPTION OF UBS AG SUBORDINATED GUARANTEE
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Preferred Funding Company as described above under "Description of Company
Preferred Securities--Additional Amounts."
If payment of the amounts described above cannot be made by reason of any
limitation referred to above, those amounts will be payable in proportion to the
amounts that would have been payable but for that limitation.
OTHER PROVISIONS
The guarantee trustee, on behalf of the holders of company preferred securities,
may enforce the UBS AG subordinated guarantee directly against UBS AG if UBS AG
defaults under the UBS AG subordinated guarantee. The UBS AG Subordinated
Guarantee Agreement provides that, to the fullest extent permitted by law,
without the need for any other action of any person, including the guarantee
trustee or any other holder of the trust preferred securities or company
preferred securities, each holder of trust preferred securities or company
preferred securities will be entitled to enforce the rights of the holders of
the company preferred securities under the UBS AG Subordinated Guarantee
Agreement represented by the trust preferred securities or company preferred
securities held by such holder.
CERTAIN COVENANTS OF UBS AG AND UBS PREFERRED FUNDING COMPANY
ISSUANCE AND GUARANTEE OF PREFERENCE SHARES
UBS AG will not issue any preferred or preference shares with liquidation rights
effectively ranking senior to its obligations under the UBS AG subordinated
guarantee or give any guarantee in respect of any of its preferred shares or
preferred shares issued by any of its subsidiaries if the guarantee would rank
senior to the UBS AG subordinated guarantee unless the UBS AG subordinated
guarantee is amended to give the holders of company preferred securities and the
trust preferred securities the same rights and entitlements as are contained in
or attached to the other guarantees so that the UBS AG subordinated guarantee
ranks equally with those guarantees and, from a financial point of view,
effectively, with those preferred shares. Except to the extent described above,
the UBS AG subordinated guarantee does not limit the incurrence or issuance of
other secured or unsecured debt or other obligations of UBS.
PAYMENT OF DIVIDENDS
UBS AG has agreed in the UBS AG subordinated guarantee that if any amount
required to be paid under the UBS AG subordinated guarantee in respect of any
dividends on the trust preferred securities or company preferred securities
payable in respect of the most recent dividend period has not been paid, UBS AG
will pay that amount before paying any dividend or other payment on any UBS AG
junior obligations, except dividends in the form of the ordinary shares.
NO ASSIGNMENT
UBS AG may not assign its obligations under the UBS AG subordinated guarantee,
except in the case of merger, consolidation or sale of substantially all of its
assets where UBS AG is not the surviving entity.
TERMINATION
The UBS AG subordinated guarantee will terminate on the earlier of:
- the payment of the redemption price for all company preferred securities
or purchase and cancellation of all company preferred securities,
- full payment of the liquidating distribution on all company preferred
securities.
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However, the UBS AG subordinated guarantee will continue to be effective or will
be reinstated, as the case may be, if the holder is required to return any
payment made under the company preferred securities or the UBS AG subordinated
guarantee.
AMENDMENTS
Any changes to the provisions of the UBS AG subordinated guarantee that
establish the amount and timing of the payments under the UBS AG subordinated
guarantee must be approved by each holder of company preferred securities. Any
other provision of the UBS AG subordinated guarantee may be modified only with
the prior approval of the holders of not less than two-thirds (based on the
aggregate liquidation preference) of the company preferred securities.
Notwithstanding the foregoing, without the consent of any holder of company
preferred securities, UBS AG may amend or supplement the UBS AG Subordinated
Guarantee Agreement:
- to evidence the succession of another entity to UBS AG and the
assumption by any such successor of the covenants of UBS AG in the UBS
AG Subordinated Guarantee Agreement,
- to add to the covenants of UBS AG for the benefit of the holders of
company preferred securities, or to surrender any right or power
conferred upon UBS AG under the UBS AG Subordinated Guarantee Agreement,
- to correct or supplement any provision in the UBS AG Subordinated
Guarantee Agreement which may be defective or inconsistent with any
other provision therein, or to make any other provisions with respect to
matters or questions arising under the UBS AG Subordinated Guarantee
Agreement, so long as any such action shall not materially adversely
affect the interests of the holders of company preferred securities, or
- to cure any ambiguity or correct any mistake.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
Wilmington Trust Company is the guarantee trustee. The guarantee trustee is
required to perform only those duties that are specifically set forth in the UBS
AG subordinated guarantee, except when a default has occurred and is continuing
with respect to the UBS AG subordinated guarantee. After a default, the
guarantee trustee must exercise the same degree of care a prudent person would
exercise under the circumstances in the conduct of his or her own affairs.
Subject to these requirements, the guarantee trustee is under no obligation to
exercise any of the powers vested in it by the UBS AG subordinated guarantee at
the request of any holder of company preferred securities or any holder of trust
preferred securities, as the case may be, unless the holder offers the guarantee
trustee reasonable indemnity against the costs, expenses and liabilities that
might be incurred by exercising those powers.
GOVERNING LAW
The UBS AG subordinated guarantee will be governed by and construed in
accordance with the laws of the State of New York.
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Description of Subordinated Notes of UBS AG
The following summary of the material terms and provisions of the subordinated
notes is not complete and is subject to, and qualified in its entirety by
reference to, the terms and provisions of the subordinated notes. We have filed
a copy of the form of subordinated note as an exhibit to the registration
statement of which this prospectus is a part.
GENERAL
UBS Preferred Funding Company applied the proceeds of the company preferred
securities and company common securities to purchase from the Cayman Islands
branch of UBS AG newly issued subordinated notes of the Cayman Islands branch.
The subordinated notes are undated perpetual obligations of UBS AG, acting
through the Cayman Islands branch, and have an aggregate principal amount of
USD1,500,000,000. Interest on the subordinated notes will be payable from the
date of initial issuance, semi-annually in arrears on 1 April and 1 October of
each year through October 2010 and thereafter quarterly in arrears on 1 January,
1 April, 1 July and 1 October of each year (or, if any such day is not a
business day, the next business day, but without any additional interest or
other payment in respect of such delay) (each an "interest payment date" and the
period from and including an interest payment date, or the date of initial
issuance, as applicable, to but not including the next interest payment date, an
"interest period") as follows:
- for each interest period through the interest period ending on the
interest payment date in October 2010, at a fixed rate per annum equal
to 8.622% (calculated on the basis of a 360-day year consisting of
twelve 30-day months), and
- for each interest period ending after October 2010, at a floating rate
per annum equal to 3.07% above three-month LIBOR (calculated on the
basis of the actual number of days elapsed in a 360-day year).
The calculation of LIBOR is described under "Description of Company Preferred
Securities--Dividends." Interest due on an interest payment date will be
deferrable at the option of UBS AG's Cayman Islands branch to the extent that
dividends on the company preferred securities due on the corresponding dividend
payment date would constitute nondefinitive dividends. Interest deferred in this
manner will not itself bear interest.
REDEMPTION
The subordinated notes will be redeemable with the consent of the Swiss Federal
Banking Commission and at the option of the Cayman Islands branch of UBS AG:
- on the interest payment date in October 2010 or any interest payment
date occurring after that date, in whole or in part, at a redemption
price equal to 100% of their principal amount plus interest accrued but
unpaid to the date fixed for redemption,
- prior to the interest payment date in October 2010, in whole but not in
part, if a Tax Event resulting from a Change in Tax Law (and relating to
an event described in clauses (A), (B) or (C) of the definition of "Tax
Event") occurs at a redemption price equal to 100% of their principal
amount plus interest accrued but unpaid to the date fixed for
redemption, or
- prior to the interest payment date in October 2010, in whole but not in
part, if a Tax Event not resulting from a Change in Tax Law relating to
an event described in clause (A), (B) or (C) of the definition of "Tax
Event", an Investment Company Act Event or a Capital Event occurs at a
redemption price equal to interest accrued but unpaid to the date fixed
for redemption plus a make whole amount calculated in substantially the
same manner as the Make Whole Amount applicable to the company preferred
securities.
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ADDITIONAL AMOUNTS
If the Cayman Islands branch of UBS AG is required to withhold any taxes, duties
or other governmental charges with respect to any payment in respect of the
subordinated notes, the Cayman Islands branch will pay such additional amounts
as shall be required so that the amount received by UBS Preferred Funding
Company under the subordinated notes shall not be reduced as a result of any
such additional taxes, duties or other governmental charges.
SUBORDINATION
The subordinated notes are a general and unsecured obligation of UBS AG and, in
liquidation of UBS AG, will rank, both as to payment and in liquidation:
- subordinate and junior to UBS AG senior liabilities, as defined under
"Description of UBS AG Subordinated Guarantee--Subordination," and
- senior to the ordinary shares of UBS AG and any other securities or
shares of UBS AG expressed to rank junior to the most senior preference
shares of UBS AG (if any) from time to time outstanding.
Payments under the subordinated notes (other than payments upon a winding-up or
dissolution, by bankruptcy or otherwise, in Switzerland of UBS AG) are
conditional upon UBS AG not being in default in the payment of UBS AG senior
liabilities, and being solvent, as defined under "Description of UBS AG
Subordinated Guarantee--Subordination," at the time of payment. A report as to
the insolvency of UBS AG by two persons, each being a managing director,
director or other authorized officer or agent of UBS AG or employees of the
independent accountants of UBS AG will, in the absence of manifest error be
treated and accepted by UBS AG, the holders of the company preferred securities
and all other interested parties as correct and sufficient evidence thereof.
ENFORCEMENT OF THE SUBORDINATED NOTES
Any consent, notice or other action (including any enforcement action) given or
taken by or on behalf of UBS Preferred Funding Company with respect to the
subordinated notes may be given or taken at the discretion of a majority of the
entire board of directors of UBS Preferred Funding Company.
TRANSFER OF THE SUBORDINATED NOTES
The subordinated notes will be represented by a single definitive note
registered in the name of UBS Preferred Funding Company. UBS Preferred Funding
Company's LLC Agreement provides that UBS Preferred Funding Company may sell the
subordinated notes only upon the affirmative vote of both a majority of the
board of directors of UBS Preferred Funding Company and the holders of
two-thirds (based on the aggregate liquidation preference) of the company
preferred securities and other company parity preferred securities (if any),
voting together as a single class.
Although UBS Preferred Funding Company may sell the subordinated notes subject
to the requirements of the Securities Act of 1933 and other applicable laws and
the foregoing requirements, UBS AG and UBS Preferred Funding Company do not
anticipate that UBS Preferred Funding Company will sell the subordinated notes
and there is no expectation that a market will develop or exist for the
subordinated notes. The subordinated notes, by their terms, will provide that
they may be sold in whole and not in part and may not be divided into
denominations of less than USD1,000.
EVENTS OF DEFAULT
The subordinated notes will not provide for acceleration if the Cayman Islands
branch of UBS AG fails to make a payment when due. If the Cayman Islands branch
fails to make a payment when due of an
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installment of interest on the subordinated notes, UBS Preferred Funding Company
will be entitled to seek to enforce payment only of the defaulted installment
but not in respect of any failure to pay interest due under the subordinated
notes that was deferred because the dividends on the company preferred
securities on the corresponding dividend payment date would have constituted
nondefinitive dividends. A "default" under the subordinated notes will occur if
the Cayman Islands branch fails to make a payment when due of an installment of
principal or interest.
MODIFICATION AND AMENDMENT OF THE SUBORDINATED NOTES
The subordinated notes may be modified or amended only by the written agreement
of the Cayman Islands branch of UBS AG and UBS Preferred Funding Company.
However, UBS Preferred Funding Company's LLC Agreement provides that UBS
Preferred Funding Company may not agree to any such modification or amendment
for so long as any company preferred securities or other company parity
preferred securities, if any, are outstanding unless holders of two-thirds
(based on the aggregate liquidation preference) of the company preferred
securities and other company parity preferred securities, if any, voting as a
class, consent to such modification or amendment (except that such consent of
the holders of company preferred securities and any other company parity
preferred securities shall not be required if (a) the proposed amendment or
modification would not materially and adversely affect the rights, preferences,
powers or privileges of UBS Preferred Funding Company and (b) UBS Preferred
Funding Company has received a letter from each of Moody's Investors Service,
Inc. and Standard & Poor's Ratings Services to the effect that such amendment
will not result in a downgrading of its respective rating then assigned to the
company preferred securities).
GOVERNING LAW
The subordinated notes will be governed by the laws of the State of New York.
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Certain U.S. Tax Considerations
In the opinion of Sullivan & Cromwell, the following accurately describes the
material United States federal income tax (and, where specifically noted, United
States federal estate tax) consequences of the purchase of the trust preferred
securities and the ownership and disposition of the trust preferred securities
and the company preferred securities.
YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISORS AS TO THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRUST
PREFERRED SECURITIES OR THE COMPANY PREFERRED SECURITIES, AS WELL AS THE EFFECT
OF ANY STATE, LOCAL OR FOREIGN TAX LAWS IN LIGHT OF YOUR PARTICULAR
CIRCUMSTANCES.
This discussion addresses only the tax consequences to a person that acquires
the trust preferred securities on their original issue at their original
offering price and that holds the trust preferred securities, and any company
preferred securities received in exchange for the trust preferred securities, as
capital assets. It does not address all tax consequences that may be applicable
to a beneficial owner of the trust preferred securities, nor does it address the
tax consequences to:
- persons that may be subject to special treatment under United States
federal income tax law, such as tax exempt entities, certain insurance
companies, broker-dealers, traders in securities that elect to mark to
market, persons liable for alternative minimum tax or persons that
actually or constructively own 10% or more of the voting stock of UBS
AG,
- persons that will hold the trust preferred securities or the company
preferred securities as part of a larger transaction, such as a
"straddle" or a "hedging" or "conversion" transaction, or
- persons whose functional currency is not the United States dollar.
This discussion is based upon the Internal Revenue Code of 1986, as amended,
Treasury regulations, Internal Revenue Service rulings and pronouncements and
judicial decisions as of the date hereof, all of which are subject to change,
possibly with retroactive effect.
CLASSIFICATION OF UBS PREFERRED FUNDING TRUST AND UBS PREFERRED FUNDING COMPANY
Under current law, and assuming compliance with the terms of the Amended and
Restated Trust Agreement, UBS Preferred Funding Trust will be treated as a
grantor trust and not as a partnership or an association taxable as a
corporation for United States federal income tax purposes. As a result, each
beneficial owner of the trust preferred securities will be considered the
beneficial owner of a pro rata portion of the company preferred securities held
by UBS Preferred Funding Trust.
Under current law, and assuming compliance with the LLC Agreement, UBS Preferred
Funding Company will be treated as a partnership for United States federal
income tax purposes. A partnership is not a taxable entity and incurs no United
States federal income tax liability. Instead, each partner is required to take
into account its allocable share of items of income, gain, loss and deduction of
the partnership in computing its United States federal income tax liability,
regardless of whether distributions are made to the partner. These items
generally will be treated as if realized by the partner directly from the same
source realized by UBS Preferred Funding Company.
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CERTAIN U.S. TAX CONSIDERATIONS
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UNITED STATES HOLDERS
You are a "United States Holder" if you are a beneficial owner of the trust
preferred securities and you are:
- an individual citizen or resident of the United States,
- a corporation organized in or under the laws of the United States or any
state thereof or the District of Columbia,
- an estate, and your income is subject to United States federal income
tax regardless of source, or
- a trust, and
- a United States court is able to exercise primary supervision over
your administration, and
- no non-United States person has the authority to control any of your
substantial decisions.
INCOME FROM THE TRUST PREFERRED SECURITIES
Under the LLC Agreement, upon the declaration, or deemed declaration, of
dividends on the company preferred securities, a like amount of UBS Preferred
Funding Company's ordinary income will be allocated to the holders of company
preferred securities. Regardless of when dividends on the trust preferred
securities are actually paid, income allocated to the holders of company
preferred securities will be includable as ordinary income by a United States
Holder for its taxable year that includes 31 December of the calendar year in
which the income is allocated, except that if the United States Holder disposes
of its entire holding of the trust preferred securities and the company
preferred securities (if any), the amount allocated for the calendar year of
that disposition will be includable for the United States Holder's taxable year
that includes the date of that disposition.
Assuming compliance with the terms of the Amended and Restated Trust Agreement,
UBS Preferred Funding Trust will distribute, on a semi-annual basis, an amount
of cash equal to all of the income that is allocated to it as a holder of
company preferred securities. As a consequence, a United States Holder will not
recognize income in respect of the trust preferred securities without receiving
the corresponding cash distribution, unless the United States Holder sells or
otherwise disposes of those trust preferred securities between the declaration
date of dividends on the company preferred securities and the corresponding
record date for dividends on the trust preferred securities. In the case of a
sale between those dates, a United States Holder will recognize ordinary income
in an amount equal to the dividends on the company preferred securities, which
would increase the United States Holder's basis in the trust preferred
securities and reduce the gain, or increase the loss, recognized on the sale or
other disposition.
A United States Holder's allocated share of UBS Preferred Funding Company's
income from the initial subordinated notes will be foreign source income for
purposes of determining the limitation on any allowable foreign tax credit. The
overall limitation on foreign taxes eligible for credit is calculated separately
with respect to specific classes of income. For this purpose, a United States
Holder's allocated share of UBS Preferred Funding Company's income from the
initial subordinated notes generally will constitute "passive income" or, in the
case of certain United States Holders, "financial services income." If, with
respect to any distribution to a United States Holder, additional amounts are
paid by UBS Preferred Funding Company as a result of withholding taxes imposed
on the distribution, those additional amounts will be taxable to the United
States Holder as foreign source income. However, withholding taxes in the amount
of those additional amounts will generally be treated as foreign income taxes
eligible for credit against that United States Holder's United States federal
income
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CERTAIN U.S. TAX CONSIDERATIONS
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tax liability, subject to generally applicable limitations and conditions or, at
the election of that United States Holder, for deduction in computing the United
States Holder's taxable income.
No portion of the income derived by a United States Holder from the trust
preferred securities will be eligible for the dividends-received deduction
generally available to United States corporations in respect of dividends
received from other United States corporations.
UBS AG believes that it is not a "passive foreign investment company" (sometimes
known as a "PFIC") for United States federal income tax purposes, but this
conclusion is a factual determination made annually and thus may be subject to
change. A United States Holder might be subject to special rules with respect to
certain amounts earned by UBS Preferred Funding Company with respect to the
initial subordinated notes if UBS AG were treated as a PFIC for United States
federal income tax purposes.
RECEIPT OF THE COMPANY PREFERRED SECURITIES UPON LIQUIDATION OF UBS PREFERRED
FUNDING TRUST
Under certain circumstances, the company preferred securities may be distributed
to the trust preferred securityholders in exchange for their trust preferred
securities and in liquidation of UBS Preferred Funding Trust. Unless the
liquidation of UBS Preferred Funding Trust occurs as a result of UBS Preferred
Funding Trust being subject to United States federal income taxes, such a
distribution to a United States Holder would be treated, for United States
federal income tax purposes, as a non-taxable event. Each United States Holder
would receive an aggregate tax basis in the company preferred securities equal
to the United States Holder's aggregate tax basis in its trust preferred
securities and the United States Holder's holding period in the company
preferred securities received would include the period during which the trust
preferred securities were held by the United States Holder. If, however, the
liquidation of UBS Preferred Funding Trust were to occur because UBS Preferred
Funding Trust is subject to United States federal income taxes, the distribution
of the company preferred securities to United States Holders by UBS Preferred
Funding Trust would likely be a taxable event to each United States Holder, and
a United States Holder would recognize gain or loss as if the United States
Holder had exchanged its trust preferred securities for the company preferred
securities it received. The gain or loss would be equal to the difference
between the United States Holder's aggregate tax basis in its trust preferred
securities surrendered in the exchange and the aggregate fair market value of
the company preferred securities received in the exchange.
If the company preferred securities are distributed to the holders of trust
preferred securities in liquidation of UBS Preferred Funding Trust, U.S. tax
information will be provided to beneficial owners of the trust preferred
securities and to the Internal Revenue Service on Schedule K-1, rather than in
the manner described below under "--Information Reporting and Backup Withholding
Tax".
DISPOSITION OF THE TRUST PREFERRED SECURITIES OR THE COMPANY PREFERRED
SECURITIES
A United States Holder will recognize gain or loss on a sale, exchange or other
taxable disposition of the trust preferred securities or the company preferred
securities in an amount equal to the difference between the United States
Holder's adjusted tax basis and the amount realized on the disposition. A United
States Holder's adjusted tax basis in the trust preferred securities generally
will equal the amount paid for the trust preferred securities, increased by the
amount of income allocated to the United States holder and reduced by the amount
of any cash, and the fair market value of any other property, distributed to the
United States Holder. Any gain or loss so recognized generally will be capital
gain or loss, will be long-term capital gain or loss if the United States
Holder's holding period is more than one year and will be U.S. source income or
loss for purposes of determining the limitation on any allowable foreign tax
credit. In the case of a non-corporate United States Holder, long-term capital
gains are generally subject to tax at preferential rates.
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CERTAIN U.S. TAX CONSIDERATIONS
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The trust preferred securities may trade at a price that does not fully reflect
the value of income that may have been allocated to a United States Holder with
respect to the United States Holder's trust preferred securities. A United
States Holder that disposes of the trust preferred securities between the
declaration date of dividends on the company preferred securities and the
corresponding record date for dividends on the trust preferred securities will
be required to include as ordinary income an amount equal to dividends on the
company preferred securities and to add the amount of that income to its
adjusted tax basis in the trust preferred securities. Accordingly, such a United
States Holder will recognize a capital loss to the extent that the selling price
is less than the United States Holder's adjusted tax basis. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
NON-UNITED STATES HOLDERS
You are a "Non-United States Holder" if you are a beneficial owner of the trust
preferred securities or the company preferred securities and you are not a
United States Holder.
UBS Preferred Funding Company intends to operate so that it will not be engaged
in a trade or business within the United States for United States federal income
tax purposes. Moreover, UBS Preferred Funding Company intends to invest in
securities the income from which will be either generally exempt from United
States federal withholding tax or exempt from United States federal withholding
tax to the extent allocable to a Non-United States Holder.
A Non-United States Holder will not be subject to United States federal income
or withholding tax on any allocated share of UBS Preferred Funding Company's
income or gain, or any gain realized on the sale or exchange of the trust
preferred securities, unless, in the case of gains, the Non-United States Holder
is an individual who was present in the United States for 183 days or more in
the taxable year in which the gain is realized and certain other conditions are
met. A Non-United States Holder will not be subject to backup withholding
provided certain certification requirements are satisfied as described under
"--Information Reporting and Backup Withholding Tax."
The treatment of the trust preferred securities and the company preferred
securities for United States federal estate tax purposes is unclear. If you are
an individual Non-United States Holder, you should consult your tax advisor
about the possibility that the trust preferred securities or the company
preferred securities will be includable in your gross estate for purposes of the
United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
If you are a noncorporate United States Holder, information reporting
requirements, on Internal Revenue Service Form 1099, generally will apply to:
- the amount of income paid or accrued on the trust preferred securities,
and
- the payment of proceeds to you from the disposition of the trust
preferred securities effected at a United States office of a broker.
Additionally, backup withholding at a rate of 31% may apply to such amount of
income or payment of proceeds if you:
- fail to provide an accurate taxpayer identification number,
- are notified by the Internal Revenue Service that you have failed to
report all interest and dividends required to be shown on your federal
income tax returns, or
- in certain circumstances, fail to comply with applicable certification
requirements.
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CERTAIN U.S. TAX CONSIDERATIONS
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If you are a Non-United States Holder, you are generally exempt from backup
withholding and information reporting requirements with respect to payments made
on the trust preferred securities and the payment of the proceeds from the
disposition of the trust preferred securities effected at a United States office
of a broker, as long as the income associated with such payments is otherwise
exempt from United States federal income tax, and:
- the payor or broker does not have actual knowledge or reason to know that
you are a United States person and you have furnished the payor or
broker:
- an Internal Revenue Service Form W-8BEN or an acceptable substitute
form upon which you certify, under penalties of perjury, that you are
a non-United States person, or
- other documentation upon which it may rely to treat the payments as
made to a non-United States person in accordance with U.S. Treasury
regulations, or
- you otherwise establish an exemption.
Payment of the proceeds from the disposition of the trust preferred securities
effected at a foreign office of a broker generally will not be subject to
information reporting or backup withholding. However, a disposition of the trust
preferred securities effected at a foreign office of a broker will be subject to
information reporting and backup withholding if:
- the proceeds are transferred to an account maintained by you in the
United States,
- the payment of proceeds or the confirmation of the sale is mailed to you
at a United States address, or
- the sale has some other specified connection with the United States as
provided in U.S. Treasury regulations,
unless the broker does not have actual knowledge or reason to know that you are
a United States person and the documentation requirements described above are
met or you otherwise establish an exemption.
In addition, a disposition of the trust preferred securities effected at a
foreign office of a broker will be subject to information reporting (and backup
withholding if the broker has actual knowledge that you are a United States
person) if the broker is:
- a United States person,
- a controlled foreign corporation for United States tax purposes,
- a foreign person 50% or more of whose gross income is effectively
connected with the conduct of a United States trade or business for a
specified three-year period, or
- 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
- such foreign partnership is engaged in the conduct of a United States
trade or business,
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CERTAIN U.S. TAX CONSIDERATIONS
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unless the broker does not have actual knowledge or reason to know that you are
a United States person and the documentation requirements described above are
met or you otherwise establish an exemption.
You generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund claim
with the United States Internal Revenue Service.
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Certain Tax Considerations Under the Laws of Switzerland
GENERAL
The tax information set forth below is based on the opinion of ATAG Ernst &
Young AG, Switzerland, dated 7 August 2000, and has been approved by them for
its accuracy. The following is a summary of the material Swiss tax consequences
related to the acquisition, ownership and disposition of the trust preferred
securities. The summary is based on legislation as of the date of this
prospectus and does not aim to be a comprehensive description of all the tax
considerations that may be relevant to a decision to invest in the trust
preferred securities. The tax treatment for each shareholder depends on the
particular situation of the shareholder and prospective investors are therefore
advised to consult with their professional tax advisors as to the respective tax
consequences of the purchase, ownership and disposition of the trust preferred
securities.
Furthermore, this summary does not address the tax treatment of the holders of
trust preferred securities subject to special tax rules.
HOLDERS WHO ARE NOT RESIDENTS OR DOMICILIARIES OF SWITZERLAND AND HAVE NO
PERMANENT ESTABLISHMENT OR REPRESENTATIVE IN SWITZERLAND
Holders of trust preferred securities who are not residents or domiciliaries of
Switzerland and have no permanent establishment or permanent representative in
Switzerland to which or to whom the shares are attributable or to which or to
whom the trust preferred securities belong, will not be subject to Swiss
corporate or individual income and capital tax or capital gains tax on the
holding and disposition of the trust preferred securities. Furthermore, there
will be no inheritance or gift tax imposed in Switzerland on the trust preferred
securities if the holder is an individual who is not domiciled in Switzerland.
ISSUANCE STAMP TAX
The issuance of the trust preferred securities will not be a taxable event for
Swiss issuance stamp tax purposes.
SECURITIES TURNOVER TAX
On the sale or purchase of the trust preferred securities through a registered
Swiss securities dealer a turnover tax of 0.15% will be imposed on each party.
No turnover tax will be imposed on transactions that are not through a
registered Swiss securities dealer.
HOLDERS WHO ARE RESIDENTS OR DOMICILIARIES OF SWITZERLAND OR HAVE A PERMANENT
ESTABLISHMENT OR REPRESENTATIVE IN SWITZERLAND
The following summary of the treatment of the holders of trust preferred
securities who are residents or domiciliaries of, or who have a permanent
establishment or residence in Switzerland, is based upon the conclusion that for
Swiss tax purposes the trust preferred securities are shareholder's equity
rather than debt.
WITHHOLDING TAX
No Swiss withholding tax is levied on dividend payments on the trust preferred
securities.
DIVIDENDS
Dividends received by a Swiss resident company or by an individual on the trust
preferred securities are subject to Swiss income tax.
Dividends received by a Swiss resident company qualify for the participation
exemption, if the recipient of the dividend owns at least 20% of the shares of
the distributing corporation or if the
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recipient holds shares with a market value of at least CHF 2 million. Moreover,
an investment in the trust preferred securities may qualify as a participation
for determining the holder privilege.
CAPITAL GAINS
Capital gains or losses realized by legal entities on the disposal or exchange
of the trust preferred securities are treated as ordinary income or expense. The
basis for determining the gain or loss is the tax value, which is generally the
book value.
As a result of a recent change of the Federal Tax Law, a corporation that
controls a participation of 20% or more in another corporation may claim the
participation relief for capital gains.
Nonbusiness capital gains realized by individuals are not taxed in Switzerland.
Individuals are only taxed on capital gains if they qualify as professional
securities dealers, or if the trust preferred securities are attributable to a
business carried on in Switzerland.
REDEMPTION OF CAPITAL
The amount distributed to individual shareholders in excess of the nominal share
capital is regarded as a dividend, which is subject to Swiss income tax.
For the trust preferred securities attributed to a business in Switzerland or a
legal entity, the principles of taxation of capital gains apply.
INHERITANCE AND GIFT TAXES
Almost all cantons levy separate inheritance and gift taxes. No inheritance or
gift taxes are imposed on the federal level. Inheritance and gift taxes are only
imposed on individuals. No corporate inheritance or gift tax is levied. The tax
is due on the transfer of the trust preferred securities by way of gift or upon
the death of a holder, provided the holder is domiciled in Switzerland. The tax
is based on the fair market value of the trust preferred securities.
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Certain ERISA Considerations
If you are a fiduciary of a pension, profit-sharing or other employee benefit
plan subject to the Employee Retirement Income Security Act ("ERISA"), you
should review the fiduciary standards of ERISA and the plan's particular
circumstances before deciding to invest in the trust preferred securities. You
should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and whether the investment would be
consistent with the terms of the plan and the other agreements which apply to
plan investments.
A fiduciary of a plan subject to ERISA, as well as a person investing on behalf
of an individual retirement account or a pension or profit-sharing plan for one
or more self-employed persons, should also consider whether an investment in the
trust preferred securities could result in a prohibited transaction. ERISA and
the Internal Revenue Code of 1986, as amended, prohibit plans and individual
retirement accounts from engaging in certain transactions involving plan assets
with persons who are parties in interest under ERISA or disqualified persons
under the Internal Revenue Code of 1986, as amended, with respect to the plan or
individual retirement account. A violation of these rules may result in a
substantial excise tax under the Internal Revenue Code of 1986, as amended, and
other liabilities under ERISA. Employee benefit plans that are governmental
plans, foreign plans or church plans generally are not subject to the prohibited
transaction rules or the fiduciary standards of ERISA.
The assets of UBS Preferred Funding Trust would be treated as plan assets for
purposes of the prohibited transaction rules under a U.S. Department of Labor
regulation if plans and individual retirement accounts purchase trust preferred
securities, unless an exception under the regulation applies. The regulation
provides an exception if the trust preferred securities are considered to be
publicly-offered securities. The underwriters expect that the trust preferred
securities will be publicly-offered securities under the regulation because:
- the underwriters expect that the trust preferred securities will be
purchased initially by at least 100 persons who are independent of us
and each other,
- the trust preferred securities can be transferred freely,
- the trust preferred securities are being sold through this prospectus
which is part of an effective registration statement filed with the SEC,
and
- the trust preferred securities will be timely registered with the SEC
under Securities Exchange Act of 1934.
If we are a party in interest or a disqualified person with respect to a plan or
individual retirement account that buys the trust preferred securities, either
directly or because we own banking or other subsidiaries, the sale could be
treated as a prohibited transaction unless an administrative exemption issued by
the Department of Labor applies. The Department of Labor has issued class
exemptions that may apply to exempt transactions resulting from the purchase or
holding of the trust preferred securities. Among those class exemptions are:
- 96-23, for transactions determined by in-house asset managers;
- 95-60, for transactions involving insurance company general accounts;
- 91-38, for transactions involving bank collective investment funds;
- 90-1, for transactions involving insurance company separate accounts;
and
- 84-14, for transactions determined by independent qualified asset
managers.
These rules are very complicated and the penalties that may be imposed upon
persons involved in prohibited transactions can be substantial. This makes it
very important that fiduciaries or other persons considering purchasing the
trust preferred securities on behalf of a benefit plan investor consult with
their lawyer regarding what could happen if the assets of UBS Preferred Funding
Trust were
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CERTAIN ERISA CONSIDERATIONS
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deemed to be plan assets and if the investor can use one of the above class
exemptions or another applicable exemption.
Before relying on any of these exemptions, a purchaser must conclude that the
exemption provides the necessary relief for all potential prohibited
transactions arising from the purchase of and from holding the trust preferred
securities. Neither the underwriters, UBS AG nor any of their respective
affiliates, agents or representatives have or can represent that these
exemptions apply with respect to any purchase of trust preferred securities by
any holder.
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Validity of the Securities
Certain matters of Delaware law relating to the validity of the trust preferred
securities and the company preferred securities were passed upon by Richards,
Layton & Finger, P.A., special Delaware counsel to UBS AG, UBS Preferred Funding
Trust and UBS Preferred Funding Company. The validity of the subordinated notes
and the UBS AG Subordinated Guarantee Agreement was passed upon for UBS AG, UBS
Preferred Funding Trust and UBS Preferred Funding Company by Sullivan &
Cromwell. Sullivan & Cromwell relied upon the opinion of Richards, Layton &
Finger, P.A., as to matters of Delaware law and the opinion of Bar & Karrer,
Swiss counsel to UBS AG, as to matters of Swiss law. Certain matters relating to
United States federal income tax considerations were passed upon for UBS AG, UBS
Preferred Funding Trust and UBS Preferred Funding Company by Sullivan &
Cromwell.
Experts
The consolidated balance sheets of UBS as of 31 December 2000 and 1999 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
2000 appearing in this document have been audited by Ernst & Young Ltd.,
independent auditors as set forth in their report thereon appearing elsewhere in
this prospectus, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. The consolidated
financial statements of Paine Webber Group Inc. at 31 December 1999 and 1998 and
for each of the three years in the period ended 31 December 1999 appearing in
this prospectus have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing elsewhere in this prospectus and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
Limitations on Enforcement of U.S. Laws against UBS AG,
its Management and Others
UBS AG is a Swiss bank. Many of its directors and executive officers, including
all of the persons who signed the registration statement of which this
prospectus is a part, and certain experts named in this prospectus, are resident
outside the United States, and all or a substantial portion of our assets and
the assets of such persons are located outside the United States. As a result,
it may be difficult for you to serve legal process on UBS AG or its management
or have any of them appear in a U.S. court. We have been advised by Bar &
Karrer, Swiss counsel to UBS AG, that there is doubt as to enforceability in
Switzerland, in original actions or in actions for enforcement of judgment of
U.S. courts, of liabilities based solely on the federal securities laws of the
United States.
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General Information
LISTING
We have applied to list the trust preferred securities on the Luxembourg Stock
Exchange in accordance with its rules.
CLEARING SYSTEMS
The trust preferred securities have been accepted for clearance by Clearstream
and Euroclear. The Common Code for the trust preferred securities is 011877982
and the International Security Identification Number (ISIN) for the trust
preferred securities is US90262PAA66.
AUTHORIZATION
The transactions constituting the formation of UBS Preferred Funding Company
were authorized by a resolution of the board of directors of UBS AG passed on 14
September 2000 and the issue of the company preferred securities was authorized
by UBS Preferred Funding Company as of 18 September 2000.
DOCUMENTS
As long as any trust preferred securities are outstanding, copies of UBS
Preferred Funding Company's LLC Agreement, the Amended and Restated Trust
Agreement of UBS Preferred Funding Trust and the UBS AG subordinated guarantee
will be available for inspection during usual business hours at the specified
office of the paying agent in Luxembourg.
As long as any trust preferred securities are outstanding, a copy of the English
translation of the statutes and by-laws of UBS AG will be available for
inspection at the specified office of the paying agent in Luxembourg.
Copies of the latest annual report of UBS Preferred Funding Company and copies
in the English language of the latest annual report on a consolidated and an
unconsolidated basis and the published consolidated semi-annual financial
statements of UBS AG will be available at the specified office of the paying
agent in Luxembourg, so long as any trust preferred securities are outstanding.
Neither UBS Preferred Funding Trust nor UBS Preferred Funding Company currently
publish interim financial statements. UBS Preferred Funding Trust and UBS
Preferred Funding Company do not intend to publish non-consolidated financial
statements. UBS Preferred Funding Trust will make available in Luxembourg any
separate financial information about it made publicly available in the United
States, Switzerland or elsewhere.
MATERIAL ADVERSE CHANGE
Except as disclosed in this prospectus, there has been no material adverse
change in the financial position of UBS AG since 31 December 2000 and in the
financial position of UBS Preferred Funding Trust or UBS Preferred Funding
Company since 18 September 2000.
INFORMATION IN PROSPECTUS
UBS AG, UBS Preferred Funding Company and UBS Preferred Funding Trust, to the
best of their knowledge, confirm respectively that this prospectus contains all
information with respect to UBS AG and its consolidated subsidiaries, UBS
Preferred Funding Company, UBS Preferred Funding Trust, the company preferred
securities and the trust preferred securities which is material in the context
of the
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issue and offering of the trust preferred securities, that all the information
contained herein is true and accurate in all material respects and is not
misleading in any material respect, that the opinions and intentions expressed
herein are honestly held and that there are no other facts the omission of which
would make this prospectus as a whole or any of such information or the
expression of any such opinions or intentions misleading in any material
respect. UBS Preferred Funding Trust accepts responsibility accordingly. Each
investor contemplating purchasing the trust preferred securities is required to
make its own independent investigation of the financial condition, general
affairs and property and its own appraisal of the credit worthiness of UBS AG
and its consolidated subsidiaries, UBS Preferred Funding Company and UBS
Preferred Funding Trust.
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus, and, if given or
made, such information or representation must not be relied upon as having been
authorized by UBS AG, UBS Preferred Funding Company and UBS Preferred Funding
Trust. This prospectus does not constitute an offer to sell or the solicitation
of an offer to buy any securities other than the securities to which it relates.
Neither the delivery of this prospectus nor any sale hereunder shall create,
under any circumstances, any implication that there has been no change in the
affairs of UBS AG, UBS Preferred Funding Company or UBS Preferred Funding Trust
since the date hereof or that the information contained herein is correct as of
any time subsequent to its date.
LITIGATION
None of UBS Preferred Funding Trust, UBS Preferred Funding Company or UBS AG are
involved in any litigation or arbitration proceedings relating to claims or
amounts that are material in the context of the issue of the trust preferred
securities nor, so far as UBS Preferred Funding Trust, UBS Preferred Funding
Company or UBS AG are aware, is any such litigation or arbitration pending or
threatened.
GOVERNING LAW
The LLC Agreement of UBS Preferred Funding Company, the company preferred
securities, the Amended and Restated Trust Agreement and the trust preferred
securities will be governed by the laws of the State of Delaware without regard
to any conflicts of laws principles that would require the application of the
laws of a jurisdiction other than the State of Delaware. The subordinated notes
and the UBS AG Subordinated Guarantee Agreement will be governed by the laws of
the State of New York.
265
267
- --------------------------------------------------------------------------------
Where You Can Find More Information
UBS files periodic reports and other information with the Securities and
Exchange Commission. You may read and copy any document that UBS files with the
SEC at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of its public reference room. You may also inspect UBS's SEC reports
and other information at the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10008 and at the American Stock Exchange LLC, 86 Trinity Place,
New York, New York 10006. Copies of these documents will, so long as any trust
preferred securities are outstanding, be available for inspection during usual
business hours at the specified office of the Luxembourg Paying Agent.
We have filed a registration statement on Form F-1 under the Securities Act of
1933, as amended, with the SEC covering the trust preferred securities, the
company preferred securities and the UBS AG subordinated guarantee. For further
information on the trust preferred securities, the company preferred securities,
the UBS AG subordinated guarantee, UBS Preferred Funding Trust, UBS Preferred
Funding Company and UBS AG, you should review our registration statement and its
exhibits. This prospectus summarizes material provisions of the contracts and
other documents that we refer you to. Since this prospectus may not contain all
the information that you may find important, you should review the full text of
these documents. We have included copies of these documents as exhibits to our
registration statement. Copies of these documents will, so long as any trust
preferred securities are outstanding, be available for inspection during usual
business hours at the specified office of the Luxembourg Paying Agent.
Presentation of Financial Information
UBS's financial statements have been prepared in accordance with International
Accounting Standards and are denominated in Swiss francs, or "CHF," the legal
tender of Switzerland.
The tables below set forth, for the periods and dates indicated, information
concerning the noon buying rate for the Swiss franc, expressed in United States
dollars or "USD", 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.
AVERAGE RATE(1)
YEAR ENDED 31 DECEMBER HIGH LOW (USD PER 1 CHF) AT PERIOD END
- -------------------------------------------------------------------------------------------------
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..................................... 0.6441 0.5479 0.5912 0.6172
------ ------ ------ ------
MONTH HIGH LOW
- -------------------------------------------------------------
September 2000............................. 0.5804 0.5596
October 2000............................... 0.5773 0.5479
November 2000.............................. 0.5759 0.5529
December 2000.............................. 0.6172 0.5785
January 2001............................... 0.6240 0.6031
February 2001.............................. 0.6124 0.5910
- ------------
(1) The average of the noon buying rates on the last business day of each full
month during the relevant period.
266
268
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TABLE OF CONTENTS
FINANCIAL STATEMENTS OF UBS GROUP
AUDITED YEAR-END FINANCIAL STATEMENTS
Years ended 2000, 1999 and 1998
Report of Independent Auditors.............................. F-2
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-7
UBS Group Notes to the Financial Statements................. F-9
FINANCIAL STATEMENTS OF PAINEWEBBER
AUDITED YEAR-END FINANCIAL STATEMENTS
Years ended 1999, 1998 and 1997
Consolidated Statements of Income........................... F-104
Consolidated Statements of Financial Condition.............. F-105
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-106
Consolidated Statements of Cash Flows....................... F-109
Notes to Consolidated Financial Statements.................. F-110
Report of Independent Auditors.............................. F-131
Financial Highlights........................................ F-132
Common Stock and Quarterly Information...................... F-133
Five Year Financial Summary................................. F-135
UNAUDITED INTERIM FINANCIAL STATEMENTS
First Quarter 2000.......................................... F-136
Condensed Consolidated Statements of Income................. F-137
Condensed Consolidated Statements of Financial Condition.... F-138
Condensed Consolidated Statements of Cash Flows............. F-139
Notes to Condensed Consolidated Financial Statements........ F-140
Second Quarter 2000......................................... F-149
Condensed Consolidated Statements of Income................. F-150
Condensed Consolidated Statements of Financial Condition.... F-151
Condensed Consolidated Statements of Cash Flows............. F-152
Notes to Condensed Consolidated Financial Statements........ F-153
Third Quarter 2000.......................................... F-164
Condensed Consolidated Statements of Income................. F-165
Condensed Consolidated Statements of Financial Condition.... F-166
Condensed Consolidated Statements of Cash Flows............. F-167
Notes to Condensed Consolidated Financial Statements........ F-168
F- i
269
UBS GROUP FINANCIAL STATEMENTS
YEARS ENDED 31 DECEMBER 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
F- 1
270
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 2000 and 1999, 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 2000. 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 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended 31 December 2000, 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 2000, 1999 and 1998 and the results of
operations for the three years then ended to the extent summarized in Note 41 of
the Notes to the Financial Statements.
Basel, 5 March 2001 Ernst & Young Ltd.
Roger K. Perkin
Chartered Accountant
in charge of the audit
Peter Heckendorn
lic. oec.
in charge of the audit
- --------------------------------------------------------------------------------
F- 2
271
- --------------------------------------------------------------------------------
Financial Statements
UBS GROUP INCOME STATEMENT
CHF million, except where indicated % change from
FOR THE YEAR ENDED NOTE 31.12.00 31.12.99( 1) 31.12.98( 1) 31.12.99
- -----------------------------------------------------------------------------------------------------------
OPERATING INCOME
Interest income 4 51,745 35,604 37,442 45
Interest expense 4 (43,615) (29,695) (32,424) 47
- -----------------------------------------------------------------------------------------------------------
Net interest income 8,130 5,909 5,018 38
Credit loss recovery / (expense) 130 (956) (951)
- -----------------------------------------------------------------------------------------------------------
Net interest income after credit loss
recovery / (expense) 8,260 4,953 4,067 67
- -----------------------------------------------------------------------------------------------------------
Net fee and commission income 5 16,703 12,607 12,626 32
Net trading income 6 9,953 7,719 3,313 29
Net gains from disposal of associates and
subsidiaries 7 83 1,821 1,119 (95)
Other income 8 1,403 1,325 1,122 6
- -----------------------------------------------------------------------------------------------------------
Total operating income 36,402 28,425 22,247 28
- -----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES PERSONNEL 9 17,163 12,577 9,816 36
General and administrative 9 6,765 6,098 6,735 11
Depreciation and amortization 9 2,275 1,857 1,825 23
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 26,203 20,532 18,376 28
- -----------------------------------------------------------------------------------------------------------
OPERATING PROFIT BEFORE TAX AND MINORITY
INTERESTS 10,199 7,893 3,871 29
- -----------------------------------------------------------------------------------------------------------
Tax expense 24 2,320 1,686 904 38
- -----------------------------------------------------------------------------------------------------------
NET PROFIT BEFORE MINORITY INTERESTS 7,879 6,207 2,967 27
- -----------------------------------------------------------------------------------------------------------
Minority interests 25 (87) (54) 5 61
- -----------------------------------------------------------------------------------------------------------
NET PROFIT 7,792 6,153 2,972 27
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share (CHF) (3) 10 19.33 15.20 7.33 27
Basic earnings per share before goodwill
(CHF) (2,3) 10 20.99 16.04 8.18 31
Diluted earnings per share (CHF) (3) 10 19.04 15.07 7.20 26
Diluted earnings per share before
goodwill (CHF) (2,3) 10 20.67 15.90 8.03 30
- -----------------------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) The amortization of goodwill and other intangible assets is excluded from
this calculation.
(3) 1999 and 1998 share figures are restated for the two-for-one share split,
effective 8 May 2000.
- --------------------------------------------------------------------------------
F- 3
272
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UBS GROUP BALANCE SHEET
% change from
CHF MILLION NOTE 31.12.00 31.12.99( 1) 31.12.99
- -------------------------------------------------------------------------------------------
ASSETS
Cash and balances with central banks 2,979 5,073 (41)
Money market paper 11 66,454 69,717 (5)
Due from banks 12 29,147 29,907 (3)
Cash collateral on securities
borrowed 13 177,857 113,162 57
Reverse repurchase agreements 13 193,801 132,391 46
Trading portfolio assets 14 253,296 211,932 20
Positive replacement values 26 57,875 62,957 (8)
Loans, net of allowance for credit
losses 12 244,842 234,858 4
Financial investments 15 16,405 7,039 133
Accrued income and prepaid expenses 7,062 5,167 37
Investments in associates 16 880 1,102 (20)
Property and equipment 17 8,910 8,701 2
Goodwill and other intangible assets 18 19,537 3,543 451
Other assets 19 8,507 11,007 (23)
- -------------------------------------------------------------------------------------------
TOTAL ASSETS 1,087,552 896,556 21
- -------------------------------------------------------------------------------------------
Total subordinated assets 475 600 (21)
- -------------------------------------------------------------------------------------------
LIABILITIES
Money market paper issued 74,780 64,655 16
Due to banks 20 82,240 76,365 8
Cash collateral on securities lent 13 23,418 12,832 82
Repurchase agreements 13 295,513 196,914 50
Trading portfolio liabilities 14 82,632 54,638 51
Negative replacement values 26 75,923 95,786 (21)
Due to customers 20 310,679 279,960 11
Accrued expenses and deferred income 21,038 12,040 75
Long-term debt 21 54,855 56,332 (3)
Other liabilities 22, 23, 24 18,756 15,992 17
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,039,834 865,514 20
- -------------------------------------------------------------------------------------------
Minority interests 25 2,885 434 565
- -------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital 4,444 4,309 3
Share premium account 20,885 14,437 45
Foreign currency translation (687) (442) (55)
Retained earnings 24,191 20,327 19
Treasury shares (4,000) (8,023) (50)
- -------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 44,833 30,608 46
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES, MINORITY
INTERESTS AND SHAREHOLDERS' EQUITY 1,087,552 896,556 21
- -------------------------------------------------------------------------------------------
Total subordinated liabilities 14,508 14,801 (2)
- -------------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
- --------------------------------------------------------------------------------
F- 4
273
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UBS GROUP STATEMENT OF CHANGES IN EQUITY
CHF million
FOR THE YEAR ENDED 31.12.00 31.12.99( 1) 31.12.98( 1)
- ---------------------------------------------------------------------------------------------
ISSUED AND PAID UP SHARE CAPITAL
Balance at the beginning of the year 4,309 4,300 4,296
Issue of share capital 135 9 4
- ---------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE YEAR( 2) 4,444 4,309 4,300
- ---------------------------------------------------------------------------------------------
SHARE PREMIUM
Balance at the beginning of the year 13,929 13,740 13,260
Change in accounting policy 508 (123) 1,406
Balance at the beginning of the year (restated) 14,437 13,617 14,666
Premium on shares issued and warrants exercised( 3) 139 45 111
Net premium / (discount) on treasury share and own
equity derivative activity( 3) (391) 775 (1,160)
Share premium increase due to PaineWebber acquisition 4,198
Borrow of own shares to be delivered( 4) 5,895
Settlement of own shares to be delivered (3,393)
- ---------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE YEAR 20,885 14,437 13,617
- ---------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
Balance at the beginning of the year (442) (456) (111)
Movements during the year (245) 14 (345)
- ---------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE YEAR (687) (442) (456)
- ---------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at the beginning of the year 20,501 16,293 15,464
Change in accounting policy (174) (69) 0
Balance at the beginning of the year (restated) 20,327 16,224 15,464
Net profit for the year 7,792 6,153 2,972
Dividends paid( 5, 6) (3,928) (2,050) (2,212)
- ---------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE YEAR 24,191 20,327 16,224
- ---------------------------------------------------------------------------------------------
TREASURY SHARES, AT COST
Balance at the beginning of the year (3,462) (1,482) (1,982)
Change in accounting policy (4,561) (3,409) (2,345)
Balance at the beginning of the year (restated) (8,023) (4,891) (4,327)
Acquisitions (16,330) (6,595) (3,860)
Disposals 20,353 3,463 3,296
- ---------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE YEAR( 7) (4,000) (8,023) (4,891)
- ---------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 44,833 30,608 28,794
- ---------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 5
274
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RECONCILIATION OF SHARES ISSUED
Number of shares % change from
- ----------------------------------------------------------------------------------------------
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
- ----------------------------------------------------------------------------------------------
BALANCE AT THE BEGINNING OF THE YEAR 430,893,162 429,952,612 428,724,700 0
Issue of share capital 804,502 940,550 1,227,912 (14)
Issue of share capital due to
PaineWebber( 8) 12,682,065
- ----------------------------------------------------------------------------------------------
TOTAL ORDINARY SHARES ISSUED, AT THE
END OF THE YEAR 444,379,729 430,893,162 429,952,612 3
- ----------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) Comprising 444,379,729 ordinary shares as of 31 December 2000, 430,893,162
ordinary shares as of 31 December 1999 and 429,952,612 ordinary shares as
of 31 December 1998, at CHF 10 each, fully paid.
(3) In prior periods, a portion of income on own equity derivative contract
activity was included in Premium / (discount) on treasury shares issued and
treasury share contract activity. This amount is now included in Net
premium / (discount) on treasury share and own equity derivative activity
for all periods.
(4) In January 2001, all remaining shares borrowed to complete the acquisition
of PaineWebber were settled resulting in a net CHF 103 million decrease in
share premium.
(5) Includes interim dividend paid in respect of the period from 1 January 2000
to 30 September 2000 of CHF 1,764 million.
(6) The Board of Directors is proposing to repay CHF 1.60 of the par value of
each CHF 10.00 share, instead of distributing a final dividend in respect
of the period from 1 October 2000 to 31 December 2000.
(7) Comprising 18,421,783 ordinary shares as of 31 December 2000, 36,873,714
ordinary shares as of 31 December 1999 and 24,456,698 ordinary shares as of
31 December 1998.
(8) Includes shares issued for employee option plans.
In addition to treasury shares, a maximum of 42,571,341 shares (1,057,908 at 31
December 1999 and 1,998,458 at 31 December 1998) can be issued without further
approval of the shareholders. The amount of shares consists of 26,000,000
authorized shares contingently issuable by the Board of Directors in reference
to the PaineWebber share exchange until February 2001 at the latest. The option
to issue authorized shares expired unused. Additionally 16,571,341 shares out of
conditional capital had been set aside by the Extraordinary General Meeting on 7
September 2000. Those shares are issuable against the exercise of options from
former PaineWebber employee option plans. The Board of Directors will propose to
the shareholders at the Annual General Meeting on 26 April 2001 a reduction of
the issuable amount to 5,643,205 shares which is the number of shares required
to settle the outstanding PaineWebber employee options at year end.
- --------------------------------------------------------------------------------
F- 6
275
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
UBS GROUP STATEMENT OF CASH FLOWS
CHF million
FOR THE YEAR ENDED 31.12.00 31.12.99( 1) 31.12.98( 1)
- -----------------------------------------------------------------------------------------------
CASH FLOW FROM / (USED IN) OPERATING ACTIVITIES
Net profit 7,792 6,153 2,972
ADJUSTMENTS TO RECONCILE TO CASH FLOW FROM / (USED IN)
OPERATING ACTIVITIES
Non-cash items included in net profit and other
adjustments:
Depreciation and amortization 2,275 1,857 1,825
Provision for credit losses (130) 956 951
Income from associates (58) (211) (377)
Deferred tax expense 544 479 491
Net gain from investing activities (730) (2,282) (1,803)
Net increase / (decrease) in operating assets:
Net due from / to banks (915) (5,298) (65,172)
Reverse repurchase agreements, cash collateral on
securities borrowed (81,054) (12,656) 66,031
Trading portfolio including net replacement values 11,553 (49,956) 45,089
Loans due to / from customers 12,381 17,222 (5,626)
Accrued income, prepaid expenses and other assets 6,923 2,545 2,107
Net increase / (decrease) in operating liabilities:
Repurchase agreements, cash collateral on
securities lent 50,762 52,958 (49,145)
Accrued expenses and other liabilities 3,313 (7,366) 1,686
Income taxes paid (959) (1,063) (733)
- -----------------------------------------------------------------------------------------------
NET CASH FLOW FROM / (USED IN) OPERATING ACTIVITIES 11,697 3,338 (1,704)
- -----------------------------------------------------------------------------------------------
CASH FLOW (USED IN) / FROM INVESTING ACTIVITIES
Investments in subsidiaries and associates (9,729) (1,720) (1,563)
Disposal of subsidiaries and associates 669 3,782 1,858
Purchase of property and equipment (1,640) (2,820) (1,813)
Disposal of property and equipment 335 1,880 1,134
Net (investment) / divestment in financial investments (8,770) 356 6,134
- -----------------------------------------------------------------------------------------------
NET CASH FLOW (USED IN) / FROM INVESTING ACTIVITIES (19,135) 1,478 5,750
- -----------------------------------------------------------------------------------------------
CASH FLOW (USED IN) / FROM FINANCING ACTIVITIES
Money market paper issued 10,125 13,128 (4,073)
Net movements in treasury shares and treasury share
contract activity (647) (2,312) (2,552)
Capital issuance 15 9 4
Dividends paid (3,928) (2,050) (2,212)
Issuance of long-term debt 14,884 12,661 5,566
Repayment of long-term debt (24,640) (7,112) (9,068)
Issuance of minority interests 2,683
Repayment of minority interests (73) (689) 0
- -----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 7
276
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CHF million
FOR THE YEAR ENDED 31.12.00 31.12.99( 1) 31.12.98( 1)
- -----------------------------------------------------------------------------------------------
NET CASH FLOW (USED IN) / FROM FINANCING ACTIVITIES (1,581) 13,635 (12,335)
Effects of exchange rate differences 112 148 (386)
- -----------------------------------------------------------------------------------------------
NET INCREASE / (DECREASE) IN CASH EQUIVALENTS (8,907) 18,599 (8,675)
Cash and cash equivalents, beginning of the year 102,277 83,678 92,353
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF THE YEAR 93,370 102,277 83,678
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS COMPRISE:
Cash and balances with central banks 2,979 5,073 3,267
Money market paper 66,454 69,717 18,390
Due from banks maturing in less than three months 23,937 27,487 62,021
- -----------------------------------------------------------------------------------------------
TOTAL 93,370 102,277 83,678
- -----------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
ADDITIONAL INFORMATION ON THE CASH FLOW STATEMENT
Cash and cash equivalents increased by CHF 1,311 million as a result of
acquisitions and disposals of subsidiaries in 2000 (see Note 38).
The principal assets and liabilities of PaineWebber upon consolidation are made
up as follows:
CHF BILLION 03.11.00
- ----------------------------------------------------------------------
Loans, net of allowances for credit losses 20
Trading portfolio assets 42
Cash collateral on securities borrowed / reverse repurchase
agreements 45
Cash collateral on securities lent / repurchase agreements 58
Due to customers 26
Long-term debt 9
- ----------------------------------------------------------------------
For more information relating to the PaineWebber acquisition please see Note 2:
Acquisition of Paine Webber Group, Inc.
- --------------------------------------------------------------------------------
F- 8
277
- --------------------------------------------------------------------------------
Notes to the Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF ACCOUNTING
UBS AG and subsidiaries (the "Group") provides a broad range of financial
services such as advisory services, 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.
The consolidated financial statements are stated in Swiss francs (CHF), 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 certain 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. Subsidiaries where
control is temporary because they 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.
Equity and net income attributable to minority interests are shown separately in
the Balance sheet and Income statement respectively.
c) 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.
d) 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 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- 9
278
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
e) BUSINESS AND GEOGRAPHICAL SEGMENTS
The Group is organized on a worldwide basis into three major Business Groups and
the Corporate Center. This organizational structure is 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 in line with charges to unaffiliated
customers for similar services.
f) 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.
g) 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 investments 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. The Group offsets reverse
repurchase agreements and repurchase agreements with the same counterparty for
transactions covered by legally enforceable master netting agreements when net
or simultaneous settlement is intended.
h) TRADING PORTFOLIO
The trading portfolio consists of debt and equity securities as well as of
precious metals. The trading portfolio is carried at fair value and marked to
market daily. 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.
i) 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.
Interest income on performing loans, including amortization of premiums and
discounts, is recognized on an accrual basis.
Loans are stated at their principal amount net of any allowance for credit
losses. The allowance and provisions for credit losses provides for probable
losses in the credit portfolio, including loans and lending-related commitments.
Such commitments include letters of credit, guarantees and commitments to extend
credit.
- --------------------------------------------------------------------------------
F- 10
279
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The carrying amounts of impaired loans are reduced to their estimated realizable
value through allowances. Increases or decreases in allowances are charged or
credited, respectively, to the income statement. 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. Recoveries are credited to the allowances for credit
losses.
A loan is considered impaired when it becomes probable that the bank will not be
able to collect all amounts due according to the contractual terms. The reason
for impairment includes both counterparty-specific and country-specific
elements. The evaluation is based on the following principles:
Counterparty-specific: 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 are established based on this assessment, and exclude exposures
addressed in counterparty-specific allowances.
All impaired loans are periodically reviewed and analyzed and the allowance for
credit losses is reassessed on a loan-by-loan basis at least annually and if
necessary adjusted for further impairments identified. If there are indications
that there are significant probable losses in the portfolio that have not been
specifically identified, allowances would also be provided for on a portfolio
basis.
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.
j) 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.
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.
k) 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
temporary significant influence because they are
- --------------------------------------------------------------------------------
F- 11
280
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
acquired and held with a view to their subsequent disposal, are included in
Financial investments (see private equity above).
Investments in companies in which the Group does not hold a significant
influence are recorded at cost less value adjustments for other than temporary
declines in value.
l) PROPERTY AND EQUIPMENT
Property and equipment includes bank occupied properties, investment properties,
software, IT and communication and other machines and 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 its
estimated useful life as follows:
Properties Not exceeding 50 years
- -----------------------------------------------------------------------------
IT, software and communication Not exceeding 3 years
- -----------------------------------------------------------------------------
Other machines and equipment Not exceeding 5 years
- -----------------------------------------------------------------------------
m) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of an acquisition over the fair value
of the Group's share of net identifiable assets of the acquired entity at the
date of acquisition.
Other intangible assets are comprised of separately identifiable intangible
items arising from acquisitions and certain purchased trademarks and similar
items.
Goodwill and other intangible assets are recognized as assets and are amortized
using the straight-line basis over their estimated useful economic life, not
exceeding 20 years. At each balance sheet date, goodwill and other intangible
assets are reviewed for indications of impairment. If such indications exist an
analysis is performed to assess 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. Software
development costs are capitalized when they meet certain criteria relating to
identifiability and future economic benefits can be reasonably estimated.
Internally developed software is classified in Property and equipment in the
balance sheet.
n) 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 of 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 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 based on enacted rates.
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.
- --------------------------------------------------------------------------------
F- 12
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NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Current and deferred taxes are recognized as tax income or expense except for
deferred taxes recognized or disposed of on the acquisition or disposal of a
subsidiary.
O) TREASURY SHARES
UBS AG shares held by the Group are classified in the Shareholders' equity as
Treasury shares and accounted for at weighted average cost. The difference
between the proceeds from sales of treasury shares and their cost (net of tax)
is classified as Share premium.
Contracts that require physical settlement or net share settlement are
classified as Shareholders' equity and reported as Share premium. The difference
between the proceeds from the settlement of the contract and its cost (net of
tax) are reported as Share premium.
P) 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
benefits. Group contributions to defined contribution plans are expensed when
employees have rendered services in exchange for such contributions, generally
in the year of contribution.
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 used by the actuary are set out in Note 34.
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 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.
q) DERIVATIVE INSTRUMENTS
Derivative instruments are carried at fair value. Fair values are obtained from
quoted market prices, discounted cash flow models and option pricing models as
appropriate. The fair values of derivative instruments are shown in the balance
sheet as Positive and Negative replacement values. Realized and unrealized gains
and losses are recognized in Net trading income.
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.
The Group offsets positive and negative replacement values with the same
counterparty for transactions covered by legally enforceable master netting
agreements.
r) COMPARABILITY
Certain amounts have been reclassified from previous years to conform to the
2000 presentation.
- --------------------------------------------------------------------------------
F- 13
282
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The prior year financial statements reflect the requirements of the following
revised or new International Accounting Standards or changes in accounting
policies which the Group implemented in 2000:
- ------------------------------------------------------------------------------
IAS 10 (revised) Events after the balance sheet date
- ------------------------------------------------------------------------------
IAS 37 Provisions, contingent liabilities and contingent
assets
- ------------------------------------------------------------------------------
IAS 38 Intangible assets
- ------------------------------------------------------------------------------
Interpretation SIC 12 Consolidation - special purpose entities
- ------------------------------------------------------------------------------
Interpretation SIC 16 Share capital - reacquired own equity instruments
(treasury shares)
- ------------------------------------------------------------------------------
Interpretation SIC 24 Earnings per share - financial instruments and other
contracts that may be settled in shares
- ------------------------------------------------------------------------------
Offsetting of amounts related to certain contracts
- ------------------------------------------------------------------------------
Interest and dividend income on trading assets
- ------------------------------------------------------------------------------
The implementation of the above standards or accounting policies had no material
impact for the Group except for the following:
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.
Capitalized costs relating to internally developed software amounted to CHF 248
million as of 31 December 2000 and are reported within Note 17 Property and
equipment as IT, software and communication, and operating expenses were reduced
accordingly.
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 are recognized as a change in shareholders' equity.
As a result of the adoption of Interpretation SIC 16, financial information has
been retroactively restated. Net trading income was reduced by CHF 196 million
for the year ended 31 December 1999. Shareholders' equity and Total assets were
reduced by CHF 4,227 million as of 31 December 1999 and CHF 3,601 million as of
31 December 1998.
Offsetting of amounts related to certain contracts
In order to improve comparability with its competitors, the Group has decided to
offset positive and negative replacement values and reverse repurchase
agreements and repurchase agreements with the same counterparty for transactions
covered by legally enforceable master netting agreements. This change became
effective as of 1 January 2000 and all prior periods represented have been
restated.
- --------------------------------------------------------------------------------
F- 14
283
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Positive and negative replacement values have been reduced by CHF 66,136 million
for the year ended 31 December 1999. Reverse repurchase and repurchase
agreements have been reduced by CHF 12,322 million for the year ended 31
December 1999.
Interest and dividend income and expense on trading assets
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 competitors, the Group has included interest and dividend
income and expense on trading assets and liabilities in interest income and
interest expense respectively. This change in presentation became effective 1
January 2000. The comparative financial information for 1999 has been restated
to comply with this change. Interest income was increased by CHF 17,281 million
for the year ended 31 December 1999. Interest expense was increased by CHF
17,728 million for the year ended 31 December 1999. In addition, Net trading
income was increased by CHF 447 million for the year ended 31 December 1999.
In addition to the above, other changes have been made to prior years to conform
to current presentation.
s) RECENT ACCOUNTING STANDARDS NOT YET ADOPTED
- -------------------------------------------------------------------
IAS 12 Revised, income taxes
- -------------------------------------------------------------------
IAS 39 Recognition and measurement of financial instruments
- -------------------------------------------------------------------
IAS 40 Investment property
- -------------------------------------------------------------------
The implementation of the above standards will have no material impact for the
Group except for the following:
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. The Group will disclose its financial
assets either as loans originated by the bank and not held for trading,
financial assets held for trading, investments held to maturity or financial
assets available for sale.
Loans originated by the bank are initially measured at cost, which is the fair
value of the consideration given to originate the loan, including any
transaction costs. Loans will subsequently be measured at amortized cost minus
any write-down for impairment or uncollectibility.
Financial assets held for trading are valued at fair value and changes in the
fair value are recognized in trading income.
Held-to-maturity investments are recognized at cost and interest is accrued
using the effective interest method. Held-to-maturity investments are subject to
review for impairment.
Financial assets available for sale are recognized at fair value on the balance
sheet. Changes in fair value are booked to equity and disclosed in the statement
of changes in equity until the financial asset is sold, collected or otherwise
disposed of, or until the financial asset is determined to be impaired, at
- --------------------------------------------------------------------------------
F- 15
284
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
which time the cumulative profit or loss previously recognized in equity should
be included in net profit or loss for the period.
In a qualifying hedge of exposures to changes in fair value, the change in fair
value of the hedging instrument is recognized as an adjustment to its carrying
amount and in net profit and loss. The change in fair value of the hedged item
attributable to the hedged risks adjusts the carrying value of the hedged item
and is also recognized in net profit or loss.
In a qualifying cash flow hedge, the effective portion of the gain or loss on
the hedging instrument is recognized as an adjustment to its carrying amount and
in equity. The ineffective portion of the gain or loss on the hedging
transaction also adjusts the hedging instrument's carrying amount, but is
reported in net profit or loss. If the forecasted transaction is no longer
expected to occur, the cumulative gain or loss on the hedging instrument is
recognized in net profit or loss.
A qualifying hedge of a net investment in a foreign entity is accounted for
similar to a cash flow hedge. The gain or loss on the hedging instrument
relating to the effective portion of the hedge is classified in the same manner
as the foreign currency translation gain or loss.
The adoption of IAS 39 is expected to have a material impact on certain
financial assets and liabilities including long-term debt. An opening adjustment
to Other comprehensive income will also be required, representing unrealized
gains and losses on financial assets recorded as available for sale and
derivatives designated as cash flow hedges.
IAS 40 Investment property
In April 2000, the IASC issued IAS 40 Investment property, which is required to
be adopted for the Group's financial statements as of 1 January 2001. The
Standard prescribes the accounting treatment and disclosure requirements for
investment property. Investment properties are measured at cost less accumulated
depreciation and any accumulated impairment losses. As of 1 January 2001
investment properties amounted to CHF 1,280 million.
- --------------------------------------------------------------------------------
F- 16
285
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 ACQUISITION OF PAINE WEBBER GROUP, INC.
On 3 November 2000, UBS completed its acquisition of 100% of the outstanding
common stock of the Paine Webber Group, Inc., a full-service broker-dealer and
one of the largest securities and commodities firms in the United States
servicing both individual and institutional clients. The transaction was
accounted for using the purchase method of accounting, making PaineWebber a
wholly owned subsidiary of UBS. Results of operations of PaineWebber are
included in the consolidated results beginning on the date of acquisition. Under
International Accounting Standards, the valuation of shares and options issued
is measured as of the date the acquisition was completed, 3 November 2000.
Purchase consideration of CHF 22.0 billion (USD 12.5 billion) consists of the
following:
CHF USD
MILLION million
- ---------------------------------------------------------------------------------------
Value of shares issued (40,580,570 shares issued) 10,246 5,817
Value of options issued (options on 6,325,270 shares
issued) 992 563
Cash consideration 10,607 6,021
Direct costs of the acquisition 115 65
- ---------------------------------------------------------------------------------------
Total purchase price 21,960 12,466
Fair value of net assets acquired (5,630) (3,196)
- ---------------------------------------------------------------------------------------
Total intangible assets (1) 16,330 9,270
Intangible assets other than goodwill (4,695) (2,665)
- ---------------------------------------------------------------------------------------
Goodwill arising from acquisition 11,635 6,605
Purchased goodwill 1,202 682
- ---------------------------------------------------------------------------------------
TOTAL GOODWILL AT 3 NOVEMBER 2000 12,837 7,287
Effect of translation adjustments (898)
Amortization from 3 November 2000 (103) (61)
- ---------------------------------------------------------------------------------------
Balance of goodwill at 31 December 2000 11,836 7,226
- ---------------------------------------------------------------------------------------
(1) Excluding purchased goodwill.
The resulting goodwill and intangible assets will be amortized using the
straight-line method over their estimated useful lives of 20 years.
In addition, UBS has entered into employee retention agreements that provide for
payments to key PaineWebber employees which are subject to the employee's
continued employment and other restrictions. The estimated cost to the Group for
the agreements is approximately CHF 1.5 billion (USD 875 million) over a
four-year period.
- --------------------------------------------------------------------------------
F- 17
286
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3a SEGMENT REPORTING BY BUSINESS GROUP
UBS is organized into three Business Groups: UBS Switzerland, UBS Warburg and
UBS Asset Management, and our Corporate Center.
UBS SWITZERLAND
UBS Switzerland encompasses two business units, Private Banking and Private and
Corporate Clients.
The Private Banking business unit offers comprehensive wealth management
services for private clients globally, who bank in Switzerland and other
financial centers worldwide.
Within Switzerland, the Private and Corporate Clients business unit provides a
complete set of banking and securities services for individual and corporate
clients, focused foremost on customer service excellence, profitability and
growth via multichannel distribution.
The two business units share technological and physical infrastructure, and have
joint departments supporting major functions such as e-commerce, financial
planning and wealth management, and investment policy and strategy.
UBS ASSET MANAGEMENT
UBS Asset Management is organized into two business units, Institutional Asset
Management and Investment Funds / GAM.
Institutional Asset Management offers a diverse range of institutional
investment management capabilities, in every major asset class, from the
traditional to the alternative.
Investment Funds provides retail investment fund products, marketed principally
through UBS Switzerland. Investment management for these funds is generally
undertaken by Institutional Asset Management, with the Investment Funds unit
concentrating on product development and distribution.
Global Asset Management (GAM), acquired in late 1999, is a diversified asset
management group, offering a wide range of investment styles. Dedicated to
giving its clients access to the world's best investment talent, GAM's funds are
managed by its own staff and by about 80 carefully selected external managers.
GAM products are marketed both independently and through Private Banking.
UBS WARBURG
UBS Warburg is a client-driven securities, investment banking and wealth
management firm. It is made up of five business units.
The Corporate and Institutional Clients business unit is one of the leading
global investment banking and securities firms. For both its own corporate and
institutional clients and the other parts of the UBS Group, UBS Warburg provides
product innovation, top-quality research and advice, and complete access to the
world's capital markets.
UBS Capital is the private equity business unit of UBS Warburg, investing UBS
and third-party funds primarily in unlisted companies.
US Private Clients, operating under the brand of UBS PaineWebber, provides a
full range of wealth management services.
The International Private Clients business unit provides private banking
products and services for high net worth clients outside the US and Switzerland
who bank in their country of residence. During 2001 the European part of this
business will become part of UBS Switzerland's Private Banking business unit and
the Asia-Pacific part will be merged with US Private Clients.
- --------------------------------------------------------------------------------
F- 18
287
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The e-services business unit was created in fourth quarter 1999. During 2000,
e-services progressed successfully towards its goal of creating a new business
providing wealth management for affluent European clients, through internet,
call centers and investment centers. Following the merger with PaineWebber,
UBS's European wealth management strategy has evolved. As a result, key
components of the e-services business unit's infrastructure will become part of
Private Banking's new European wealth management strategy and e-services will no
longer be reported separately.
CORPORATE CENTER
The Corporate Center encompasses Group level functions which cannot be devolved
to the operating divisions, and ensures that the Business Groups operate as a
coherent and effective whole with a common set of values and principles.
Corporate Center's remit covers areas such as risk management, financial
reporting, marketing and communications, funding, capital and balance sheet
management and management of foreign currency earnings.
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. 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.
FOR THE YEAR ENDED 31 DECEMBER 2000
UBS UBS ASSET UBS CORPORATE UBS
CHF MILLION SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
- ----------------------------------------------------------------------------------------------------
Income 14,182 1,953 19,779 358 36,272
Credit loss recovery /
(expense)( 1) (784) 0 (247) 1,161 130
- ----------------------------------------------------------------------------------------------------
Total operating income 13,398 1,953 19,532 1,519 36,402
- ----------------------------------------------------------------------------------------------------
Personnel expenses 4,759 880 11,002 522 17,163
General and
administrative expenses 2,394 439 3,501 431 6,765
Depreciation 508 49 731 320 1,608
Amortization of goodwill
and other intangible
assets 62 263 298 44 667
- ----------------------------------------------------------------------------------------------------
Total operating expenses 7,723 1,631 15,532 1,317 26,203
- ----------------------------------------------------------------------------------------------------
BUSINESS GROUP
PERFORMANCE BEFORE TAX 5,675 322 4,000 202 10,199
Tax expense 2,320
- ----------------------------------------------------------------------------------------------------
NET PROFIT BEFORE
MINORITY INTERESTS 7,879
Minority interests (87)
- ----------------------------------------------------------------------------------------------------
NET PROFIT 7,792
- ----------------------------------------------------------------------------------------------------
OTHER INFORMATION AS OF 31 DECEMBER 2000( 2)
Total assets 281,780 6,727 870,608 (71,563) 1,087,552
Total liabilities 272,134 5,513 846,451 (81,379) 1,042,719
- ----------------------------------------------------------------------------------------------------
(1) In order to show the relevant Business Group performance over time,
adjusted expected loss figures rather than the net credit expense /
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
- --------------------------------------------------------------------------------
F- 19
288
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
loss figures and the net IAS credit loss expenses recorded at Group level
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 130 million for the year ended 31 December 2000
is as follows: UBS Switzerland CHF 695 million, UBS Warburg CHF (565)
million.
(2) The funding surplus or requirement is reflected in each Business Group and
adjusted in Corporate Center.
FOR THE YEAR ENDED 31 DECEMBER 1999 (1)
UBS UBS ASSET UBS CORPORATE UBS
CHF MILLION SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
- ----------------------------------------------------------------------------------------------
Income 12,761 1,369 13,241 2,010 29,381
Credit loss recovery / (expense) (2) (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
- ----------------------------------------------------------------------------------------------
BUSINESS GROUP 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 DECEMBER 1999 (3)
Total assets 254,577 10,451 719,568 (88,040) 896,556
Total liabilities 270,137 4,614 693,633 (102,436) 865,948
- ----------------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) 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 expenses recorded at
Group level for financial reporting purposes is reported in the Corporate
Center. The divisional breakdown of the net credit loss recovery /
(expense) for financial reporting purposes of CHF (956) million for the
year ended 31 December 1999 is as follows: UBS Switzerland CHF (965)
million, Corporate Center CHF 9 million.
(3) The funding surplus / requirement is reflected in each Business Group and
adjusted in Corporate Center.
- --------------------------------------------------------------------------------
F- 20
289
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED 31 DECEMBER 1998 (1)
UBS UBS ASSET UBS CORPORATE UBS
CHF MILLION SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
- -----------------------------------------------------------------------------------------------
Income 13,958 1,358 7,691 191 23,198
Credit loss recovery / (expense) (2) (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
- -----------------------------------------------------------------------------------------------
BUSINESS GROUP 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
- -----------------------------------------------------------------------------------------------
(1) The 1998 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) 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 expenses recorded at
Group level for financial reporting purposes is reported in the Corporate
Center. The divisional breakdown of the net credit loss recovery /
(expense) for financial reporting purposes of CHF (951) million for the
year ended 31 December 1998 is as follows: UBS Switzerland CHF (445)
million and UBS Warburg CHF (506) million.
NOTE 3b SEGMENT REPORTING BY GEOGRAPHIC LOCATION
The geographic 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
worldwide, 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
Group, as shown in Note 3a to these financial statements, is a more meaningful
representation of the way in which the Group is managed.
FOR THE YEAR ENDED 31 DECEMBER 2000
TOTAL OPERATING INCOME TOTAL ASSETS CAPITAL INVESTMENT
----------------------- --------------------- ---------------------
CHF MILLION SHARE % CHF MILLION SHARE % CHF MILLION SHARE %
- ------------------------------------------------------------------------------------------------------
Switzerland 15,836 44 211,851 19 1,135 43
Rest of Europe 10,907 30 305,342 28 311 12
Americas 6,976 19 474,617 44 1,169 44
Asia / Pacific 2,626 7 87,831 8 36 1
Africa / Middle East 57 0 7,911 1 8 0
- ------------------------------------------------------------------------------------------------------
TOTAL 36,402 100 1,087,552 100 2,659 100
- ------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 21
290
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED 31 DECEMBER 1999(1)
TOTAL OPERATING INCOME TOTAL ASSETS CAPITAL INVESTMENT
----------------------- --------------------- ---------------------
CHF MILLION SHARE % CHF MILLION SHARE % CHF MILLION SHARE %
- -------------------------------------------------------------------------------------------------------
Switzerland 14,976 52 207,702 23 1,990 70
Rest of Europe 7,626 27 303,365 34 356 13
Americas 3,861 14 281,974 31 386 14
Asia / Pacific 1,945 7 96,469 11 87 3
Africa / Middle East 17 0 7,046 1 1 0
- -------------------------------------------------------------------------------------------------------
TOTAL 28,425 100 896,556 100 2,820 100
- -------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED 31 DECEMBER 1998(1)
TOTAL OPERATING INCOME
-----------------------
CHF MILLION SHARE %
- -------------------------------------------------------
Switzerland 16,757 75
Rest of Europe 1,655 8
Americas 2,548 11
Asia / Pacific 1,251 6
Africa / Middle East 36 0
- -------------------------------------------------------
TOTAL 22,247 100
- -------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
- --------------------------------------------------------------------------------
F- 22
291
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INCOME STATEMENT
NOTE 4 NET INTEREST INCOME
CHF million % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- --------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest earned on loans and advances to
banks 5,615 6,105 7,687 (8)
Interest earned on loans and advances to
customers 14,692 12,077 14,111 22
Interest from finance leasing 36 49 60 (27)
Interest earned on securities borrowed and
reverse repurchase agreements 19,088 11,422 10,380 67
Interest and dividend income from financial
investments 202 160 372 26
Interest and dividend income from trading
portfolio 11,842 5,598 3,901 112
Other 270 193 931 40
- --------------------------------------------------------------------------------------------------------
Total 51,745 35,604 37,442 45
- --------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on amounts due to banks 6,155 5,515 8,205 12
Interest on amounts due to customers 9,505 8,330 9,890 14
Interest on securities lent and repurchase
agreements 14,915 8,446 7,543 77
Interest and dividend expense from trading
portfolio 5,309 2,070 1,741 156
Interest on medium and long-term debt 7,731 5,334 5,045 45
- --------------------------------------------------------------------------------------------------------
Total 43,615 29,695 32,424 47
- --------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 8,130 5,909 5,018 38
- --------------------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
- --------------------------------------------------------------------------------
F- 23
292
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 NET FEE AND COMMISSION INCOME
CHF million % change from
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.98 31.12.99
- -------------------------------------------------------------------------------------------
CREDIT-RELATED FEES AND COMMISSIONS 310 372 559 (17)
- -------------------------------------------------------------------------------------------
SECURITY TRADING AND INVESTMENT ACTIVITY FEES
Underwriting fees(1) 1,434 905 1,122 58
Corporate finance fees(1) 1,772 1,298 1,016 37
Brokerage fees 5,792 3,934 3,670 47
Investment fund fees 2,821 1,915 1,778 47
Fiduciary fees 351 317 349 11
Custodian fees 1,439 1,583 1,386 (9)
Portfolio and other management and
advisory fees(1) 3,677 2,612 2,891 41
Other 50 57 110 (12)
- -------------------------------------------------------------------------------------------
Total 17,336 12,621 12,322 37
- -------------------------------------------------------------------------------------------
COMMISSION INCOME FROM OTHER SERVICES 802 765 776 5
- -------------------------------------------------------------------------------------------
TOTAL FEE AND COMMISSION INCOME 18,448 13,758 13,657 34
- -------------------------------------------------------------------------------------------
FEE AND COMMISSION EXPENSE
Brokerage fees paid 1,084 795 704 36
Other 661 356 327 86
- -------------------------------------------------------------------------------------------
Total 1,745 1,151 1,031 52
- -------------------------------------------------------------------------------------------
NET FEE AND COMMISSION INCOME 16,703 12,607 12,626 32
- -------------------------------------------------------------------------------------------
(1) In prior periods, Corporate finance related advisory fees were included in
Portfolio and other management and advisory fees. These fees are now
reported in the new disclosure line Corporate finance fees together with
merger and acquisition fees which were previously reported in Underwriting
and corporate finance fees. All previous periods have been restated
accordingly.
- --------------------------------------------------------------------------------
F- 24
293
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 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 instruments of 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 globally in equity securities and equity derivatives such as
swaps, options, futures, and forward contracts.
CHF million % change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- --------------------------------------------------------------------------------------------------
Foreign exchange 1,287 1,108 1,992 16
Fixed income 912 2,603 162 (65)
Equities 7,754 4,008 1,159 93
- --------------------------------------------------------------------------------------------------
NET TRADING INCOME 9,953 7,719 3,313 29
- --------------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
NOTE 7 NET GAINS FROM DISPOSAL OF ASSOCIATES AND SUBSIDIARIES
CHF million % change from
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.98 31.12.99
- ----------------------------------------------------------------------------------------------
Net gains from disposal of consolidated
subsidiaries 57 8 1,149 613
Net gains/(losses) from disposal of
investments in associates 26 1,813 (30) (99)
- ----------------------------------------------------------------------------------------------
NET GAINS FROM DISPOSAL OF ASSOCIATES
AND SUBSIDIARIES 83 1,821 1,119 (95)
- ----------------------------------------------------------------------------------------------
While the 1999 figure represents mainly the disposal gains from our investments
in Swiss Life/ Rentenanstalt and Julius Baer registered shares, the 1998 figure
is mainly attributable to the disposal of the BSI--Banca della Svizzera
Italiana.
- --------------------------------------------------------------------------------
F- 25
294
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 OTHER INCOME
CHF million % change from
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.98 31.12.99
- ---------------------------------------------------------------------------------------------------
INVESTMENTS IN FINANCIAL ASSETS (DEBT AND EQUITY)
Net gain from disposal of private equity
investments 919 374 587 146
Net gain from disposal of other financial
assets 162 180 398 (10)
Impairment charges in private equity
investments and other financial assets (507) (102) (556) 397
- ---------------------------------------------------------------------------------------------------
TOTAL 574 452 429 27
- ---------------------------------------------------------------------------------------------------
INVESTMENTS IN PROPERTY
Net gain from disposal of properties held
for resale 85 78 33 9
Net loss from revaluation of properties held
for resale (108) (49) (106) 120
Net income from other properties 96 (20) 328
- ---------------------------------------------------------------------------------------------------
TOTAL 73 9 255 711
- ---------------------------------------------------------------------------------------------------
EQUITY INCOME FROM INVESTMENTS IN ASSOCIATES 58 211 377 (73)
- ---------------------------------------------------------------------------------------------------
OTHER 698 653 61 7
- ---------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 1,403 1,325 1,122 6
- ---------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 26
295
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 OPERATING EXPENSES
CHF million % change from
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.98 31.12.99
- ---------------------------------------------------------------------------------------------------
PERSONNEL EXPENSES
Salaries and bonuses 13,523 9,872 7,082 37
Contractors 725 886 535 (18)
Insurance and social contributions 959 717 542 34
Contribution to retirement benefit plans 475 8 614
Employee share plans 97 151 201 (36)
Other personnel expenses 1,384 943 842 47
- ---------------------------------------------------------------------------------------------------
TOTAL 17,163 12,577 9,816 36
- ---------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
Occupancy 979 847 822 16
Rent and maintenance of machines and
equipment 520 410 390 27
Telecommunications and postage 914 756 820 21
Administration 750 784 759 (4)
Marketing and public relations 480 335 262 43
Travel and entertainment 656 552 537 19
Professional fees 660 526 532 25
IT and other outsourcing 1,246 1,289 1,260 (3)
Other 560 599 1,353 (7)
- ---------------------------------------------------------------------------------------------------
TOTAL 6,765 6,098 6,735 11
- ---------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Property, equipment and software 1,608 1,517 1,483 6
Goodwill and other intangible assets 667 340 342 96
- ---------------------------------------------------------------------------------------------------
TOTAL 2,275 1,857 1,825 23
- ---------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 26,203 20,532 18,376 28
- ---------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 27
296
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 EARNINGS PER SHARE
% change from
FOR THE YEAR ENDED 31.12.00 31.12.99(1) 31.12.98(1) 31.12.99
- ------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE CALCULATION
Net profit for the period (CHF million) 7,792 6,153 2,972 27
Net profit for the period before
goodwill amortization (CHF million)(2) 8,459 6,493 3,314 30
Weighted average shares outstanding:
Registered ordinary shares 433,486,003 430,497,026 429,710,128 1
Own shares to be delivered 2,058,212
Treasury shares (32,514,906) (25,754,544)(3) (24,487,833)(3) 26
- ------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES FOR BASIC
EARNINGS PER SHARE 403,029,309 404,742,482 405,222,295 0
- ------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE (CHF) 19.33 15.20 7.33 27
BASIC EARNINGS PER SHARE BEFORE
GOODWILL AMORTIZATION (CHF)(2) 20.99 16.04 8.18 31
- ------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE CALCULATION
Net profit for the period (CHF million) 7,778(5) 6,153 2,972 26
Net profit for the period before
goodwill amortization (CHF million)(2) 8,445(5) 6,493 3,314 30
Weighted average shares for basic
earnings per share 403,029,309 404,742,482 405,222,295 0
Potential dilutive ordinary shares
resulting from outstanding options,
warrants and convertible debt
securities(6) 5,496,591 3,632,670(4) 7,658,746(4) 51
- ------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES FOR DILUTED
EARNINGS PER SHARE 408,525,900 408,375,152 412,881,041 0
- ------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE (CHF) 19.04 15.07 7.20 26
DILUTED EARNINGS PER SHARE BEFORE
GOODWILL AMORTIZATION (CHF)(2) 20.67 15.90 8.03 30
- ------------------------------------------------------------------------------------------------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) The amortization of goodwill and other intangible assets is excluded from
this calculation.
(3) Treasury shares have increased by 11,371,720 and by 18,372,661 for the
periods ended 31 December 1999 and 31 December 1998, due to a change in
accounting policy (see Note 1: Summary of Significant Accounting Policies).
(4) Share amount has been adjusted by 1,414,114 and by 5,371,922 representing
other potentially dilutive instruments for the periods ended 31 December
1999 and 31 December 1998, due to a change in accounting policy (see Note
1: Summary of Significant Accounting Policies).
(5) Net profit has been adjusted for the dilutive impact of own equity
derivative activity in accordance with International Accounting Standards.
(6) Total equivalent shares outstanding on options that were not dilutive for
the respective periods but could potentially dilute earnings per share in
the future were 9,174,760, 24,045,261 and 11,367,184 for the years ended 31
December 2000, 31 December 1999 and 31 December 1998, respectively.
1999 and 1998 share figures are restated for the two-for-one share split,
effective 8 May 2000.
- --------------------------------------------------------------------------------
F- 28
297
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
BALANCE SHEET: ASSETS
NOTE 11 MONEY MARKET PAPER
CHF MILLION 31.12.00 31.12.99
- -----------------------------------------------------------------------------------------
Government treasury notes and bills 22,551 32,724
Money market placements 43,477 36,540
Other bills and cheques 426 453
- -----------------------------------------------------------------------------------------
TOTAL MONEY MARKET PAPER 66,454 69,717
- -----------------------------------------------------------------------------------------
thereof eligible for discount at central banks 60,689 64,671
- -----------------------------------------------------------------------------------------
NOTE 12a DUE FROM BANKS AND LOANS TO CUSTOMERS
The composition of Due from banks, the Loan portfolio and the Allowance for
credit losses by type of exposure at the end of the year was as follows:
CHF MILLION 31.12.00 31.12.99
- -----------------------------------------------------------------------------------------
Banks 30,064 30,785
Allowance for credit losses (917) (878)
- -----------------------------------------------------------------------------------------
Net due from banks 29,147 29,907
- -----------------------------------------------------------------------------------------
Loans to customers
Mortgages 120,554 127,987
Other loans 133,898 119,242
- -----------------------------------------------------------------------------------------
Subtotal 254,452 247,229
Allowance for credit losses (9,610) (12,371)
- -----------------------------------------------------------------------------------------
Net loans to customers 244,842 234,858
- -----------------------------------------------------------------------------------------
NET DUE FROM BANKS AND LOANS TO CUSTOMERS 273,989 264,765
- -----------------------------------------------------------------------------------------
thereof subordinated 393 86
- -----------------------------------------------------------------------------------------
The composition of Due from banks and Loans to customers by geographical region
based on the location of the borrower at the end of the year was as follows:
CHF MILLION 31.12.00 31.12.99
- -----------------------------------------------------------------------------------------
Switzerland 164,645 183,944
Rest of Europe 46,882 44,796
Americas 52,939 31,285
Asia / Pacific 16,504 13,451
Africa / Middle East 3,546 4,538
- -----------------------------------------------------------------------------------------
Subtotal 284,516 278,014
Allowance for credit losses (10,527) (13,249)
- -----------------------------------------------------------------------------------------
NET DUE FROM BANKS AND LOANS TO CUSTOMERS 273,989 264,765
- -----------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 29
298
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The composition of Due from banks and Loans to customers by type of collateral
at the end of the year was as follows:
CHF MILLION 31.12.00 31.12.99
- -----------------------------------------------------------------------------------------
Secured by real estate 122,898 130,835
Collateralized by securities 37,714 19,061
Guarantees and other collateral 28,373 28,725
Unsecured 95,531 99,393
- -----------------------------------------------------------------------------------------
Subtotal 284,516 278,014
Allowance for credit losses (10,527) (13,249)
- -----------------------------------------------------------------------------------------
NET DUE FROM BANKS AND LOANS TO CUSTOMERS 273,989 264,765
- -----------------------------------------------------------------------------------------
NOTE 12b ALLOWANCE AND PROVISION FOR CREDIT LOSSES
The allowance and provision for credit losses developed as follows:
COUNTRY RISK
SPECIFIC ALLOWANCE AND TOTAL TOTAL
CHF MILLION ALLOWANCE PROVISION 31.12.00 31.12.99
- --------------------------------------------------------------------------------------------------
Balance at the beginning of the year 12,022 1,376 13,398 14,978
Write-offs (2,963) (32) (2,995) (3,275)
Recoveries 150 13 163 65
Increase / (decrease) in credit loss allowance
and provision (49) (81) (130) 956
Net foreign exchange and other adjustments 129 16 145 674
- --------------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE YEAR 9,289 1,292 10,581 13,398
- --------------------------------------------------------------------------------------------------
At the end of the year the aggregate allowances and provisions were apportioned
and displayed as follows:
CHF MILLION 31.12.00 31.12.99
- ---------------------------------------------------------------------------------------
As a reduction of Due from banks 917 878
As a reduction of Loans to customers 9,610 12,371
- ---------------------------------------------------------------------------------------
Subtotal 10,527 13,249
Included in other liabilities related to commitments and
contingent liabilities 54 149
- ---------------------------------------------------------------------------------------
TOTAL ALLOWANCE AND PROVISION FOR CREDIT LOSSES 10,581 13,398
- ---------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 30
299
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12c IMPAIRED LOANS
UBS classifies a loan as impaired when there is a probability of incurring a
partial or full loss. A provision is then made with respect to the loan in
question.
The impaired loans were as follows:
CHF MILLION 31.12.99 31.12.00
- ---------------------------------------------------------------------------------------
Impaired loans (1, 2) 18,494 22,456
Amount of allowance for credit losses related to impaired
loans 9,685 12,471
Average impaired loans (3) 20,804 24,467
- ---------------------------------------------------------------------------------------
(1) All impaired loans have a specific allowance for credit losses.
(2) Interest income on impaired loans is immaterial.
(3) Average balances were calculated from quarterly data.
NOTE 12d NON-PERFORMING LOANS
When principal, interest or commission are overdue by 90 days, loans are
classified as non-performing, the recognition of interest or commission income
ceases and a charge is recognized against income for the unpaid interest or
commission receivable. Allowances are provided for non-performing loans to
reflect their net estimated recoverable amount. Unrecognized interest related to
such loans totalled CHF 182 million for the year ended 31 December 2000 and CHF
409 million for the year ended 31 December 1999.
The non-performing loans were as follows:
CHF MILLION 31.12.00 31.12.99
- -----------------------------------------------------------------------------------------
Non-performing loans 10,452 13,073
Amount of allowance for credit losses related to
non-performing loans 6,850 8,661
Average non-performing loans (1) 11,884 14,615
- -----------------------------------------------------------------------------------------
(1) Average balances were calculated from quarterly data.
An analysis of changes in non-performing loans is presented in the following
table:
CHF MILLION 31.12.00 31.12.99
- -----------------------------------------------------------------------------------------
Non-performing loans at the beginning of the year 13,073 16,113
Net reductions (290) (638)
Write-offs and disposals (2,331) (2,402)
- -----------------------------------------------------------------------------------------
NON-PERFORMING LOANS AT THE END OF THE YEAR 10,452 13,073
- -----------------------------------------------------------------------------------------
The non-performing loans by type of exposure were as follows:
CHF MILLION 31.12.00 31.12.99
- -----------------------------------------------------------------------------------------
Banks 172 499
- -----------------------------------------------------------------------------------------
Loans to customers
Mortgages 4,586 7,105
Other 5,694 5,469
- -----------------------------------------------------------------------------------------
Total loans to customers 10,280 12,574
- -----------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS 10,452 13,073
- -----------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 31
300
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The non-performing loans by geographical region based on the location of the
borrower were as follows:
CHF MILLION 31.12.00 31.12.99
- -----------------------------------------------------------------------------------------
Switzerland 7,588 11,435
Rest of Europe 342 223
Americas 1,865 697
Asia / Pacific 307 373
Africa / Middle East 350 345
- -----------------------------------------------------------------------------------------
TOTAL NON-PERFORMING LOANS 10,452 13,073
- -----------------------------------------------------------------------------------------
NOTE 13 SECURITIES BORROWING, SECURITIES LENDING, REPURCHASE,
REVERSE REPURCHASE AND OTHER COLLATERALIZED TRANSACTIONS
The Group enters into collateralized reverse repurchase and repurchase
agreements and securities borrowing and securities lending transactions that may
result in credit exposure in the event the counterparty to the transaction is
unable to fulfill its contractual obligations. The Group minimizes credit risk
associated with these activities by monitoring counterparty credit exposure and
collateral values on a daily basis and requiring additional collateral to be
deposited with or returned to the Group when deemed necessary.
The following table presents cash collateral received and paid under securities
lending, repurchase agreements, securities borrowing and reverse repurchase
agreements.
SECURITIES SECURITIES SECURITIES SECURITIES
BORROWED LENT BORROWED LENT
CHF MILLION 31.12.00 31.12.00 31.12.99 31.12.99
- -------------------------------------------------------------------------------------------------------
CASH COLLATERAL BY COUNTERPARTIES
Banks 159,619 18,291 99,810 8,926
Customers 18,238 5,127 13,352 3,906
- -------------------------------------------------------------------------------------------------------
TOTAL CASH COLLATERAL ON SECURITIES
BORROWED AND LENT 177,857 23,418 113,162 12,832
- -------------------------------------------------------------------------------------------------------
REVERSE Reverse
REPURCHASE REPURCHASE REPURCHASE REPURCHASE
AGREEMENTS AGREEMENTS AGREEMENTS AGREEMENTS
CHF MILLION 31.12.00 31.12.00 31.12.99(1) 31.12.99(1)
- ---------------------------------------------------------------------------------------------------------
AGREEMENTS BY COUNTERPARTIES
Banks 144,505 175,421 93,104 125,054
Customers 49,296 120,092 39,287 71,860
- ---------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AND REVERSE REPURCHASE
AGREEMENTS 193,801 295,513 132,391 196,914
- ---------------------------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
Under reverse repurchase, securities borrowing, and other collateralized
arrangements, the Group obtains securities on terms which permit it to repledge
or resell the securities to others. At 31 December 2000, the Group held CHF 478
billion of securities on such terms, CHF 407 billion of which have been either
pledged or otherwise transferred to others in connection with its financing
activities or to satisfy its commitments under short sale transactions.
- --------------------------------------------------------------------------------
F- 32
301
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 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
reporting period.
CHF MILLION 31.12.00 31.12.99(1)
- ------------------------------------------------------------------------------------------
TRADING PORTFOLIO ASSETS
DEBT INSTRUMENTS
Swiss government and government agencies 1,104 7,391
US Treasury and government agencies 19,769 21,816
Other government 33,222 65,804
Corporate listed instruments 64,514 13,420
Other unlisted instruments 26,583 8,322
- ------------------------------------------------------------------------------------------
TOTAL 145,192 116,753
- ------------------------------------------------------------------------------------------
EQUITY INSTRUMENTS
Listed instruments 102,571 87,089
Unlisted instruments 2,320 2,963
- ------------------------------------------------------------------------------------------
TOTAL 104,891 90,052
- ------------------------------------------------------------------------------------------
PRECIOUS METALS 3,213 5,127
- ------------------------------------------------------------------------------------------
TOTAL TRADING PORTFOLIO ASSETS 253,296 211,932
- ------------------------------------------------------------------------------------------
TRADING PORTFOLIO LIABILITIES
DEBT INSTRUMENTS
Swiss government and government agencies 439 0
US Treasury and government agencies 13,645 24,535
Other government 5,070 11,917
Corporate listed instruments 31,905 6,502
Other unlisted instruments 192 9
- ------------------------------------------------------------------------------------------
TOTAL 51,251 42,963
- ------------------------------------------------------------------------------------------
LISTED EQUITY INSTRUMENTS 31,381 11,675
- ------------------------------------------------------------------------------------------
TOTAL TRADING PORTFOLIO LIABILITIES 82,632 54,638
- ------------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
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 26 provides a description of the various classes of
derivatives together with the related volumes used in the Group's trading
activities, whereas Note 13 provides further details about cash collateral on
securities borrowed and lent and repurchase and reverse repurchase agreements.
Included in total trading portfolio assets above are CHF 59 billion of
securities pledged to others under terms which permit the counterparty to sell
or repledge and CHF 12 billion of securities pledged to others under terms which
do not permit the counterparty to resell or repledge.
- --------------------------------------------------------------------------------
F- 33
302
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 FINANCIAL INVESTMENTS
CHF MILLION 31.12.00 31.12.99
- ------------------------------------------------------------------------------------
DEBT INSTRUMENTS
Listed 1,403 1,357
Unlisted 4,803 609
- ------------------------------------------------------------------------------------
Total 6,206 1,966
- ------------------------------------------------------------------------------------
EQUITY INVESTMENTS
Listed 1,119 356
Unlisted 1,438 557
- ------------------------------------------------------------------------------------
Total 2,557 913
- ------------------------------------------------------------------------------------
PRIVATE EQUITY INVESTMENTS 6,658 3,001
PROPERTIES HELD FOR RESALE 984 1,159
- ------------------------------------------------------------------------------------
TOTAL FINANCIAL INVESTMENTS 16,405 7,039
- ------------------------------------------------------------------------------------
thereof eligible for discount at central banks 381 563
- ------------------------------------------------------------------------------------
The following table gives additional disclosure in respect of the valuation
methods used.
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
CHF MILLION 31.12.00 31.12.00 31.12.99 31.12.99
- ---------------------------------------------------------------------------------------------------
VALUED AT AMORTIZED COST
Debt instruments 5,851 5,853 677 687
- ---------------------------------------------------------------------------------------------------
VALUED AT THE LOWER OF COST OR MARKET
VALUE
Debt instruments 355 367 1,289 1,314
Equity instruments 2,557 3,031 913 939
Properties held for resale 984 1,150 1,159 1,194
- ---------------------------------------------------------------------------------------------------
Total 3,896 4,548 3,361 3,447
- ---------------------------------------------------------------------------------------------------
VALUED AT COST LESS ADJUSTMENTS FOR
IMPAIRMENTS
Private equity investments 6,658 7,940 3,001 4,146
- ---------------------------------------------------------------------------------------------------
TOTAL FINANCIAL INVESTMENTS 16,405 18,341 7,039 8,280
- ---------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 34
303
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 INVESTMENTS IN ASSOCIATES
CARRYING CARRYING
AMOUNT AMOUNT
AT CHANGE IN AT
CHF million 31.12.99 ADDITIONS DISPOSAL(1) INCOME WRITE-OFFS EQUITY 31.12.00
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
ASSOCIATES 1,102 65 (287) 62 (4) (58) 880
- ---------------------------------------------------------------------------------------------------------------
(1) The figure of CHF 287 million for disposals for the year ended 31 December
2000 primarily consists of disposal of a stake in National Versicherung AG.
NOTE 17 PROPERTY AND EQUIPMENT
IT, soft- Other
Bank ware and machines
occupied Investment communi- and
CHF million properties properties cation equipment 31.12.00 31.12.99
- ----------------------------------------------------------------------------------------------------------
HISTORICAL COST
Balance at the beginning of the
year 9,085 2,006 3,321 2,798 17,210 18,505
Additions 233 138 1,032 237 1,640 1,813
Additions from acquired companies 0 0 201 818 1,019 755
Disposals (224) (176) (279) (90) (769) (4,333)
Reclassifications (1) (287) (145) 0 0 (432) 0
Foreign currency translation 0 7 (18) (26) (37) 470
Balance at the end of the year 8,807 1,830 4,257 3,737 18,631 17,210
- ----------------------------------------------------------------------------------------------------------
ACCUMULATED DEPRECIATION
Balance at the beginning of the
year
3,625 539 2,416 1,929 8,509 8,619
Depreciation (2)
395 119 952 419 1,885 2,105
Disposals
(84) (31) (268) (70) (453) (2,500)
Reclassifications (1)
(97) (79) 0 0 (176) 0
Foreign currency translation
1 2 (26) (21) (44) 285
Balance at the end of the year 3,840 550 3,074 2,257 9,721 8,509
- ----------------------------------------------------------------------------------------------------------
NET BOOK VALUE AT THE END OF THE
YEAR (3) 4,967 1,280 1,183 1,480 8,910 8,701
- ----------------------------------------------------------------------------------------------------------
(1) Properties held for sale of CHF 256 million (CHF 432 million acquisition
costs and CHF 176 million accumulated depreciation) have been reclassified
to Note 15 Financial Investments
(2) Depreciation of CHF 1,885 million includes CHF 277 million that was charged
against the restructuring provision.
(3) Fire insurance value of property and equipment is CHF 14,570 million (1999:
CHF 15,004 million).
- --------------------------------------------------------------------------------
F- 35
304
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18 GOODWILL AND OTHER INTANGIBLE ASSETS
OTHER
INTANGIBLE
CHF MILLION GOODWILL ASSETS 31.12.00 31.12.99
- ---------------------------------------------------------------------------------------------------
HISTORICAL COST
Balance at the beginning of the year 4,229 305 4,534 3,000
Additions 12,939 4,902 17,841 1,467
Write-offs (16) 0 (16) (192)
Reclassifications (41) 41 0 (88)
Foreign currency translation (839) (354) (1,193) 347
Balance at the end of the year 16,272 4,894 21,166 4,534
- ---------------------------------------------------------------------------------------------------
ACCUMULATED AMORTIZATION
Balance at the beginning of the year
951 40 991 790
Amortization
533 134 667 340
Write-offs
(16) 0 (16) (183)
Reclassifications
(16) 16 0 (2)
Foreign currency translation
(7) (6) (13) 46
Balance at the end of the year 1,445 184 1,629 991
- ---------------------------------------------------------------------------------------------------
NET BOOK VALUE AT THE END OF THE YEAR 14,827 4,710 19,537 3,543
- ---------------------------------------------------------------------------------------------------
NOTE 19 OTHER ASSETS
CHF million Note 31.12.00 31.12.99
- ----------------------------------------------------------------------------------------------
Deferred tax assets 24 2,208 742
Settlement and clearing accounts 3,153 4,911
VAT and other tax receivables 419 702
Prepaid pension costs 405 456
Other receivables 2,322 4,196
- ----------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 8,507 11,007
- ----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 36
305
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
BALANCE SHEET: LIABILITIES
NOTE 20 DUE TO BANKS AND CUSTOMERS
CHF MILLION 31.12.00 31.12.99
- ---------------------------------------------------------------------------------------
Due to banks 82,240 76,365
- ---------------------------------------------------------------------------------------
Due to customers in savings and investment accounts 68,213 78,640
Amounts due to customers on demand and time 242,466 201,320
- ---------------------------------------------------------------------------------------
Total due to customers 310,679 279,960
- ---------------------------------------------------------------------------------------
TOTAL DUE TO BANKS AND CUSTOMERS 392,919 356,325
- ---------------------------------------------------------------------------------------
NOTE 21 LONG-TERM DEBT
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 21.5% including
structured note issues. 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 2000 and 31 December
1999, the Group had CHF 13,018 million and CHF 13,106 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 2000 and 31 December 1999, the Group had CHF 40,428
million and CHF 41,093 million, respectively, in unsubordinated debt.
The Group issues convertible obligations that can be exchanged for common stock
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 2000 and 31 December 1999, the Group had CHF 1,409
million and CHF 2,133 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 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.
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 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.
CHF MILLION 31.12.00 31.12.99
- --------------------------------------------------------------------------------
Total bond issues 48,179 48,305
Shares in bond issues of the Swiss Regional or Cantonal
Banks' Central Bond
Institutions 1,305 2,055
Medium-term notes 5,371 5,972
- --------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 54,855 56,332
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 37
306
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONTRACTUAL MATURITY DATE
UBS AG (PARENT) SUBSIDIARIES
----------------------- ------
FIXED FLOATING FIXED
CHF MILLION RATE RATE RATE
- ---------------------------------------------------------------------------
2001 13,021 251 2,033
2002 7,645 153 2,407
2003 4,232 135 1,275
2004 1,327 8 1,261
2005 3,463 81 664
2006 - 2010 5,888 107 1,923
Thereafter 3,150 55 1,214
- ---------------------------------------------------------------------------
TOTAL 38,726 790 10,777
- ---------------------------------------------------------------------------
BSIDIARIES
----------
FLOATING TOTAL
CHF MILLION RATE 31.12.00
- ----------------------------------- ---------------------------
2001 373 15,678
2002 889 11,094
2003 19 5,661
2004 1,836 4,432
2005 249 4,457
2006 - 2010 1,173 9,091
Thereafter 23 4,442
- ---------------------------------------------------------------------------
TOTAL 4,562 54,855
- ---------------------------------------------------------------------------
PUBLICLY PLACED BOND ISSUES OF UBS AG (PARENT COMPANY) OUTSTANDING AT 31.12.2000
PREMATURE
YEAR OF INTEREST REDEMPTION AMOUNT
ISSUE RATE IN % REMARKS MATURITY POSSIBLE CURRENCY IN MILLIONS
- ---------------------------------------------------------------------------------------------
1999 10.250 12.01.2001 EUR 160(1)
1996 3.000 07.02.2001 USD 100
1999 10.000 12.02.2001 CHF 375(2)
1999 12.250 15.02.2001 GBP 20(3)
1999 14.100 27.02.2001 SEK 193(4)
1999 12.000 29.03.2001 GBP 10(5)
1999 11.000 30.03.2001 USD 10(6)
1996 3.625 10.04.2001 CHF 400
1991 5.000 15.04.2001 CHF 60
1998 7.500 11.05.2001 CHF 60(7)
1998 7.500 11.05.2001 CHF 801(7)
1998 7.000 18.05.2001 CHF 738(8)
1999 12.500 06.06.2001 GBP 10(9)
1999 5.250 14.06.2001 CHF 410(10)
1999 10.750 15.06.2001 EUR 50(11)
2000 17.750 05.07.2001 EUR 100(12)
1999 11.000 06.07.2001 EUR 40(13)
1998 7.500 10.07.2001 CHF 372(10)
1998 7.500 10.07.2001 CHF 40(10)
2000 21.500 12.07.2001 EUR 45(14)
1993 5.125 15.07.2001 CHF 30
1997 1.750 25.07.2001 USD 96(15)
2000 17.000 30.07.2001 EUR 80(16)
1998 8.000 03.08.2001 CHF 920(17)
2000 15.500 06.08.2001 EUR 60(18)
2000 14.250 10.08.2001 USD 25(19)
1998 8.000 17.08.2001 CHF 50(20)
1998 8.000 17.08.2001 CHF 450(20)
2000 15.500 24.08.2001 EUR 145(21)
2000 17.500 24.08.2001 EUR 95(22)
2000 15.750 03.09.2001 EUR 105(23)
- --------------------------------------------------------------------------------
F- 38
307
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PUBLICLY PLACED BOND ISSUES OF UBS AG (PARENT COMPANY) OUTSTANDING AT 31.12.2000
PREMATURE
YEAR OF INTEREST REDEMPTION AMOUNT
ISSUE RATE IN % REMARKS MATURITY POSSIBLE CURRENCY IN MILLIONS
- ---------------------------------------------------------------------------------------------
1991 7.000 subordinated 04.09.2001 CHF 250
2000 15.000 06.09.2001 USD 45(24)
1994 5.375 07.09.2001 CHF 200
2000 17.000 10.09.2001 EUR 10(25)
2000 16.500 25.09.2001 EUR 15(26)
2000 16.250 04.10.2001 EUR 15(27)
1999 8.500 05.10.2001 CHF 120(28)
2000 14.500 11.10.2001 EUR 135(29)
2000 8.750 11.10.2001 CHF 50(10)
2000 15.000 19.10.2001 USD 20(30)
2000 16.500 29.10.2001 EUR 75(31)
2000 16.000 02.11.2001 USD 40(32)
2000 11.750 09.11.2001 CHF 110(7)
2000 18.750 19.11.2001 USD 30(33)
2000 20.250 27.11.2001 USD 20(34)
1999 11.625 06.12.2001 GBP 10(35)
2000 16.500 21.12.2001 USD 20(36)
2000 14.250 28.12.2001 USD 10(37)
2000 12.250 11.01.2002 EUR 30(38)
2000 13.250 18.01.2002 EUR 20(39)
2000 12.500 18.01.2002 EUR 20(40)
2000 0.100 28.01.2002 JPY 10,000(15)
1992 7.000 subordinated 06.02.2002 CHF 200
2000 9.000 14.03.2002 CHF 256(28)
1998 5.750 18.03.2002 USD 250
2000 10.000 10.04.2002 CHF 100(17)
1996 4.000 18.04.2002 CHF 200
2000 18.500 28.05.2002 USD 75(41)
1999 11.000 06.06.2002 GBP 15(42)
1990 7.500 subordinated 07.06.2002 CHF 300
2000 18.250 27.06.2002 USD 50(32)
2000 6.500 28.06.2002 CHF 50(43)
1992 7.500 subordinated 10.07.2002 CHF 200
1997 6.500 18.07.2002 USD 300
1997 1.000 07.08.2002 DEM 19(44)
2000 8.375 07.08.2002 EUR 45(45)
1996 2.000 23.08.2002 CHF 301
2000 9.000 02.10.2002 CHF 220(17)
1992 7.000 subordinated 16.10.2002 CHF 200
1996 6.750 18.10.2002 USD 250
1995 4.375 07.11.2002 CHF 250
1996 3.250 20.12.2002 CHF 350
2000 8.000 11.02.2003 USD 15
1991 7.500 subordinated 15.02.2003 15.02.2001 CHF 300
- --------------------------------------------------------------------------------
F- 39
308
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PUBLICLY PLACED BOND ISSUES OF UBS AG (PARENT COMPANY) OUTSTANDING AT 31.12.2000
PREMATURE
YEAR OF INTEREST REDEMPTION AMOUNT
ISSUE RATE IN % REMARKS MATURITY POSSIBLE CURRENCY IN MILLIONS
- ---------------------------------------------------------------------------------------------
1998 1.000 25.02.2003 EUR 60(46)
1993 4.875 subordinated 03.03.2003 CHF 200
1997 1.500 14.03.2003 DEM 80(47)
1998 1.000 20.03.2003 NLG 125(48)
1993 4.000 subordinated 31.03.2003 CHF 200
1993 3.500 subordinated 31.03.2003 CHF 200
1999 1.000 05.05.2003 USD 80(49)
1998 1.625 14.05.2003 USD 100(50)
1991 7.000 subordinated 16.05.2003 16.05.2001 CHF 200
1995 5.250 subordinated 20.06.2003 CHF 200
2000 0.000 14.07.2003 USD 10(51)
2000 0.000 14.07.2003 USD 10(51)
2000 5.200 28.08.2003 CHF 26
1996 1.500 20.11.2003 CHF 27(52)
2000 1.850 25.11.2003 CHF 13
1993 3.000 26.11.2003 CHF 200
1994 6.250 subordinated 06.01.2004 USD 300
1992 7.250 subordinated 10.01.2004 10.01.2002 CHF 150
2000 0.500 10.02.2004 USD 75(53)
2000 1.000 07.06.2004 USD 25(54)
1991 4.250 subordinated 25.06.2004 CHF 300
1999 3.500 01.07.2004 EUR 250
1997 7.375 subordinated 26.11.2004 GBP 250
1993 4.750 subordinated 08.01.2005 08.01.2003 CHF 200
1995 4.000 subordinated 07.02.2005 CHF 150
1995 5.500 10.02.2005 CHF 150
2000 1.000 18.02.2005 USD 30(55)
2000 1.000 21.03.2005 EUR 50(56)
1995 5.625 subordinated 13.04.2005 CHF 150
2000 0.000 31.05.2005 JPY 5,000(15)
1995 8.750 subordinated 20.06.2005 GBP 250
2000 0.000 14.07.2005 USD 10(51)
1995 6.750 subordinated 15.07.2005 USD 200
1995 5.250 subordinated 18.07.2005 CHF 200
1995 5.000 subordinated 24.08.2005 CHF 250
2000 7.300 06.09.2005 HKD 200
1995 4.500 21.11.2005 CHF 300
1999 0.000 08.12.2005 USD 50(57)
1999 3.500 26.01.2006 EUR 650
1996 4.250 subordinated 06.02.2006 CHF 250
1996 4.000 14.02.2006 CHF 200
1999 2.500 29.03.2006 CHF 250
1999 1.500 12.07.2006 USD 100(58)
1996 7.250 subordinated 17.07.2006 USD 500
- --------------------------------------------------------------------------------
F- 40
309
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PUBLICLY PLACED BOND ISSUES OF UBS AG (PARENT COMPANY) OUTSTANDING AT 31.12.2000
PREMATURE
YEAR OF INTEREST REDEMPTION AMOUNT
ISSUE RATE IN % REMARKS MATURITY POSSIBLE CURRENCY IN MILLIONS
- ---------------------------------------------------------------------------------------------
1996 7.250 subordinated 01.09.2006 USD 150
1995 5.000 subordinated 07.11.2006 CHF 250
1996 6.250 subordinated 06.12.2006 DEM 500
1997 8.000 subordinated 08.01.2007 GBP 450
1997 5.750 subordinated 12.03.2007 DEM 350
1998 3.500 27.08.2008 CHF 300
1997 5.875 subordinated 18.08.2009 FRF 2,000
1986 5.000 subordinated 10.02.2011 10.02.2001 CHF 250
1995 7.375 subordinated 15.07.2015 USD 150
1995 7.000 subordinated 15.10.2015 USD 300
1997 7.375 subordinated 15.06.2017 USD 300
1990 0.000 31.03.2020 CHF 59
1995 7.500 subordinated 15.07.2025 USD 350
1995 8.750 subordinated 18.12.2025 GBP 150
1996 7.750 subordinated 01.09.2026 USD 300
- --------------------------------------------------------------------------------
PUBLICLY PLACED BOND ISSUES OF UBS SUBSIDIARIES OUTSTANDING AT 31.12.2000
PREMATURE
YEAR OF INTEREST REDEMPTION AMOUNT
ISSUE RATE IN % REMARKS MATURITY POSSIBLE CURRENCY IN MILLIONS
- ---------------------------------------------------------------------------------------------
UBS AMERICAS INC. (FORMER
PAINEWEBBER)
1999 7.460 11.01.2001 USD 15
1999 5.830 25.01.2001 USD 20
2000 6.924 26.01.2001 USD 50
2000 6.820 05.04.2001 USD 30
1999 7.060 16.05.2001 USD 8
2000 7.500 17.05.2001 USD 49
1998 6.185 21.05.2001 USD 25
1999 5.810 08.06.2001 USD 10
2000 7.540 18.06.2001 USD 49
1999 7.060 20.06.2001 USD 8
1998 6.870 26.06.2001 USD 7
1997 6.585 23.07.2001 USD 25
1997 6.520 26.09.2001 USD 22
1997 6.440 28.09.2001 USD 22
1999 7.090 19.11.2001 USD 12
1997 6.580 14.12.2001 USD 10
1991 9.250 17.12.2001 USD 154
2000 6.910 19.02.2002 USD 20
1997 6.990 18.03.2002 USD 10
1999 6.015 28.03.2002 USD 20
1999 6.020 22.04.2002 USD 45
- --------------------------------------------------------------------------------
F- 41
310
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PUBLICLY PLACED BOND ISSUES OF UBS SUBSIDIARIES OUTSTANDING AT 31.12.2000
PREMATURE
YEAR OF INTEREST REDEMPTION AMOUNT
ISSUE RATE IN % REMARKS MATURITY POSSIBLE CURRENCY IN MILLIONS
- ---------------------------------------------------------------------------------------------
1995 8.250 01.05.2002 USD 128
2000 7.590 02.05.2002 USD 25
1999 7.060 14.05.2002 USD 25
1999 7.030 20.05.2002 USD 12
2000 1.010 01.07.2002 JPY 900
2000 7.358 15.07.2002 USD 101
1992 8.390 subordinated 24.07.2002 USD 6
1997 7.035 14.08.2002 USD 25
1997 7.010 27.08.2002 USD 15
1992 7.750 02.09.2002 USD 178
1997 7.010 19.09.2002 USD 25
1997 6.650 15.10.2002 USD 25
1999 7.210 30.10.2002 USD 10
1999 7.259 18.11.2002 USD 40
1999 7.160 18.12.2002 USD 11
1998 7.140 03.02.2003 USD 12
1998 6.250 04.02.2003 USD 25
2000 7.020 14.02.2003 USD 12
1993 7.875 17.02.2003 USD 103
1998 7.110 13.03.2003 USD 10
2000 1.270 13.03.2003 JPY 900
1998 6.320 18.03.2003 USD 45
1998 6.331 20.05.2003 USD 25
1998 6.980 23.06.2003 USD 10
1993 6.785 01.07.2003 USD 30
1999 1.340 01.07.2003 JPY 900
1993 7.130 subordinated 02.07.2003 USD 7
2000 7.250 23.07.2003 USD 7
1994 6.900 subordinated 15.08.2003 USD 10
1994 6.930 subordinated 15.08.2003 USD 28
1996 7.300 15.10.2003 USD 20
1998 6.450 01.12.2003 USD 340
1998 8.010 01.12.2003 USD 26
1994 6.730 20.01.2004 USD 21
2000 6.730 26.01.2004 USD 20
1999 7.580 28.01.2004 USD 10
1997 6.900 subordinated 09.02.2004 USD 15
1994 6.680 10.02.2004 USD 21
1999 7.510 10.02.2004 USD 13
1999 7.015 10.02.2004 USD 14
2000 7.660 12.02.2004 USD 11
1999 7.360 11.05.2004 USD 46
1999 6.375 17.05.2004 USD 534
1999 7.280 27.05.2004 USD 12
- --------------------------------------------------------------------------------
F- 42
311
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PUBLICLY PLACED BOND ISSUES OF UBS SUBSIDIARIES OUTSTANDING AT 31.12.2000
PREMATURE
YEAR OF INTEREST REDEMPTION AMOUNT
ISSUE RATE IN % REMARKS MATURITY POSSIBLE CURRENCY IN MILLIONS
- ---------------------------------------------------------------------------------------------
1997 7.060 18.08.2004 USD 25
1996 7.550 04.10.2004 USD 25
1997 6.790 04.10.2004 USD 14
1999 7.260 13.10.2004 USD 31
1996 7.490 15.10.2004 USD 12
1997 7.010 25.10.2004 USD 20
2000 7.410 27.01.2005 USD 26
2000 7.410 11.02.2005 USD 12
1995 8.875 15.03.2005 USD 125
1999 7.380 15.03.2005 USD 57
1998 6.520 06.04.2005 USD 31
2000 7.678 15.07.2005 USD 26
1993 6.500 01.11.2005 USD 208
1999 7.460 14.11.2005 USD 32
1996 6.750 01.02.2006 USD 102
1999 7.330 01.05.2006 USD 10
1999 7.330 01.05.2006 USD 11
1997 7.220 20.02.2007 USD 10
1997 7.110 22.10.2007 USD 26
1998 6.720 01.04.2008 USD 36
1998 6.730 03.04.2008 USD 44
1998 6.550 15.04.2008 USD 257
1998 6.520 21.04.2008 USD 10
1998 7.180 31.07.2008 USD 10
1996 7.625 15.10.2008 USD 157
1999 6.640 05.02.2009 USD 27
1999 7.625 01.12.2009 USD 290
1998 6.650 13.04.2010 USD 26
1998 6.640 14.04.2010 USD 31
1999 6.760 16.05.2011 USD 11
1997 7.740 30.01.2012 USD 21
1994 7.625 17.02.2014 USD 212
1997 8.060 17.01.2017 USD 28
1997 7.930 06.02.2017 USD 11
1997 7.810 13.02.2017 USD 17
1997 7.910 17.03.2017 USD 22
1997 7.990 09.06.2017 USD 11
1997 7.605 17.07.2017 USD 21
1997 7.633 11.09.2017 USD 11
1997 7.390 16.10.2017 USD 27
1998 7.310 07.05.2018 USD 14
1996 8.300 subordinated 12.01.2036 12.03.2001 USD 198
1997 8.080 subordinated 03.01.2037 03.01.2002 USD 203
- ---------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 43
312
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PUBLICLY PLACED BOND ISSUES OF UBS SUBSIDIARIES OUTSTANDING AT 31.12.2000
PREMATURE
YEAR OF INTEREST REDEMPTION AMOUNT
ISSUE RATE IN % REMARKS MATURITY POSSIBLE CURRENCY IN MILLIONS
- ---------------------------------------------------------------------------------------------
UBS FINANCE (CURACAO) N.V.
1996 2.500 30.10.2001 DEM 100
1996 2.500 30.10.2001 DEM 150
1997 2.500 30.10.2001 DEM 100
1990 9.125 08.02.2002 USD 225
1992 FRN 13.11.2002 USD 250
1997 0.000 29.01.2027 LIT 226,955
1998 0.000 03.03.2028 03.03.2003 DEM 136
- ---------------------------------------------------------------------------------------------
UBS AUSTRALIA LTD.
1997 3.250 02.10.2001 USD 101
1999 5.000 25.02.2002 AUD 104
1999 5.000 25.02.2004 AUD 104
- ---------------------------------------------------------------------------------------------
S.G.W. FINANCE PLC
1991 13.250 30.03.2001 AUD 60
- ---------------------------------------------------------------------------------------------
S.G. WARBURG GROUP PLC
1994 9.000 subordinated perpetual GBP 12
- ---------------------------------------------------------------------------------------------
UBS FINANCE (CAYMAN ISLANDS) LTD.
1991 0.000 28.02.2001 STG 200
2000 0.000 10.02.2005 USD 22(59)
- ---------------------------------------------------------------------------------------------
( 1) GOAL on Royal Dutch shares
( 2) GOAL on Swisscom shares
( 3) GOAL on Lloyds TSB shares
( 4) Convertible into Omvand Konvertible Svensk Basportfolj
( 5) GOAL on British Telecom shares
( 6) GOAL on S&P Index
( 7) GOAL on Credit Suisse shares
( 8) GOAL on Novartis shares
( 9) GOAL on BP Amoco shares
(10) GOAL on Roche GS
(11) GOAL on SAP shares
(12) GOAL on Philips shares
(13) GOAL on Bank Austria shares
(14) GOAL on Sonera shares
(15) Convertible into Nikkei 225 Index
(16) GOAL on Sony ADR's
(17) GOAL on UBS AG shares
(18) GOAL on Telefonica shares
(19) GOAL on Cisco shares
(20) GOAL on Zurich Fin. Services shares
(21) GOAL on Nokia shares
(22) GOAL on Vivendi shares
(23) GOAL on Ericsson shares
(24) GOAL on Lucent shares
(25) GOAL on Kyocera shares
(26) GOAL on Telecom Italia Mobile shares
(27) GOAL on ICI shares
(28) GOAL on ABB shares
(29) GOAL on Siemens shares
- --------------------------------------------------------------------------------
F- 44
313
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(30) GOAL on Telmex shares
(31) GOAL on Deutsche Telekom shares
(32) GOAL on Intel shares
(33) GOAL on Texas Instruments shares
(34) GOAL on Nortel shares
(35) GOAL on Granada Group shares
(36) GOAL on IBM shares
(37) GOAL on Nasdaq 100 Index
(38) GOAL on Banco Bilbao shares
(39) GOAL on Carrefour shares
(40) GOAL on Bayer shares
(41) GOAL on Motorola shares
(42) GOAL on Glaxo shares
(43) GOAL on Swiss Re shares
(44) Convertible into European Insurance Shares Basket
(45) GOAL on Daimler Chrysler shares
(46) Convertible into FTSE Index
(47) Indexed to UBS Currency Portfolio
(48) Convertible into UBS Dutch Corporate Basket
(49) Convertible into Sony shares
(50) Convertible into UBS Oil Basket
(51) Convertible into UBS Global Equity Arbitrage
(52) Convertible into SMI Index
(53) Convertible into NTT shares
(54) Convertible into Blue Chip Basket
(55) Convertible into Nasdaq 100 Index
(56) Convertible into STOXX 50 Index
(57) PEP on Internet Perf. Basket
(58) Convertible into AT&T shares
(59) PIP on Worldbasket
PIP Protected Index Participation
PEP Protected Equity Participation
GOAL Geld- oder Aktien-Lieferung (cash or share delivery)
- --------------------------------------------------------------------------------
F- 45
314
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 22 OTHER LIABILITIES
CHF million Note 31.12.00 31.12.99
- -------------------------------------------------------------------------------------------
Provisions, including restructuring provision 23 3,024 3,611
Provisions for commitments and contingent liabilities 54 149
Current tax liabilities 2,423 1,747
Deferred tax liabilities 24 1,565 994
VAT and other tax payables 1,071 888
Settlement and clearing accounts 4,906 4,789
Other payables 5,713 3,814
- -------------------------------------------------------------------------------------------
TOTAL OTHER LIABILITIES 18,756 15,992
- -------------------------------------------------------------------------------------------
NOTE 23 PROVISIONS, INCLUDING RESTRUCTURING PROVISION
BUSINESS RISK PROVISIONS
Business risk provisions consist mainly of provisions for operational risks and
reserves for litigation.
CHF MILLION 31.12.00 31.12.99
- -------------------------------------------------------------------------------------------
Balance at the beginning of the year 2,182 4,121
New provisions charged to income 746 539
Provisions applied (1,316) (705)
Recoveries and adjustments 682 (1,773)(1)
- -------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE YEAR 2,294 2,182
- -------------------------------------------------------------------------------------------
(1) Includes reclassification of valuation adjustments of CHF 2,384 million to
related trading assets and liabilities.
UBS/SBC MERGER RESTRUCTURING PROVISION
At the announcement of the UBS/SBC merger in December 1997, it was communicated
that the merged firm's 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, a restructuring provision 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) was established, to be used over a period of four
years. At 31 December 2000, the Group had utilized CHF 6,570 million of the
provisions.
The restructuring provision included approximately 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 or equipment which management had committed to dispose
of and CHF 1,150 million for other costs classified as Personal expenses,
General and administrative expense or Other income.
The employee terminations affected all functional levels and all operating
Business Groups. CHF 2,000 million of the provision related to employee
termination benefits reflects the costs of eliminating approximately 7,800
positions, after considering attrition and redeployment within the Company. CHF
1,000 million of the provision related to payments to maintain stability in the
workforce during the integration period. As of 31 December 2000, approximately
6,200 employees had been made redundant or retired early and the remaining
personnel restructuring provision balance was CHF 410 million.
- --------------------------------------------------------------------------------
F- 46
315
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CHF MILLION 31.12.00 31.12.99
- ----------------------------------------------------------------------------------------
Balance at the beginning of the year 1,429 2,973
Addition 0 300
Applied (1)
Personnel (188) (378)
IT (63) (642)
Premises (399) (673)
Other (49) (151)
- ----------------------------------------------------------------------------------------
Total utilized during the year (699) (1,844)
- ----------------------------------------------------------------------------------------
BALANCE AT THE END OF THE YEAR 730 1,429
- ----------------------------------------------------------------------------------------
TOTAL PROVISIONS, INCLUDING RESTRUCTURING PROVISION 3,024 3,611
- ----------------------------------------------------------------------------------------
(1) The expense categories refer to the nature of the expense rather than the
income statement expense line.
CUMULATIVE UTILIZATION, SINCE ESTABLISHMENT OF UBS/SBC MERGER RESTRUCTURING
PROVISION THROUGH 31 DECEMBER 2000
CHF million Personnel IT Premises Other TOTAL
- --------------------------------------------------------------
UBS Switzerland 476 1,086 184 220 1,966
UBS Asset Management 32 9 3 44
UBS Warburg 1,983 373 1 413 2,770
Corporate Center 99 34 1,154 503 1,790
- --------------------------------------------------------------
GROUP TOTAL 2,590 1,502 1,339 1,139 6,570
- --------------------------------------------------------------
TOTAL PROVISION 7,300
- --------------------------------------------------------------
FUTURE UTILIZATION 730
- --------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 47
316
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 24 INCOME TAXES
CHF million
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.98
- -------------------------------------------------------------------------------------------
FEDERAL AND CANTONAL
Current payable 1,325 849 213
Deferred 233 511 463
FOREIGN
Current payable 451 359 200
Deferred 311 (33) 28
- -------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE 2,320 1,686 904
- -------------------------------------------------------------------------------------------
The Group made net tax payments, including domestic federal, cantonal and
foreign taxes, of CHF 959 million, CHF 1,063 million and CHF 733 million for the
full years of 2000, 1999 and 1998, respectively.
The components of operating profit before tax, and the differences between
income tax expense reflected in the financial statements and the amounts
calculated at the Swiss statutory rate of 25% are as follows:
CHF million
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.98
- -------------------------------------------------------------------------------------------
Operating profit before tax 10,199 7,893 3,871
Domestic 7,079 6,957 10,287
Foreign 3,120 936 (6,416)
- -------------------------------------------------------------------------------------------
Income taxes at Swiss statutory rate of 25% 2,550 1,973 968
Increase/(decrease) resulting from:
Applicable tax rates differing from Swiss statutory
rate (336) 55 88
Tax losses not recognized 164 39 1,436
Previously unrecorded tax losses now recognized (655) (215) (142)
Lower taxed income (401) (278) (1,849)
Non-deductible goodwill amortization 159 98 117
Other non-deductible expenses 432 34 55
Adjustments related to prior years 245 (112) 7
Change in deferred tax valuation allowance 162 92 224
- -------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 2,320 1,686 904
- -------------------------------------------------------------------------------------------
As of 31 December 2000 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.
- --------------------------------------------------------------------------------
F- 48
317
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Significant components of the Group's deferred income tax assets and liabilities
(gross) are as follows:
CHF MILLION 31.12.00 31.12.99
- ----------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Compensation and benefits 1,705 316
Restructuring provision 160 316
Allowance for credit losses 148 138
Net operating loss carry forwards 1,690 2,194
Others 1,069 237
- ----------------------------------------------------------------------------------------
Total 4,772 3,201
Valuation allowance (2,564) (2,459)
- ----------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS 2,208 742
- ----------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Property and equipment 457 342
Investment in associates 86 153
Other provisions 133 142
Unrealized gains on investment securities 306 93
Others 583 264
- ----------------------------------------------------------------------------------------
TOTAL 1,565 994
- ----------------------------------------------------------------------------------------
The change in the balance of the net deferred tax assets does not equal the
deferred tax expense. This is due to the effect of foreign currency rate changes
on tax assets and liabilities denominated in currencies other than CHF and also
due to the integration of PaineWebber.
Certain foreign branches and subsidiaries of the Group have deferred tax assets
related to net operating loss carry forwards and other items. Because
recognition of these assets is uncertain, the Group has established valuation
allowances of CHF 2,564 million and CHF 2,459 million at 31 December 2000 and 31
December 1999, respectively.
Net operating loss carry forwards totalling CHF 6,520 million at 31 December
2000 are available to reduce future taxable income of certain branches and
subsidiaries.
THE CARRY FORWARDS HAVE LIVES AS FOLLOWS: 31.12.00
- ----------------------------------------------------------------------
One year 5
2 to 4 years 170
More than 4 years 6,345
- ----------------------------------------------------------------------
TOTAL 6,520
- ----------------------------------------------------------------------
NOTE 25 MINORITY INTERESTS
CHF MILLION 31.12.00 31.12.99
- ----------------------------------------------------------------------------------------
Balance at the beginning of the year 434 990
Issuances and increases (1) 2,596 17
Decreases and dividend payments (73) (689)
Foreign currency translation (159) 62
Minority interest in profit 87 54
- ----------------------------------------------------------------------------------------
Balance at the end of the year 2,885 434
- ----------------------------------------------------------------------------------------
(1) Thereof issuance of Trust Preferred securities USD 1,500 million (CHF 2,594
million at issuance) in connection with the PaineWebber acquisition.
- --------------------------------------------------------------------------------
F- 49
318
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 26 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 favourable 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 and 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 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 the fixed rate instrument into a variable rate instrument.
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 balances that
are exchanged. The principal balances are re-exchanged at an agreed upon
rate at a specified future date.
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.
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.
- --------------------------------------------------------------------------------
F- 50
319
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTIONAL AMOUNTS AND REPLACEMENT VALUES
The following table 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 (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. 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
after netting are included in the balance sheet separately.
- --------------------------------------------------------------------------------
F- 51
320
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Total
AS AT 31 DECEMBER 2000 notional
Term to maturity amount
WITHIN 3 MONTHS 3-12 MONTHS 1-5 YEARS OVER 5 YEARS TOTAL TOTAL CHF
CHF million PRV(1) NRV(2) PRV NRV PRV NRV PRV NRV PRV NRV bn
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST RATE CONTRACTS
Over the counter (OTC)
contracts
Forward contracts 517 791 167 360 284 256 968 1,407 1,066.3
Swaps 1,879 4,231 5,398 1,785 16,846 9,246 28,248 20,993 52,371 36,255 3,033.2
Options 542 541 865 2,969 1,512 6,862 701 4,541 3,620 14,913 864.6
- -----------------------------------------------------------------------------------------------------------------------------
Exchange-traded
contracts(3)
Futures 454.6
Options 0 6 10 0 16 24.1
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 2,938 5,569 6,430 5,124 18,642 16,364 28,949 25,534 56,959 52,591 5,442.8
- -----------------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE
CONTRACTS
Over the counter (OTC)
contracts
Forward contracts 22,652 20,140 8,098 9,410 939 1,084 35 27 31,724 30,661 1,250.3
Interest and currency
swaps 2,563 1,621 2,921 2,507 8,715 7,031 3,019 2,098 17,218 13,257 345.9
Options 2,958 2,726 2,896 3,031 821 438 28 35 6,703 6,230 786.8
- -----------------------------------------------------------------------------------------------------------------------------
Exchange-traded
contracts(3)
Futures 1.0
Options 4 1 21 4 25 5 1.2
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 28,177 24,488 13,936 14,952 10,475 8,553 3,082 2,160 55,670 50,153 2,385.2
- -----------------------------------------------------------------------------------------------------------------------------
PRECIOUS METALS CONTRACTS
Over the counter (OTC)
contracts
Forward contracts 176 187 211 181 369 394 2 17 758 779 15.3
Options 128 80 206 201 934 936 85 119 1,353 1,336 75.2
- -----------------------------------------------------------------------------------------------------------------------------
Exchange-traded
contracts(3)
Futures 0.7
Options 1 2 6 12 7 14 1.3
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 305 269 423 394 1,303 1,330 87 136 2,118 2,129 92.5
- -----------------------------------------------------------------------------------------------------------------------------
EQUITY / INDEX CONTRACTS
Over the counter (OTC)
contracts
Forward contracts 1,417 3,186 1,170 2,271 2,424 3,019 1,715 2,948 6,726 11,424 32.2
Options 1,751 3,867 6,977 12,358 4,752 17,985 311 2,648 13,791 36,858 283.8
- -----------------------------------------------------------------------------------------------------------------------------
Exchange-traded
contracts(3)
Futures 15.3
Options 1,771 1,647 819 1,051 400 446 2 3 2,992 3,147 45.2
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 4,939 8,700 8,966 15,680 7,576 21,450 2,028 5,599 23,509 51,429 376.5
- -----------------------------------------------------------------------------------------------------------------------------
COMMODITY CONTRACTS
Over the counter (OTC)
contracts
Forward contracts 1 1 0 2 0.0
Options 1 1 3 3 4 4 0.0
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 2 1 3 4 4 6 0.0
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE
INSTRUMENTS 36,359 39,028 29,756 36,150 37,999 47,701 34,146 33,429 138,260 156,308
Replacement value netting 80,385 80,385
- -----------------------------------------------------------------------------------------------------------------------------
REPLACEMENT VALUES AFTER
NETTING 57,875 75,923
- -----------------------------------------------------------------------------------------------------------------------------
(1) PRV: Positive replacement value.
(2) NRV: Negative replacement value.
(3) Exchange-traded products include proprietary trades only.
- --------------------------------------------------------------------------------
F- 52
321
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Total
AS AT 31 DECEMBER 1999( 1) notional
Term to maturity amount
WITHIN 3 MONTHS 3-12 MONTHS 1-5 YEARS OVER 5 YEARS TOTAL TOTAL CHF
CHF million PRV( 2) NRV( 3) PRV NRV PRV NRV PRV NRV PRV NRV bn
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE CONTRACTS
Over the counter (OTC)
contracts
Forward contracts 34 55 68 19 6 1 108 75 554.0
Swaps 5,248 2,100 3,125 2,871 22,565 24,168 35,557 30,301 66,495 59,440 2,650.9
Options 108 27 47 742 268 12 4 2,018 427 2,799 1,877.0
- --------------------------------------------------------------------------------------------------------------------------------
Exchange-traded
contracts( 4)
Futures 774.1
Options 54.4
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL 5,390 2,182 3,240 3,632 22,839 24,181 35,561 32,319 67,030 62,314 5,910.4
- --------------------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE CONTRACTS
Over the counter (OTC)
contracts
Forward contracts 9,657 14,264 3,628 7,008 411 851 13 37 13,709 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( 4)
Futures 0 1 0 1 3.5
Options 0 1 4 1 4 2 3.7
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL 13,623 17,494 9,602 11,973 9,823 7,338 2,610 1,565 35,658 38,370 2,150.1
- --------------------------------------------------------------------------------------------------------------------------------
PRECIOUS METALS CONTRACTS
Over the counter (OTC)
contracts
Forward contracts 1,092 1,047 44 62 70 60 0 0 1,206 1,169 30.0
Options 277 215 594 466 1,168 1,059 117 130 2,156 1,870 82.9
- --------------------------------------------------------------------------------------------------------------------------------
EXCHANGE-TRADED
CONTRACTS( 4)
Futures 0.8
Options 5 5 8 10 5 23 4.9
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL 1,369 1,267 643 536 1,238 1,129 117 130 3,367 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 1,840 1,611 3,814 10,021 9,766 27,182 350 2,985 15,770 41,799 264.7
- --------------------------------------------------------------------------------------------------------------------------------
Exchange-traded
contracts( 4)
Futures 74 46 74 46 25.1
Options 1,395 304 1,744 4,047 72 63 3,211 4,414 79.8
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL 3,835 3,682 6,706 16,112 10,341 32,570 2,112 5,772 22,994 58,136 519.0
- --------------------------------------------------------------------------------------------------------------------------------
COMMODITY CONTRACTS
Over the counter (OTC)
contracts
Forward contracts 29 25 29 25 0.2
Options 15 15 15 15 0.1
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL 44 40 44 40 0.2
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE
INSTRUMENTS 24,261 24,665 20,191 32,253 44,241 65,218 40,400 39,786 129,093 161,922
Replacement value netting 66,136 66,136
- --------------------------------------------------------------------------------------------------------------------------------
REPLACEMENT VALUES AFTER
NETTING 62,957 95,786
- --------------------------------------------------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
(2) PRV: Positive replacement value.
(3) NRV: Negative replacement value.
(4) Exchange-traded products include proprietary trades only.
- --------------------------------------------------------------------------------
F- 53
322
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Group uses derivative instruments for trading and non-trading purposes as
explained in the previous paragraphs. All derivatives instruments held or issued
for trading or used to hedge another financial instrument carried at fair value
are accounted for 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. They are disclosed under
"non-trading" in the table below. 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.
The following table presents the fair value, average fair value and notional
amounts for each class of derivative financial instrument, before netting, for
the years ended 31 December 2000 and 31 December 1999 distinguished between held
or issued for trading purposes and held or issued for non-trading purposes.
Average balances for the years ended 31 December 2000 and 31 December 1999 are
calculated from quarterly data.
31 DECEMBER 2000 31 December 1999(1)
-------------------------------------------- --------------------------------------------
TOTAL total
TOTAL AVERAGE TOTAL AVERAGE NOTIONAL TOTAL AVERAGE TOTAL AVERAGE NOTIONAL
CHF MILLION PRV PRV NRV NRV CHF BN PRV PRV NRV NRV CHF BN
- -----------------------------------------------------------------------------------------------------------------------------
TRADING
Interest Rate contracts 52,626 55,447 49,202 54,803 5,244 62,082 75,923 58,107 75,129 5,775
Foreign Exchange contracts 55,299 42,820 49,314 37,138 2,374 34,632 35,843 37,479 37,075 2,137
Precious Metal contracts 2,118 2,809 2,129 2,659 92 3,367 4,630 3,062 4,501 119
Equity/Index contracts 23,509 22,224 51,429 46,591 377 22,994 18,366 58,136 42,984 519
Commodity contracts 4 18 6 18 0 44 383 40 213 0
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 133,556 123,318 152,080 141,209 123,119 135,145 156,824 159,902
- -----------------------------------------------------------------------------------------------------------------------------
NON-TRADING
Interest Rate contracts 4,333 3,997 3,389 3,400 199 4,948 5,014 4,207 4,212 135
Foreign Exchange contracts 371 364 839 1,057 11 1,026 669 891 622 13
Precious Metal contracts 0 0 0 0 0 0 0 0 0 0
Equity/Index contracts 0 0 0 0 0 0 0 0 0 0
Commodity contracts 0 0 0 0 0 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 4,704 4,361 4,228 4,457 5,974 5,683 5,098 4,834
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL TRADING AND NON-TRADING
Interest Rate contracts 56,959 59,444 52,591 58,203 5,443 67,030 80,937 62,314 79,341 5,910
Foreign Exchange contracts 55,670 43,184 50,153 38,195 2,385 35,658 36,512 38,370 37,697 2,150
Precious Metal contracts 2,118 2,809 2,129 2,659 92 3,367 4,630 3,062 4,501 119
Equity/Index contracts 23,509 22,224 51,429 46,591 377 22,994 18,366 58,136 42,984 519
Commodity contracts 4 18 6 18 0 44 383 40 213 0
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 138,260 127,679 156,308 145,666 129,093 140,828 161,922 164,736
- -----------------------------------------------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
presentation.
- --------------------------------------------------------------------------------
F- 54
323
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
OFF-BALANCE SHEET AND OTHER INFORMATION
NOTE 27 PLEDGED ASSETS
ASSETS PLEDGED OR ASSIGNED AS SECURITY FOR LIABILITIES AND ASSETS SUBJECT TO
RESERVATION OF TITLE
CARRYING RELATED CARRYING RELATED
AMOUNT LIABILITY AMOUNT LIABILITY
CHF MILLION 31.12.00 31.12.00 31.12.99 31.12.99
- -----------------------------------------------------------------------------------------------
Money market paper 28,395 5 35,578 707
Mortgage loans 1,639 1,121 2,536 1,736
Securities( 1) 87,871 62,611 23,837 585
Property and equipment 137 66 170 91
Other 1 0 2,110 0
- -----------------------------------------------------------------------------------------------
TOTAL PLEDGED ASSETS 118,043 63,803 64,231 3,119
- -----------------------------------------------------------------------------------------------
(1) For the year ended 31 December 2000 includes securities pledged in respect
of securities lending 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.
NOTE 28 FIDUCIARY TRANSACTIONS
Fiduciary placement 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.
CHF MILLION 31.12.00 31.12.99
- -----------------------------------------------------------------------------------------
Placements with third parties 69,300 60,221
Fiduciary credits and other fiduciary financial transactions 1,234 1,438
- -----------------------------------------------------------------------------------------
TOTAL FIDUCIARY TRANSACTIONS 70,534 61,659
- -----------------------------------------------------------------------------------------
NOTE 29 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 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.
- --------------------------------------------------------------------------------
F- 55
324
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CHF MILLION 31.12.00 31.12.99
- ----------------------------------------------------------------------------------------
CONTINGENT LIABILITIES
Credit guarantees and similar instruments( 1) 18,651 18,822
Sub-participations (5,669) (3,665)
- ----------------------------------------------------------------------------------------
Total 12,982 15,157
- ----------------------------------------------------------------------------------------
Performance guarantees and similar instruments( 2) 6,337 6,782
Sub-participations (62) (42)
- ----------------------------------------------------------------------------------------
Total 6,275 6,740
- ----------------------------------------------------------------------------------------
Irrevocable commitments under documentary credits 2,798 2,704
- ----------------------------------------------------------------------------------------
GROSS CONTINGENT LIABILITIES 27,786 28,308
SUB-PARTICIPATIONS (5,731) (3,707)
- ----------------------------------------------------------------------------------------
NET CONTINGENT LIABILITIES 22,055 24,601
- ----------------------------------------------------------------------------------------
IRREVOCABLE COMMITMENTS
Undrawn irrevocable credit facilities 53,510 65,693
Sub-participations (788) (1,836)
- ----------------------------------------------------------------------------------------
Total 52,722 63,857
- ----------------------------------------------------------------------------------------
Liabilities for calls on shares and other equities 133 57
- ----------------------------------------------------------------------------------------
GROSS IRREVOCABLE COMMITMENTS 53,643 65,750
SUB-PARTICIPATIONS (788) (1,836)
- ----------------------------------------------------------------------------------------
NET IRREVOCABLE COMMITMENTS 52,855 63,914
- ----------------------------------------------------------------------------------------
GROSS COMMITMENTS AND CONTINGENT LIABILITIES 81,429 94,058
SUB-PARTICIPATIONS (6,519) (5,543)
- ----------------------------------------------------------------------------------------
NET COMMITMENTS AND CONTINGENT LIABILITIES 74,910 88,515
- ----------------------------------------------------------------------------------------
(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.
MORTGAGE OTHER
CHF MILLION COLLATERAL COLLATERAL UNSECURED TOTAL
- ---------------------------------------------------------------------------------------------------
OVERVIEW OF COLLATERAL
Gross contingent liabilities 154 12,703 14,929 27,786
Gross irrevocable commitments 1,124 7,455 44,931 53,510
Liabilities for calls on shares and
other equities 0 0 133 133
- ---------------------------------------------------------------------------------------------------
TOTAL 31.12.2000 1,278 20,158 59,993 81,429
- ---------------------------------------------------------------------------------------------------
Total 31.12.1999 577 20,130 73,351 94,058
- ---------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 56
325
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 30 OPERATING LEASE COMMITMENTS
Our minimum commitments for non-cancellable leases of premises and equipment are
as follows:
CHF MILLION 31.12.00
- ---------------------------------------------------------------------
OPERATING LEASES DUE 2001 686
2002 652
2003 634
2004 580
2005 503
2006 and thereafter 3,958
- ---------------------------------------------------------------------
TOTAL COMMITMENTS FOR MINIMUM PAYMENTS UNDER OPERATING
LEASES 7,013
- ---------------------------------------------------------------------
Operating expenses include CHF 816 million and CHF 742 million in respect of
operating lease rentals for the year ended 31 December 2000 and 31 December
1999, respectively.
NOTE 31 LITIGATION
In the United States, several class actions, in relation to the business
activities of Swiss Companies during World War II, have been brought against the
bank (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 was 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. As a result of contributions by Swiss
industrial companies to the settlement, UBS' share was reduced by CHF 50
million. A number of persons have elected to opt out of the settlement and not
to participate in the class action. Based on our estimates of forthcoming
contributions, we provided USD 610 million in 1998, an additional USD 95 million
in 1999 and USD 123 million in 2000. Several payments have been made
approximating the reserved amount. The settlement agreement was approved by the
competent judge on 26 July 2000, and on 22 November 2000 the distribution plan
was approved. Appeals against these decisions are still pending, but we do not
believe they should have a financial impact on the Group.
In addition, UBS AG and other companies within the UBS 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 will be
made by the Group, and the amount can be reasonably estimated. All litigation
provisions are included within Business risk provisions.
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.
- --------------------------------------------------------------------------------
F- 57
326
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 32 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 (VaR) model used by the Group to manage its overall market
risk, of which interest rate risk is a part.
The following table sets out the extent to which the Group was exposed to
interest rate risk at 31 December 2000. The table shows 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.
INTEREST RATE SENSITIVITY POSITION
CHF INTEREST SENSITIVITY BY TIME BANDS AS OF 31.12.2000
thousand ------------------------------------------------------------------------
PER BASIS WITHIN 1 1 TO 3 3 TO 12 1 TO 5 OVER 5
POINT MONTH MONTHS MONTHS YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------
CHF Trading 41 (471) 854 63 (478) 9
Non-trading (39) 49 (49) (6,802) (3,018) (9,859)
- --------------------------------------------------------------------------------------------------------------
USD Trading (493) 2,007 293 (2,293) 380 (106)
Non-trading 13 58 11 (342) (183) (443)
- --------------------------------------------------------------------------------------------------------------
EUR Trading (82) (152) 114 1,190 (1,801) (731)
Non-trading 0 9 1 82 177 269
- --------------------------------------------------------------------------------------------------------------
GBP Trading (227) 152 145 (229) 521 362
Non-trading 0 0 (36) 270 585 819
- --------------------------------------------------------------------------------------------------------------
JPY Trading 293 (1,532) 1,088 62 (450) (539)
Non-trading 0 0 0 (1) (4) (5)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 58
327
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CHF INTEREST SENSITIVITY BY TIME BANDS AS OF 31.12.2000
thousand ------------------------------------------------------------------------
PER BASIS WITHIN 1 1 TO 3 3 TO 12 1 TO 5 OVER 5
POINT MONTH MONTHS MONTHS YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------
Others Trading (2) (41) 124 (50) (44) (13)
Non-trading 0 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------
CHF INTEREST SENSITIVITY BY TIME BANDS AS OF 31.12.1999
thousand ------------------------------------------------------------------------
PER BASIS WITHIN 1 1 TO 3 3 TO 12 1 TO 5 OVER 5
POINT MONTH MONTHS MONTHS YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------
TRADING
The major part of 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 managed within the Value at
Risk model. Interest rate sensitivity arising from trading activities is quite
sizeable in USD, EUR, GBP and JPY 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 sensitivity analysis at a particular point in
time has limited relevance with respect to trading positions, which can vary
significantly on a daily basis.
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 notes issues which are intentionally
unhedged since they are regarded as constituting a part of the Group's equity
for asset and liability management purposes as well as funding transactions
related to the acquisition of PaineWebber. At 31 December 2000, the Group's
equity was invested in a portfolio of fixed rate CHF deposits with an average
duration of 2.5 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 (9.9) 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.
- --------------------------------------------------------------------------------
F- 59
328
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
b) CREDIT RISK
Credit risk represents the loss which UBS would suffer if a counterparty or
issuer failed to perform its contractual obligations in all forms. It is
inherent in traditional banking products - loans, commitments to lend, and
contracts to support counterparties' obligations to third parties such as
letters of credit - and in foreign exchange and derivatives contracts, such as
swaps and options ("traded products"). Positions in tradeable assets such as
bonds and equities, including both direct holdings and synthetic positions
through derivatives, also carry credit risk.
This risk is managed primarily based on reviews of the financial status of each
specific counterparty, which are rated on a 14 point rating scale, based on
probability of default. Credit risk is higher 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 honor 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 2000, due from banks and loans to customers amounted to CHF
285 billion. 57.9% of the gross loans were with clients domiciled in
Switzerland. Please refer to Note 12 for a breakdown by region.
The issuer default risk of securities positions reported at fair value in the
trading portfolio assets amounted to CHF 253 billion as of 31 December 2000.
Please refer to Note 14 for a further breakdown by type of issuer.
(b)(ii) OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
CREDIT COMMITMENTS AND CONTINGENT LIABILITIES
Of the CHF 81 billion in credit commitment and contingent liabilities as at 31
December 2000, 15% related to clients domiciled in Switzerland, 30% Europe
(excluding Switzerland) and 45% North America.
DERIVATIVES
Credit risk represents the current replacement value of all outstanding
derivative contracts with an unrealized gain by taking into consideration
legally enforceable master netting agreements. Positive replacement values
amounted to CHF 58 billion as at 31 December 2000. Based on the location of the
ultimate counterparty, 6% of this credit risk amount related to Switzerland, 45%
to Europe (excluding Switzerland) and 32% to North America. 42% of the positive
replacement values are with other banks.
(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 derivative 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
- --------------------------------------------------------------------------------
F- 60
329
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2000 is to mitigate credit risk on derivative instruments by approximately CHF
80 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 against established limits on a continual basis and is subject to a
standard exception reporting process.
c) CURRENCY RISK
The Group views itself as a Swiss entity, with the Swiss franc as its reporting
currency. Hedging transactions are used to manage risks in other currencies.
BREAKDOWN OF ASSETS AND LIABILITIES BY CURRENCIES
31.12.00 31.12.99
------------------------- -------------------------
CHF BILLION CHF USD EUR OTHER CHF USD EUR OTHER
- ---------------------------------------------------------------------------------------------
ASSETS
Cash and balances with central banks 1.9 0.2 0.5 0.4 3.4 0.2 0.5 1.0
Money market paper 0.5 51.5 11.1 3.4 1.5 38.6 0.7 28.9
Due from banks 5.8 10.4 8.0 4.9 7.5 7.7 5.3 9.4
Cash collateral on securities borrowed 0.5 169.2 2.4 5.8 0.1 106.4 1.1 5.6
Reverse repurchase agreements 5.3 83.7 37.4 67.4 2.0 42.5 37.8 50.1
Trading portfolio assets 16.0 134.5 27.3 75.5 29.4 77.1 26.9 78.5
Positive replacement values 11.7 6.9 0.6 38.7 7.7 5.2 0.5 49.6
Loans, net of allowance for credit
losses 154.2 52.3 7.1 31.2 166.4 35.0 5.3 28.2
Financial investments 7.1 6.4 0.7 2.2 2.5 2.9 0.7 0.9
Accrued income and prepaid expenses 1.6 4.4 0.2 0.9 1.7 1.8 0.5 1.2
Investments in associates 0.7 0.0 0.1 0.1 0.9 0.1 0.0 0.1
Property and equipment 6.9 1.4 0.0 0.6 7.4 0.5 0.1 0.7
Goodwill and other intangible assets 0.3 19.1 0.0 0.1 1.2 2.2 0.0 0.1
Other assets 2.2 3.3 0.6 2.4 3.1 1.9 2.5 3.5
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS 214.7 543.3 96.0 233.6 234.8 322.1 81.9 257.8
- ---------------------------------------------------------------------------------------------
LIABILITIES
Money market paper issued 0.2 67.2 0.5 6.8 1.0 55.7 0.3 7.7
Due to banks 6.5 46.5 10.6 18.6 8.1 36.3 14.5 17.5
Cash collateral on securities 0.1 12.6 5.0 5.7 0.1 6.5 1.0 5.2
Repurchase agreements 10.0 194.6 16.1 74.9 16.5 91.3 27.8 61.3
Trading portfolio liabilities 2.0 52.4 11.4 16.8 0.0 38.2 5.4 11.0
Negative replacement values 8.6 6.3 2.0 59.0 12.8 7.0 2.0 74.0
Due to customers 118.8 129.7 29.9 32.4 127.5 93.8 23.7 35.0
Accrued expenses and deferred income 3.0 11.8 1.7 4.5 3.1 4.8 0.5 3.6
Long-term debt 18.1 23.5 3.9 9.4 23.7 17.6 3.1 11.9
Other liabilities 9.9 3.6 2.5 2.8 8.5 3.2 0.7 3.7
Minority interests 0.2 2.5 0.1 0.1 0.3 0.0 0.0 0.1
Shareholders' equity 44.8 0.0 0.0 0.0 30.6 0.0 0.0 0.0
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS' EQUITY 222.2 550.7 83.7 231.0 232.2 354.4 79.0 231.0
- ---------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 61
330
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
d) LIQUIDITY RISK
MATURITY ANALYSIS OF ASSETS AND LIABILITIES
Due Due
Due between between Due
On Subject within 3 and 1 and after
CHF billion demand to notice (1) 3 mths 12 mths 5 years 5 years Total
- -------------------------------------------------------------------------------------------------------
ASSETS
Cash and balances with central
banks 3.0 3.0
Money market paper 0.0 0.0 42.4 24.0 0.0 0.0 66.4
Due from banks 12.0 1.5 12.0 2.3 1.1 0.3 29.2
Cash collateral on securities
borrowed 0.0 0.5 177.0 0.0 0.4 0.0 177.9
Reverse repurchase agreements 0.0 0.0 164.6 21.1 0.3 7.9 193.9
Trading portfolio assets 253.3 0.0 0.0 0.0 0.0 0.0 253.3
Positive replacement values 57.9 0.0 0.0 0.0 0.0 0.0 57.9
Loans, net of allowance for
credit losses 0.0 36.8 106.2 37.5 56.7 7.6 244.8
Financial investments 10.1 0.0 0.1 2.4 2.3 1.5 16.4
Accrued income and prepaid
expenses 7.0 0.0 0.0 0.0 0.0 0.0 7.0
Investments in associates 0.0 0.0 0.0 0.0 0.0 0.9 0.9
Property and equipment 0.0 0.0 0.0 0.0 0.0 8.9 8.9
Goodwill and other intangible
assets 0.0 0.0 0.0 0.0 0.0 19.5 19.5
Other assets 8.5 0.0 0.0 0.0 0.0 0.0 8.5
- -------------------------------------------------------------------------------------------------------
TOTAL 31.12.00 351.8 38.8 502.3 87.3 60.8 46.6 1,087.6
- -------------------------------------------------------------------------------------------------------
Total 31.12.99 309.5 53.4 395.2 44.8 72.7 21.0 896.6
- -------------------------------------------------------------------------------------------------------
LIABILITIES
Money market paper issued 0.0 0.0 48.7 26.1 0.0 0.0 74.8
Due to banks 8.6 4.7 59.3 3.7 5.5 0.4 82.2
Cash collateral on securities
lent 0.0 0.1 23.3 0.0 0.0 0.0 23.4
Repurchase agreements 0.0 0.0 251.3 32.7 0.4 11.1 295.5
Trading portfolio liabilities 82.6 0.0 0.0 0.0 0.0 0.0 82.6
Negative replacement values 75.9 0.0 0.0 0.0 0.0 0.0 75.9
Due to customers 76.2 72.3 150.1 10.0 1.7 0.4 310.7
Accrued expenses and deferred
income 21.0 0.0 0.0 0.0 0.0 0.0 21.0
Long-term debt 0.0 0.1 3.8 11.8 25.7 13.5 54.9
Other liabilities 18.8 0.0 0.0 0.0 0.0 0.0 18.8
- -------------------------------------------------------------------------------------------------------
TOTAL 31.12.00 283.1 77.2 536.5 84.3 33.3 25.4 1,039.8
- -------------------------------------------------------------------------------------------------------
Total 31.12.99 247.1 83.6 416.2 72.6 30.0 16.0 865.5
- -------------------------------------------------------------------------------------------------------
(1) Deposits without a fixed term, on which notice of withdrawal or
termination has not been given. (Such funds may be withdrawn by the
depositor or repaid by the borrower subject to an agreed period of
notice.)
- --------------------------------------------------------------------------------
F- 62
331
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
e) CAPITAL ADEQUACY
RISK-WEIGHTED ASSETS (BIS)
BALANCE Balance
SHEET / RISK- SHEET / RISK-
NOTIONAL WEIGHTED NOTIONAL WEIGHTED
AMOUNT AMOUNT AMOUNT AMOUNT
CHF MILLION 31.12.00 31.12.00 31.12.99 31.12.99
- --------------------------------------------------------------------------------------------
BALANCE SHEET ASSETS
Due from banks and other collateralized
lendings 333,270 7,409 229,737 9,486
Net positions on securities (1) 83,739 10,979 77,858 5,806
Positive replacement values 57,875 18,763 62,957 18,175
Loans, net of allowances for credit losses
and other collateralized lendings 312,376 162,539 292,902 159,835
Accrued income and prepaid expenses 7,062 4,653 5,167 3,164
Property and equipment (2) 13,620 14,604(2) 8,701 9,860(2)
Other assets 8,507 4,581 11,007 7,686
- --------------------------------------------------------------------------------------------
OFF-BALANCE SHEET AND OTHER POSITIONS
Contingent liabilities 27,786 12,548 28,308 14,459
Irrevocable commitments 53,643 12,599 65,693 17,787
Forward and swap contracts (3) 5,743,239 10,933 4,881,483 13,213
Purchased options (3) 380,411 2,922 406,208 2,823
- --------------------------------------------------------------------------------------------
MARKET RISK POSITIONS (4) 10,760 10,813
- --------------------------------------------------------------------------------------------
TOTAL RISK-WEIGHTED ASSETS 273,290 273,107
- --------------------------------------------------------------------------------------------
(1) Excluding positions in the trading book, included in market risk positions.
(2) Including for the year 2000, intangible assets of CHF 4,710 million. The
risk-weighted amount includes CHF 984 million (1999: CHF 1,159 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.
BIS CAPITAL RATIOS
CAPITAL RATIO CAPITAL RATIO
CHF MILLION % CHF MILLION %
31.12.00 31.12.00 31.12.99 31.12.99
- -------------------------------------------------------------------------------------------
Tier 1(1) 31,892 11.7 28,952 10.6
Tier 2 10,968 10,730
- -------------------------------------------------------------------------------------------
TOTAL BIS 42,860 15.7 39,682 14.5
- -------------------------------------------------------------------------------------------
(1) The Tier 1 capital includes USD 1,500 million (CHF 2,456 million) Trust
Preferred securities issued in connection with the PaineWebber acquisition.
Among other measures UBS monitors the adequacy of its capital using ratios
established by the Bank for International Settlements (BIS). The BIS ratio is
required to be at least 8%. The Group has complied with 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.
- --------------------------------------------------------------------------------
F- 63
332
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 Swiss 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 in July 1999.
Tier 1 capital consists of permanent shareholders' equity, trust preferred
securities and retained earnings less goodwill and investments in unconsolidated
subsidiaries. Tier 2 capital includes the Group's subordinated long-term debt.
NOTE 33 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the fair value of on- and off-balance sheet
financial instruments based on certain 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.
- --------------------------------------------------------------------------------
F- 64
333
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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;
(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.
CARRYING FAIR UNREALIZED CARRYING FAIR UNREALIZED
VALUE VALUE GAIN/(LOSS) VALUE VALUE GAIN/(LOSS)
CHF BILLION 31.12.00 31.12.00 31.12.00 31.12.99 31.12.99 31.12.99
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and balances with central banks 3.0 3.0 0.0 5.0 5.0 0.0
Money market paper 66.5 66.5 0.0 69.7 69.7 0.0
Due from banks 29.1 29.1 0.0 30.0 30.0 0.0
Cash collateral on securities borrowed 177.9 177.9 0.0 113.2 113.2 0.0
Reverse repurchase agreements 193.8 193.8 0.0 132.4 132.4 0.0
Trading portfolio assets 253.3 253.3 0.0 211.9 211.9 0.0
Positive replacement values 57.9 57.9 0.0 62.9 62.9 0.0
Loans, net of allowance for credit
losses 245.1 244.9 (0.2) 235.1 235.3 0.2
Financial investments 15.4 17.2 1.8 5.9 7.1 1.2
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 65
334
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CARRYING FAIR UNREALIZED CARRYING FAIR UNREALIZED
VALUE VALUE GAIN/(LOSS) VALUE VALUE GAIN/(LOSS)
CHF BILLION 31.12.00 31.12.00 31.12.00 31.12.99 31.12.99 31.12.99
- --------------------------------------------------------------------------------------------------------------
LIABILITIES
Money market paper issued 74.8 74.8 0.0 64.7 64.7 0.0
Due to banks 82.8 82.8 0.0 76.9 76.9 0.0
Cash collateral on securities lent 23.4 23.4 0.0 12.8 12.8 0.0
Repurchase agreements 295.5 295.5 0.0 196.9 196.9 0.0
Trading portfolio liabilities 82.6 82.6 0.0 54.6 54.6 0.0
Negative replacement values 75.9 75.9 0.0 95.8 95.8 0.0
Due to customers 311.2 311.2 0.0 280.1 280.1 0.0
Long-term debt 55.7 56.6 (0.9) 56.4 57.6 (1.2)
- --------------------------------------------------------------------------------------------------------------
Fair value effect on income of hedging
derivatives recorded on the accrual
basis (0.5) 0.5
- --------------------------------------------------------------------------------------------------------------
NET DIFFERENCE BETWEEN CARRYING VALUE
AND FAIR VALUE 0.2 0.7
- --------------------------------------------------------------------------------------------------------------
The table does not reflect the fair values of non-financial assets and
liabilities such as property, equipment, goodwill, intangible assets,
prepayments, and non-interest accruals. The interest amounts accrued to date for
financial instruments are included, for purposes of the above fair value
disclosure, in the carrying value of the respective 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 losses and the amortized amount
is deferred and shown net in the table as Fair value effect on income of hedging
derivatives recorded on the accrual basis.
During 2000, the interest rate level of leading economies continued to increase.
The 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 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 rate
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. If the calculation took into
account the fair value differences based on the economic maturity of the
non-maturity liabilities, such as savings and deposits, in an environment of
rising interest rates, they would generate fair value gains which may offset
most of the fair value loss reported for fixed term transactions and for hedging
derivative transactions.
- --------------------------------------------------------------------------------
F- 66
335
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 34 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 US and
Germany. Independent actuarial valuations are performed for the plans in these
locations.
SWISS PENSION PLANS UNTIL 30 JUNE 1999
The pension funds of the Group were set up as trusts, domiciled in Basel and
Zurich. All domestic employees were covered. The pension funds were defined
benefit plans. The pension plan benefits exceeded the minimum benefits required
under Swiss law.
Contributions were paid for by the Group and the employees. The employee
contributions were calculated as a percentage of the insured annual salary and
were deducted monthly. The percentages deducted from salary were dependent on
age and varied between 8% and 12%. The Group contributions were variable and
amount to 125% to 250% of the employees contributions depending on the financial
situation of the pension fund.
The pension plan formula was based on years of contributions and final covered
salary. The benefits covered included 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 an increase of vested plan benefits for the beneficiaries of
such plans due to the allocation of the excess of the fair value of plan assets
over the benefit obligation. This had the effect of increasing the Defined
benefit obligation 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.
The pension plan covers practically all employees in Switzerland and exceeds the
minimum benefit requirements under Swiss law. Contributions to the pension plan
are paid for by employees and the Group. The employee contributions are
calculated as a percentage of insured annual salary and are deducted monthly.
The percentages deducted from salary for 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 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.
In 1999, the Group recognized a prepaid pension asset of CHF 456 million
representing excess employer contributions. In 2000, CHF 100 million of this
asset was used to satisfy the benefit obligation.
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 US and Germany. These locations together
with Switzerland cover nearly 90% of the active work-force. Certain of these
- --------------------------------------------------------------------------------
F- 67
336
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
CHF MILLION 31.12.00 31.12.99 31.12.98
- -----------------------------------------------------------------------------------------------------
SWISS PENSION PLANS
Defined benefit obligation at the beginning of the
year (17,011) (14,944) (14,431)
Service cost (545) (464) (535)
Interest cost (666) (636) (726)
Plan amendments 0 (3,517) (119)
Special termination benefits (211) 1,000 0
Actuarial gain (loss) 0 571 (6)
Benefits paid 721 979 873
- -----------------------------------------------------------------------------------------------------
DEFINED BENEFIT OBLIGATION AT THE END OF THE YEAR (17,712) (17,011) (14,944)
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets at the beginning of the
year 18,565 17,885 17,224
Actual return on plan assets 535 2,136 856
Employer contributions 490 515 493
Plan participant contributions 205 180 185
Benefits paid (721) (979) (873)
Special termination benefits 0 (1,172) 0
- -----------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT THE END OF THE YEAR 19,074 18,565 17,885
- -----------------------------------------------------------------------------------------------------
PLAN ASSETS IN EXCESS OF BENEFIT OBLIGATION 1,362 1,554 2,941
Unrecognized net actuarial gains (331) (724) (385)
Unrecognized assets (675) (374) (2,556)
- -----------------------------------------------------------------------------------------------------
PREPAID PENSION COST 356 456 0
- -----------------------------------------------------------------------------------------------------
ADDITIONAL DETAILS TO FAIR VALUE OF PLAN ASSETS
Own financial instruments and securities lent to UBS
included in plan assets 4,643 6,785 2,761
Any assets used by UBS included in plan assets 179 187 176
- -----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 68
337
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CHF MILLION 31.12.00 31.12.99 31.12.98
- -----------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS EXPENSE
Current service cost 545 464 535
Interest cost 666 636 726
Expected return on plan assets (928) (883) (856)
Adjustment to limit prepaid pension cost 301 (150) 148
Amortization of unrecognized prior service costs 211 172 6
Employee contributions (204) (180) (185)
- -----------------------------------------------------------------------------------------------------
ACTUARIALLY DETERMINED NET PERIODIC PENSION COST 591 59 374
- -----------------------------------------------------------------------------------------------------
Actual return on plan assets (%) 2.9 11.9 6.7
PRINCIPAL ACTUARIAL ASSUMPTIONS USED (%)
- -----------------------------------------------------------------------------------------------------
Discount rate 4.0 4.0 5.0
Expected rate of return on plan assets 5.0 5.0 5.0
Expected rate of salary increase 2.5 2.5 4.5
Rate of pension increase 1.5 1.5 2.0
- -----------------------------------------------------------------------------------------------------
PENSION PLANS ABROAD
Defined benefit obligation at the beginning of the
year (2,444) (2,009) (1,950)
Service cost (165) (118) (116)
Interest cost (162) (123) (140)
Plan amendments 0 (2) (7)
Special termination benefits (3) 0 40
Actuarial gain / (loss) (99) 2 32
Benefits paid 84 133 60
Acquisition of PaineWebber (740) 0 0
Currency adjustment 123 (269) 5
Other 0 (58) 67
- -----------------------------------------------------------------------------------------------------
DEFINED BENEFIT OBLIGATION AT THE END OF THE YEAR (3,406) (2,444) (2,009)
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets at the beginning of the
year 2,880 2,173 2,188
Actual return on plan assets 0 352 267
Employer contributions 13 22 43
Plan participant contributions 23 15 9
Benefits paid (84) (133) (60)
Acquisition of PaineWebber 676 0 0
Currency adjustment (130) 333 0
Other 0 118 (274)
- -----------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT THE END OF THE YEAR 3,378 2,880 2,173
- -----------------------------------------------------------------------------------------------------
PLAN ASSETS IN EXCESS OF BENEFIT OBLIGATION (28) 436 164
Unrecognized net actuarial gains (81) (474) (63)
Unrecognized transition amount 1 1 2
Unrecognized past service cost 2 2 0
Unrecognized assets (47) (28) (60)
- -----------------------------------------------------------------------------------------------------
(UNFUNDED ACCRUED) / PREPAID PENSION COST (153) (63) 43
- -----------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 69
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NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CHF MILLION 31.12.00 31.12.99 31.12.98
- -----------------------------------------------------------------------------------------------------
MOVEMENT OF NET (LIABILITY) OR ASSET
(Unfunded accrued) / prepaid pension cost at the
beginning of the year (63) 43 36
Net periodic pension cost (55) (123) (33)
Employer contributions 13 22 43
Acquisition of PaineWebber (63) 0 0
Currency adjustment 15 (5) (3)
- -----------------------------------------------------------------------------------------------------
(UNFUNDED ACCRUED) / PREPAID PENSION COST AT THE END
OF THE YEAR (153) (63) 43
- -----------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS EXPENSE
Current service cost 165 118 116
Interest cost 162 123 140
Expected return on plan assets (243) (195) (191)
Amortization of net transition liability 0 0 2
Adjustment to limit prepaid pension cost 0 21 2
Immediate recognition of transition assets under IAS
8 0 0 (23)
Amortization of unrecognized prior service costs 3 77 7
Amortization of unrecognized net (gain) / losses (9) (6) (3)
Effect of any curtailment or settlement 0 0 (8)
Employee contributions (23) (15) (9)
- -----------------------------------------------------------------------------------------------------
ACTUARIALLY DETERMINED NET PERIODIC PENSION COST 55 123 33
- -----------------------------------------------------------------------------------------------------
Actual return on plan assets (%) (0.9) 15.3 5.2
PRINCIPAL ACTUARIAL ASSUMPTIONS USED (WEIGHTED
AVERAGE %)
- -----------------------------------------------------------------------------------------------------
Discount rate 6.3 6.0 7.3
Expected rates of return on plan assets 8.1 8.1 8.6
Expected rate of salary increase 4.4 4.6 6.8
Rate of pension increase 1.6 2.2 3.3
- -----------------------------------------------------------------------------------------------------
POSTRETIREMENT MEDICAL AND LIFE PLANS
In the US and the UK the Group offers retiree medical benefits that contribute
to the health care coverage of employees and beneficiaries after retirement. In
addition to retiree medical benefits, the Group in the US also provides retiree
life insurance benefits.
The benefit obligation in excess of plan assets for those plans amounts to CHF
111 million as of 31 December 2000 (1999 CHF 113 million, 1998 CHF 93 million)
and the total unfunded accrued postretirement liabilities to CHF 108 million as
of 31 December 2000 (1999 CHF 83 million, 1998 CHF 62 million). The actuarially
determined net postretirement cost amounts to CHF 22 million as of 31 December
2000 (1999 CHF 17 million, 1998 CHF 17 million).
- --------------------------------------------------------------------------------
F- 70
339
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
POSTRETIREMENT MEDICAL AND LIFE PLANS
CHF MILLION 31.12.00 31.12.99 31.12.98
- ------------------------------------------------------------------------------------------------------
POSTRETIREMENT BENEFIT OBLIGATION AT THE BEGINNING OF
THE YEAR (117) (96) (103)
Service cost (6) (2) (7)
Interest cost (8) (6) (8)
Plan amendments (7) 0 (5)
Actuarial gain / (loss) 27 0 (9)
Benefits paid 5 4 4
Acquisition of PaineWebber (9) 0 0
Currency adjustment 0 (16) 5
Other 0 (1) 27
- ------------------------------------------------------------------------------------------------------
POSTRETIREMENT BENEFIT OBLIGATION AT THE END OF THE
YEAR (115) (117) (96)
- ------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT THE BEGINNING OF THE YEAR 4 3 3
Actual return on plan assets 0 1 1
Company contributions 4 4 3
Benefits paid (4) (4) (4)
- ------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT THE END OF THE YEAR 4 4 3
- ------------------------------------------------------------------------------------------------------
The assumed health care cost trend used in determining the benefit expense for
2000 is 5.33%. 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
the assumed health care cost trend rates would change the US postretirement
benefit obligation and the service and interest cost components of the net
periodic postretirement benefit costs as follows:
CHF MILLION 1% INCREASE 1% DECREASE
- ---------------------------------------------------------------------------------------------
Effect on total service and interest cost 2.4 (1.7)
Effect on the postretirement benefit obligation 11.0 (8.3)
- ---------------------------------------------------------------------------------------------
NOTE 35 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.
Under the Equity Ownership Plan, selected personnel are awarded a portion of
their performance-related compensation in UBS AG shares or warrants, which are
restricted for a specified number of years. Under the Long Term Incentive Plan,
key employees are granted long-term stock options to purchase UBS AG shares at a
price not less than the fair market value of the shares on the date the option
is granted. Participation in both plans is mandatory. Long-term stock options
are blocked for three or five years, during which they cannot be exercised. One
option gives the right to purchase one registered UBS AG share at the option's
strike price. UBS AG has additional plans under which new recruits and members
of senior management may be granted UBS AG shares, options and warrants.
Under the Equity Investment Plan, employees have the choice to invest part of
their annual bonus in UBS AG shares or in warrants 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
- --------------------------------------------------------------------------------
F- 71
340
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 the PAP 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.
The Group has adopted the equity-based compensation plans of PaineWebber for its
eligible employees. The PaineWebber Equity Plus Program allows eligible
employees to purchase UBS AG shares at a price equal to fair market value on the
purchase date and receive stock options to purchase UBS AG shares based upon the
number of shares purchased under the Program. The non-qualified stock options
have a price equal to the fair market value of the stock on the date the option
is granted. Shares purchased under the Equity Plus Program are restricted from
resale for two years from the time of purchase, and the options that are granted
under the Equity Plus Program have a three-year vesting requirement and expire
seven years after the date of grant. PaineWebber has additional plans under
which new recruits, senior management and other key employees may receive option
grants. Options granted under the plans of PaineWebber are denominated in US
dollars.
In addition, UBS has entered into employee retention agreements that provide for
the payment to key PaineWebber employees which are subject to the employees'
continued employment and other restrictions. The awards are primarily in the
form of UBS stock and option grants. The estimated cost to the Group for the
agreements is approximately CHF 1.5 billion (USD 875 million) over a four-year
period.
Generally, the Group's policy is to recognize expense as of the date of grant
for equity participation instruments (stocks, 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 (excess of the UBS AG share
price over the instrument's strike price, if any) of the instrument at such
date. The accrued expense for the years ended 31 December 2000, 1999 and 1998
was CHF 1,749 million, CHF 1,684 million and CHF 996 million, respectively. The
accruals include awards earned currently but issued in the following year.
- --------------------------------------------------------------------------------
F- 72
341
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
OPTIONS ON UBS AG SHARES
WEIGHTED- Weighted- Weighted-
AVERAGE average average
EXERCISE exercise exercise
NUMBER OF PRICE NUMBER OF PRICE NUMBER OF PRICE
OPTIONS (IN CHF) OPTIONS (IN CHF) OPTIONS (IN CHF)
31.12.00 31.12.00 31.12.99 31.12.99 31.12.98 31.12.98
- -------------------------------------------------------------------------------------------------
Outstanding, at the
beginning of the year 10,138,462 197 7,202,786 177 1,899,924 186
Options due to
acquisition of
PaineWebber 6,325,270(1) 102 0 0 0 0
Granted during the year 7,082,682(2) 215 3,439,142 237 5,811,778 182
Exercised during the
year (1,796,769) 150 (71,766) 179 (22,970) 178
Forfeited during the
year (646,811) 193 (431,700) 190 (485,946) 268
- -------------------------------------------------------------------------------------------------
Outstanding, at the end
of the year 21,102,834 175 10,138,462 197 7,202,786 177
- -------------------------------------------------------------------------------------------------
Exercisable, at the end
of the year 6,103,613 101 650,640 186 0 0
- -------------------------------------------------------------------------------------------------
(1) UBS AG issued options in exchange for vested options of PaineWebber, which
have been included in the purchase price for PaineWebber at fair value (see
Note 2: Acquisition of Paine Webber Group, Inc.).
(2) Includes options granted to key employees of PaineWebber, vesting over a
3-year period, subject to the employee's continued employment and other
restrictions.
Some of the options in the table above have exercise prices denominated in US
dollars, which have been converted to Swiss francs for inclusion in the table.
- --------------------------------------------------------------------------------
F- 73
342
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THE FOLLOWING TABLE SUMMARIZES INFORMATION ABOUT STOCK OPTIONS OUTSTANDING AT 31
DECEMBER 2000:
OPTIONS OUTSTANDING
----------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -------------------------------
NUMBER WEIGHTED- AVERAGE NUMBER WEIGHTED-
OF AVERAGE REMAINING OF AVERAGE
RANGE OF EXERCISE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE
PRICES PER SHARE OUTSTANDING PRICE LIFE EXERCISABLE PRICE
- -----------------------------------------------------------------------------------------------------------------------
CHF CHF years CHF
170.00-225.00 9,755,040 186.81 4.1 460,408 184.24
- -----------------------------------------------------------------------------------------------------------------------
225.01-270.00 3,436,805 237.80 4.1 - -
- -----------------------------------------------------------------------------------------------------------------------
170.00-270.00 13,191,845 200.09 4.1 460,408 184.24
- -----------------------------------------------------------------------------------------------------------------------
USD USD years USD
14.65-25.00 1,129,643 21.84 3.2 1,129,643 21.84
- -----------------------------------------------------------------------------------------------------------------------
25.01-50.00 1,236,743 32.11 3.9 1,236,743 32.11
- -----------------------------------------------------------------------------------------------------------------------
50.01-75.00 1,194,960 70.40 4.3 1,194,960 70.40
- -----------------------------------------------------------------------------------------------------------------------
75.01-100.00 1,880,768 80.50 6.4 1,880,768 80.50
- -----------------------------------------------------------------------------------------------------------------------
100.01-125.00 - - - - -
- -----------------------------------------------------------------------------------------------------------------------
125.01-143.07 2,468,875 141.01 6.8 201,091 142.96
- -----------------------------------------------------------------------------------------------------------------------
14.65-143.07 7,910,989 81.92 5.4 5,643,205 58.24
- -----------------------------------------------------------------------------------------------------------------------
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 the 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.
Had the Group determined compensation cost for its stock-based compensation
plans based on fair value at the award grant dates, the net income and earnings
per share for 2000, 1999 and 1998 would approximate the amounts in the following
table.
CHF MILLION, EXCEPT PER SHARE DATA 31.12.00 31.12.99 31.12.98
- --------------------------------------------------------------------------------------------------------
Net income As reported 7,792 6,153 2,972
Pro forma 7,614 6,027 2,893
Basic EPS As reported 19.33 15.20 7.33
Pro forma 18.89 14.89 7.14
Diluted EPS As reported 19.04 15.07 7.20
Pro forma 18.61 14.76 7.01
The pro forma amounts in the table above reflect the vesting periods of all
options granted. The effects of 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- 74
343
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The weighted-average fair-value of options granted in 2000, 1999 and 1998 was
CHF 48, 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 model, with the
following assumptions:
31.12.2000 31.12.1999 31.12.1998
- ---------------------------------------------------------------------------------------------
Expected volatility 30% 33% 40%
Risk free interest rate (CHF) 3.27% 2.07% 2.56%
Risk free interest rate (USD) 5.66% - -
Expected dividend rate 2.44% 1.44% 1.64%
Expected life 4 YEARS 6 years 6 years
STOCK BONUS AND STOCK PURCHASE PLANS
The following table shows the shares awarded and the weighted-average fair value
per share for the Group's equity-based compensation plans. The fair values for
the stock purchase awards reflect the purchase price paid. The stock bonus
awards for 2000 include approximately 6,622,000 shares granted under the
retention agreements with key employees of PaineWebber and the bonus awards for
1999, in addition to the 1998 plan-year awards, include 1,405,000 shares issued
in exchange for previously issued non-share awards and for special bonuses. The
stock purchase awards for 1999 include 666,000 shares issued for the 1999
plan-year.
STOCK BONUS PLANS 31.12.2000 31.12.1999 31.12.1998
- ---------------------------------------------------------------------------------------------
Shares awarded 12,780,000 3,469,000 2,524,000
Weighted-average fair market value per share (in
CHF) 228 220 210
STOCK PURCHASE PLANS 31.12.2000 31.12.1999 31.12.1998
- ---------------------------------------------------------------------------------------------
Shares awarded 322,000 1,802,000 1,338,000
Weighted-average fair market value per share (in
CHF) 104 148 155
Shares awarded in 1998 under both types of plans included Swiss Bank Corporation
shares issued to employees prior to the merger. For the above table, the number
of these shares and their fair market value have been adjusted for the 1 1/13
Swiss Bank Corporation to UBS AG share conversion rate of the merger.
NOTE 36 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 as well as certain persons performing similar functions.
Total remuneration of related parties recognized in the income statement
amounted to CHF 272.3 million in 2000 and CHF 193.1 million in 1999, including
accrued pension benefits of approximately CHF 30.0 million in 2000 and CHF 21.2
million in 1999.
The number of long-term stock options outstanding from equity plans was
1,564,486 at 31 December 2000 and 274,616 at 31 December 1999. This scheme is
further explained in Note 35 Equity Participation Plans.
The external members of the Board of Directors do not have employment or service
contracts with UBS, and thus are not entitled to benefits upon termination of
their service on the Board of Directors. The full-time Chairman and
Vice-Chairman have top-management employment contracts and receive pension
benefits upon retirement.
- --------------------------------------------------------------------------------
F- 75
344
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The total amounts of shares and warrants held by members of the Board of
Directors, Group Executive Board and Group Managing Board were 2,527,728 and
69,504,577 as of 31 December 2000 and 2,456,092 and 11,424,514 as of 31 December
1999.
TOTAL LOANS AND ADVANCES RECEIVABLE (MORTGAGES ONLY) FROM RELATED PARTIES WERE
AS FOLLOWS:
CHF MILLION 2000 1999
- ------------------------------------------------------------------------------
Mortgages at the beginning of the year 28 27
Additions 9 6
Reductions (1) (5)
- ------------------------------------------------------------------------------
MORTGAGES AT THE END OF THE YEAR 36 28
- ------------------------------------------------------------------------------
Members of the Board of Directors, Group Executive Board and Group Managing
Board are granted mortgages at the same terms and conditions as other employees.
Terms and conditions are based on third party conditions excluding credit
margin.
LOANS AND ADVANCES TO SIGNIFICANT ASSOCIATED COMPANIES WERE AS FOLLOWS:
CHF MILLION 2000 1999
- ------------------------------------------------------------------------------
Loans and advances at the beginning of the year 62 165
Additions 0 42
Reductions (62) (145)
- ------------------------------------------------------------------------------
LOANS AND ADVANCES AT THE END OF THE YEAR 0 62
- ------------------------------------------------------------------------------
Note 38 provides a list of significant associates.
NOTE 37 POST-BALANCE SHEET EVENTS
There have been no material post-balance sheet events which would require
disclosure or adjustment to the December 2000 financial statements.
Long-term debt, excluding medium-term notes, has decreased by CHF 582 million
since the balance sheet date to 5 March 2001.
On 14 February 2001, the Board of Directors reviewed the financial statements
and authorised them for issue. These financial statements will be submitted to
the Annual General Meeting of Shareholders to be held on 26 April 2001 for
approval.
NOTE 38 SIGNIFICANT SUBSIDIARIES AND ASSOCIATES
The legal entity group structure of UBS is designed to support the Group's
businesses within an efficient legal, tax, regulatory and funding framework.
Neither the Business Groups of UBS (namely UBS Warburg, UBS Switzerland and UBS
Asset Management) nor Corporate Center are replicated in their own individual
legal entities but rather they generally operate out of the parent bank, UBS AG,
through its Swiss and foreign branches.
The goal of the focus on the parent bank is to capitalize on the synergies
offered by the use of a single legal platform, enable the flexible use of
capital in an efficient manner and to provide a structure where the activities
of the Business Groups may be carried on without the need to set up separate
subsidiaries beforehand.
- --------------------------------------------------------------------------------
F- 76
345
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Where, usually due to local legal, tax or regulatory rules or due to additional
legal entities joining the UBS Group via acquisition, it is either not possible
or not efficient to operate out of the parent bank then local subsidiary
companies host the appropriate businesses. The significant operating subsidiary
companies in the Group are listed below:
SIGNIFICANT SUBSIDIARIES
EQUITY
SHARE INTEREST
REGISTERED BUSINESS CAPITAL ACCUMUL-
COMPANY OFFICE GROUP IN MILLIONS ATED IN %
- ---------------------------------------------------------------------------------------------------
Armand von Ernst & Cie AG Bern CH(1) CHF 5.0 100.0
Aventic AG Zurich CH CHF 30.0 100.0
Bank Ehinger & Cie AG Basel CH CHF 6.0 100.0
BDL Banco di Lugano Lugano CH CHF 50.0 100.0
Brinson Partners Inc Chicago AM(2) USD 1.9(5) 100.0
Brunswick UBS Warburg Limited George Town WA(3) USD 25.0(5) 50.0
Cantrade Privatbank AG Zurich CH CHF 10.0 100.0
Cantrade Private Bank Switzerland (CI) GBP
Limited St. Helier CH 0.7 100.0
Correspondent Services Corporation Delaware WA USD 26.8(5) 100.0
Credit Industriel SA Zurich CH CHF 10.0 100.0
EIBA "Eidgenossische Bank"
Beteiligungs- und Finanzgesellschaft Zurich WA CHF 14.0 100.0
Factors AG Zurich CH CHF 5.0 100.0
Ferrier Lullin & Cie SA Geneva CH CHF 30.0 100.0
Fondvest AG Zurich AM CHF 4.3 100.0
Global Asset Management Limited Hamilton AM USD 2.0 100.0
HYPOSWISS, Schweizerische Hypotheken- und CHF
Handelsbank Zurich CH 26.0 100.0
IL Immobilien-Leasing AG Opfikon CH CHF 5.0 100.0
Klinik Hirslanden AG Zurich CC(4) CHF 22.5 91.2
Mitchell Hutchins Asset Management Inc(6) Delaware WA USD 35.1(5) 100.0
NYRE Holding Corporation Delaware WA USD 30.3(5) 100.0
PaineWebber Capital Inc Delaware WA USD 25.5(5) 100.0
PaineWebber Incorporated Delaware WA USD 1,625.6(5) 100.0
PaineWebber Incorporated of Puerto Rico Puerto Rico WA USD 24.2(5) 100.0
PaineWebber Life Insurance Company California WA USD 29.3(5) 100.0
PT UBS Warburg Indonesia Jakarta WA IDR 11,000.0 85.0
PW Trust Company New Jersey WA USD 4.4(5) 99.6
Schroder Munchmeyer Hengst AG Hamburg WA DEM 100.0 100.0
SG Warburg & Co International BV Amsterdam WA GBP 40.5 100.0
SG Warburg Securities SA Geneva WA CHF 14.5 100.0
Thesaurus Continentale Effekten-Gesellschaft CHF
Zurich Zurich CH 30.0 100.0
UBS (Bahamas) Ltd Nassau CH USD 4.0 100.0
UBS (Cayman Islands) Ltd George Town CH USD 5.6 100.0
UBS (France) SA Paris WA EUR 10.0 100.0
UBS (Italia) SpA Milan WA ITL 43,000.0 100.0
UBS (Luxembourg) SA Luxembourg CH CHF 150.0 100.0
UBS (Monaco) SA Monte Carlo CH EUR 9.2 100.0
- --------------------------------------------------------------------------------
F- 77
346
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EQUITY
SHARE INTEREST
REGISTERED BUSINESS CAPITAL ACCUMUL-
COMPANY OFFICE GROUP IN MILLIONS ATED IN %
- ---------------------------------------------------------------------------------------------------
UBS (Panama) SA Panama CH USD 6.0 100.0
UBS (Sydney) Limited Sydney CH AUD 12.7 100.0
UBS (Trust and Banking) Limited Tokyo WA JPY 10,500.0 100.0
UBS (USA) Inc New York WA USD 315.0 100.0
UBS Americas Inc Stamford WA USD 3,562.9(5) 100.0
UBS Asset Management (Australia) Ltd Sydney AM AUD 8.0 100.0
UBS Asset Management (France) SA Paris AM EUR 0.8 100.0
UBS Asset Management (Japan) Ltd Tokyo AM JPY 2,200.0 100.0
UBS Asset Management (New York) Inc New York AM USD 72.7(5) 100.0
UBS Asset Management (Singapore) Ltd Singapore AM SGD 4.0 100.0
UBS Asset Management (Taiwan) Ltd Taipei AM TWD 340.0 82.0
UBS Asset Management Holding Limited London AM GBP 8.0(5) 100.0
UBS Australia Holdings Ltd Sydney WA AUD 11.7 100.0
UBS Australia Limited Sydney WA AUD 15.0 100.0
UBS Bank (Canada) Toronto CH CAD 20.7 100.0
UBS Beteiligungs-GmbH & Co KG Frankfurt WA EUR 398.8 100.0
UBS Capital AG Zurich WA CHF 0.5 100.0
UBS Capital Asia Pacific Limited George Town WA USD 5.0 100.0
UBS Capital BV The Hague WA EUR 104.1(5) 100.0
UBS Capital GmbH Munich WA EUR - 100.0
UBS Capital II LLC Delaware WA USD 2.6(5) 100.0
UBS Capital LLC New York WA USD 18.5(5) 100.0
UBS Capital Partners Limited London WA GBP 6.7 100.0
UBS Capital SpA Milan WA ITL 50,000.0 100.0
UBS Card Center AG Glattbrugg CH CHF 40.0 100.0
UBS Espana SA Madrid WA EUR 55.3 100.0
UBS Finance (Cayman Islands) Limited George Town CC USD 0.5 100.0
UBS Finance (Curacao) NV Willemstad CC USD 0.1 100.0
UBS Finance (Delaware) LLC Delaware WA USD 37.3(5) 100.0
UBS Finanzholding AG Zurich CC CHF 10.0 100.0
UBS Fund Holding (Luxembourg) SA Luxembourg AM CHF 42.0 100.0
UBS Fund Holding (Switzerland) AG Basel AM CHF 18.0 100.0
UBS Fund Management (Switzerland) AG Basel AM CHF 1.0 100.0
UBS Fund Services (Luxembourg) SA Luxembourg AM CHF 2.5 100.0
UBS Futures & Options Limited London WA GBP 2.0 100.0
UBS Global Trust Corporation St. John CH CAD 0.1 100.0
UBS Immoleasing AG Zurich CH CHF 3.0 100.0
UBS Inc New York WA USD 375.3(5) 100.0
UBS International Holdings BV Amsterdam CC CHF 5.5 100.0
UBS Invest Kapitalanlagegesellschaft mbH Frankfurt AM DEM 15.0 100.0
UBS Investment Management Pte Ltd Singapore WA SGD 0.5 90.0
UBS Lease Finance LLC Delaware WA USD 16.7 100.0
UBS Leasing AG Brugg CH CHF 10.0 100.0
UBS Life AG Zurich CH CHF 25.0 100.0
UBS Limited London WA GBP 10.0 100.0
UBS O'Connor Limited London AM GBP 8.8 100.0
- --------------------------------------------------------------------------------
F- 78
347
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EQUITY
SHARE INTEREST
REGISTERED BUSINESS CAPITAL ACCUMUL-
COMPANY OFFICE GROUP IN MILLIONS ATED IN %
- ---------------------------------------------------------------------------------------------------
UBS Overseas Holding BV Amsterdam WA EUR 18.1 100.0
UBS Preferred Funding Company LLC I Delaware WA USD - 100.0
UBS Securities Limited London WA GBP 10.0 100.0
UBS Services Limited London WA GBP - 100.0
UBS Trust (Canada) Toronto CH CAD 12.5 100.0
UBS Trustees (Singapore) Ltd Singapore CH SGD 0.8 100.0
UBS UK Holding Limited London WA GBP 5.0 100.0
UBS UK Limited London WA GBP 609.0 100.0
UBS Warburg Asia Limited Hong Kong WA HKD 20.0 100.0
UBS Warburg (France) SA Paris WA EUR 22.9 100.0
UBS Warburg (Italia) SIM SpA Milan WA EUR 1.9 100.0
UBS Warburg (Japan) Limited George Town WA JPY 30,000.0 50.0
UBS Warburg (Malaysia) Sdn Bhd Kuala Lumpur WA MYR 0.5 70.0
UBS Warburg (Nederland) BV Amsterdam WA EUR 10.9 100.0
UBS Warburg AG Frankfurt WA EUR 155.7 100.0
UBS Warburg Australia Corporation Pty Limited Sydney WA AUD 50.4(5) 100.0
UBS Warburg Australia Limited Sydney WA AUD 571.5(5) 100.0
UBS Warburg Derivatives Limited Hong Kong WA HKD 20.0 100.0
UBS Warburg Futures Inc Delaware WA USD 2.0 100.0
UBS Warburg Hong Kong Limited Hong Kong WA HKD 30.0 100.0
UBS Warburg International Ltd London WA GBP 18.0 100.0
UBS Warburg LLC Delaware WA USD 450.1 100.0
UBS Warburg Ltd London WA GBP 17.5 100.0
UBS Warburg Pte Limited Singapore WA SGD 3.0 100.0
UBS Warburg Real Estate Securities Inc Delaware WA USD 0.4(5) 100.0
UBS Warburg Securities (Espana) SV SA Madrid WA EUR 13.4 100.0
UBS Warburg Securities (South Africa) (Pty) ZAR
Limited Sandton WA 22.1 100.0
UBS Warburg Securities Co Ltd Bangkok WA THB 400.0 100.0
UBS Warburg Securities India Private Limited Mumbai WA INR 237.8 75.0
UBS Warburg Securities Ltd London WA GBP 140.0 100.0
UBS Warburg Securities Philippines Inc Makati City WA PHP 120.0 100.0
- ------------
FOOTNOTES
(1) CH: UBS Switzerland
(2) AM: UBS Asset Management
(3) WA: UBS Warburg
(4) CC: Corporate Center
(5) Share Capital and Share Premium
(6) Joined UBS Asset Management on 20 February 2001 and was renamed Brinson
Advisors Inc
- --------------------------------------------------------------------------------
F- 79
348
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SIGNIFICANT ASSOCIATES
EQUITY INTEREST SHARE CAPITAL
COMPANY IN % IN MILLIONS
- --------------------------------------------------------------------------------------------
FSG Swiss Financial Services Group AG, Zurich 33.0 CHF 26
Giubergia UBS Warburg SIM SpA, Milan 50.0 EUR 15
Motor Columbus AG, Baden 35.6 CHF 253
Telekurs Holding AG, Zurich 33.3 CHF 45
Volbroker.com Limited, London 20.6 GBP 16
None of the above investments carry voting rights that are significantly
different from the proportion of shares held.
CONSOLIDATED COMPANIES: CHANGES IN 2000
SIGNIFICANT NEW COMPANIES
- --------------------------------------------------------------------------------
Correspondent Services Corporation, Delaware
Fondvest AG, Zurich
Mitchell Hutchins Asset Management Inc, Delaware(1)
PaineWebber Capital Inc, Delaware
PaineWebber Incorporated of Puerto Rico, Puerto Rico
PaineWebber Incorporated, Delaware
PaineWebber Life Insurance Company, California
PW Trust Company, New Jersey
UBS Americas Inc, Stamford
UBS Asset Management (Taiwan) Ltd, Taipei (formerly Fortune Securities
Investment & Trust Co Ltd)
UBS Global Trust Corporation, St. John
UBS Life AG, Zurich
UBS Preferred Funding Company LLC I, Delaware
UBS Trustees (Singapore) Ltd, Singapore
UBS Warburg Real Estate Securities Inc, Delaware
- ------------
FOOTNOTES
(1) Joined UBS Asset Management on 20 February 2001 and was renamed Brinson
Advisors Inc
DECONSOLIDATED COMPANIES
SIGNIFICANT DECONSOLIDATED COMPANIES REASON FOR DECONSOLIDATION
- ----------------------------------------------------------------------------------------
IMPRIS AG, Zurich Sold
Solothurner Bank, Solothurn Sold
- ----------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 80
349
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 39 SIGNIFICANT CURRENCY TRANSLATION RATES
The following table shows the significant rates used to translate the financial
statements of foreign entities into Swiss francs.
SPOT RATE AVERAGE RATE
At Year-to-date
------------------ ----------------------------
31.12.00 31.12.99 31.12.00 31.12.99 31.12.98
- -----------------------------------------------------------------------------------------------------
1 USD 1.64 1.59 1.69 1.50 1.45
1 EUR 1.52 1.61 1.56 1.60
1 GBP 2.44 2.58 2.57 2.43 2.41
100 JPY 1.43 1.56 1.57 1.33 1.11
100 DEM 82.07 81.88 82.38
- -----------------------------------------------------------------------------------------------------
NOTE 40 SWISS BANKING LAW REQUIREMENTS
The significant differences between International Accounting Standards (IAS),
which are the principles followed by the Group, and the accounting requirements
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. Up to 31 December 1999, the Swiss requirement was 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.
For the year ended 31 December 2000 the Swiss regulators accepted the same
treatment as for IAS and therefore there is no difference in the balance sheet.
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 would be carried in the balance sheet
(trading portfolio assets, financial investments or other liabilities) 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 items 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.
- --------------------------------------------------------------------------------
F- 81
350
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CHF MILLION 31.12.00 31.12.99(1)
- ------------------------------------------------------------------------------------
DIFFERENCES IN THE BALANCE SHEET
Securities borrowing and lending
Assets
Trading portfolio / Money market paper 47,401
Due from banks / customers 273,093
Liabilities
Due to banks / customers 375,080
Trading portfolio liabilities (54,586)
- ------------------------------------------------------------------------------------
Treasury shares
Assets
Trading portfolio 4,561
Financial investments 4,007 3,136
Liabilities
Other liabilities 2,516 0
- ------------------------------------------------------------------------------------
DIFFERENCES IN THE INCOME STATEMENT
Treasury shares 201 (182)
- ------------------------------------------------------------------------------------
RECLASSIFICATION OF EXTRAORDINARY INCOME AND EXPENSE
Other income, including income from associates (211) (1,726)
- ------------------------------------------------------------------------------------
DIFFERENCES IN THE SHAREHOLDERS' EQUITY
Share premium (2,509)
Treasury shares(1) 4,000 8,023
- ------------------------------------------------------------------------------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable International Accounting
Standards and changes in presentation (see Note 1: Summary of Significant
Accounting Policies).
NOTE 41 RECONCILIATION OF INTERNATIONAL ACCOUNTING STANDARDS TO
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
NOTE 41.1 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 relevant significant accounting and valuation
differences between IAS and U.S. GAAP.
a. PURCHASE ACCOUNTING (MERGER OF UNION BANK OF SWITZERLAND AND SWISS BANK
CORPORATION)
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 accounted for under
the purchase method with Union Bank of Switzerland being considered the
acquirer. Under the purchase method, the cost of acquisition is measured at fair
value and the acquirer's interests in identifiable tangible
- --------------------------------------------------------------------------------
F- 82
351
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 for any
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 2000 and 1999, goodwill was reduced by CHF 211 million and CHF 118 million
respectively, due to 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 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 two years to 20 years.
b. HARMONIZATION OF ACCOUNTING POLICIES
The business combination noted above was accounted for under the pooling of
interests method under IAS. Under the pooling interest 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 combination noted above is being accounted for under the
purchase method and the impact of the accounting changes was recorded in 1998.
Harmonization of accounting policies
The income statement effect of this conforming adjustment was as follows:
CHF million
FOR THE YEAR ENDED 31.12.99 31.12.98
- ----------------------------------------------------------------------------------------
Depreciation policies (20) (338)
Credit risk adjustments on derivatives 0 (193)
Policies for other real estate 0 (140)
Retirement benefit and equity participation plans 0 (47)
Settlement-risk adjustments on derivatives 0 (33)
- ----------------------------------------------------------------------------------------
TOTAL (20) (751)
- ----------------------------------------------------------------------------------------
There was no income statement effect after year 1999.
- --------------------------------------------------------------------------------
F- 83
352
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, IT, premises and other costs
associated with combining and restructuring the merged Group. A further CHF 300
million provision was recognized in 1999, reflecting the impact of increased
precision in the estimation of certain leased and owned property costs.
Under U.S. GAAP, the criteria for establishing restructuring provisions were
more stringent than under IAS prior to 2000. 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 that 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. The reserve is expected to be
substantially utilized by 2001.
The U.S. GAAP restructuring provision was adjusted in 1999 (increase of CHF 600
million) and 2000 (increase of CHF 130 million) as shown in the table below.
During 2000, the IAS requirements for restructuring provisions were changed such
that they became substantially identical to the U.S. GAAP requirements. As of 31
December 2000, the remaining IAS provision was higher than the remaining U.S.
GAAP provision by approximately CHF 114 million. This amount represents an
accrual permitted under IAS for lease costs on properties to be vacated. Under
U.S. GAAP, such costs may not be recognized until the premises are actually
vacated.
Restructuring provision
The usage of the U.S. GAAP restructuring provision was as follows:
BALANCE REVISION USAGE BALANCE REVISION USAGE BALANCE USAGE PROVISION
CHF MILLION 31.12.00 2000 2000 31.12.99 1999 1999 31.12.98 1998 1998
- ------------------------------------------------------------------------------------------------------------------
Personnel 422 (71) (188) 681 553 (254) 382 (374) 756
Premises 143 194 (291) 240 179 (244) 305 (27) 332
IT 31 67 (63) 27 7 (5) 25 (68) 93
Other 20 (60) (49) 129 (139) (45) 313 (81) 394
- ------------------------------------------------------------------------------------------------------------------
TOTAL 616 130 (591) 1,077 600 (548) 1,025 (550) 1,575
- ------------------------------------------------------------------------------------------------------------------
Additionally, for purposes of the U.S. GAAP reconciliation, CHF 138 million, CHF
150 million and CHF 273 million of restructuring costs were expensed as incurred
in 2000, 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).
- --------------------------------------------------------------------------------
F- 84
353
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Group does not 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. 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 ("LOCOM"). 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.
For purposes of the U.S. GAAP reconciliation, marketable equity securities are
adjusted from LOCOM to fair value and classified as available for sale
investments. Held to maturity investments that do not meet U.S. GAAP criteria
are also reclassified to the available for sale category. Unrealized gains or
unrealized losses relating to these investments are recorded as a component of
Shareholders' equity.
f. 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.
Generally, under U.S. GAAP, pension expense 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 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 by CHF 3,525 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 accounting 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 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- 85
354
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
g. 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.
h. 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 (Accounting Principles Board "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 recognizes 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 pursuant to APB No. 25, 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 2000, 1999 and 1998, is CHF 85 million, CHF 41 million and CHF
1 million, respectively. In addition, certain of the Group's equity
participation plans provide for deferral and diversification 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 net
effect on income of recording these assets and liabilities is a debit to expense
of CHF 82 million, CHF 8 million and nil for the years ended 31 December 2000,
1999 and 1998, respectively.
i. SOFTWARE CAPITALIZATION
Under IAS, effective 1 January 2000, certain costs associated with the
acquisitions 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 two years once it is ready for its
intended use. From 1 January 2000, the only remaining reconciliation item is the
amortization of software capitalized in 1999 for U.S. GAAP purposes.
j. TRADING IN OWN SHARES AND DERIVATIVES ON OWN SHARES
As of 1 January 2000, upon adoption of the Standing Interpretations Committee's
("SIC") interpretation 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, Summary of
Significant Accounting Policies).
- --------------------------------------------------------------------------------
F- 86
355
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
k. 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 instrument embedded in other
contracts, and for hedging activities. Under International Accounting Standards,
the Group is not required to comply with all the criteria necessary to obtain
hedge accounting under U.S. GAAP. Accordingly, for future U.S. GAAP
reconciliation, derivative instruments held or issued for non-trading purposes
that do not meet U.S. GAAP hedging criteria under SFAS No. 133 will be carried
at fair value with changes in fair value recognized as adjustments to trading
income. The specific impact on earnings and financial position as a result of
SFAS No. 133 is not possible to quantify as the Group will be complying with
hedge accounting criteria necessary to obtain hedge accounting for certain
activity, but not all.
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
In 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities". That statement provided
standards for distinguishing transfers of financial assets that are sales from
those that are financing transactions. In September 2000, the FASB issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities - a replacement of SFAS No. 125". SFAS No. 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain new disclosures, but it
carries over most of SFAS No. 125's provisions without reconsideration.
Generally, the new provisions of this standard are to be applied prospectively
and become effective 31 March 2001. However, certain recognition and
classification requirements for collateral and disclosures for collateral and
securitization transactions have been adopted by the Group as of 31 December
2000. Adoption of the remaining provisions of this revised accounting standard
is not expected to have a material impact on the Group.
- --------------------------------------------------------------------------------
F- 87
356
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 41.2 RECONCILIATION OF IAS SHAREHOLDERS' EQUITY AND NET PROFIT/LOSS TO
U.S. GAAP
Shareholders' equity Net profit/(loss)
------------------------------ ------------------------------
CHF MILLION 31.12.00 31.12.99 31.12.98 31.12.00 31.12.99 31.12.98
- -------------------------------------------------------------------------------------------------------------
AMOUNTS DETERMINED IN ACCORDANCE WITH IAS 44,833 30,608 28,794 7,792 6,153 2,972
Adjustments in respect of
a. SBC purchase accounting:
Goodwill 17,835 19,765 21,612 (1,719) (1,729) (864)
Other purchase accounting adjustments (808) (858) (895) 50 37 (2,415)
b. Harmonization of accounting policies 0 0 20 0 (20) (751)
c. Restructuring provision 112 350 1948 (238) (1,598) (3,982)
d. Derivative instruments held or issued
for non-trading purposes (857) 507 1,052 (1,353) (545) (405)
e. Financial investments 379 52 108 28 36 23
f. Retirement benefit plans 1,898 1,839 1,858 59 (19) 88
g. Other employee benefits (16) (24) (26) 8 2 (20)
h. Equity participation plans (311) (113) (40) (167) (47) (1)
i. Software capitalization 229 389 0 (160) 389 0
Tax adjustments (334) (682) 330 137 178 1,690
- -------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 18,127 21,225 25,967 (3,355) (3,316) (6,637)
- -------------------------------------------------------------------------------------------------------------
AMOUNTS DETERMINED IN ACCORDANCE WITH U.S.
GAAP 62,960 51,833 54,761 4,437 2,837 (3,665)
- -------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 88
357
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 41.3 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 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 computations of basic and diluted EPS for the years ended 31 December 2000,
31 December 1999 and 31 December 1998 are presented in the following table. The
adjustment in 1998 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.
% change from
FOR THE YEAR ENDED 31.12.00 31.12.99 31.12.98 31.12.99
- ------------------------------------------------------------------------------------------------
NET PROFIT / (LOSS) AVAILABLE
FOR BASIC EARNINGS PER SHARE (CHF
MILLION)
IAS 7,792 6,153 2,972 27
U.S. GAAP 4,437 2,837 (3,665) 56
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING
IAS 403,029,309 404,742,482 405,222,295 0
U.S. GAAP 403,029,309 404,742,482 414,609,886 0
BASIC EARNINGS / (LOSS) PER SHARE
(CHF)
IAS 19.33 15.20 7.33 27
U.S. GAAP 11.01 7.01 (8.84) 57
NET PROFIT / (LOSS) AVAILABLE
FOR DILUTED EARNINGS PER SHARE (CHF
MILLION)
IAS 7,778 6,153 2,972 26
U.S. GAAP 4,423 2,837 (3,665) 56
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING
IAS 408,525,900 408,375,152 412,881,041 0
U.S. GAAP 408,525,900 408,375,152 414,609,886(1) 0
DILUTED EARNINGS / (LOSS) PER SHARE
(CHF)
IAS 19.04 15.07 7.20 26
U.S. GAAP 10.83 6.95 (8.84)(1) 56
- ------------------------------------------------------------------------------------------------
(1) No potential ordinary shares may be included in the computation of any
diluted per-share amount when a loss from continuing operations exists.
- --------------------------------------------------------------------------------
F- 89
358
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following are adjustments to the calculation of weighted average outstanding
common shares which result from valuation and presentation differences between
IAS and U.S. GAAP:
WEIGHTED AVERAGE SHARES
OUTSTANDING 31.12.00 31.12.99 31.12.98
- ------------------------------------------------------------------------------------------------
Basic weighted-average ordinary
shares (IAS) 403,029,309 404,742,482 405,222,295
add: Treasury shares adjustments 0 0 9,387,591
Basic weighted-average ordinary
shares (U.S. GAAP) 403,029,309 404,742,482 414,609,886
NOTE 41.4 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 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.
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 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.
- --------------------------------------------------------------------------------
F- 90
359
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SBC'S SUMMARIZED INCOME STATEMENT FOR THE PERIOD 1 JANUARY 1998 TO 29 JUNE 1998
CHF million
- -------------------------------------------------------------------
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
- -------------------------------------------------------------------
3. SECURITIES LENDING, SECURITIES BORROWING, REPURCHASE, REVERSE REPURCHASE AND
OTHER COLLATERALIZED TRANSACTIONS
Under IAS, the Group's repurchase agreements and securities lending are
accounted for as collateralized borrowings. Reverse repurchase agreements and
securities borrowing 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, these 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. U.S. GAAP (SFAS No. 125) required recognition of securities
collateral controlled, and an offsetting obligation to return such securities
collateral on certain financing transactions, when specific control conditions
existed. Pursuant to the guidance in SFAS No. 140, Accounting for Transfers of
Servicing of Financial Assets and Extinguishment of Liabilities (a replacement
of SFAS No. 125) issued in 2000, the Group has restated its 1999 U.S. GAAP
Balance sheet to derecognize securities collateral received that are no longer
required to be recognized.
Additionally, SFAS No. 140 requires segregation of the balance, as of 31
December 2000, of the Group's Trading portfolio assets which it has pledged
under agreements permitting the transferee to repledge or resell such
collateral. For presentation purposes, such reclassifications are reflected in
the U.S. GAAP Balance Sheet in Trading portfolio assets, pledged.
- --------------------------------------------------------------------------------
F- 91
360
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. EQUITY PARTICIPATION PLANS
Certain of the Group's equity participation plans provide for deferral and
diversification of the awards. The shares and other diversified 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 1,298 million and CHF 655 million, liabilities by CHF
1,377 million and CHF 717 million, and decrease shareholders' equity by CHF 69
million and CHF 62 million (for UBS AG shares held by the trusts which are
treated as treasury shares) at 31 December 2000 and 31 December 1999,
respectively.
6. 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, Summary of Significant Accounting Policies). 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.
NOTE 41.5 CONSOLIDATED INCOME STATEMENT
The following is a Consolidated Income Statement of the Group, for the years
ended 31 December 2000, 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.
- --------------------------------------------------------------------------------
F- 92
361
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
31.12.00 31.12.99(1) 31.12.98(1)
FOR THE YEAR ENDED ------------------- ------------------- -------------------
CHF MILLION REFERENCE U.S. GAAP IAS U.S. GAAP IAS U.S. GAAP IAS
- ---------------------------------------------------------------------------------------------------------
OPERATING INCOME
Interest income a, d, 1 51,565 51,745 35,404 35,604 29,136 37,442
Less: Interest
expense a, 1 (43,584) (43,615) (29,660) (29,695) (25,773) (32,424)
- ---------------------------------------------------------------------------------------------------------
Net interest income 7,981 8,130 5,744 5,909 3,363 5,018
Less: Credit loss
expense 1 130 130 (956) (956) (787) (951)
- ---------------------------------------------------------------------------------------------------------
Total 8,111 8,260 4,788 4,953 2,576 4,067
- ---------------------------------------------------------------------------------------------------------
Net fee and
commission income 1 16,703 16,703 12,607 12,607 8,925 12,626
Net trading income b, d, 1 8,597 9,953 7,174 7,719 455 3,313
Net gains from
disposal of
associates and
subsidiaries 1 83 83 1,821 1,821 84 1,119
Other income b, e, 1 1,431 1,403 1,361 1,325 641 1,122
- ---------------------------------------------------------------------------------------------------------
Total 34,925 36,402 27,751 28,425 12,681 22,247
- ---------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Personnel b, c, f, g, h, 1 17,262 17,163 12,483 12,577 7,938 9,816
General and
administrative a, c, i, 1 6,813 6,765 6,664 6,098 6,259 6,735
Depreciation and
amortization a, b, i, 1 3,952 2,275 3,454 1,857 2,403 1,825
Restructuring costs c 191 0 750 0 1,089 0
- ---------------------------------------------------------------------------------------------------------
Total 28,218 26,203 23,351 20,532 17,689 18,376
- ---------------------------------------------------------------------------------------------------------
OPERATING
PROFIT/(LOSS) BEFORE
TAX AND MINORITY
INTERESTS 6,707 10,199 4,400 7,893 (5,008) 3,871
- ---------------------------------------------------------------------------------------------------------
Tax expense/(benefit) 1 2,183 2,320 1,509 1,686 (1,339) 904
- ---------------------------------------------------------------------------------------------------------
NET PROFIT/(LOSS)
BEFORE MINORITY
INTERESTS 4,524 7,879 2,891 6,207 (3,669) 2,967
- ---------------------------------------------------------------------------------------------------------
Minority interests 1 (87) (87) (54) (54) 4 5
- ---------------------------------------------------------------------------------------------------------
NET PROFIT/(LOSS) 4,437 7,792 2,837 6,153 (3,665) 2,972
- ---------------------------------------------------------------------------------------------------------
(1) Certain IAS and U.S. GAAP 1999 and 1998 figures have been restated to
reflect retroactive changes in accounting policy arising from newly
applicable International Accounting Standards and changes in presentation
(see Note 1, Summary of Significant Accounting Policies).
Note: References above coincide with the discussions in Note 41.1 and Note 41.4.
These references indicate which IAS to U.S. GAAP adjustments affect an
individual financial statement caption.
- --------------------------------------------------------------------------------
F- 93
362
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 41.6 CONSOLIDATED BALANCE SHEET
The following is a Consolidated Balance Sheet of the Group, as of 31 December
2000 and 31 December 1999 restated to reflect the impact of valuation and income
recognition principles and presentation differences between IAS and U.S. GAAP.
31.12.00 31.12.99(1)
-------------------- ------------------
CHF MILLION REFERENCE U.S. GAAP IAS U.S. GAAP IAS
- --------------------------------------------------------------------------------------------------------
ASSETS
Cash and balances with central
banks 2,979 2,979 5,073 5,073
Money market paper 66,454 66,454 69,717 69,717
Due from banks a, 3 29,182 29,147 29,954 29,907
Cash collateral on securities
borrowed 177,857 177,857 113,162 113,162
Reverse repurchase agreements 193,801 193,801 132,391 132,391
Trading portfolio assets b, 2,3 197,048 253,296 184,085 211,932
Trading portfolio assets, pledged 3 59,448
Positive replacement values 2 57,775 57,875 62,294 62,957
Loans, net of allowance for credit
losses a, 3 245,214 244,842 235,401 234,858
Financial investments b, e, 4 7,807 16,405 2,378 7,039
Accrued income and prepaid
expenses 7,062 7,062 5,167 5,167
Investments in associates 880 880 1,102 1,102
Property and equipment a, b, i 9,692 8,910 9,655 8,701
Intangible assets and goodwill a 35,726 19,537 21,428 3,543
Private equity investments 4 6,658 0 3,001 0
Other assets b, d, f, g, h, 2, 4, 5 26,971 8,507 18,717 11,007
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,124,554 1,087,552 893,525 896,556
- --------------------------------------------------------------------------------------------------------
LIABILITIES
Money market paper issued a 74,780 74,780 64,655 64,655
Due to banks 3 82,240 82,240 76,363 76,365
Cash collateral on securities lent 3 23,418 23,418 12,832 12,832
Repurchase agreements 3 295,513 295,513 173,840 196,914
Trading portfolio liabilities 2, 3 87,832 82,632 52,658 54,638
Negative replacement values 2 75,423 75,923 95,004 95,786
Due to customers a, 3 310,686 310,679 279,971 279,960
Accrued expenses and deferred
income 21,038 21,038 12,040 12,040
Long-term debt a 54,970 54,855 56,049 56,332
Other liabilities a, b, c, d, e, h, 2, 3 32,809 18,756 17,846 15,992
- --------------------------------------------------------------------------------------------------------
Total liabilities 1,058,709 1,039,834 841,258 865,514
- --------------------------------------------------------------------------------------------------------
Minority interests 2,885 2,885 434 434
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 62,960 44,833 51,833 30,608
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS'
EQUITY 1,124,554 1,087,552 893,525 896,556
- --------------------------------------------------------------------------------------------------------
(1) Certain IAS and U.S. GAAP 1999 and 1998 figures have been restated to
reflect retroactive changes in accounting policy arising from newly
applicable International Accounting Standards and changes in presentation
(see Note 1, Summary of Significant Accounting Policies).
Note: References above coincide with the discussions in Note 41.1 and Note 41.4.
These references indicate which IAS and U.S. GAAP adjustments affect an
individual financial statement caption.
- --------------------------------------------------------------------------------
F- 94
363
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 41.7 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
2000, 31 December 1999 and 31 December 1998 are as follows:
UNREALIZED ACCUMULATED
FOREIGN GAINS IN OTHER
CURRENCY AVAILABLE-FOR- COMPREHENSIVE COMPREHENSIVE
CHF MILLION TRANSLATION SALE SECURITIES INCOME INCOME
- --------------------------------------------------------------------------------------------------
BALANCE, 1 JANUARY 1998 (111) 47 (64)
Net loss (3,665)
Other comprehensive income:
Foreign currency translation (345) (345)
Unrealized gains, arising during
the year, net of CHF 89 million tax 267 267
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
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)
- --------------------------------------------------------------------------------------------------
NET PROFIT 4,437
Other comprehensive income:
Foreign currency translation (245) (245)
Unrealized gains, arising during
the year, net of CHF 152 million
tax 456 456
Reclassification adjustment for
gains realized in net profit, net
of CHF 40 million tax (121) (121) 90
- --------------------------------------------------------------------------------------------------
Comprehensive income 4,527
- --------------------------------------------------------------------------------------------------
BALANCE, 31 DECEMBER 2000 (687) 351 (336)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F- 95
364
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 42 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.
NOTE 42.1 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 AG. New
shares totaling 428,746,982 were issued exclusively for the exchange of the
existing shares of Union Bank of Switzerland and Swiss Bank Corporation. Under
the terms of the merger agreement, Union Bank of Switzerland shareholders
received 5 registered shares for each bearer share held and 1 registered share
for each registered share held, totaling 257,500,000 shares of UBS AG. Swiss
Bank Corporation shareholders received 1 1/13 registered shares of the Group for
each Swiss Bank Corporation registered share held, totaling 171,246,982 shares.
The combined share capital amounted to CHF 5,754 million. As a result of the
exchange of shares, CHF 1,467 million were transferred from share capital to the
share premium account. The merger was accounted for 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:
UNION BANK SWISS BANK
CHF MILLION OF SWITZERLAND CORPORATION
- -------------------------------------------------------------------------------------------
Total operating income 5,702 8,646
Net profit 739 2,614
- -------------------------------------------------------------------------------------------
As a result of the merger, the Group harmonized its accounting policies that
have 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:
TOTAL OPERATING
CHF MILLION INCOME NET LOSS
- -----------------------------------------------------------------------------------------
Union Bank of Switzerland 13,114 (129)
Swiss Bank Corporation 13,026 (248)
- -----------------------------------------------------------------------------------------
Total as previously reported 26,140 (377)
Impact of accounting policy harmonization (1,260) (290)
- -----------------------------------------------------------------------------------------
CONSOLIDATED 24,880 (667)
- -----------------------------------------------------------------------------------------
Prior to 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation
entered into certain transactions with each other in the normal course of
business. These intercompany transactions have been eliminated in the
accompanying financial statements.
- --------------------------------------------------------------------------------
F- 96
365
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 42.2 FINANCIAL INVESTMENTS
See Note 15 for information on financial investments. The following table
summarizes the Group's financial investments as of 31 December 2000 and 31
December 1999:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
CHF MILLION COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------
31 DECEMBER 2000
Equity securities(1) 1,147 447 6 1,588
Debt securities issued by the Swiss national
government and agencies 34 2 0 36
Debt securities issued by Swiss local
governments 46 1 1 46
Debt securities issued by the U.S. Treasury and
agencies 0 0 0 0
Debt securities issued by foreign governments
and official institutions 4,852 7 3 4,856
Corporate debt securities 1,139 5 1 1,143
Mortgage-backed securities 47 0 0 47
Other debt securities 88 4 0 92
- ---------------------------------------------------------------------------------------------
TOTAL 7,353 466 11 7,808
- ---------------------------------------------------------------------------------------------
31 DECEMBER 1999
Equity securities(1) 388 3 14 377
Debt securities issued by the Swiss national
government and agencies 78 3 0 81
Debt securities issued by Swiss local
governments 81 3 1 83
Debt securities issued by the U.S. Treasury and
agencies 410 0 0 410
Debt securities issued by foreign governments
and official institutions 321 6 1 326
Corporate debt securities 851 24 6 869
Mortgage-backed securities 109 1 1 109
Other debt securities 120 3 0 123
- ---------------------------------------------------------------------------------------------
TOTAL 2,358 43 23 2,378
- ---------------------------------------------------------------------------------------------
(1) The LOCOM value of the equity securities as reported in Note 15 is adjusted
to cost basis for the purpose of fair value calculation.
- --------------------------------------------------------------------------------
F- 97
366
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table presents an analysis of the contractual maturities of the
investments in debt securities as of 31 December 2000:
1-5 YEARS 5-10 YEARS OVER 10 YEARS
CHF MILLION, EXCEPT WITHIN 1 YEAR ----------------- ----------------- -----------------
PERCENTAGES AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%)
- ----------------------------------------------------------------------------------------------------
Swiss national
government and
agencies 2 6.90 16 5.13 16 6.45 0
Swiss local
governments 1 6.11 27 5.19 18 4.43 0
U.S. Treasury and
agencies 0 0 0 0
Foreign governments
and official
institutions 2,451 1.62 1,236 1.80 1,165 0.85 0
Corporate debt
securities 16 5.20 917 6.02 206 2.21 0
Mortgage-backed
securities 20 6.02 5 6.54 22 14.46 0
Other debt securities 21 6.57 56 4.33 11 3.68 0
- ----------------------------------------------------------------------------------------------------
Total amortized cost 2,511 2,257 1,438 0
- ----------------------------------------------------------------------------------------------------
TOTAL MARKET VALUE 2,514 2,272 1,434 0
- ----------------------------------------------------------------------------------------------------
Proceeds from sales and maturities of investment securities available for sale
during the year ended 31 December 2000 and the year ended 31 December 1999 were
CHF 325 million and CHF 1,482 million, respectively. Gross gains of CHF 162
million and gross losses of CHF 1 million were realized in 2000 on those sales,
and gross gains of CHF 180 million and gross losses of CHF 3 million were
realized in 1999.
- --------------------------------------------------------------------------------
F- 98
367
NOTE 43 ACQUISITION OF PAINE WEBBER GROUP, INC.--PRO FORMA RESULTS
The following table presents pro forma consolidated financial information about
the combined company as if the acquisition had occurred on 1 January 2000 and
1999, respectively:
CHF million, except per share data
For the year ended 31.12.00 31.12.99
- ----------------------------------------------------------------------------------
Operating income............................................ 43,373 35,020
Net profit.................................................. 7,045 5,286
Earnings per share (EPS).................................... 16.82 12.50
For purposes of calculating earnings per share, the effects of a share
repurchase program associated with the acquisition funding have been reflected
in the determination of weighted average outstanding shares as if the program
had been executed at the pro forma acquisition dates. In addition, CHF 290
million of non-recurring charges recognized by the Group in 2000 which resulted
directly from the acquisition and CHF 68 million of direct charges relating to
the acquisition, incurred and expensed by Paine Webber Group, Inc.
("PaineWebber") prior to 3 November 2000, have been excluded from the pro forma
Net Profit.
NOTE 44 SUPPLEMENTAL GUARANTOR INFORMATION
Guarantee of PaineWebber securities
Following the acquisition of PaineWebber, UBS AG made a full and unconditional
guarantee of the publicly traded debt and trust preferred securities of
PaineWebber. Prior to the acquisition, PaineWebber was an SEC registrant. Upon
the acquisition, PaineWebber was merged into UBS Americas Inc., a wholly owned
subsidiary of UBS AG. The following is summarized consolidating financial
information segregating UBS AG Parent Bank, UBS Americas Inc. and UBS AG's other
non-guarantor subsidiaries.
The UBS AG Parent Bank financial statements use the cost method for investments
in associates. In this note, investments in associates are presented on the
equity method.
The information presented in this note is prepared in accordance with
International Accounting Standards and should be read in conjunction with the
consolidated financial statements of the Group of which this information is a
part. Below each column, Net profit and Shareholders' equity has been reconciled
to U.S. GAAP. See Note 41 for a more detailed reconciliation of the IAS
financial statements to U.S. GAAP for the Group on a consolidated basis.
- --------------------------------------------------------------------------------
F- 99
368
CONSOLIDATING INCOME STATEMENT
UBS AG UBS UBS GROUP
CHF MILLION PARENT AMERICAS OTHER CONSOLIDATING INCOME
FOR THE YEAR ENDED 31 DECEMBER 2000 BANK(1) INC. SUBSIDIARIES ENTRIES STATEMENT
- -----------------------------------------------------------------------------------------------------------------
OPERATING INCOME
Interest income............................. 40,362 1,268 22,701 (12,586) 51,745
Interest expense............................ 32,161 1,282 22,758 (12,586) 43,615
--------- -------- ------------ ------------- ---------
Net interest income......................... 8,201 (14) (57) 8,130
Credit loss recovery........................ 119 2 9 130
--------- -------- ------------ ------------- ---------
Net interest income after credit loss
recovery.................................. 8,320 (12) (48) 8,260
Net fee and commission income............... 9,145 949 6,609 16,703
Net trading income.......................... 7,344 195 2,414 9,953
Net gains from disposal of associates and
subsidiaries.............................. 6 77 83
Income from subsidiaries.................... 1,804 (1,804)
Other income................................ 276 1,127 1,403
--------- -------- ------------ ------------- ---------
Total operating income...................... 26,895 1,132 10,179 (1,804) 36,402
OPERATING EXPENSES
Personnel................................... 10,501 1,141 5,521 17,163
General and administrative.................. 5,296 350 1,119 6,765
Depreciation and amortization............... 1,410 183 682 2,275
--------- -------- ------------ ------------- ---------
Total operating expenses.................... 17,207 1,674 7,322 26,203
--------- -------- ------------ ------------- ---------
OPERATING PROFIT/(LOSS) BEFORE TAX AND
MINORITY INTERESTS........................ 9,688 (542) 2,857 (1,804) 10,199
Tax expense/(benefit)....................... 1,896 (128) 552 2,320
--------- -------- ------------ ------------- ---------
NET PROFIT/(LOSS) BEFORE MINORITY
INTERESTS................................. 7,792 (414) 2,305 (1,804) 7,879
Minority interests.......................... (87) (87)
--------- -------- ------------ ------------- ---------
NET PROFIT/(LOSS)........................... 7,792 (414) 2,218 (1,804) 7,792
========= ======== ============ ============= =========
Net profit/(loss)--U.S. GAAP(2)............. 4,342 (414) 2,313 (1,804) 4,437
========= ======== ============ ============= =========
- ------------
(1) UBS AG prepares its financial statements in accordance with Swiss Banking
Law requirements. For the purpose of this disclosure the accounts have been
adjusted to IAS.
(2) See Note 41.1 and 41.4 to the Financial Statements for a description of the
differences between IAS and U.S. GAAP. U.S. GAAP adjustments are principally
related to UBS AG Parent Bank.
- --------------------------------------------------------------------------------
F- 100
369
CONSOLIDATING BALANCE SHEET
UBS AG
CHF MILLION PARENT UBS AMERICAS OTHER CONSOLIDATING UBS GROUP
AS OF 31 DECEMBER 2000 BANK(1) INC. SUBSIDIARIES ENTRIES BALANCE SHEET
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and balances with central banks............. 2 242 0 737 0 2 979
Money market paper............................... 61 153 3 348 1 953 0 66 454
Due from banks................................... 75 473 13 007 86 125 (145 458) 29 147
Cash collateral on securities borrowed........... 40 791 33 992 144 778 (41 704) 177 857
Reverse repurchase agreements.................... 157 417 32 589 102 209 (98 414) 193 801
Trading portfolio assets......................... 151 326 7 425 94 545 0 253 296
Positive replacement values...................... 59 246 232 6 029 (7 632) 57 875
Loans, net of allowance for credit losses........ 261 946 18 283 15 153 (50 540) 244 842
Financial investments............................ 7 751 2 289 6 365 0 16 405
Accrued income and prepaid expenses.............. 3 239 1 771 3 702 (1 650) 7 062
Investments in associates........................ 14 010 0 4 800 (17 930) 880
Property and equipment........................... 6 348 975 1 587 0 8 910
Goodwill and other intangible assets............. 262 16 163 3 112 0 19 537
Other assets..................................... 5 556 1 488 3 533 (2 070) 8 507
------- ------- ------- -------- ---------
TOTAL ASSETS..................................... 846 760 131 562 474 628 (365 398) 1 087 552
======= ======= ======= ======== =========
LIABILITIES
Money market paper issued........................ 36 341 123 38 316 0 74 780
Due to banks..................................... 105 074 31 040 91 584 (145 458) 82 240
Cash collateral on securities lent............... 22 792 6 151 36 179 (41 704) 23 418
Repurchase agreements............................ 127 433 49 940 216 554 (98 414) 295 513
Trading portfolio liabilities.................... 62 242 1 360 19 030 0 82 632
Negative replacement values...................... 74 675 231 8 649 (7 632) 75 923
Due to customers................................. 304 389 21 760 35 070 (50 540) 310 679
Accrued expenses and deferred income............. 11 057 5 224 6 407 (1 650) 21 038
Long term debt................................... 44 334 8 790 1 731 0 54 855
Other liabilities................................ 13 590 1 482 5 754 (2 070) 18 756
------- ------- ------- -------- ---------
TOTAL LIABILITIES................................ 801 927 126 101 459 274 (347 468) 1 039 834
------- ------- ------- -------- ---------
MINORITY INTERESTS............................... 0 0 2 885 0 2 885
SHAREHOLDERS' EQUITY
Share capital.................................... 4 444 0 3 808 (3 808) 4 444
Share premium account............................ 20 885 5 868 2 813 (8 681) 20 885
Foreign currency translation..................... (687) 7 (40) 33 (687)
Retained earnings................................ 24 191 (414) 5 888 (5 474) 24 191
Treasury shares.................................. (4 000) 0 0 0 (4 000)
------- ------- ------- -------- ---------
TOTAL SHAREHOLDERS' EQUITY....................... 44 833 5 461 12 469 (17 930) 44 833
------- ------- ------- -------- ---------
TOTAL LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS' EQUITY........................... 846 760 131 562 474 628 (365 398) 1 087 552
======= ======= ======= ======== =========
Total shareholders' equity--U.S. GAAP(2)......... 62 868 5 389 12 633 (17 930) 62 960
======= ======= ======= ======== =========
- ---------------
(1) UBS AG prepares its financial statements in accordance with Swiss Banking
Law requirements. For the purpose of this disclosure the accounts have been
adjusted to IAS.
(2) See Note 41.1 and 41.4 to the Financial Statements for a description of the
differences between IAS and U.S. GAAP. U.S. GAAP adjustments are principally
related to UBS AG Parent Bank. Total assets under U.S. GAAP do not differ
materially from total assets presented on an IAS basis.
- --------------------------------------------------------------------------------
F- 101
370
CONSOLIDATING CASH FLOW STATEMENT
UBS UBS GROUP
CHF MILLION UBS AG AMERICAS OTHER BALANCE
FOR THE YEAR ENDED 31 DECEMBER 2000 PARENT BANK(1) INC. SUBSIDIARIES SHEET
- --------------------------------------------------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES.............. 38,788 6,358 (33,449) 11,697
CASH FLOW FROM INVESTING ACTIVITIES
Investments in subsidiaries and associates, net...... (379) (9,350) (9,729)
Disposal of subsidiaries and associates.............. 669 669
Purchase of property and equipment................... (937) (139) (564) (1,640)
Disposal of property and equipment................... 269 66 335
Net (investment)/divestment in financial
investments ....................................... (5,656) (2,340) (774) (8,770)
------- ------- -------- -------
NET CASH FLOW FROM INVESTING ACTIVITIES.............. (6,034) (11,829) (1,272) (19,135)
CASH FLOW FROM FINANCING ACTIVITIES
Money market paper issued............................ (11,589) 123 21,591 10,125
Net movements in treasury shares and treasury share
contract activity.................................. (647) (647)
Capital issuance..................................... 15 15
Dividends paid....................................... (3,928) (3,928)
Issuance of long term debt........................... 14,391 144 349 14,884
Repayment of long term debt.......................... (19,089) (782) (4,769) (24,640)
Issuances of minority interests...................... 2,683 2,683
Repayment of minority interests...................... (73) (73)
Net activity in investments in subsidiaries.......... (10,039) 10,609 (570)
------- ------- -------- -------
NET CASH FLOW FROM FINANCING ACTIVITIES.............. (30,886) 10,094 19,211 (1,581)
Effects of exchange rate differences................. (538) 782 (132) 112
------- ------- -------- -------
NET INCREASE/(DECREASE) IN CASH EQUIVALENTS.......... 1,330 5,405 (15,642) (8,907)
Cash and cash equivalents, beginning of period....... 76,918 25,359 102,277
------- ------- -------- -------
Cash and cash equivalents, end of period............. 78,248 5,405 9,717 93,370
======= ======= ======== =======
CASH AND CASH EQUIVALENTS COMPRISE:
Cash and balances with central banks................. 2,242 737 2,979
Money market papers.................................. 61,153 3,348 1,953 66,454
Due from banks maturing in less than three months.... 14,853 2,057 7,027 23,937
------- ------- -------- -------
Total................................................ 78,248 5,405 9,717 93,370
======= ======= ======== =======
- ---------------
(1) UBS AG prepares its financial statements in accordance with Swiss Banking
Law requirements. For the purpose of this disclosure the accounts have been
adjusted to IAS.
Guarantee of other securities.
On 10 October 2000, UBS AG, acting through a wholly-owned subsidiary, issued USD
1.5 billion (CHF 2.6 billion at issuance) 8.622% UBS Trust Preferred securities.
UBS AG has fully and unconditionally guaranteed these securities.
- --------------------------------------------------------------------------------
F- 102
371
PAINE WEBBER GROUP INC. FINANCIAL STATEMENTS
YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
F- 103
372
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
REVENUES
Commissions......................................... $1,948,959 $1,641,283 $1,496,791
Principal transactions.............................. 1,110,080 868,807 1,055,648
Asset management.................................... 911,099 713,570 542,755
Investment banking.................................. 558,224 530,972 460,001
Interest............................................ 3,123,440 3,352,708 2,963,124
Other............................................... 170,951 142,242 138,633
---------- ---------- ----------
Total revenues.................................... 7,822,753 7,249,582 6,656,952
Interest expense.................................... 2,532,578 2,844,468 2,544,550
---------- ---------- ----------
Net revenues...................................... 5,290,175 4,405,114 4,112,402
---------- ---------- ----------
NON-INTEREST EXPENSES
Compensation and benefits........................... 3,049,568 2,601,364 2,420,296
Office and equipment................................ 352,712 301,845 275,532
Communications...................................... 168,071 154,272 153,285
Business development................................ 122,678 103,287 82,099
Brokerage, clearing and exchange fees............... 95,211 97,430 86,808
Professional services............................... 136,758 123,265 129,066
Other............................................... 330,375 308,644 292,209
---------- ---------- ----------
Total non-interest expenses....................... 4,255,373 3,690,107 3,439,295
---------- ---------- ----------
Income before taxes and minority interest........... 1,034,802 715,007 673,107
Provision for income taxes.......................... 373,959 249,208 228,626
---------- ---------- ----------
Income before minority interest..................... 660,843 465,799 444,481
Minority interest................................... 32,244 32,244 29,032
Net income.......................................... $ 628,599 $ 433,555 $ 415,449
---------- ---------- ----------
Dividends and amortization of discount on preferred
stock............................................. 22,802 23,647 29,513
Unamortized discount charged to equity on redemption
of preferred stock................................ 59,883 -- --
---------- ---------- ----------
Net income applicable to common shares.............. $ 545,914 $ 409,908 $ 385,936
========== ========== ==========
EARNINGS PER COMMON SHARE (1)
Basic............................................... $ 3.77 $ 2.91 $ 2.84
Diluted............................................. $ 3.56 $ 2.72 $ 2.56
---------- ---------- ----------
- ---------------
(1) The 1999 amounts reflect the effect of the unamortized discount of $59,883
charged to stockholders' equity resulting from the redemption of preferred
stock on December 16, 1999.
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
F- 104
373
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 1998
------------ ----------- -----------
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
Cash and cash equivalents................................... $ 176,401 $ 228,359
Cash and securities segregated and on deposit for federal
and other regulations..................................... 823,059 631,272
Financial instruments owned................................. 21,144,830 20,021,351
Securities received as collateral........................... 1,079,976 1,189,331
Securities purchased under agreements to resell............. 15,923,948 14,217,062
Securities borrowed......................................... 10,526,638 8,717,476
Receivables:
Clients, net of allowance for doubtful accounts of $30,039
and $20,496 in 1999 and 1998, respectively............. 8,918,069 6,667,055
Brokers and dealers....................................... 701,497 634,825
Dividends and interest.................................... 376,380 306,998
Fees and other............................................ 291,991 267,741
Office equipment and leasehold improvements, net of
accumulated depreciation and amortization of $527,718 and
$431,460 in 1999 and 1998, respectively................... 579,819 434,895
Other assets................................................ 1,069,768 859,556
----------- -----------
$61,612,376 $54,175,921
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings....................................... $ 1,884,250 $ 1,417,783
Financial instruments sold, not yet purchased............... 7,099,208 5,177,099
Securities sold under agreements to repurchase.............. 25,740,196 23,948,872
Securities loaned........................................... 5,661,200 4,969,638
Obligation to return securities received as collateral...... 1,079,976 1,189,331
Payables:
Clients................................................... 7,742,759 6,691,316
Brokers and dealers....................................... 295,262 533,621
Dividends and interest.................................... 410,196 294,431
Other liabilities and accrued expenses.................... 1,779,984 1,642,682
Accrued compensation and benefits........................... 1,384,512 1,032,838
Long-term borrowings........................................ 5,223,826 4,255,802
----------- -----------
58,301,369 51,153,413
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts holding solely Company
Guaranteed Related Subordinated Debt...................... 393,750 393,750
Redeemable Preferred Stock.................................. -- 189,815
Stockholders' equity:
Common stock, $1 par value, 400,000,000 shares authorized;
issued 193,145,152 shares and 191,047,151 shares in
1999 and 1998, respectively............................ 193,145 191,047
Additional paid-in capital................................ 1,672,085 1,525,938
Retained earnings......................................... 2,171,080 1,689,386
Treasury stock, at cost; 47,557,064 shares and 45,527,707
shares in 1999 and 1998, respectively.................. (1,113,736) (962,792)
Accumulated other comprehensive income.................... (5,317) (4,636)
----------- -----------
2,917,257 2,438,943
----------- -----------
$61,612,376 $54,175,921
=========== ===========
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
F- 105
374
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AT PER SHARE AMOUNTS)
6%
CUMULATIVE
CONVERTIBLE ADDITIONAL
REDEEMABLE COMMON PAID-IN
PREFERRED STOCK STOCK CAPITAL
--------------- -------- ----------
BALANCE AT DECEMBER 31, 1996......................... $ 100,000 $162,537 $ 792,215
========= ======== ==========
Net income.........................................
Foreign currency translation.......................
Total comprehensive income, year ended December 31,
1997...............................................
Dividends declared:
Common stock, $.41 per share.......................
Redeemable Preferred Stock, $9.00 per share........
Convertible Preferred Stock, $6.00 per share.......
Employee stock transactions.......................... 3,528 14,164
Restricted stock awards.............................. (857) 83,599
Conversion of Convertible Preferred Stock............ (100,000) (69,443)
Conversion of debentures............................. (14,633)
Tax benefit relating to employee compensation
programs........................................... 58,738
Other................................................ (1,811)
Repurchases of common stock:
Kidder-related repurchase.......................... 23,250 542,500
Other..............................................
--------- -------- ----------
BALANCE AT DECEMBER 31, 1997......................... -- $188,458 $1,405,329
========= ======== ==========
Net income.........................................
Foreign currency translation.......................
Total comprehensive income, year ended December 31,
1998...............................................
Dividends declared:
Common stock, $.44 per share.......................
Redeemable Preferred Stock, $9.00 per share..........
Employee stock transactions.......................... 2,954 27,999
Restricted stock awards.............................. (368) 31,800
Conversion of debentures............................. (15,757)
Tax benefit relating to employee compensation
programs........................................... 70,425
Other................................................ 3 6,142
Repurchases of common stock..........................
--------- -------- ----------
BALANCE AT DECEMBER 31, 1998......................... -- $191,047 $1,525,938
========= ======== ==========
Net income.........................................
Foreign currency translation.......................
Total comprehensive income, year ended December 31,
1999...............................................
Dividends declared:
Common stock, $.44 per share.......................
Redeemable Preferred Stock, $9.00 per share........
Employee stock transactions.......................... 2,330 49,937
Restricted stock awards.............................. (235) 50,051
Tax benefit relating to employee compensation
programs........................................... 45,699
Unamortized discount on redemption of preferred
stock..............................................
Other................................................ 3 460
Repurchases of common stock..........................
--------- -------- ----------
BALANCE AT DECEMBER 31, 1999......................... -- $193,145 $1,672,085
========= ======== ==========
- --------------------------------------------------------------------------------
F- 106
375
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AT PER SHARE AMOUNTS)--(CONTINUED)
ACCUMULATED NUMBER OF
OTHER TOTAL SHARES
RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' COMMON TREASURY
EARNINGS STOCK INCOME EQUITY STOCK STOCK
---------- ----------- ------------- ------------- ----------- -----------
BALANCE AT DECEMBER 31, 1996.......... $1,009,448 $ (331,907) $(1,868) $1,730,425 162,537,267 (23,049,351)
========== =========== ======= ========== =========== ===========
Net income.......................... 415,449 415,449
Foreign currency translation........ (3,622) (3,622)
Total comprehensive income, year ended
December 31, 1997................... 411,827
----------
Dividends declared:
Common stock, $.41 per share........ (54,418) (54,418)
Redeemable Preferred Stock, $9.00
per share......................... (22,500) (22,500)
Convertible Preferred Stock, $6.00
per share......................... (6,000) (6,000)
Employee stock transactions........... 17,692 3,528,030
Restricted stock awards............... 5,061 87,803 (857,214) 271,716
Conversion of Convertible Preferred
Stock............................... 169,443 -- 8,273,600
Conversion of debentures.............. 34,721 20,088 2,224,209
Tax benefit relating to employee
compensation programs............... 58,738
----------
Other................................. (1,013) (400) (3,224) (312,485)
Repurchases of common stock:
Kidder-related repurchase........... (784,750) (219,000) 23,250,000 (32,250,000)
Other............................... (90,468) (90,468) (3,715,477)
---------- ----------- ------- ---------- ----------- -----------
BALANCE AT DECEMBER 31, 1997.......... $1,340,966 $ (998,300) $(5,490) $1,930,963 188,458,083 (48,557,788)
========== =========== ======= ========== =========== ===========
Net income.......................... 433,555 433,555
Foreign currency translation........ 854 854
----------
Total comprehensive income, year ended
December 31, 1998................... 434,409
Dividends declared:
Common stock, $.44 per share........ (61,488) (61,488)
Redeemable Preferred Stock, $9.00
per share......................... (22,500) (22,500)
Employee stock transactions........... 30,953 2,953,503
Restricted stock awards............... 57,534 88,966 (367,921) 2,725,525
Conversion of debentures.............. 30,061 14,304 1,454,707
Tax benefit relating to employee
compensation programs............... 70,425
Other................................. (1,147) 15,526 20,524 3,486 982,919
Repurchases of common stock........... (67,613) (67,613) (2,133,070)
---------- ----------- ------- ---------- ----------- -----------
BALANCE AT DECEMBER 31, 1998.......... $1,689,386 $ (962,792) $(4,636) $2,438,943 191,047,151 (45,527,707)
========== =========== ======= ========== =========== ===========
- --------------------------------------------------------------------------------
F- 107
376
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AT PER SHARE AMOUNTS)--(CONTINUED)
ACCUMULATED NUMBER OF
OTHER TOTAL SHARES
RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' COMMON TREASURY
EARNINGS STOCK INCOME EQUITY STOCK STOCK
---------- ----------- ------------- ------------- ----------- -----------
Net income.......................... 628,599 628,599
Foreign currency translation........ (681) (681)
----------
Total comprehensive income, year ended
December 31, 1999................... 627,918
Dividends declared:
Common stock, $.44 per share........ (64,220) (64,220)
Redeemable Preferred Stock, $9.00
per share......................... (21,562) (21,562)
Employee stock transactions........... 32,775 85,042 2,329,596 1,484,938
Restricted stock awards............... 86,546 136,362 (235,081) 3,733,981
Tax benefit relating to employee
compensation programs............... 45,699
Unamortized discount on redemption of
preferred stock..................... (59,883) (59,883)
Other................................. (1,240) 346 (431) 3,486 15,751
Repurchases of common stock........... (270,611) (270,611) (7,264,027)
---------- ----------- ------- ---------- ----------- -----------
BALANCE AT DECEMBER 31, 1999.......... $2,171,080 $(1,113,736) $(5,317) $2,917,257 193,145,152 (47,557,064)
========== =========== ======= ========== =========== ===========
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
F- 108
377
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 628,599 $ 433,555 $ 415,449
Adjustments to reconcile net income to cash used for
operating activities:
Noncash items included in net income:
Depreciation and amortization............................ 99,723 74,296 68,700
Deferred income taxes.................................... (74,097) (43,118) (119,934)
Amortization of deferred charges......................... 59,138 84,932 105,911
Stock-based compensation................................. 136,362 88,966 87,803
(Increase) decrease in operating receivables:
Clients.................................................. (2,260,557) (999,221) (1,343,942)
Brokers and dealers...................................... (66,672) (139,970) (221,118)
Dividends and interest................................... (69,382) 30,411 13,387
Fees and other........................................... (24,250) 135,834 (267,030)
Increase (decrease) in operating payables:
Clients.................................................. 1,051,443 1,638,800 169,172
Brokers and dealers...................................... (238,359) 265,571 62,613
Dividends and interest................................... 115,765 (48,960) 58,050
Other.................................................... 523,330 408,672 393,127
(Increase) decrease in:
Cash and securities on deposit........................... (191,787) (62,134) (69,377)
Financial instruments owned.............................. (1,091,755) (3,041,221) 456,731
Securities purchased under agreements to resell.......... (1,706,886) 7,345,677 (815,908)
Securities borrowed...................................... (1,809,162) 855,711 (2,192,813)
Other assets............................................. (196,808) 16,726 (165,625)
Increase (decrease) in:
Financial instruments sold, not yet purchased............ 1,922,109 (1,925,045) 480,253
Securities sold under agreements to repurchase........... 1,791,324 (5,680,030) 831,626
Securities loaned........................................ 691,562 235,677 1,274,101
----------- ----------- -----------
Cash used for operating activities....................... (710,360) (324,871) (778,824)
=========== =========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Office equipment and leasehold improvements.............. (252,186) (181,417) (90,947)
----------- ----------- -----------
Cash used for investing activities....................... (252,186) (181,417) (90,947)
=========== =========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on):
Short-term borrowings.................................... 466,467 (248,433) 328,570
Proceeds from:
Long-term borrowings..................................... 1,414,997 1,148,860 822,011
Employee stock transactions.............................. 85,042 45,257 72,820
Issuances of Preferred Trust Securities.................. -- -- 198,750
Payments for:
Long-term borrowings..................................... (449,525) (293,223) (207,863)
Repurchases of common stock.............................. (270,611) (67,613) (411,668)
Preferred stock transactions............................. (250,000) -- --
Dividends................................................ (85,782) (83,988) (82,918)
----------- ----------- -----------
Cash provided by financing activities.................... 910,588 500,860 719,702
----------- ----------- -----------
Decrease in cash and cash equivalents.................... (51,958) (5,428) (150,069)
Cash and cash equivalents, beginning of year............. 228,359 233,787 383,856
----------- ----------- -----------
Cash and cash equivalents, end of year................... $ 176,401 $ 228,359 $ 233,787
=========== =========== ===========
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
F- 109
378
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Paine Webber Group Inc. ("PWG") is a holding company which, together with its
operating subsidiaries (collectively, the "Company"), forms one of the largest
full-service securities firms in the industry. The Company is engaged in one
principal line of business, that of serving the investment and capital needs of
individual and institutional clients.
The consolidated financial statements include the accounts of PWG and its wholly
owned subsidiaries, including its principal subsidiary PaineWebber Incorporated
("PWI"). All material intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior year amounts to
conform to current year presentations. The consolidated financial statements are
prepared in conformity with accounting principles generally accepted in the
United States which require management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Financial Instruments Owned and Sold, Not Yet Purchased
Financial instruments used in the Company's trading activities, including
derivative contracts held or issued for trading purposes, are recorded on a
trade date basis at fair value or amounts approximating fair value. Fair value
is generally based upon quoted market prices. If quoted market prices are not
available, or if liquidating the Company's position is reasonably expected to
impact market prices, fair value is determined based upon other relevant
factors, including dealer price quotations, price activity of similar
instruments and pricing models. Pricing models consider the time value and
volatility factors underlying the financial instruments and other economic
measurements.
Related revenues and expenses are recorded in the accounts on a trade date
basis. Unrealized gains and losses from marking-to-market trading instruments
daily are included in principal transactions revenues. Realized gains and losses
on trading instruments and any related interest amounts are included in
principal transactions revenues and interest revenues and expenses,
respectively.
Equity and debt securities purchased in connection with the Company's principal
investing activities, as well as investments in partnerships and other entities
that invest in financial instruments, in which there are no available market
quotations or may be otherwise restricted, are reported at cost or estimated net
realizable value. Realized and unrealized gains and losses are included in
principal transactions revenues.
Derivative Financial Instruments
A derivative instrument is typically defined as a contractual agreement whose
value is "derived" from an underlying asset, rate or index and includes products
such as forwards, futures, swaps or option contracts and other financial
instruments with similar characteristics. A derivative financial instrument also
includes firm or standby commitments for the purchase of securities. The
derivative definition does not include cash instruments whose values are derived
from changes in the value of some asset or index, such as mortgage-backed
securities and structured notes. Derivative contracts used by the Company
generally represent future commitments to exchange interest payment streams
based on the gross contract or notional amount or to purchase or sell financial
instruments at specified terms and future dates.
In connection with the Company's market risk management and trading activities,
the Company may enter into a derivative contract to manage the risk arising from
other financial instruments or to take a
- --------------------------------------------------------------------------------
F- 110
379
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
position based upon expected future market conditions. The Company also takes
positions to facilitate client transactions.
A large portion of the Company's derivative financial instruments are "to be
announced" mortgage securities requiring forward settlement. As a principal in
the mortgage-backed securities business, the Company has outstanding forward
purchase and sale agreements committing the Company to receive or deliver
mortgage-backed securities. These forward contracts are generally short-term
with maturity or settlement dates ranging from 30 to 90 days.
Derivative instruments held or issued for trading purposes are marked-to-market
daily with the resulting unrealized gains and losses recorded on the
Consolidated Statement of Financial Condition in financial instruments owned or
financial instruments sold, not yet purchased, and the related profit or loss
reflected in principal transactions revenues on the Consolidated Statement of
Income. The fair value of an exchange-traded derivative, such as futures and
certain option contracts, is determined by quoted market prices while the fair
value of derivatives negotiated in over-the-counter markets are valued based
upon dealer price quotations or pricing models which consider time value and the
volatility of the underlying instruments, as well as other economic factors.
The Company also enters into interest rate swaps to modify the interest rate
characteristics of its outstanding fixed rate debt. These agreements generally
involve the exchange between the Company and its counterparties of amounts based
on a fixed interest rate for amounts based on a variable interest rate over the
life of the agreement without the exchange of the notional amount upon which the
payments are based. The Company accounts for interest rate swap agreements used
for hedging purposes on the accrual method. The difference to be paid or
received on the swap agreements is accrued as an adjustment to interest expense
as incurred. The related receivable from or payable to counterparties is
reflected as an asset or liability, accordingly. The fair values of the swap
agreements are not recognized in the financial statements. Any gains and losses
on early terminations of swap agreements are deferred as an adjustment to the
carrying amount of the debt and amortized as an adjustment to interest expense
over the remaining term of the original contract life of the hedged item. In the
event of the early extinguishment of debt, any unrealized gain or loss from the
related swap would be recognized in income coincident with the extinguishment.
Collateralized Securities Transactions
Securities purchased under agreements to resell ("resale agreements") and
securities sold under agreements to repurchase ("repurchase agreements"),
principally government and agency securities are, for accounting purposes,
treated as financing transactions and are recorded at their contractual amounts,
plus accrued interest. It is Company policy to obtain possession or control of
securities, which have a fair value in excess of the original principal amount
loaned, in order to collateralize resale agreements. The Company is required to
provide securities to counterparties in order to collateralize repurchase
agreements. The Company monitors the fair value of the securities purchased and
sold under these agreements daily versus the related receivable or payable
balances. Should the fair value of the securities purchased decline or the fair
value of the securities sold increase, additional collateral is requested or
excess collateral is returned when deemed appropriate to maintain contractual
margin protection. When specific conditions are met, including the existence of
a legally enforceable master netting agreement, balances related to resale
agreements and repurchase agreements are netted by counterparty on the
Consolidated Statements of Financial Condition.
Resale agreements and repurchase agreements for which the resale/repurchase date
corresponds to the maturity date of the underlying securities are accounted for
as purchases and sales, respectively.
- --------------------------------------------------------------------------------
F- 111
380
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
Securities borrowed and securities loaned are recorded at the amount of cash
collateral advanced or received in connection with the transaction. Securities
borrowed transactions require the Company to deposit cash or other collateral
with the lender. With respect to securities loaned, the Company receives
collateral. The initial collateral advanced or received approximates or is
greater than, the fair value of the securities borrowed or loaned. The Company
monitors the fair value of the securities borrowed and loaned on a daily basis
and requests additional collateral or returns excess collateral, as appropriate.
Depreciation and Amortization
The Company depreciates office equipment using the straight-line method over
estimated useful lives of three to ten years. Leasehold improvements are
amortized over the lesser of the estimated useful life of the asset or the
remaining term of the lease.
The excess cost of acquired companies over the fair value of the net assets
acquired is recorded as goodwill and is amortized on a straight-line basis over
periods not exceeding 35 years.
Income Taxes
The Company files a consolidated federal income tax return and uses the asset
and liability method in providing for income tax expense. Under this method,
deferred taxes are provided based upon the net tax effects of temporary
differences between the book and tax bases of assets and liabilities.
Translation of Foreign Currencies
Assets and liabilities denominated in foreign currencies are translated at
year-end rates of exchange, and revenues and expenses are translated at average
rates of exchange during the year. Gains and losses resulting from translation
adjustments are accumulated as a separate component of comprehensive income
within stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in net income.
Stock-Based Compensation
The Company grants stock options to certain employees and non-employee directors
with an exercise price equal to the fair market value of the stock at the date
of grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and, accordingly, recognizes no compensation expense related to
such grants.
Statement of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, cash equivalents are
defined as highly liquid investments not held for resale, with a maturity of
three months or less when purchased. Total interest payments for the years ended
December 31, 1999, 1998 and 1997 were $2,416,813, $2,893,428 and $2,486,500,
respectively.
Fair Value of Financial Instruments
Substantially all of the Company's financial instruments are carried at fair
value or amounts approximating fair value. Assets, including cash and cash
equivalents, cash and securities segregated for regulatory purposes, trading
assets, resale agreements, securities borrowed, and certain receivables, are
carried at fair value or contracted amounts which approximate fair value.
Similarly, liabilities, including short-term borrowings, trading liabilities,
repurchase agreements, securities loaned,
- --------------------------------------------------------------------------------
F- 112
381
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
obligations to return securities received as collateral and certain payables,
are carried at fair value or contracted amounts approximating fair value. Fair
values of the Company's long-term borrowings and interest rate swaps used to
hedge the Company's long-term borrowings are discussed in Note 4.
Accounting Changes and Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes revised accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity measure all derivative instruments at fair value and
recognize such instruments as either assets or liabilities in the consolidated
statements of financial condition. The accounting for changes in the fair value
of a derivative instrument will depend on the intended use of the derivative as
either a fair value hedge, a cash flow hedge or a foreign currency hedge. The
effect of the changes in fair value of the derivatives and, in certain cases,
the hedged items are to be reflected in either the consolidated statements of
income or as a component of other comprehensive income, based upon the resulting
designation. As issued, SFAS No. 133 was effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133
for one year to fiscal years beginning after June 15, 2000. The Company has not
yet determined the impact of this statement on the Company's Consolidated
Financial Statements, taken as a whole.
NOTE 2 FINANCIAL INSTRUMENTS OWNED AND SOLD, NOT YET PURCHASED
At December 31, 1999 and 1998, financial instruments owned and financial
instruments sold, not yet purchased, consisted of the following:
1999 1998
----------- -----------
FINANCIAL INSTRUMENTS OWNED
U.S. government and agencies........................... $ 5,864,331 $ 4,858,189
Mortgages and mortgage-backed.......................... 9,012,415 8,861,944
Corporate debt......................................... 1,875,361 2,466,322
Commercial paper and other short-term debt............. 1,744,036 1,534,913
Equities and other..................................... 2,030,986 1,799,804
State and municipals................................... 617,701 500,179
----------- -----------
$21,144,830 $20,021,351
=========== ===========
FINANCIAL INSTRUMENTS SOLD, NOT YET PURCHASED
U.S. government and agencies........................... $ 5,804,259 $ 4,031,254
Mortgages and mortgage-backed.......................... 123,049 79,521
Corporate debt......................................... 785,890 837,099
Equities............................................... 348,485 215,991
State and municipals................................... 37,525 13,234
----------- -----------
$ 7,099,208 $ 5,177,099
=========== ===========
NOTE 3 SHORT-TERM BORROWINGS
The Company meets its short-term financing needs principally by obtaining bank
loans on either a secured or unsecured basis; by issuing commercial paper and
medium-term notes; by entering into
- --------------------------------------------------------------------------------
F- 113
382
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
agreements to repurchase, whereby securities are sold with a commitment to
repurchase at a future date; and through securities lending activity.
Short-term borrowings at December 31, 1999 and 1998 consisted of the following:
1999 1998
---------- ----------
Commercial paper.......................................... $ 763,909 $ 457,973
Bank loans................................................ 708,841 714,810
Medium-Term Notes......................................... 411,500 245,000
---------- ----------
$1,884,250 $1,417,783
========== ==========
The interest rate on commercial paper fluctuates throughout the year. The
weighted-average interest rates on commercial paper borrowings outstanding at
December 31, 1999 and 1998 were 6.30 percent and 5.74 percent, respectively, and
during 1999 and 1998 were 5.33 percent and 5.67 percent, respectively.
Bank loans generally bear interest at rates based on either the federal funds
rate or the London Interbank Offered Rate ("LIBOR"). The weighted-average
interest rates on bank loans outstanding at December 31, 1999 and 1998 were 5.53
percent and 5.57 percent, respectively, and during 1999 and 1998 were 5.88
percent and 5.72 percent, respectively.
The Company has a Multiple Currency Medium-Term Note Program under the terms of
which the Company may offer for sale medium-term senior and subordinated notes
(collectively, the "Medium-Term Notes") due from nine months to thirty years
from date of issuance. The Medium-Term Notes may be either fixed or variable
with respect to interest rates. At December 31, 1999, the Company had
outstanding $276,500 and $135,000 of variable rate and fixed rate Medium-Term
Notes, respectively, with maturities of less than one year from the date of
issuance. At December 31, 1998, the Company had $245,000 of variable rate
Medium-Term Notes with maturities of less than one year from the date of
issuance. The weighted-average interest rates on these Medium-Term Notes
outstanding at December 31, 1999 and 1998 were 6.26 percent and 5.46 percent,
respectively, and during 1999 and 1998 were 5.43 percent and 5.78 percent,
respectively.
The Company has a $1,200,000 committed unsecured senior revolving credit
facility with a group of banks which expires in September 2000, with provisions
for renewal through 2001. In addition, certain of the Company's subsidiaries
have entered into a committed secured revolving credit facility which extends
through August 2000. At December 31, 1999, this credit facility provided an
aggregate of up to $1,000,000. Interest on borrowings under the terms of the
revolving credit facilities is computed, at the option of the Company, at a rate
based on LIBOR, a base rate or the federal funds rate. The Company pays a fee on
the commitments. At December 31, 1999, there were no outstanding borrowings
under these credit facilities.
NOTE 4 LONG-TERM BORROWINGS
Long-term borrowings at December 31, 1999 and 1998 consisted of the following:
1999 1998
---------- ----------
Fixed Rate Notes due 2000--2014........................... $2,757,851 $1,961,340
Fixed Rate Subordinated Notes due 2002.................... 174,765 174,677
Medium-Term Senior Notes.................................. 2,143,010 1,936,835
Medium-Term Subordinated Notes............................ 148,200 182,950
---------- ----------
$5,223,826 $4,255,802
========== ==========
- --------------------------------------------------------------------------------
F- 114
383
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
The Company issued $525,000 of 6.38 percent senior notes due 2004 and $275,000
of 7.63 percent senior notes due 2009 on May 18, 1999 and December 1, 1999,
respectively.
Interest rates on the fixed rate notes and the fixed rate subordinated notes
outstanding at December 31, 1999 ranged from 6.38 percent to 9.25 percent. The
weighted-average interest rates on these notes outstanding at December 31, 1999
and 1998 were 7.20 percent and 7.35 percent, respectively. Interest on the notes
is payable semi-annually.
At December 31, 1999 and 1998, the Company had outstanding $1,422,210 and
$1,267,135 of fixed rate Medium-Term Notes and $869,000 and $852,650 of variable
rate Medium-Term Notes, respectively. The Medium-Term Notes outstanding at
December 31, 1999 and 1998 had weighted-average interest rates of 6.76 percent
and 6.48 percent, respectively.
At December 31, 1999, the total long-term borrowings of the Company had an
average maturity of 4.96 years. The aggregate amount of principal repayment
requirements on long-term borrowings for each of the five years subsequent to
December 31, 1999, and the total amount due thereafter, was as follows:
2000........................................................ $ 875,373
2001........................................................ 357,500
2002........................................................ 602,465
2003........................................................ 706,837
2004........................................................ 850,434
Thereafter.................................................. 1,831,217
----------
$5,223,826
The Company has entered into interest rate swap agreements which effectively
convert substantially all of its fixed rate debt into floating rate debt. The
floating interest rates are based on LIBOR and generally adjust semi-annually.
The effective weighted-average interest rates on the long-term borrowings, after
giving effect to the interest rate swap agreements, were 6.94 percent and 6.42
percent at December 31, 1999 and 1998, respectively. The interest rate swap
agreements entered into have had the effect of reducing net interest expense on
the Company's long-term borrowings by $22,593, $15,606 and $10,966 for the years
ended December 31, 1999, 1998 and 1997, respectively. The notional amounts and
maturities of the interest rate swap agreements outstanding at December 31, 1999
were as follows:
2000........................................................ $ 747,000
2001........................................................ 284,000
2002........................................................ 279,500
2003........................................................ 645,500
2004........................................................ 690,200
Thereafter.................................................. 1,559,810
----------
$4,206,010
At December 31, 1999 and 1998, the fair values of long-term borrowings were
$5,140,331 and $4,325,014, respectively, as compared to the carrying amounts of
$5,223,826 and $4,255,802, respectively. The estimated fair value of long-term
borrowings was based upon quoted market prices for the same or similar issues
and pricing models. The fair values of the interest rate swaps were $127,097
payable and $113,226 receivable at December 31, 1999 and 1998, respectively. The
fair value of interest rate swaps used to hedge the Company's long-term
borrowings was based upon the amounts the Company would receive or pay to
terminate the agreements, taking into account current
- --------------------------------------------------------------------------------
F- 115
384
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
interest rates. The carrying amounts of the interest rate swap agreements
included in the Company's Consolidated Statements of Financial Condition at
December 31, 1999 and 1998 were net receivables of $12,075 and $8,827,
respectively. See Notes 1 and 8 for a further discussion of interest rate swap
agreements used for hedging purposes.
NOTE 5 PREFERRED STOCK
Preferred Stock Issued by Paine Webber Group Inc.
The Company is authorized to issue up to 20,000,000 shares of preferred stock,
in one or more series.
Redeemable Preferred Stock--In connection with the acquisition of certain net
assets and specific businesses of Kidder, Peabody Group Inc. ("Kidder") in
December 1994, the Company issued 2,500,000 shares of 20-year 9 percent
Cumulative Redeemable Preferred Stock, Series C (the "Redeemable Preferred
Stock"), with a stated value and liquidation preference of $100.00 per share.
The Redeemable Preferred Stock was recorded at its fair value of $185,000 at the
date of issuance, which was increased periodically by charges to retained
earnings, using the interest method, so that the carrying amount would have
equaled the redemption amount of $250,000 at the mandatory redemption date on
December 15, 2014. The Redeemable Preferred Stock was redeemable at any time, in
whole or in part, on or after December 16, 1999 at the option of the Company at
a price of $100.00 per share, plus accrued and unpaid dividends.
At the earliest redemption date of December 16, 1999, the Company redeemed the
Redeemable Preferred Stock which resulted in a charge to stockholders' equity
equal to the difference between the carrying value and par value (unamortized
discount) of $59,883. Dividends on the Redeemable Preferred Stock were
cumulative and payable in quarterly installments. Holders of the Redeemable
Preferred Stock had no voting rights, except in the event of certain dividend
payment defaults.
Preferred Stock Issued by Subsidiary Trusts
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts holding solely Company Guaranteed Related Subordinated Debt--In December
1996, PWG Capital Trust I, a business trust formed under Delaware law and a
wholly owned subsidiary of the Company, issued $195,000 (7,800,000 shares) of
8.30 percent Preferred Trust Securities to the public at $25.00 per security and
$6,031 (241,238 securities) of 8.30 percent Common Trust Securities to the
Company at $25.00 per security. In March 1997, PWG Capital Trust II, a business
trust formed under Delaware law and a wholly owned subsidiary of the Company,
issued $198,750 (7,950,000 securities) of 8.08 percent Preferred Trust
Securities to the public at $25.00 per security and $6,147 (245,877 securities)
of 8.08 percent Common Trust Securities to the Company at $25.00 per security.
The 8.30 percent Preferred Trust Securities and the 8.08 percent Preferred Trust
Securities (collectively, the "Preferred Trust Securities") have a stated
liquidation amount of $25.00 per share.
PWG Capital Trust I and PWG Capital Trust II (collectively, the "Trusts") exist
for the sole purpose of issuing the Preferred Trust Securities and common
securities and investing the proceeds in an equivalent amount of junior
subordinated debentures of the Company. The sole assets of PWG Capital Trust I
at December 31, 1999 were $201,031 of 8.30 percent Junior Subordinated
Debentures due December 1, 2036 issued by the Company. The sole assets of PWG
Capital Trust II at December 31, 1999 were $204,897 of 8.08 percent Junior
Subordinated Debentures due March 1, 2037 issued by the Company. The 8.30
percent Junior Subordinated Debentures and the 8.08 percent Junior Subordinated
Debentures (collectively, the "Junior Subordinated Debentures") held by the
Trusts are redeemable by the Company, in whole or in part, on or after December
1, 2001 and March 1, 2002, respectively. If the Company redeems Junior
Subordinated Debentures, the Trust must redeem Preferred Trust
- --------------------------------------------------------------------------------
F- 116
385
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
Securities and common securities having an aggregate liquidation amount equal to
the aggregate principal amount of Junior Subordinated Debentures.
The Company guarantees payment to the holders of the Preferred Trust Securities,
on a subordinated basis, to the extent the Company has made principal and
interest payments on the Junior Subordinated Debentures. This guarantee,
together with the Company's obligations under the Junior Subordinated
Debentures, provides a full and unconditional guarantee on a subordinated basis
of amounts due on the Preferred Trust Securities. Dividends on the Preferred
Trust Securities are cumulative, payable monthly in arrears, and are deferrable
at the Company's option for periods not to exceed sixty consecutive months. The
Company generally cannot pay dividends on its preferred and common stocks during
such deferments. Dividends on the Preferred Trust Securities have been
classified as minority interest in the Company's Consolidated Statements of
Income.
NOTE 6 COMMON STOCK
In accordance with the repurchase programs, the Company had available to
repurchase at December 31, 1999 a maximum of 18,681,999 shares of its common
stock. Subsequent to December 31, 1999, the Company's Board of Directors
increased the number of shares of common stock authorized for repurchase by
18,000,000.
NOTE 7 CAPITAL REQUIREMENTS
PWI, a registered broker-dealer, is subject to the Securities and Exchange
Commission ("SEC") Uniform Net Capital Rule and New York Stock Exchange ("NYSE")
Growth and Business Reduction capital requirements. Under the method of
computing capital requirements adopted by PWI, minimum net capital shall not be
less than 2 percent of combined aggregate debit items arising from client
transactions, plus excess margin collected on securities purchased under
agreements to resell, as defined. A reduction of business is required if net
capital is less than 4 percent of such aggregate debit items. Business may not
be expanded if net capital is less than 5 percent of such aggregate debit items.
As of December 31, 1999, PWI's net capital of $892,165 was 7.5 percent of
December 29, 1999 aggregate debit items and its net capital in excess of the
minimum required was $649,034.
Advances, dividend payments and other equity distributions by PWI and other
regulated subsidiaries are restricted by the regulations of the SEC, NYSE, and
international securities and banking agencies, as well as by covenants in
various loan agreements. At December 31, 1999, the equity of PWG's subsidiaries
totaled approximately $2,900,000. Of this amount, approximately $453,000 was not
available for payment of cash dividends and advances to PWG.
Under the terms of certain credit agreements, PWG is subject to dividend payment
restrictions and minimum net worth and net capital requirements. At December 31,
1999, these restrictions did not affect PWG's ability to pay dividends to its
shareholders.
NOTE 8 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Held or Issued for Trading Purposes
Set forth below are the gross contract or notional amounts of the Company's
outstanding off-balance-sheet derivative and other financial instruments held or
issued for trading purposes. These amounts are not reflected in the Consolidated
Statements of Financial Condition and are indicative only of the volume of
activity at December 31, 1999 and 1998. They do not represent amounts subject to
market risks, and in many cases, limit the Company's overall exposure to market
losses by hedging other on-and off-balance-sheet transactions.
- --------------------------------------------------------------------------------
F- 117
386
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
NOTIONAL OR CONTRACT AMOUNT AT DECEMBER 31, 1999 DECEMBER 31, 1998
- ------------------------------ -------------------------- --------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ----------- -----------
Mortgage-backed forward contracts
and options written and
purchased...................... $14,417,186 $17,540,786 $30,296,601 $35,558,370
Foreign currency forward
contracts, futures contracts,
and options written and
purchased...................... 1,380,925 1,373,981 2,709,421 2,628,824
Equity securities contracts
including stock index futures,
forwards, and options written
and purchased.................. 144,034 239,682 156,519 332,248
Other fixed income securities
contracts including futures,
forwards, and options written
and purchased.................. 3,557,193 5,538,887 3,890,619 4,336,300
Interest rate swaps and caps..... 1,688,762 419,989 1,292,620 282,546
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of December 31, 1999 and 1998. The fair value
amounts are netted by counterparty when specific conditions are met.
FAIR VALUE AT DECEMBER 31, 1999 DECEMBER 31, 1998
- ------------- ----------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- ------- -----------
Mortgage-backed forward contracts and options
written and purchased........................ $159,228 $114,838 $85,995 $76,315
Foreign currency forward contracts, futures
contracts, and options written and
purchased.................................... 20,274 20,158 31,622 31,726
Equity securities contracts including stock
index futures, forwards, and options written
and purchased................................ 152,024 48,835 26,806 46,606
Other fixed income securities contracts
including futures, forwards, and options
written and purchased........................ 29,584 20,177 12,183 55,015
Interest rate swaps and caps................... 31,569 11,087 34,749 8,096
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes during the years ended December 31, 1999 and
1998. The average fair value is based on the average of the month-end balances
during the year.
AVERAGE FAIR VALUE FOR THE YEARS ENDED DECEMBER 31, 1999 DECEMBER 31, 1998
- -------------------------------------- ----------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Mortgage-backed forward contracts and
options written and purchased............. $171,113 $163,954 $158,215 $146,522
Foreign currency forward contracts, futures
contracts, and options written and
purchased................................. 22,549 22,377 46,222 45,895
Equity securities contracts including stock
index futures, forwards, and options
written and purchased..................... 63,624 40,321 20,836 42,995
Other fixed income securities contracts
including futures, forwards, and options
written and purchased..................... 11,932 49,800 16,547 41,786
Interest rate swaps and caps................ 18,593 6,754 13,423 40,760
- --------------------------------------------------------------------------------
F- 118
387
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
The Company also sells securities, at predetermined prices, which have not yet
been purchased. The Company is exposed to market risk since to satisfy the
obligation, the Company must acquire the securities at market prices, which may
exceed the values reflected on the Consolidated Statements of Financial
Condition.
The off-balance-sheet derivative trading transactions are generally short-term.
At December 31, 1999, substantially all of the off-balance-sheet trading-related
derivative and other financial instruments had remaining maturities of less than
one year.
The Company's risk of loss in the event of counterparty default is limited to
the current fair value or replacement cost on contracts in which the Company has
recorded an unrealized gain. These amounts are reflected as assets on the
Company's Consolidated Statements of Financial Condition and amounted to
$392,679 and $191,355 at December 31, 1999 and 1998, respectively. Options
written do not expose the Company to credit risk since they do not obligate the
counterparty to perform. Transactions in futures contracts are conducted through
regulated exchanges which have margin requirements, and are settled in cash on a
daily basis, thereby minimizing credit risk. See Note 1 for a further discussion
of derivative financial instruments.
The following table summarizes the Company's principal transactions revenues by
business activity for the years ended December 31, 1999 and 1998. Principal
transactions revenues include realized and unrealized gains and losses on
trading positions and principal investing activities, including hedges. In
assessing the profitability of its trading activities, the Company views net
interest and principal transactions revenues in the aggregate.
YEARS ENDED DECEMBER 31, 1999 1998
- ------------------------ ---------- --------
Taxable fixed income (includes futures, forwards, options
contracts and other securities)........................... $ 501,819 $451,668
Equities (includes stock index futures, forwards and options
contracts)................................................ 446,168 279,720
Municipals (includes futures and options contracts)......... 162,093 137,419
---------- --------
$1,110,080 $868,807
========== ========
Held or Issued for Purposes other than Trading
The Company enters into interest rate swap agreements to manage the interest
rate characteristics of its assets and liabilities. As of December 31, 1999 and
1998, the Company had outstanding interest rate swap agreements with commercial
banks with notional amounts of $4,206,010 and $3,096,985, respectively. These
agreements effectively converted substantially all of the Company's fixed rate
debt at December 31, 1999 into floating rate debt. The Company had no deferred
gains or losses related to terminated swap agreements on the Company's long-term
borrowings at December 31, 1999 and 1998. The Company is subject to market risk
as interest rates fluctuate. The interest rate swaps contain credit risk to the
extent the Company is in a receivable or gain position and the counterparty
defaults. However, the counterparties to the agreements generally are large
financial institutions, and the Company has not experienced defaults in the
past, and management does not anticipate any counterparty defaults in the
foreseeable future. See Notes 1 and 4 for further discussion of interest rate
swap agreements used for hedging purposes.
NOTE 9 RISK MANAGEMENT
Transactions involving derivative and non-derivative financial instruments
involve varying degrees of both market and credit risk. The Company monitors its
exposure to market and credit risk on a daily
- --------------------------------------------------------------------------------
F- 119
388
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
basis and through a variety of financial, security position and credit exposure
reporting and control procedures.
Market Risk
Market risk is the potential change in value of the financial instrument caused
by unfavorable changes in interest rates, equity prices and foreign currency
exchange rates. The Company has a variety of methods to monitor its market risk
profile. The senior management of each business group is responsible for
reviewing trading positions, exposures, profits and losses, and trading
strategies. The Company also has an independent risk management group which
reviews the Company's risk profile and aids in setting and monitoring risk
management policies of the Company, including monitoring adherence to the
established limits, performing market risk modeling, and reviewing trading
positions and hedging strategies. The Asset/Liability Management Committee,
comprised of senior corporate and business group managers, is responsible for
establishing trading position and exposure limits.
Market risk modeling is based on estimating loss exposure through sensitivity
testing. These results are compared to established limits, and exceptions are
subject to review and approval by senior management. Other market risk control
procedures include monitoring inventory agings, reviewing traders' marks, and
holding regular meetings between the senior management of the business groups
and the risk management group.
Credit Risk in Proprietary Transactions
Counterparties to the Company's proprietary trading, hedging, financing and
arbitrage activities are primarily financial institutions, including banks,
brokers and dealers, investment funds, and insurance companies. Credit losses
could arise should counterparties fail to perform and the value of any
collateral proves inadequate. The Company manages credit risk by monitoring net
exposure to individual counterparties on a daily basis, monitoring credit limits
and requiring additional collateral where appropriate.
Derivative credit exposures are calculated, aggregated and compared to
established limits by the credit department. Credit reserve requirements are
determined by senior management in conjunction with the Company's continuous
credit monitoring procedures. Historically, reserve requirements arising from
instruments with off-balance-sheet risk have not been material.
Receivables and payables with brokers and dealers, agreements to resell and
repurchase securities, and securities borrowed and loaned are generally
collateralized by cash, government and agency securities, and letters of credit.
The market value of the initial collateral received approximates or is greater
than the contract value. Additional collateral is requested when considered
necessary. The Company may pledge clients' margined securities as collateral in
support of securities loaned and bank loans, as well as to satisfy margin
requirements at clearing organizations. The amounts loaned or pledged are
limited to the extent permitted by applicable margin regulations. Should the
counterparty fail to return the clients' securities, the Company may be required
to replace them at prevailing market prices. At December 31, 1999, the market
value of client securities loaned to other brokers approximated the amounts due
or collateral obtained.
Credit Risk in Client Activities
Client transactions are entered on either a cash or margin basis. In a margin
transaction, the Company extends credit to a client for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Receivables from customers
are substantially collateralized by customer securities. Amounts loaned are
limited by margin regulations of
- --------------------------------------------------------------------------------
F- 120
389
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
the Federal Reserve Board and other regulatory authorities and are subject to
the Company's credit review and daily monitoring procedures. Market declines
could, however, reduce the value of any collateral below the principal amount
loaned, plus accrued interest, before the collateral can be sold.
Client transactions include positions in commodities and financial futures,
trading liabilities, and written options. The risk to the Company's clients in
these transactions can be substantial, principally due to price volatility which
can reduce the clients' ability to meet their obligations. Margin deposit
requirements pertaining to commodity futures and exchange-traded options
transactions are generally lower than those for exchange-traded securities. To
the extent clients are unable to meet their commitments to the Company and
margin deposits are insufficient to cover outstanding liabilities, the Company
may take market action and credit losses could be realized.
Client trades are recorded on a settlement date basis. Should either the client
or broker fail to perform, the Company may be required to complete the
transaction at prevailing market prices. Trades pending at December 31, 1999
were settled without material adverse effect on the Company's consolidated
financial statements, taken as a whole.
Concentrations of Credit Risk
Concentrations of credit risk that arise from financial instruments (whether
on-or off-balance-sheet) exist for groups of counterparties when they have
similar economic characteristics that would cause their ability to meet
obligations to be similarly affected by economic, industry or geographic
factors. As a major securities firm, the Company engages in underwriting and
other financing activities with a broad range of clients, including other
financial institutions, municipalities, governments, financing companies, and
commercial real estate investors and operators. These activities could result in
concentrations of credit risk with a particular counterparty, or group of
counterparties operating in a particular geographic area or engaged in business
in a particular industry. The Company seeks to control its credit risk and the
potential for risk concentration through a variety of reporting and control
procedures described above.
The Company's most significant industry concentration, which arises within its
normal course of business activities, is financial institutions including banks,
brokers and dealers, investment funds, and insurance companies.
NOTE 10 COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space and equipment under noncancelable operating
lease agreements which expire at various dates through 2015. As of December 31,
1999, the aggregate minimum future rental payments required by operating leases
with initial or remaining lease terms exceeding one year were as follows:
2000.................................................. $ 166,168
2001.................................................. 155,240
2002.................................................. 146,857
2003.................................................. 142,583
2004.................................................. 136,963
Thereafter............................................ 897,467
----------
$1,645,278
==========
- --------------------------------------------------------------------------------
F- 121
390
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
Rentals are subject to periodic escalation charges and do not include amounts
payable for insurance, taxes and maintenance. In addition, minimum payments have
not been reduced by future minimum sublease rental income of $7,859.
For the years ended December 31, 1999, 1998 and 1997, rent expense under
operating leases was $183,967, $168,417 and $160,973, respectively.
Other Commitments and Contingencies
At December 31, 1999 and 1998, the Company was contingently liable under
unsecured letters of credit totaling $139,156 and $159,647, respectively, which
approximated fair value. At December 31, 1999, certain of the Company's
subsidiaries were contingently liable as issuer of approximately $45,000 of
notes payable to managing general partners of various limited partnerships
pursuant to certain partnership agreements. In addition, as part of the 1995
limited partnership settlements, the Company has agreed, under certain
circumstances, to provide to class members additional consideration including
assignment of fees the Company is entitled to receive from certain partnerships.
In the opinion of management, these contingencies will not have a material
adverse effect on the Company's consolidated financial statements, taken as a
whole.
In meeting the financing needs of certain of its clients, the Company may also
issue standby letters of credit which are fully collateralized by customer
margin securities. At December 31, 1999, the Company had outstanding $101,400 of
such standby letters of credit. At December 31, 1999 and 1998, securities with a
fair value of $2,536,073 and $2,008,145, respectively, had been loaned or
pledged as collateral for securities borrowed of approximately equal fair value.
In the normal course of business, the Company enters into when-issued
transactions, underwriting and other commitments. Also, at December 31, 1999,
the Company had commitments of $858,122, consisting of secured credit lines to
real estate operators, mortgage and asset-backed originators, and other
commitments to investment partnerships. Settlement of these transactions at
December 31, 1999 would not have had a material impact on the Company's
consolidated financial statements, taken as a whole.
The Company has been named as a defendant in numerous legal actions in the
ordinary course of business. While the outcome of such matters cannot be
predicted with certainty, in the opinion of management of the Company, after
consultation with various counsel handling such matters, these actions will be
resolved with no material adverse effect on the Company's consolidated financial
statements, taken as a whole.
NOTE 11 EMPLOYEE INCENTIVE AWARDS
The Company's various Stock Option and Award Plans (the "Plans") provide for the
granting to officers and other key employees nonqualified stock options,
restricted stock awards, stock appreciation rights, restricted stock units,
stock purchase rights, performance units and other stock based awards. At
December 31, 1999 and 1998, there were 10,597,664 and 9,502,661 shares,
respectively, available for future stock option, common stock and restricted
stock awards under these plans. The Company had no stock appreciation rights,
performance units or stock purchase rights outstanding at December 31, 1999.
Nonqualified Stock Options
Officers and other key employees are granted nonqualified stock options to
purchase shares of common stock at a price not less than the fair market value
of the stock on the date the option is granted. Options for the Company's common
stock have also been granted to limited partnerships, in
- --------------------------------------------------------------------------------
F- 122
391
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
which key employees of the Company are limited partners, and to non-employee
directors. Options are exercisable in ratable installments or otherwise,
generally over a period of one to five years from the date of grant. The rights
generally expire within seven to ten years after the date of grant.
Beginning in January 1999, the Company established the Equity Plus Program which
allows eligible employees to purchase shares of the Company's common stock at a
price equal to fair market value on the purchase date and receive stock options
based upon the number of shares purchased under the Program. The maximum number
of shares an employee can purchase is 1,000 per year. The nonqualified stock
options have a price equal to the fair market value of the stock on the date the
option is granted. Shares purchased under the Equity Plus Program are restricted
from resale for two years from the time of purchase, and the options that are
granted under the Equity Plus Program have a three year vesting requirement and
expire seven years after the date of grant. The number of common shares
authorized for purchase by eligible employees is 3,000,000 per annum. During
1999, employees of the Company purchased 1,484,983 shares under the Equity Plus
Program and received 3,005,209 options.
The activity during the years ended December 31, 1997, 1998 and 1999 is set
forth below. In January 2000, eligible participants were granted nonqualified
stock options for 1,822,500 shares which are not included in the table below.
NUMBER OF EXERCISE PRICE WEIGHTED-AVERAGE
SHARES PER SHARE EXERCISE PRICE
---------- -------------- ----------------
Options outstanding at December 31, 1996
(6,351,551 exercisable)..................... 26,330,606 $ 4.37 - 17.71 $11.80
Granted....................................... 7,726,325 18.50 - 34.22 27.58
Exercised..................................... (4,964,542) 4.37 - 14.08 10.60
Terminated.................................... (928,594) 4.37 - 22.50 13.89
---------- -------------- ------
Options outstanding at December 31, 1997
(6,062,722 exercisable)..................... 28,163,795 $ 4.43 - 34.22 $16.27
Granted....................................... 5,865,220 30.69 - 42.63 36.19
Exercised..................................... (2,953,503) 4.43 - 34.22 10.48
Terminated.................................... (826,541) 4.93 - 34.22 22.06
---------- -------------- ------
Options outstanding at December 31, 1998
(8,712,066 exercisable) 30,248,971 $ 4.93 - 42.63 $20.54
Granted....................................... 3,594,777 35.78 - 48.03 39.70
Exercised..................................... (2,329,596) 4.93 - 36.78 11.43
Terminated.................................... (861,589) 6.69 - 46.66 27.30
---------- -------------- ------
Options outstanding at December 31, 1999
(13,072,821 exercisable).................... 30,652,563 $ 5.00 - 48.03 $23.29
========== ============== ======
- --------------------------------------------------------------------------------
F- 123
392
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
The following table summarizes information about stock options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING
------------------------ OPTIONS EXERCISABLE
WEIGHTED- -----------------------
WEIGHTED- AVERAGE WEIGHTED-
RANGE OF NUMBER OF AVERAGE REMAINING NUMBER OF AVERAGE
EXERCISE PRICES SHARES EXERCISE CONTRACTUAL SHARES EXERCISE
PER SHARE OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE
- --------------- ----------- --------- ------------ ----------- ---------
$ 5.00 - 13.00 7,228,012 $10.76 4.2 7,228,012 $10.76
13.01 - 21.00 9,795,481 15.15 4.7 5,832,343 14.54
21.01 - 29.00 789,750 22.47 4.3 -- --
29.01 - 37.00 7,481,268 34.68 5.2 11,346 34.41
37.01 - 48.03 5,358,052 39.28 6.2 1,120 44.89
$ 5.00 - 48.03 30,652,563 $23.29 5.0 13,072,821 $12.47
The Company accounts for stock option grants in accordance with APB Opinion No.
25. Accordingly, no compensation cost has been recognized for its stock option
grants. Pro forma information regarding net income and earnings per share is
required under SFAS No. 123 and has been determined as if the Company had
accounted for all post 1994 stock option grants based on the fair value method.
The pro forma information presented below is not representative of the effect
stock options will have on pro forma net income or earnings per share for future
years.
The fair value of each option grant was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: dividend yields of 1.1
percent, 1.2 percent and 1.7 percent; expected lives of 4.0 years, 3.8 years,
and 3.8 years; risk-free interest rates of 5.5 percent, 5.0 percent and 6.2
percent; and expected volatility of 38 percent, 35 percent and 33 percent. The
weighted-average fair values of options granted during 1999, 1998 and 1997 were
$13.64, $11.15 and $8.52, respectively.
For purposes of the pro forma information, the fair values of the 1999, 1998 and
1997 stock option grants are amortized over the vesting period. The pro forma
information for the years ended 1999, 1998 and 1997 was as follows:
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- --------
NET INCOME
As reported.................................... $628,599 $433,555 $415,449
Pro forma...................................... $592,684 $406,967 $397,131
EARNINGS PER COMMON SHARE
Basic
As reported.................................... $ 3.77(1) $ 2.91 $ 2.84
Pro forma...................................... $ 3.52(1) $ 2.72 $ 2.70
Diluted
As reported.................................... $ 3.56(1) $ 2.72 $ 2.56
Pro forma...................................... $ 3.33(1) $ 2.55 $ 2.44
- ------------
(1) Reflects the effect of the unamortized discount of $59,883 charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16, 1999.
Restricted Stock Awards
Restricted stock awards are granted to key employees, whereby shares of the
Company's common stock are awarded in the name of the employee, who has all
rights of a stockholder, subject to certain
- --------------------------------------------------------------------------------
F- 124
393
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
sale and transfer restrictions. The awards generally contain restrictions on
sales and transfers ranging from one to three years. The restricted stock awards
are subject to forfeiture if the employee terminates prior to the prescribed
restriction period.
During the years ended December 31, 1999, 1998 and 1997, the Company awarded
3,498,900, 2,357,604 and 2,174,502 shares, respectively, of restricted stock,
net of forfeitures. Restricted stock awards are expensed in the service year to
which the grant relates at the value of the stock on grant date. The charge to
compensation expense, net of forfeitures, amounted to $136,362, $88,966 and
$87,803 in the years ended December 31, 1999, 1998 and 1997, respectively.
Other Deferred Compensation Awards
Eligible employees in the Company's Private Client Group participate in the
PaineWebber PartnerPlus Plan (the "PartnerPlus Plan"), a nonqualified deferred
compensation plan. Under the PartnerPlus Plan, the Company makes annual
contributions and the employee may elect to make voluntary pre-tax
contributions, subject to a maximum percent of the Company contribution. The
Company and employee contributions earn tax-deferred interest for ten years.
Company contributions made beginning January 1, 1999 and the interest thereon
generally vest 20 percent per year beginning the sixth year from the date of
contribution, through year ten. Company contributions made prior to January 1,
1999, vest after four years, and the related interest vests after ten years from
the date of contribution. Voluntary contributions vest immediately and the
interest thereon vests on the same terms as interest on Company contributions.
The Company expenses these costs over the service period.
NOTE 12 EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
In 1998, the Company adopted SFAS No. 132 "Employers' Disclosure about Pension
and Other Postretirement Benefits" which revised and standardized disclosure
requirements. Prior year disclosures have been restated to comply with SFAS No.
132.
The Company has a non-contributory defined benefit pension plan (the "Plan"),
which provides benefits to eligible employees. As of December 31, 1998, the
Company amended its Plan to freeze future accruals except as related to
employees meeting certain age and years of service eligibility requirements.
Pension expense for the years ended 1999, 1998 and 1997 for the Plan included
the following components:
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- -------
Service cost....................................... $ 15,900 $ 23,729 $19,373
Interest cost...................................... 27,860 27,016 23,576
Expected return on Plan assets..................... (35,394) (37,085) (28,991)
Amortization of transition asset................... (840) (840) (840)
Amortization of prior service cost................. -- 1,742 2,037
Recognized actuarial loss.......................... 2,748 6,289 5,783
-------- -------- -------
Net periodic pension cost.......................... $ 10,274 $ 20,851 $20,938
======== ======== =======
The following table provides a reconciliation of the Plan's benefit obligation
and fair value of Plan assets, as well as a summarization of the Plan's funded
status and prepaid pension asset which is
- --------------------------------------------------------------------------------
F- 125
394
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
included in other assets on the Company's Consolidated Statements of Financial
Condition at December 31, 1999 and 1998:
1999 1998
-------- --------
Change in Benefit Obligation:
Benefit obligation at beginning of year................... $406,458 $394,583
Service cost........................................... 15,900 23,729
Interest cost.......................................... 27,860 27,016
Actuarial gain......................................... (49,113) (3,731)
Effect of curtailment.................................. -- (18,003)
Benefits paid.......................................... (20,597) (17,136)
-------- --------
Benefit obligation at end of year......................... 380,508 406,458
-------- --------
Change in Plan Assets:
Fair value of Plan assets at beginning of year............ 424,874 399,010
Actual return on assets................................ 25,453 33,000
Employer contribution.................................. -- 10,000
Benefits paid.......................................... (20,597) (17,136)
-------- --------
Fair value of Plan assets at end of year.................. 429,730 424,874
-------- --------
Funded status............................................... 49,222 18,416
Unrecognized transition asset............................... (2,005) (2,845)
Unrecognized net loss....................................... 21,212 63,132
-------- --------
Prepaid pension asset at year-end........................... $ 68,429 $ 78,703
======== ========
The benefit obligation for the Plan was determined using an assumed discount
rate of 8.0 percent for 1999 and 7.0 percent for 1998, and an assumed rate of
compensation increase of 4 percent for 1999 and 5 percent for 1998. The
weighted-average assumed rate of return on Plan assets was 8.5 percent for 1999
and 9.5 percent for 1998 and 1997. The Company's funding policy is to contribute
to the Plan amounts that can be deducted for federal income tax purposes. Plan
assets consist primarily of equity securities and U.S. government and agency
obligations.
Defined Contribution Pension Plan
Effective January 1, 1999, the Company established the PaineWebber 401(k) Plus
Plan (the "Plus Plan") which was developed for eligible employees of the Company
to modify the PaineWebber Savings Investment Plan and replace the benefits that
employees would have accrued under the frozen defined benefit pension plan. The
Plus Plan is a defined contribution pension plan that includes two retirement
benefit features: an employee savings investment plan (401(k)) and an annual
retirement contribution that the Company will make to the Plus Plan on the
employee's behalf. Employee contributions vest immediately while Company
contributions are subject to certain vesting provisions.
Under the new Plus Plan, a portion of the employee's 401(k) contributions are
matched by the Company on a graduated scale based on the Company's pre-tax
earnings. The provision for Company contributions for amounts contributed or to
be contributed in cash and/or stock of the Company to the 401(k) and invested in
the PaineWebber Common Stock Fund amounted to approximately $22,900, $14,100 and
$13,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The annual retirement contribution feature provides a Company contribution equal
to a percentage based on the employee's eligible compensation and the employee's
number of years of service with the
- --------------------------------------------------------------------------------
F- 126
395
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
Company. The provision for the Company's annual retirement contribution to be
contributed in cash for the year ended December 31, 1999 is $24,300.
Other Benefit Plans
The Company also provides certain life insurance and healthcare benefits to
employees. The costs of such benefits for the years ended December 31, 1999,
1998 and 1997 were $72,500, $57,600 and $55,400, respectively.
NOTE 13 INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For financial reporting
purposes, net deferred tax assets are included in other assets in the
Consolidated Statements of Financial Condition. Deferred tax assets are
reflected without reduction for a valuation allowance. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1999, 1998
and 1997 were as follows:
1999 1998 1997
-------- -------- --------
DEFERRED TAX ASSETS
Employee benefits................................ $395,326 $276,367 $229,449
Accelerated income and deferred deductions....... 117,978 92,724 91,263
Acquired tax benefits............................ 730 25,472 46,000
Other............................................ 29,509 20,554 23,627
-------- -------- --------
Total deferred tax assets...................... 543,543 415,117 390,339
-------- -------- --------
DEFERRED TAX LIABILITIES
Tax over book depreciation....................... 8,947 6,792 16,450
Accelerated deductions and deferred income....... 70,076 41,414 36,753
Safe harbor leases............................... 3,198 4,385 5,282
Valuation of trading assets and investments...... 70,412 45,662 57,781
Other............................................ 3,203 3,254 3,581
-------- -------- --------
Total deferred tax liabilities................. 155,836 101,507 119,847
-------- -------- --------
Net deferred tax asset........................... $387,707 $313,610 $270,492
======== ======== ========
- --------------------------------------------------------------------------------
F- 127
396
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
The significant components of the provision for income taxes for the years ended
December 31, 1999, 1998 and 1997 were as follows:
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ -------- -------- --------
CURRENT
Federal.......................................... $360,596 $262,733 $235,349
State............................................ 45,970 14,501 56,476
Foreign.......................................... 41,490 15,092 10,735
-------- -------- --------
Total current.................................. 448,056 292,326 302,560
-------- -------- --------
DEFERRED
Federal.......................................... (67,871) (59,732) (56,373)
State............................................ (7,298) 14,562 (17,348)
Foreign.......................................... 1,072 2,052 (213)
-------- -------- --------
Total deferred................................. (74,097) (43,118) (73,934)
-------- -------- --------
$373,959 $249,208 $228,626
======== ======== ========
The reconciliation of income taxes, computed at the statutory federal rate, to
the provision for income taxes recorded for the years ended December 31, 1999,
1998 and 1997, was as follows:
1999 1998 1997
---------------- ---------------- ----------------
YEARS ENDED DECEMBER 31, AMOUNT % AMOUNT % AMOUNT %
- ------------------------ -------- ---- -------- ---- -------- ----
Tax at statutory federal
rate................... $362,181 35.0 $250,252 35.0 $235,587 35.0
State and local income
taxes, net of federal
tax benefit............ 25,137 2.4 18,891 2.6 25,433 3.8
Foreign rate
differential........... (3,709) (0.4) 902 0.1 (1,926) (0.3)
Nontaxable dividends and
interest............... (6,657) (0.6) (6,264) (0.8) (6,936) (1.0)
Nondeductible expenses... 6,757 0.7 3,261 0.5 3,251 0.5
Minority interest........ (11,285) (1.1) (11,285) (1.6) (10,161) (1.5)
Other, net............... 1,535 0.1 (6,549) (0.9) (16,622) (2.5)
-------- ---- -------- ---- -------- ----
$373,959 36.1 $249,208 34.9 $228,626 34.0
======== ==== ======== ==== ======== ====
Income taxes paid for the years ended December 31, 1999, 1998 and 1997 were
$379,194, $236,597 and $278,553, respectively.
Undistributed earnings of the Company's foreign subsidiaries are considered to
be permanently reinvested and, accordingly, no provision for U.S. income taxes
is required on such earnings. As of December 31, 1999, such earnings were
estimated to be $293,000. The estimated U.S. income taxes that would be payable
upon the repatriation of such earnings were not material.
NOTE 14 EARNINGS PER COMMON SHARE
Earnings per common share are computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share excludes the dilutive effects of
options and convertible securities and is calculated by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects all potentially
dilutive securities.
- --------------------------------------------------------------------------------
F- 128
397
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
Set forth below is the reconciliation of net income applicable to common shares
and weighted-average common and common equivalent shares of the basic and
diluted earnings per share computations:
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------ ------------ ------------ ------------
NUMERATOR
Net income........................... $ 628,599 $ 433,555 $ 415,449
Preferred stock dividends.......... (22,802) (23,647) (29,513)
Unamortized discount charged to
equity on redemption of
preferred stock................. (59,883) -- --
------------ ------------ ------------
Net income applicable to common
shares for basic earnings per
share.............................. 545,914 409,908 385,936
------------ ------------ ------------
Effect of dilutive securities:
Preferred stock dividends.......... -- -- 6,000
Interest savings on convertible
debentures...................... -- 279 1,030
------------ ------------ ------------
-- 279 7,030
------------ ------------ ------------
Net income applicable to common
shares for diluted earnings per
share.............................. $ 545,914 $ 410,187 $ 392,966
------------ ------------ ------------
DENOMINATOR
Weighted-average common shares for
basic earnings per share........... 144,931,042 140,863,761 135,943,063
Weighted-average effect of dilutive
securities:
Employee stock options and
awards.......................... 8,283,402 8,870,423 7,759,013
Convertible debentures............. -- 877,241 1,984,328
6% Convertible Preferred
Stock......................... -- -- 7,661,580(1)
------------ ------------ ------------
Dilutive potential common shares..... 8,283,402 9,747,664 17,404,921
Weighted-average common and common
equivalent shares for diluted
earnings per share................. 153,214,444 150,611,425 153,347,984
------------ ------------ ------------
EARNINGS PER COMMON SHARE
Basic................................ $ 3.77(2) $ 2.91 $ 2.84
Diluted.............................. $ 3.56(2) $ 2.72 $ 2.56
============ ============ ============
- ------------
(1) The 6% Convertible Preferred Stock was converted into 8,273,600 common
shares on December 4, 1997.
(2) Reflects the effect of the unamortized discount of $59,883 charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16,1999.
NOTE 15 SEGMENT REPORTING DATA
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company offers a wide variety of
products and services, primarily those of a full service broker-dealer to a
domestic market, through its two operating segments: Individual and
Institutional. The Individual segment offers brokerage services and products
(such as the purchase and sale of securities, insurance annuity contracts,
mutual funds, wrap fee products, and margin and
- --------------------------------------------------------------------------------
F- 129
398
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(In thousands of dollars except share and per share amounts)
securities lending), 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 the placing
of securities and other financial instruments for--and the execution of trades
on behalf of--institutional clients, investment banking services such as the
underwriting of debt and equity securities, and mergers and acquisitions
advisory services).
Segment revenues and expenses in the table below consist of those that are
directly attributable, combined with segment amounts based on Company allocation
methodologies (for example, allocating a portion of investment banking revenues
to the Individual segment; relative utilization of the Company's square footage
for certain cost allocations).
1999 1998
----------------------------------------- -----------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL INDIVIDUAL INSTITUTIONAL TOTAL
----------- ------------- ----------- ----------- ------------- -----------
Total revenues........ $ 4,676,467 $ 3,146,286 $ 7,822,753 $ 3,978,301 $ 3,271,281 $ 7,249,582
Net interest
revenues............. 368,853 222,009 590,862 314,078 194,162 508,240
Net revenues.......... 4,014,049 1,276,126 5,290,175 3,373,456 1,031,658 4,405,114
Depreciation and
amortization......... 78,868 20,855 99,723 49,639 24,657 74,296
Income before taxes
and minority
interest............. 641,870 392,932 1,034,802 494,666 220,341 715,007
Total assets.......... 21,828,324 39,784,052 61,612,376 18,330,427 35,845,494 54,175,921
Expenditures for long-
lived assets......... 145,531 106,655 252,186 89,460 91,957 181,417
=========== =========== =========== =========== =========== ===========
1997
-----------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL
----------- ------------- -----------
Total revenues........ $ 3,556,246 $ 3,100,706 $ 6,656,952
Net interest
revenues............. 274,762 143,812 418,574
Net revenues.......... 3,082,359 1,030,043 4,112,402
Depreciation and
amortization......... 37,637 31,063 68,700
Income before taxes
and minority
interest............. 443,376 229,731 673,107
Total assets.......... 14,736,069 42,328,964 57,065,033
Expenditures for long-
lived assets......... 45,950 44,997 90,947
=========== =========== ===========
The following presents information about the Company's operations by geographic
area:
1999 1998
----------------------------------------- -----------------------------------------
UNITED STATES NON-U.S.(1) TOTAL UNITED STATES NON-U.S.(1) TOTAL
------------- ----------- ----------- ------------- ----------- -----------
Total revenues.......... $ 7,531,898 $ 290,855 $ 7,822,753 $ 7,001,967 $ 247,615 $ 7,249,582
Net revenues............ 5,022,697 267,478 5,290,175 4,239,413 165,701 4,405,114
Income before taxes and
minority interest...... 907,253 127,549 1,034,802 677,646 37,361 715,007
Total assets............ 53,921,208 7,691,168 61,612,376 44,691,427 9,484,494 54,175,921
=========== ========== =========== =========== ========== ===========
1997
-----------------------------------------
UNITED STATES NON-U.S.(1) TOTAL
------------- ----------- -----------
Total revenues.......... $ 6,461,976 $ 194,976 $ 6,656,952
Net revenues............ 3,965,289 147,113 4,112,402
Income before taxes and
minority interest...... 647,268 25,839 673,107
Total assets............ 46,610,462 10,454,571 57,065,033
=========== =========== ===========
- ------------
(1) Predominantly the United Kingdom.
- --------------------------------------------------------------------------------
F- 130
399
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Paine Webber Group Inc.
We have audited the accompanying consolidated statements of financial condition
of Paine Webber Group Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 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. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Paine
Webber Group Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
New York, New York
January 31, 2000
- --------------------------------------------------------------------------------
F- 131
400
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995(2)
- ------------------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS EXCEPT PER
SHARE AMOUNTS)
OPERATING RESULTS
Total revenues................ $ 7,822,753 $ 7,249,582 $ 6,656,952 $ 5,705,966 $ 5,320,090
Net revenues (including net
interest)................... $ 5,290,175 $ 4,405,114 $ 4,112,402 $ 3,735,212 $ 3,350,279
Income before taxes and minority
interest.................... $ 1,034,802 $ 715,007 $ 673,107 $ 560,033 $ 102,677
Net income.................... $ 628,599 $ 433,555 $ 415,449 $ 364,350 $ 80,750
----------- ----------- ----------- ----------- -----------
PER COMMON SHARE(1)
Basic earnings................ $ 3.77(3) $ 2.91 $ 2.84 $ 2.55 $ 0.37
Diluted earnings.............. $ 3.56(3) $ 2.72 $ 2.56 $ 2.24 $ 0.35
Dividends declared............ $ 0.44 $ 0.44 $ 0.41 $ 0.32 $ 0.32
Book value.................... $ 20.04 $ 16.76 $ 13.80 $ 12.19 $ 10.41
----------- ----------- ----------- ----------- -----------
FINANCIAL CONDITION
Total assets.................. $61,612,376 $54,175,921 $57,065,033 $52,513,500 $45,671,294
Long-term borrowings and preferred
securities.................. $ 5,617,576 $ 4,839,367 $ 3,980,379 $ 3,164,349 $ 2,622,797
Stockholders' equity.......... $ 2,917,257 $ 2,438,943 $ 1,930,963 $ 1,730,425 $ 1,552,288
Total capitalization.......... $ 8,534,833 $ 7,278,310 $ 5,911,342 $ 4,894,774 $ 4,175,085
----------- ----------- ----------- ----------- -----------
- ---------------
(1) All per share data reflect a three-for-two common stock split in November
1997.
(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
the Company's sale of public proprietary limited partnerships.
(3) Reflects the effect of the unamortized discount of $59.9 million charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16, 1999.
- --------------------------------------------------------------------------------
F- 132
401
COMMON STOCK AND QUARTERLY INFORMATION
COMMON STOCK DIVIDEND HISTORY
During 1999, Paine Webber Group Inc. continued its policy of paying quarterly
common stock dividends. Dividends declared during the last twelve quarters were
as follows:
CALENDAR QUARTER 4TH 3RD 2ND 1ST
- ---------------- ---- ---- ---- ----
1999.................................................. $.11 $.11 $.11 $.11
1998.................................................. .11 .11 .11 .11
1997.................................................. .11 .10 .10 .10
On February 3, 2000, Paine Webber Group Inc. declared a 2000 first quarter
dividend of $.12 per share, an increase of 9 percent over the fourth quarter of
1999. However, there is no assurance that dividends will continue to be paid in
the future, since they are dependent upon income, financial condition and other
factors, including the restrictions described in Note 7 in the Notes to
Consolidated Financial Statements.
MARKET FOR COMMON STOCK
The common stock of Paine Webber Group Inc. is listed on the New York Stock
Exchange ("NYSE") and the Pacific Stock Exchange. The following table summarizes
the high and low sales prices per share of the common stock as reported on the
Composite Tape for the periods indicated:
HIGH LOW
------ ------
Calendar 1999
4th Quarter............................................... $44.00 $31.75
3rd Quarter............................................... 46.38 34.00
2nd Quarter............................................... 49.75 38.00
1st Quarter............................................... 42.06 32.63
Calendar 1998
4th Quarter............................................... $44.50 $20.38
3rd Quarter............................................... 53.38 29.25
2nd Quarter............................................... 49.44 39.44
1st Quarter............................................... 43.13 28.69
On February 11, 2000 the last reported sale price per share of Paine Webber
Group, Inc. common stock on the NYSE was $37.56. The approximate number of
holders of record of Paine Webber Group Inc. common stock as of the close of
business on February 11, 2000 was 6,077.
- --------------------------------------------------------------------------------
F- 133
402
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
EARNINGS PER
INCOME BEFORE COMMON
(IN THOUSANDS OF DOLLARS TOTAL NET TAXES AND NET SHARE
EXCEPT PER SHARE AMOUNTS) REVENUES REVENUES MINORITY INTEREST INCOME BASIC/DILUTED
- ------------------------- ---------- ---------- ----------------- -------- -------------
Calendar 1999
4th Quarter........... $2,068,273 $1,390,210 $274,131 $166,294 $ .71/.67(1)
3rd Quarter........... 1,860,192 1,237,167 225,985 138,202 .91/.86
2nd Quarter........... 1,970,978 1,347,907 269,667 163,504 1.08/1.02
1st Quarter........... 1,923,310 1,314,891 265,019 160,599 1.06/1.01
Calendar 1998
4th Quarter........... $1,735,041 $1,096,493 $166,214 $100,427 $ .66/.63
3rd Quarter........... 1,809,148 1,031,476 138,599 82,892 .54/.51
2nd Quarter........... 1,900,283 1,162,168 211,999 129,501 .88/.82
1st Quarter........... 1,805,110 1,114,977 198,195 120,735 .82/.77
- ------------
(1) Reflects the effect of unamortized discount of $59,883 charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16, 1999.
The sum of the quarterly earnings per share amounts does not equal the annual
amount reported, as per share amounts are computed independently for each
quarter and the full year based on respective weighted-average common and common
equivalent shares outstanding during each period.
- --------------------------------------------------------------------------------
F- 134
403
FIVE-YEAR FINANCIAL SUMMARY
(In thousands of dollars except share and per share amounts)
1999 1998 1997 1996
-------------------- -------------------- -------------------- --------------------
YEARS ENDED DECEMBER 31, AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- ------------------------ ------------ ----- ------------ ----- ------------ ----- ------------ -----
REVENUES
COMMISSIONS
Listed securities and
options....................... $ 1,115,508 21.1 $ 992,816 22.5 $ 884,341 21.5 $ 821,499 22.0
Mutual funds and insurance..... 545,125 10.3 438,598 10.0 415,855 10.1 380,982 10.2
Over-the-counter securities and
other......................... 288,326 5.5 209,869 4.8 196,595 4.8 178,994 4.8
------------ ----- ------------ ----- ------------ ----- ------------ -----
1,948,959 36.9 1,641,283 37.3 1,496,791 36.4 1,381,475 37.0
------------ ----- ------------ ----- ------------ ----- ------------ -----
PRINCIPAL TRANSACTIONS
Taxable fixed income........... 501,819 9.5 451,668 10.3 514,976 12.5 500,391 13.4
Equities....................... 446,168 8.4 279,720 6.3 408,969 9.9 379,446 10.2
Municipals..................... 162,093 3.1 137,419 3.1 131,703 3.2 143,778 3.8
------------ ----- ------------ ----- ------------ ----- ------------ -----
1,110,080 21.0 868,807 19.7 1,055,648 25.6 1,023,615 27.4
------------ ----- ------------ ----- ------------ ----- ------------ -----
ASSET MANAGEMENT............... 911,099 17.2 713,570 16.2 542,755 13.2 453,267 12.1
------------ ----- ------------ ----- ------------ ----- ------------ -----
INVESTMENT BANKING
Underwriting fees, management
fees and selling concessions:
Corporate securities.......... 248,407 4.7 265,721 6.0 249,777 6.1 226,063 6.1
Municipal obligations......... 89,098 1.7 117,978 2.7 76,964 1.9 53,914 1.4
Private placement and other
fees.......................... 220,719 4.2 147,273 3.3 133,260 3.2 111,187 3.0
------------ ----- ------------ ----- ------------ ----- ------------ -----
558,224 10.6 530,972 12.0 460,001 11.2 391,164 10.5
------------ ----- ------------ ----- ------------ ----- ------------ -----
OTHER.......................... 170,951 3.2 142,242 3.2 138,633 3.4 146,708 3.9
------------ ----- ------------ ----- ------------ ----- ------------ -----
INTEREST....................... 3,123,440 59.0 3,352,708 76.1 2,963,124 72.1 2,309,737 61.9
------------ ----- ------------ ----- ------------ ----- ------------ -----
TOTAL REVENUES................. 7,822,753 147.9 7,249,582 164.5 6,656,952 161.9 5,705,966 152.8
============ ===== ============ ===== ============ ===== ============ =====
INTEREST EXPENSE............... 2,532,578 (47.9) 2,844,468 (64.5) 2,544,550 (61.9) 1,970,754 (52.8)
------------ ----- ------------ ----- ------------ ----- ------------ -----
NET REVENUES................... $ 5,290,175 100.0 $ 4,405,114 100.0 $ 4,112,402 100.0 $ 3,735,212 100.0
============ ===== ============ ===== ============ ===== ============ =====
1995(1)
--------------------
YEARS ENDED DECEMBER 31, AMOUNT %
- ------------------------ ------------ -----
REVENUES
COMMISSIONS
Listed securities and
options....................... $ 816,517 24.4
Mutual funds and insurance..... 302,654 9.0
Over-the-counter securities and
other......................... 153,595 4.6
------------ -----
1,272,766 38.0
------------ -----
PRINCIPAL TRANSACTIONS
Taxable fixed income........... 396,787 11.8
Equities....................... 377,650 11.3
Municipals..................... 139,764 4.2
------------ -----
914,201 27.3
------------ -----
ASSET MANAGEMENT............... 399,540 11.9
------------ -----
INVESTMENT BANKING
Underwriting fees, management
fees and selling concessions:
Corporate securities.......... 207,499 6.2
Municipal obligations......... 43,578 1.3
Private placement and other
fees.......................... 75,700 2.2
------------ -----
326,777 9.7
------------ -----
OTHER.......................... 150,056 4.5
------------ -----
INTEREST....................... 2,256,750 67.4
------------ -----
TOTAL REVENUES................. 5,320,090 158.8
============ =====
INTEREST EXPENSE............... 1,969,811 (58.8)
------------ -----
NET REVENUES................... $ 3,350,279 100.0
============ =====
NON-INTEREST EXPENSES
Compensation and benefits...... $ 3,049,568 57.6 $ 2,601,364 59.1 $ 2,420,296 58.9 $ 2,219,129 59.4
Office and equipment........... 352,712 6.7 301,845 6.9 275,532 6.7 267,006 7.1
Communications................. 168,071 3.2 154,272 3.5 153,285 3.7 153,301 4.1
Business development........... 122,678 2.3 103,287 2.3 82,099 2.0 75,981 2.0
Brokerage, clearing and
exchange fees................. 95,211 1.8 97,430 2.2 86,808 2.1 87,839 2.4
Professional services.......... 136,758 2.6 123,265 2.8 129,066 3.1 108,123 2.9
Other.......................... 330,375 6.2 308,644 7.0 292,209 7.1 263,800 7.1
------------ ----- ------------ ----- ------------ ----- ------------ -----
TOTAL NON-INTEREST EXPENSES.... 4,255,373 80.4 3,690,107 83.8 3,439,295 83.6 3,175,179 85.0
------------ ----- ------------ ----- ------------ ----- ------------ -----
Income before taxes and
minority interest............. 1,034,802 19.6 715,007 16.2 673,107 16.4 560,033 15.0
Provision for income taxes..... 373,959 7.1 249,208 5.7 228,626 5.6 194,649 5.2
Income before minority
interest...................... 660,843 12.5 465,799 10.5 444,481 10.8 365,384 9.8
Minority interest.............. 32,244 0.6 32,244 0.7 29,032 0.7 1,034 0.0
------------ ----- ------------ ----- ------------ ----- ------------ -----
Net income..................... $ 628,599 11.9 $ 433,555 9.8 $ 415,449 10.1 $ 364,350 9.8
============ ===== ============ ===== ============ ===== ============ =====
EARNINGS PER COMMON SHARE(2)
Basic.......................... $ 3.77(3) $ 2.91 $ 2.84 $ 2.55
Diluted........................ $ 3.56(3) $ 2.72 $ 2.56 $ 2.24
------------ ------------ ------------ ------------
WEIGHTED-AVERAGE COMMON
SHARES(2)
Basic.......................... 144,931,042 140,863,761 135,943,063 131,547,207
Diluted........................ 153,214,444 150,611,425 153,347,984 153,829,662
------------ ------------ ------------ ------------
DIVIDENDS DECLARED PER SHARE
Common stock(2)................ $ .44 $ .44 $ .41 $ .32
Preferred stock:
Redeemable Preferred Stock.... $ 9.00 $ 9.00 $ 9.00 $ 9.00
Convertible Preferred Stock... $ -- $ -- $ 6.00 $ 6.00
============ ============ ============ ============
NON-INTEREST EXPENSES
Compensation and benefits...... $ 2,004,585 59.8
Office and equipment........... 266,291 7.9
Communications................. 149,047 4.5
Business development........... 90,752 2.7
Brokerage, clearing and
exchange fees................. 93,657 2.8
Professional services.......... 101,911 3.0
Other.......................... 541,359 16.2
------------ -----
TOTAL NON-INTEREST EXPENSES.... 3,247,602 96.9
------------ -----
Income before taxes and
minority interest............. 102,677 3.1
Provision for income taxes..... 21,927 0.7
Income before minority
interest...................... 80,750 2.4
Minority interest.............. -- 0.0
------------ -----
Net income..................... $ 80,750 2.4
============ =====
EARNINGS PER COMMON SHARE(2)
Basic.......................... $ 0.37
Diluted........................ $ 0.35
------------
WEIGHTED-AVERAGE COMMON
SHARES(2)
Basic.......................... 138,045,626
Diluted........................ 152,268,070
------------
DIVIDENDS DECLARED PER SHARE
Common stock(2)................ $ .32
Preferred stock:
Redeemable Preferred Stock.... $ 9.00
Convertible Preferred Stock... $ 6.00
============
- ------------
(1) The 1995 results include after-tax charges of $146 million ($230 million
before income taxes) related to the resolution of the issues arising from
the Company's sale of public proprietary limited partnerships.
(2) All share and per share data reflect a three-for-two common stock split in
November 1997.
(3) Reflects the effect of the unamortized discount of $59.9 million charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16, 1999.
- --------------------------------------------------------------------------------
F- 135
404
PAINE WEBBER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER 2000
MARCH 31, 2000
- --------------------------------------------------------------------------------
F- 136
405
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands of dollars except share and per share amounts)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------ ------------
REVENUES
Commissions................................................. $ 676,172 $ 478,873
Principal transactions...................................... 309,289 314,208
Asset management............................................ 278,288 206,051
Investment banking.......................................... 122,180 125,953
Interest.................................................... 981,547 757,160
Other....................................................... 37,645 41,065
------------ ------------
Total revenues......................................... 2,405,121 1,923,310
Interest expense............................................ 808,016 608,419
------------ ------------
Net revenues........................................... 1,597,105 1,314,891
------------ ------------
NON-INTEREST EXPENSES
Compensation and benefits................................... 949,786 768,714
Office and equipment........................................ 96,592 81,452
Communications.............................................. 44,123 42,203
Business development........................................ 38,901 23,867
Brokerage, clearing & exchange fees......................... 27,303 24,390
Professional services....................................... 49,426 30,452
Other....................................................... 100,755 78,794
------------ ------------
Total non-interest expenses............................ 1,306,886 1,049,872
------------ ------------
INCOME BEFORE TAXES AND MINORITY INTEREST................... 290,219 265,019
Provision for income taxes................................ 105,809 96,359
------------ ------------
INCOME BEFORE MINORITY INTEREST............................. 184,410 168,660
Minority interest......................................... 8,061 8,061
------------ ------------
NET INCOME.................................................. $ 176,349 $ 160,599
============ ============
Net income applicable to common shares...................... $ 176,349 $ 154,650
============ ============
Earnings per common share:
Basic..................................................... $ 1.22 $ 1.06
Diluted................................................... $ 1.16 $ 1.01
Weighted-average common shares:
Basic..................................................... 145,019,159 145,598,619
Diluted................................................... 152,336,445 153,728,711
Dividends declared per common share......................... $ 0.12 $ 0.11
See notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
F- 137
406
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands of dollars except share and per share amounts)
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
ASSETS
Cash and cash equivalents................................... $ 286,899 $ 176,401
Cash and securities segregated and on deposit for federal
and other regulations..................................... 849,756 823,059
Financial instruments owned................................. 22,467,838 21,144,830
Securities received as collateral........................... 809,168 1,079,976
Securities purchased under agreements to resell............. 15,873,737 15,923,948
Securities borrowed......................................... 10,129,834 10,526,638
Receivables, net of allowance for doubtful accounts of
$27,413 and $30,039 at March 31, 2000 and December 31,
1999, respectively........................................ 11,363,652 10,287,937
Office equipment and leasehold improvements, net of
accumulated depreciation and amortization of $561,375 and
$527,718 at March 31, 2000 and December 31, 1999,
respectively.............................................. 628,310 579,819
Other assets................................................ 1,105,729 1,069,768
----------- -----------
$63,514,923 $61,612,376
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings....................................... $ 1,855,495 $ 1,884,250
Financial instruments sold, not yet purchased............... 5,732,661 7,099,208
Securities sold under agreements to repurchase.............. 27,762,648 25,740,196
Securities loaned........................................... 7,605,308 5,661,200
Obligation to return securities received as collateral...... 809,168 1,079,976
Payables.................................................... 8,239,030 8,448,217
Other liabilities and accrued expenses...................... 2,961,542 3,164,496
Long-term borrowings........................................ 5,114,910 5,223,826
----------- -----------
60,080,762 58,301,369
----------- -----------
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts holding solely Company
Guaranteed Related Subordinated Debt...................... 393,750 393,750
Stockholders' Equity:
Common stock, $1 par value, 400,000,000 shares authorized,
issued 194,530,404 shares and 193,145,152 shares at
March 31, 2000 and December 31, 1999, respectively..... 194,530 193,145
Additional paid-in capital................................ 1,722,842 1,672,085
Retained earnings......................................... 2,329,992 2,171,080
Treasury stock, at cost; 49,393,807 shares and 47,557,064
shares at March 31, 2000 and December 31, 1999,
respectively........................................... (1,200,754) (1,113,736)
Accumulated other comprehensive income.................... (6,199) (5,317)
----------- -----------
3,040,411 2,917,257
----------- -----------
$63,514,923 $61,612,376
=========== ===========
See notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
F- 138
407
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 176,349 $ 160,599
Adjustments to reconcile net income to cash provided by
(used for) operating activities:
Noncash items included in net income:
Depreciation and amortization............................. 30,118 21,435
Deferred income taxes..................................... 31,841 11,198
Amortization of deferred charges.......................... 25,332 18,386
Stock-based compensation.................................. (1,596) 5,790
(Increase) decrease in operating assets:
Cash and securities on deposit............................ (26,697) 32,778
Financial instruments owned............................... (1,302,698) (2,074,670)
Securities purchased under agreements to resell........... 50,211 (1,071,797)
Securities borrowed....................................... 396,804 (702,443)
Receivables............................................... (1,073,089) (379,327)
Other assets.............................................. (93,806) (156,608)
Increase (decrease) in operating liabilities:
Financial instruments sold, not yet purchased............. (1,366,547) 1,013,811
Securities sold under agreements to repurchase............ 2,022,452 4,119,870
Securities loaned......................................... 1,944,108 545,931
Payables.................................................. (209,187) (1,576,819)
Other..................................................... (198,042) (211,215)
----------- -----------
Cash provided by (used for) operating activities.......... 405,553 (243,081)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Office equipment and leasehold improvements............... (80,211) (45,492)
----------- -----------
Cash used for investing activities........................ (80,211) (45,492)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments for) proceeds from short-term borrowings...... (28,755) 195,116
Proceeds from:
Long-term borrowings...................................... 196,022 147,000
Employee stock transactions............................... 54,447 37,576
Payments for:
Long-term borrowings...................................... (307,530) (37,600)
Repurchases of common stock............................... (111,592) (56,404)
Dividends................................................. (17,436) (22,067)
----------- -----------
Cash (used for) provided by financing activities.......... (214,844) 263,621
----------- -----------
Increase (decrease) in cash and cash equivalents............ 110,498 (24,952)
Cash and cash equivalents, beginning of period............ 176,401 228,359
----------- -----------
Cash and cash equivalents, end of period.................. $ 286,899 $ 203,407
=========== ===========
See notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
F- 139
408
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Paine
Webber Group Inc. ("PWG") and its wholly owned subsidiaries, including its
principal subsidiary PaineWebber Incorporated ("PWI") (collectively, the
"Company"). All material intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior year amounts to
conform to current year presentations. The December 31, 1999 Condensed
Consolidated Statement of Financial Condition was derived from the audited
consolidated financial statements of the Company. The financial information as
of and for the periods ended March 31, 2000 and 1999 is unaudited. All normal
recurring adjustments which, in the opinion of management, are necessary for a
fair presentation have been made.
Certain financial information that is normally in annual financial statements
but is not required for interim reporting purposes has been condensed or
omitted. The condensed consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
which require management to make estimates and assumptions that affect the
amounts reported in the condensed consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. The results of
operations reported for interim periods are not necessarily indicative of the
results of operations for the entire year.
Statement of Cash Flows
Total interest payments, which relate principally to agreements to repurchase,
short-term borrowings, securities loaned and long-term borrowings, were $865,029
and $577,797 for the three months ended March 31, 2000 and 1999, respectively.
Income taxes paid were $86,657 and $63,680 for the three months ended March 31,
2000 and 1999, respectively.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes revised accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity measure all derivative instruments at fair value and
recognize such instruments as either assets or liabilities in the consolidated
statements of financial condition. The accounting for changes in the fair value
of a derivative instrument will depend on the intended use of the derivative as
either a fair value hedge, a cash flow hedge or a foreign currency hedge. The
effect of the changes in fair value of the derivatives and, in certain cases,
the hedged items are to be reflected in either the consolidated statements of
income or as a component of other comprehensive income, based upon the resulting
designation. As issued, SFAS No. 133 was effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133
for one year to fiscal years beginning after June 15, 2000. The Company has not
yet determined the impact of this statement on the Company's Consolidated
Financial Statements, taken as a whole.
- --------------------------------------------------------------------------------
F- 140
409
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: FINANCIAL INSTRUMENTS OWNED AND SOLD, NOT YET PURCHASED
At March 31, 2000 and December 31, 1999, financial instruments owned and
financial instruments sold, not yet purchased consisted of the following:
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
Financial instruments owned:
U.S. government and agencies......................... $ 6,685,430 $ 5,864,331
Mortgages and mortgage-backed........................ 9,087,219 9,012,415
Corporate debt....................................... 1,791,952 1,875,361
Commercial paper and other short-term debt........... 1,835,741 1,744,036
Equities and other................................... 2,510,595 2,030,986
State and municipals................................. 556,901 617,701
----------- -----------
$22,467,838 $21,144,830
=========== ===========
Financial instruments sold, not yet purchased:
U.S. government and agencies......................... $ 3,998,570 $ 5,804,259
Mortgages and mortgage-backed........................ 100,908 123,049
Corporate debt....................................... 1,238,058 785,890
Equities............................................. 379,992 348,485
State and municipals................................. 15,133 37,525
----------- -----------
$ 5,732,661 $ 7,099,208
=========== ===========
NOTE 3: LONG-TERM BORROWINGS
Long-term borrowings at March 31, 2000 and December 31, 1999 consisted of the
following:
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
U.S. Dollar-Denominated:
Fixed Rate Notes due 2000--2014......................... $2,624,543 $2,757,851
Fixed Rate Subordinated Notes due 2002.................. 174,787 174,765
Medium-Term Senior Notes................................ 2,142,990 2,143,010
Medium-Term Subordinated Notes.......................... 85,200 148,200
Non-U.S. Dollar-Denominated:
Medium-Term Note due 2003............................... 87,390 --
---------- ----------
$5,114,910 $5,223,826
========== ==========
At March 31, 2000, interest rates on the U.S. dollar-denominated fixed rate
notes and fixed rate subordinated notes ranged from 6.25 percent to 9.25 percent
and the weighted-average interest rate was 7.19 percent. Interest on the notes
is payable semi-annually. The fixed rate notes and fixed rate subordinated notes
outstanding at March 31, 2000 had an average maturity of 5.8 years.
At March 31, 2000, the Company had outstanding U.S. dollar-denominated fixed
rate Medium-Term Notes of $1,324,040 and variable rate Medium-Term Notes of
$904,150. The Medium-Term Notes outstanding at March 31, 2000 had an average
maturity of 4.1 years and a weighted-average interest rate of 6.73 percent.
At March 31, 2000, the interest rate on the Non-U.S. dollar-denominated
Medium-Term note was 1.27 percent.
- --------------------------------------------------------------------------------
F- 141
410
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At March 31, 2000 and December 31, 1999, the fair values of long-term borrowings
were $4,975,067 and $5,140,331, respectively, as compared to the carrying
amounts of $5,114,910 and $5,223,826, respectively. The estimated fair value of
long-term borrowings is based upon quoted market prices for the same or similar
issues and pricing models. However, for substantially all of its fixed rate
debt, the Company enters into interest rate swap agreements to convert its fixed
rate payments into floating rate payments.
The net fair values of the interest rate swaps were $142,099 and $127,097
payable at March 31, 2000 and December 31, 1999, respectively. The fair value of
interest rate swaps used to hedge the Company's fixed rate debt is based upon
the amounts the Company would receive or pay to terminate the agreements, taking
into account current interest rates.
The carrying amounts of the interest rate swap agreements included in the
Company's Condensed Consolidated Statements of Financial Condition at March 31,
2000 and December 31, 1999 were net receivables of $12,956 and $12,075,
respectively. See Note 5 for further discussion of interest rate swap agreements
used for hedging purposes.
NOTE 4: CAPITAL REQUIREMENTS
PWI, a registered broker-dealer, is subject to the Securities and Exchange
Commission Uniform Net Capital Rule and New York Stock Exchange Growth and
Business Reduction capital requirements. Under the method of computing capital
requirements adopted by PWI, minimum net capital shall not be less than 2
percent of combined aggregate debit items arising from client transactions, plus
excess margin collected on securities purchased under agreements to resell, as
defined. A reduction of business is required if net capital is less than 4
percent of such aggregate debit items. Business may not be expanded if net
capital is less than 5 percent of such aggregate debit items. As of March 31,
2000, PWI's net capital of $1,177,824 was 9.5 percent of aggregate debit items
and its net capital in excess of the minimum required was $919,943.
NOTE 5: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Held or Issued for Trading Purposes
Set forth below are the gross contract or notional amounts of the Company's
outstanding off-balance-sheet derivative and other financial instruments held or
issued for trading purposes. These amounts are not reflected in the Condensed
Consolidated Statements of Financial Condition and are indicative only of the
volume of activity at March 31, 2000 and December 31, 1999. They do not
represent amounts subject to market risks, and in many cases, limit the
Company's overall exposure to market losses by hedging other on- and
off-balance-sheet transactions.
NOTIONAL OR CONTRACT AMOUNT
-----------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
------------------------- -------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ----------- -----------
Mortgage-backed forward contracts and
options written and purchased........ $15,768,316 $20,472,150 $14,417,186 $17,540,786
Foreign currency forward contracts,
futures contracts, and options
written and purchased................ 1,799,585 1,800,063 1,380,925 1,373,981
Equity securities contracts including
stock index futures, forwards, and
options written and purchased........ 201,171 470,999 144,034 239,682
Other fixed income securities contracts
including futures, forwards, and
options written and purchased........ 6,987,108 5,358,536 3,557,193 5,538,887
Interest rate swaps and caps........... 1,464,080 2,434,080 1,688,762 419,989
- --------------------------------------------------------------------------------
F- 142
411
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of March 31, 2000 and December 31, 1999. The fair
value amounts are netted by counterparty when specific conditions are met.
FAIR VALUE AT FAIR VALUE AT
MARCH 31, 2000 DECEMBER 31, 1999
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Mortgage-backed forward contracts and options
written and purchased............................ $ 78,782 $86,714 $159,228 $114,838
Foreign currency forward contracts, futures
contracts, and options written and purchased..... 19,365 19,163 20,274 20,158
Equity securities contracts including stock index
futures, forwards, and options written and
purchased........................................ 132,908 58,919 152,024 48,835
Other fixed income securities contracts including
futures, forwards, and options written and
purchased........................................ 28,566 13,008 29,584 20,177
Interest rate swaps and caps....................... 15,624 23,704 31,569 11,087
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes for the three months ended March 31, 2000
and the twelve months ended December 31, 1999. The average fair value is based
on the average of the month-end balances during the periods indicated.
AVERAGE FAIR VALUE AVERAGE FAIR VALUE
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, 2000 DECEMBER 31, 1999
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Mortgage-backed forward contracts and options
written and purchased............................ $ 93,071 $89,451 $171,113 $163,954
Foreign currency forward contracts, futures
contracts, and options written and purchased..... 33,468 30,338 22,549 22,377
Equity securities contracts including stock index
futures, forwards, and options written and
purchased........................................ 136,105 51,531 63,624 40,321
Other fixed income securities contracts including
futures, forwards, and options written and
purchased........................................ 27,772 13,164 11,932 49,800
Interest rate swaps and caps....................... 26,662 18,052 18,593 6,754
The Company also sells securities, at predetermined prices, which have not yet
been purchased. The Company is exposed to market risk since to satisfy the
obligation, the Company must acquire the securities at market prices, which may
exceed the values reflected on the Condensed Consolidated Statements of
Financial Condition.
The off-balance-sheet derivative trading transactions are generally short-term.
At March 31, 2000 substantially all of the off-balance-sheet trading-related
derivative and other financial instruments had remaining maturities of less than
one year.
The Company's risk of loss in the event of counterparty default is limited to
the current fair value or the replacement cost on contracts in which the Company
has recorded an unrealized gain. These amounts are reflected as assets on the
Company's Condensed Consolidated Statements of Financial Condition and amounted
to $275,245 and $392,679 at March 31, 2000 and December 31, 1999, respectively.
Options written do not expose the Company to credit risk since they do not
obligate the counterparty to perform. Transactions in futures contracts are
conducted through regulated exchanges which have margin requirements, and are
settled in cash on a daily basis, thereby minimizing credit risk.
- --------------------------------------------------------------------------------
F- 143
412
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the Company's principal transactions revenues by
business activity for the three months ended March 31, 2000 and 1999. Principal
transactions revenues include realized and unrealized gains and losses on
trading positions and principal investing activities, including hedges. In
assessing the profitability of its trading activities, the Company views net
interest and principal transactions revenues in the aggregate.
PRINCIPAL TRANSACTIONS
REVENUES
-----------------------
THREE MONTHS
ENDED MARCH 31,
-----------------------
2000 1999
---------- ----------
Taxable fixed income (includes futures, forwards, options
contracts and other securities)........................... $ 57,771 $194,404
Equities (includes stock index futures, forwards and options
contracts)................................................ 206,822 84,907
Municipals (includes futures and options contracts)......... 44,696 34,897
-------- --------
$309,289 $314,208
======== ========
Held or Issued for Purposes Other Than Trading
The Company enters into interest rate swap agreements to manage the interest
rate characteristics of its assets and liabilities. As of March 31, 2000 and
December 31, 1999, the Company had outstanding interest rate swap agreements
with commercial banks with notional amounts of $3,891,010 and $4,206,010,
respectively. These agreements effectively converted substantially all of the
Company's fixed rate debt at March 31, 2000 into floating rate debt. The
interest rate swap agreements entered into have had the effect of reducing net
interest expense on the Company's fixed rate debt by $282 and $5,753 for the
three months ended March 31, 2000 and 1999, respectively. The Company had no
deferred gains or losses related to terminated swap agreements on the Company's
long-term borrowings at March 31, 2000 and December 31, 1999. The Company is
subject to market risk as interest rates fluctuate. The interest rate swaps
contain credit risk to the extent the Company is in a receivable or gain
position and the counterparty defaults. However, the counterparties to the
agreements generally are large financial institutions, and the Company has not
experienced defaults in the past, and management does not anticipate any
counterparty defaults in the foreseeable future. See Note 3 for further
discussion of interest rate swap agreements used for hedging purposes.
NOTE 6: RISK MANAGEMENT
Transactions involving derivative and non-derivative financial instruments
involve varying degrees of both market and credit risk. The Company monitors its
exposure to market and credit risk on a daily basis and through a variety of
financial, security position and credit exposure reporting and control
procedures.
Market Risk
Market risk is the potential change in value of the financial instrument caused
by unfavorable changes in interest rates, equity prices, and foreign currency
exchange rates. The Company has a variety of methods to monitor its market risk
profile. The senior management of each business group is responsible for
reviewing trading positions, exposures, profits and losses, and trading
strategies. The Company also has an independent risk management group which
reviews the Company's risk profile and aids in setting and monitoring risk
management policies of the Company, including monitoring adherence to the
established limits, performing market risk modeling, and reviewing trading
positions and hedging strategies. The Asset/Liability Management Committee,
comprised of senior corporate and business group managers, is responsible for
establishing trading position and exposure limits.
- --------------------------------------------------------------------------------
F- 144
413
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Market risk modeling is based on estimating loss exposure through sensitivity
testing. These results are compared to established limits, and exceptions are
subject to review and approval by senior management. Other market risk control
procedures include monitoring inventory agings, reviewing traders' marks and
holding regular meetings between the senior management of the business groups
and the risk management group.
Credit Risk in Proprietary Transactions
Counterparties to the Company's proprietary trading, hedging, financing and
arbitrage activities are primarily financial institutions, including banks,
brokers and dealers, investment funds and insurance companies. Credit losses
could arise should counterparties fail to perform and the value of any
collateral proves inadequate. The Company manages credit risk by monitoring net
exposure to individual counterparties on a daily basis, monitoring credit limits
and requiring additional collateral where appropriate.
Derivative credit exposures are calculated, aggregated and compared to
established limits by the credit department. Credit reserve requirements are
determined by senior management in conjunction with the Company's continuous
credit monitoring procedures. Historically, reserve requirements arising from
instruments with off-balance-sheet risk have not been material.
Receivables and payables with brokers and dealers, agreements to resell and
repurchase securities, and securities borrowed and loaned are generally
collateralized by cash, government and government-agency securities, and letters
of credit. The market value of the initial collateral received approximates or
is greater than the contract value. Additional collateral is requested when
considered necessary. The Company may pledge clients' margined securities as
collateral in support of securities loaned and bank loans, as well as to satisfy
margin requirements at clearing organizations. The amounts loaned or pledged are
limited to the extent permitted by applicable margin regulations. Should the
counterparty fail to return the clients' securities, the Company may be required
to replace them at prevailing market prices. At March 31, 2000, the market value
of client securities loaned to other brokers approximated the amounts due or
collateral obtained.
Credit Risk in Client Activities
Client transactions are entered on either a cash or margin basis. In a margin
transaction, the Company extends credit to a client for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Receivables from customers
are substantially collateralized by customer securities. Amounts loaned are
limited by margin regulations of the Federal Reserve Board and other regulatory
authorities and are subject to the Company's credit review and daily monitoring
procedures. Market declines could, however, reduce the value of any collateral
below the principal amount loaned, plus accrued interest, before the collateral
can be sold.
Client transactions include positions in commodities and financial futures,
trading liabilities and written options. The risk to the Company's clients in
these transactions can be substantial, principally due to price volatility which
can reduce the clients' ability to meet their obligations. Margin deposit
requirements pertaining to commodity futures and exchange-traded options
transactions are generally lower than those for exchange-traded securities. To
the extent clients are unable to meet their commitments to the Company and
margin deposits are insufficient to cover outstanding liabilities, the Company
may take market action and credit losses could be realized.
Client trades are recorded on a settlement date basis. Should either the client
or broker fail to perform, the Company may be required to complete the
transaction at prevailing market prices. Trades pending at March 31, 2000 were
settled without material adverse effect on the Company's consolidated financial
statements, taken as a whole.
- --------------------------------------------------------------------------------
F- 145
414
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Concentrations of Credit Risk
Concentrations of credit risk that arise from financial instruments (whether on-
or off-balance-sheet) exist for groups of counterparties when they have similar
economic characteristics that would cause their ability to meet obligations to
be similarly affected by economic, industry or geographic factors. As a major
securities firm, the Company engages in underwriting and other financing
activities with a broad range of clients, including other financial
institutions, municipalities, governments, financing companies, and commercial
real estate investors and operators. These activities could result in
concentrations of credit risk with a particular counterparty, or group of
counterparties operating in a particular geographic area or engaged in business
in a particular industry. The Company seeks to control its credit risk and the
potential for risk concentration through a variety of reporting and control
procedures described above.
The Company's most significant industry concentration, which arises within its
normal course of business activities, is financial institutions including banks,
brokers and dealers, investment funds, and insurance companies.
NOTE 7: COMMITMENTS AND CONTINGENCIES
At March 31, 2000 and December 31, 1999, the Company was contingently liable
under unsecured letters of credit totaling $193,787 and $139,156, respectively,
which approximated fair value. At March 31, 2000 and December 31, 1999 certain
of the Company's subsidiaries were contingently liable as issuer of
approximately $45,000 of notes payable to managing general partners of various
limited partnerships pursuant to certain partnership agreements. In addition, as
part of the 1995 limited partnership settlements, the Company has agreed, under
certain circumstances, to provide to class members additional consideration
including assignment of fees the Company is entitled to receive from certain
partnerships. In the opinion of management, these contingencies will not have a
material adverse effect on the Company's consolidated financial statements,
taken as a whole.
In meeting the financing needs of certain of its clients, the Company may also
issue standby letters of credit which are collateralized by customer margin
securities. At March 31, 2000 and December 31, 1999, the Company had outstanding
$118,300 and $101,400, respectively, of such standby letters of credit. At March
31, 2000 and December 31, 1999, securities with fair value of $1,791,490 and
$2,536,073, respectively, had been loaned or pledged as collateral for
securities borrowed of approximately equal fair value.
In the normal course of business, the Company enters into when-issued
transactions, underwriting and other commitments. Also, at March 31, 2000 and
December 31, 1999, the Company had commitments of $1,070,416 and $858,122,
respectively, consisting of secured credit lines to real estate operators,
mortgage and asset-backed originators, and commitments to investment
partnerships, in certain of which key employees are limited partners. Settlement
of these transactions at March 31, 2000 would not have had a material impact on
the Company's consolidated financial statements, taken as a whole.
The Company has been named as defendant in numerous legal actions in the
ordinary course of business. While the outcome of such matters cannot be
predicted with certainty, in the opinion of management of the Company, after
consultation with various counsel handling such matters, these actions will be
resolved with no material adverse effect on the Company's consolidated financial
statements, taken as a whole.
NOTE 8: COMPREHENSIVE INCOME
Comprehensive income is calculated in accordance with SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income combines net income and certain
items that directly affect
- --------------------------------------------------------------------------------
F- 146
415
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stockholders' equity, such as foreign currency translation adjustments. The
components of comprehensive income for the three months ended March 31, 2000 and
1999 were as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
Net income.................................................. $176,349 $160,599
Foreign currency translation adjustment..................... (882) (1,512)
-------- --------
Total comprehensive income.................................. $175,467 $159,087
======== ========
NOTE 9: EARNINGS PER COMMON SHARE
Earnings per common share are computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share excludes the dilutive effects of
options and convertible securities and is calculated by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects all potentially
dilutive securities.
Set forth below is the reconciliation of net income applicable to common shares
and weighted-average common and common equivalent shares of the basic and
diluted earnings per common share computations:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------ ------------
NUMERATOR:
Net income........................................... $ 176,349 $ 160,599
Preferred stock dividends.......................... -- (5,949)
------------ ------------
Net income applicable to common shares for basic
earnings per share................................. 176,349 154,650
============ ============
Net income applicable to common shares for diluted
earnings per share................................. $ 176,349 $ 154,650
============ ============
DENOMINATOR:
Weighted-average common shares for basic earnings per
share.............................................. 145,019,159 145,598,619
============ ============
Weighted-average effect of dilutive employee stock
options and awards................................. 7,317,286(1) 8,130,092
------------ ------------
Dilutive potential common shares..................... 7,317,286 8,130,092
------------ ------------
Weighted-average common and common equivalent shares
for diluted earnings per share..................... 152,336,445 153,728,711
============ ============
EARNINGS PER SHARE:
Basic................................................ $ 1.22 $ 1.06
============ ============
Diluted.............................................. $ 1.16 $ 1.01
============ ============
- ------------
(1) Included in the calculation of employee stock options and awards was the
dilutive effect of 1,925,000 instruments related to convertible debentures.
- --------------------------------------------------------------------------------
F- 147
416
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: SEGMENT REPORTING DATA
The Company offers a wide variety of products and services, primarily those of a
full service domestic broker-dealer to a domestic market, through its two
operating segments: Individual and Institutional. The Individual segment offers
brokerage services and products (such as the purchase and sale of securities,
insurance annuity contracts, mutual funds, wrap fee products, and margin and
securities lending), 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 market products and services (such as the placing
of securities and other financial instruments for--and the execution of trades
on behalf of--institutional clients, investment banking services such as the
underwriting of debt and equity securities, and mergers and acquisitions
advisory services).
Segment revenues and expenses in the table below consist of those that are
directly attributable to the segment under which they are reported, combined
with segment amounts based on Company allocation methodologies (for example,
allocating a portion of investment banking revenues to the Individual segment;
relative utilization of the Company's square footage for certain cost
allocations).
THREE MONTHS ENDED MARCH 31, 2000 THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------- ---------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ---------- ---------- ------------- ----------
Total revenues......... $1,470,751 $934,370 $2,405,121 $1,104,409 $818,901 $1,923,310
Net revenues........... 1,251,278 345,827 1,597,105 955,113 359,778 1,314,891
Income before taxes and
minority interest.... 199,194 91,025 290,219 155,483 109,536 265,019
Total assets for the Individual and Institutional segments were $25,175,880 and
$38,339,043, respectively, at March 31, 2000 and $21,828,324 and $39,784,052,
respectively at December 31, 1999.
NOTE 11: SUBSEQUENT EVENTS
On April 27, 2000, PWG entered into an agreement and plan of merger (the "Merger
Agreement") with J.C. Bradford & Co. L.L.C. ("J.C. Bradford"), a leading
privately-held brokerage firm in the Southeast, pursuant to which a subsidiary
of PWG will merge with and into J.C. Bradford. The all cash transaction, valued
at $620 million, is expected to close in the third quarter of this year.
At the May 4, 2000 Annual Meeting of Stockholders, the Company approved to amend
the Restated Certificate of Incorporation of PWG to authorize the issuance of up
to 150,000,000 shares of Non-Voting Common Stock, par value of $1.00 per share.
- --------------------------------------------------------------------------------
F- 148
417
PAINE WEBBER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER 2000
JUNE 30, 2000
- --------------------------------------------------------------------------------
F- 149
418
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands of dollars except share and per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUES
Commissions................................. $ 560,510 $ 488,878 $ 1,236,682 $ 967,751
Principal transactions...................... 181,428 279,846 490,717 594,054
Asset management............................ 300,705 224,487 578,993 430,538
Investment banking.......................... 155,647 160,133 277,827 286,086
Interest.................................... 1,074,208 770,271 2,055,755 1,527,431
Other....................................... 43,928 47,363 81,573 88,428
------------ ------------ ------------ ------------
Total revenues......................... 2,316,426 1,970,978 4,721,547 3,894,288
Interest expense............................ 905,254 623,071 1,713,270 1,231,490
------------ ------------ ------------ ------------
Net revenues........................... 1,411,172 1,347,907 3,008,277 2,662,798
------------ ------------ ------------ ------------
NON-INTEREST EXPENSES
Compensation and benefits................... 839,603 780,078 1,789,389 1,548,792
Office and equipment........................ 99,695 89,330 196,287 170,782
Communications.............................. 46,807 42,645 90,930 84,848
Business development........................ 41,776 28,534 80,677 52,401
Brokerage, clearing & exchange fees......... 20,300 23,487 47,603 47,877
Professional services....................... 50,455 32,397 99,881 62,849
Other....................................... 100,466 81,769 201,221 160,563
------------ ------------ ------------ ------------
Total non-interest expenses............ 1,199,102 1,078,240 2,505,988 2,128,112
------------ ------------ ------------ ------------
INCOME BEFORE TAXES AND MINORITY INTEREST... 212,070 269,667 502,289 534,686
Provision for income taxes................ 76,503 98,102 182,312 194,461
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST............. 135,567 171,565 319,977 340,225
Minority interest......................... 8,061 8,061 16,122 16,122
------------ ------------ ------------ ------------
NET INCOME.................................. $ 127,506 $ 163,504 $ 303,855 $ 324,103
============ ============ ============ ============
Net income applicable to common shares...... $ 127,506 $ 157,555 $ 303,855 $ 312,205
============ ============ ============ ============
Earnings per common share:
Basic..................................... $ 0.87 $ 1.08 $ 2.09 $ 2.14
Diluted................................... $ 0.82 $ 1.02 $ 1.98 $ 2.02
Weighted-average common shares:
Basic..................................... 146,067,820 145,742,741 145,324,940 145,631,920
Diluted................................... 154,576,404 154,960,397 153,233,875 154,305,795
Dividends declared per common
share..................................... $ 0.12 $ 0.11 $ 0.24 $ 0.22
Results for the quarter and six months ended June 30, 2000 include J.C. Bradford
merger-related costs of $30 million, $18.8 million after taxes.
See notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
F- 150
419
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands of dollars except share and per share amounts)
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
ASSETS
Cash and cash equivalents................................... $ 429,002 $ 176,401
Cash and securities segregated and on deposit for federal
and other regulations..................................... 719,651 823,059
Financial instruments owned................................. 23,577,357 21,144,830
Securities received as collateral........................... 907,299 1,079,976
Securities purchased under agreements to resell............. 15,313,111 15,923,948
Securities borrowed......................................... 10,517,232 10,526,638
Receivables, net of allowance for doubtful accounts of
$21,301 and $30,039 at June 30, 2000 and December 31,
1999, respectively........................................ 12,215,893 10,287,937
Office equipment and leasehold improvements, net of
accumulated depreciation and amortization of $591,129 and
$527,718 at June 30, 2000 and December 31, 1999,
respectively.............................................. 747,931 579,819
Other assets................................................ 1,975,026 1,069,768
----------- -----------
$66,402,502 $61,612,376
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings....................................... $ 2,255,603 $ 1,884,250
Financial instruments sold, not yet purchased............... 4,275,325 7,099,208
Securities sold under agreements to repurchase.............. 27,918,155 25,740,196
Securities loaned........................................... 7,249,077 5,661,200
Obligation to return securities received as collateral...... 907,299 1,079,976
Payables.................................................... 11,882,125 8,448,217
Other liabilities and accrued expenses...................... 3,121,054 3,164,496
Long-term borrowings........................................ 5,209,136 5,223,826
----------- -----------
62,817,774 58,301,369
----------- -----------
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts holding solely Company
Guaranteed Related Subordinated Debt...................... 393,750 393,750
Stockholders' Equity:
Common stock, $1 par value, 400,000,000 shares authorized,
issued 195,719,680 shares and 193,145,152 shares at
June 30, 2000 and December 31, 1999, respectively...... 195,720 193,145
Additional paid-in capital................................ 1,755,825 1,672,085
Retained earnings......................................... 2,439,962 2,171,080
Treasury stock, at cost; 48,971,281 shares and 47,557,064
shares at June 30, 2000 and December 31, 1999,
respectively........................................... (1,191,934) (1,113,736)
Accumulated other comprehensive income.................... (8,595) (5,317)
----------- -----------
3,190,978 2,917,257
----------- -----------
$66,402,502 $61,612,376
=========== ===========
See notes to condensed consolidated financial statements.
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F- 151
420
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 303,855 $ 324,103
Adjustments to reconcile net income to cash provided by
(used for) operating activities:
Noncash items included in net income:
Depreciation and amortization............................. 63,815 49,206
Deferred income taxes..................................... 14,268 (10,317)
Amortization of deferred charges.......................... 53,729 51,736
Stock-based compensation.................................. (3,126) 11,480
(Increase) decrease in operating assets:
Cash and securities on deposit............................ 103,685 (54,585)
Financial instruments owned............................... (2,156,799) (2,200,354)
Securities purchased under agreements to resell........... 610,837 (306,902)
Securities borrowed....................................... 234,592 (197,510)
Receivables............................................... (1,031,176) (1,032,062)
Other assets.............................................. (306,671) (243,111)
Increase (decrease) in operating liabilities:
Financial instruments sold, not yet purchased............. (2,823,883) 2,863,254
Securities sold under agreements to repurchase............ 2,177,959 1,697,395
Securities loaned......................................... 1,319,954 14,021
Payables.................................................. 2,603,232 (1,204,663)
Other..................................................... (312,241) 73,936
----------- -----------
Cash provided by (used for) operating activities.......... 852,030 (164,373)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Net assets acquired in business acquisition............... (621,667) --
Office equipment and leasehold improvements............... (196,740) (110,289)
----------- -----------
Cash used for investing activities........................ (818,407) (110,289)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) short-term borrowings....... 337,151 (233,289)
Proceeds from:
Long-term borrowings...................................... 346,762 875,985
Employee stock transactions............................... 88,365 56,593
Payments for:
Long-term borrowings...................................... (403,560) (190,180)
Repurchases of common stock............................... (114,767) (121,080)
Dividends................................................. (34,973) (43,706)
----------- -----------
Cash provided by financing activities..................... 218,978 344,323
----------- -----------
Increase in cash and cash equivalents....................... 252,601 69,661
Cash and cash equivalents, beginning of period............ 176,401 228,359
----------- -----------
Cash and cash equivalents, end of period.................. $ 429,002 $ 298,020
=========== ===========
See notes to condensed consolidated financial statements.
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F- 152
421
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Paine
Webber Group Inc. ("PWG") and its wholly owned subsidiaries, including its
principal subsidiary PaineWebber Incorporated ("PWI") (collectively, the
"Company"). All material intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior year amounts to
conform to current year presentations. The December 31, 1999 Condensed
Consolidated Statement of Financial Condition was derived from the audited
consolidated financial statements of the Company. The financial information as
of and for the periods ended June 30, 2000 and 1999 is unaudited. All normal
recurring adjustments which, in the opinion of management, are necessary for a
fair presentation have been made.
Certain financial information that is normally in annual financial statements
but is not required for interim reporting purposes has been condensed or
omitted. The condensed consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
which require management to make estimates and assumptions that affect the
amounts reported in the condensed consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. The results
of operations reported for interim periods are not necessarily indicative of the
results of operations for the entire year.
Statement of Cash Flows
Total interest payments, which relate principally to agreements to repurchase,
short-term borrowings, securities loaned and long-term borrowings, were
$1,763,452 and $1,211,332 for the six months ended June 30, 2000 and 1999,
respectively. Income taxes paid were $202,888 and $118,274 for the six months
ended June 30, 2000 and 1999, respectively.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes revised accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity measure all derivative instruments at fair value and
recognize such instruments as either assets or liabilities in the consolidated
statements of financial condition. The accounting for changes in the fair value
of a derivative instrument will depend on the intended use of the derivative as
either a fair value hedge, a cash flow hedge or a foreign currency hedge. The
effect of the changes in fair value of the derivatives and, in certain cases,
the hedged items are to be reflected in either the consolidated statements of
income or as a component of other comprehensive income, based upon the resulting
designation. As issued, SFAS No. 133 was effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133
for one year to fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities--an Amendment to FASB Statement No. 133". The
Company has not yet determined the impact of these statements on the Company's
Consolidated Financial Statements, taken as a whole.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 2: SUBSEQUENT EVENT
On July 12, 2000, PWG entered into an agreement and plan of merger with UBS AG
("UBS") and a subsidiary of UBS, pursuant to which PWG will merge with and into
that subsidiary. Under the terms of the agreement, PWG's shareholders 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 PWG's common stock, $1 par value
("common stock") that they own. The percentage of PWG's common stock that will
be converted into the right to receive UBS AG stock is fixed at 50 percent.
Adjustments to elections may therefore be necessary so that, in the aggregate,
50 percent of the shares of PWG's common stock is converted into the right to
receive UBS AG stock, and 50 percent is converted into the right to receive
cash. The transaction, which is expected to be completed in the fourth quarter
of 2000, has been approved by PWG's Board of Directors and is subject to
customary closing conditions, including certain regulatory approvals and the
approval of PWG's shareholders.
NOTE 3: MERGER WITH J.C. BRADFORD
On June 9, 2000, the Company completed its merger with J.C. Bradford & Co.
L.L.C. ("J.C. Bradford"), a leading privately-held brokerage firm in the
Southeastern U.S., for approximately $622,000 in cash. The merger was accounted
for as a purchase and, accordingly, the excess of the purchase cost over the
fair value of the net assets acquired of approximately $185,000, resulted in the
Company recording $560,000 in goodwill, which is being amortized over 25 years
on a straight-line basis. The consolidated financial statements of the Company
include the results of J.C. Bradford from the closing date. As a result of the
merger, the Company recorded after-tax costs of approximately $18,800 ($30,000
pre-tax) relating primarily to elimination of the Company's duplicate
facilities, severance and other costs.
NOTE 4: FINANCIAL INSTRUMENTS OWNED AND SOLD, NOT YET PURCHASED
At June 30, 2000 and December 31, 1999, financial instruments owned and
financial instruments sold, not yet purchased consisted of the following:
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
Financial instruments owned:
U.S. government and agencies......................... $ 6,859,578 $ 5,864,331
Mortgages and mortgage-backed........................ 9,585,261 9,012,415
Corporate debt....................................... 1,972,518 1,875,361
Commercial paper and other short-term debt........... 2,196,741 1,744,036
Equities and other................................... 2,342,821 2,030,986
State and municipals................................. 620,438 617,701
----------- -----------
$23,577,357 $21,144,830
=========== ===========
Financial instruments sold, not yet purchased:
U.S. government and agencies......................... $ 2,907,693 $ 5,804,259
Mortgages and mortgage-backed........................ 144,194 123,049
Corporate debt....................................... 940,826 785,890
Equities............................................. 239,698 348,485
State and municipals................................. 42,914 37,525
----------- -----------
$ 4,275,325 $ 7,099,208
=========== ===========
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 5: LONG-TERM BORROWINGS
Long-term borrowings at June 30, 2000 and December 31, 1999 consisted of the
following:
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
U.S. Dollar-Denominated:
Fixed Rate Notes........................................ $2,608,917 $2,757,851
Fixed Rate Subordinated Notes........................... 198,809 174,765
Medium-Term Senior Notes................................ 2,186,350 2,143,010
Medium-Term Subordinated Notes.......................... 85,200 148,200
Other................................................... 11,037 --
Non-U.S. Dollar-Denominated:
Medium-Term Notes....................................... 118,823 --
---------- ----------
$5,209,136 $5,223,826
========== ==========
At June 30, 2000, interest rates on the U.S. dollar-denominated fixed rate notes
and fixed rate subordinated notes ranged from 6.25 percent to 9.25 percent and
the weighted-average interest rate was 7.19 percent. Interest on the notes is
payable semi-annually. The fixed rate notes and fixed rate subordinated notes
outstanding at June 30, 2000 had an average maturity of 5.6 years.
At June 30, 2000, the Company had outstanding U.S. dollar-denominated fixed rate
Medium-Term Notes of $1,292,100 and variable rate Medium-Term Notes of $979,450.
The Medium-Term Notes outstanding at June 30, 2000 had an average maturity of
3.9 years and a weighted-average interest rate of 6.36 percent.
At June 30, 2000, the Non-U.S. dollar-denominated Medium-Term Notes outstanding
had a weighted-average interest rate of 1.18 percent and an average maturity of
2.4 years.
In 2000, the Company issued to certain employees, 6.25% Convertible Debentures
(the "Debentures") due 2007. The Debentures are convertible, at the option of
the holders, into 1,931,250 shares of Convertible Preferred Stock, which are
then convertible into 1,931,250 shares of common stock of the Company. The
Debentures are convertible beginning on January 20, 2003.
At June 30, 2000 and December 31, 1999, the fair values of long-term borrowings
were $4,998,397 and $5,140,331, respectively, as compared to the carrying
amounts of $5,209,136 and $5,223,826, respectively. The estimated fair value of
long-term borrowings is based upon quoted market prices for the same or similar
issues and pricing models. However, for substantially all of its fixed rate
debt, the Company enters into interest rate swap agreements to convert its fixed
rate payments into floating rate payments.
The net fair values of the interest rate swaps were $125,726 and $127,097
payable at June 30, 2000 and December 31, 1999, respectively. The fair value of
interest rate swaps used to hedge the Company's long-term borrowings is based
upon the amounts the Company would receive or pay to terminate the agreements,
taking into account current interest rates.
The carrying amounts of the interest rate swap agreements included in the
Company's Condensed Consolidated Statements of Financial Condition at June 30,
2000 and December 31, 1999 were net receivables of $6,233 and $12,075,
respectively. See Note 7 for further discussion of interest rate swap agreements
used for hedging purposes.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 6: CAPITAL REQUIREMENTS
PWI, a registered broker-dealer, is subject to the Securities and Exchange
Commission Uniform Net Capital Rule and New York Stock Exchange Growth and
Business Reduction capital requirements. Under the method of computing capital
requirements adopted by PWI, minimum net capital shall not be less than 2
percent of combined aggregate debit items arising from client transactions, plus
excess margin collected on securities purchased under agreements to resell, as
defined. A reduction of business is required if net capital is less than 4
percent of such aggregate debit items. Business may not be expanded if net
capital is less than 5 percent of such aggregate debit items. As of June 30,
2000, PWI's net capital of $1,196,312 was 9.1 percent of aggregate debit items
and its net capital in excess of the minimum required was $921,545.
Effective June 9, 2000, the Company completed its merger with J.C. Bradford, a
registered broker-dealer. As a registered broker-dealer, J.C. Bradford is
subject to the Securities and Exchange Commission Uniform Net Capital Rule and
New York Stock Exchange Growth and Business Reduction capital requirements,
similar to PWI. As of June 30, 2000, J.C. Bradford's net capital of $376,146 was
41.3 percent of aggregate debit items and its net capital in excess of the
minimum required was $357,940.
NOTE 7: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Held or Issued for Trading Purposes
Set forth below are the gross contract or notional amounts of the Company's
outstanding off-balance-sheet derivative and other financial instruments held or
issued for trading purposes. These amounts are not reflected in the Condensed
Consolidated Statements of Financial Condition and are indicative only of the
volume of activity at June 30, 2000 and December 31, 1999. They do not represent
amounts subject to market risks, and in many cases, limit the Company's overall
exposure to market losses by hedging other on- and off-balance-sheet
transactions.
NOTIONAL OR CONTRACT AMOUNT
--------------------------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------- --------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ----------- -----------
Mortgage-backed forward contracts
and options written and
purchased...................... $14,862,935 $20,758,712 $14,417,186 $17,540,786
Foreign currency forward
contracts, futures contracts,
and options written and
purchased...................... 2,047,008 2,014,695 1,380,925 1,373,981
Equity securities contracts
including stock index futures,
forwards, and options written
and purchased.................. 202,385 359,693 144,034 239,682
Other fixed income securities
contracts including futures,
forwards, and options written
and purchased.................. 5,930,773 7,913,074 3,557,193 5,538,887
Interest rate swaps and caps..... 1,591,267 3,737,418 1,688,762 419,989
- --------------------------------------------------------------------------------
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of June 30, 2000 and December 31, 1999. The fair
value amounts are netted by counterparty when specific conditions are met.
FAIR VALUE AT FAIR VALUE AT
JUNE 30, 2000 DECEMBER 31, 1999
---------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- -------- -----------
Mortgage-backed forward contracts and options
written and purchased...................... $93,514 $110,055 $159,228 $114,838
Foreign currency forward contracts, futures
contracts, and options written and
purchased.................................. 21,160 20,211 20,274 20,158
Equity securities contracts including stock
index futures, forwards, and options
written and purchased...................... 41,655 16,051 152,024 48,835
Other fixed income securities contracts
including futures, forwards, and options
written and purchased...................... 12,327 6,436 29,584 20,177
Interest rate swaps and caps................. 21,000 41,489 31,569 11,087
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes for the three months ended June 30, 2000 and
the twelve months ended December 31, 1999. The average fair value is based on
the average of the month-end balances during the periods indicated.
AVERAGE FAIR VALUE AVERAGE FAIR VALUE
JUNE 30, 2000 DECEMBER 31, 1999
----------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Mortgage-backed forward contracts and
options written and purchased............. $121,674 $112,297 $171,113 $163,954
Foreign currency forward contracts, futures
contracts, and options written and
purchased................................. 31,807 31,218 22,549 22,377
Equity securities contracts including stock
index futures, forwards, and options
written and purchased..................... 88,125 31,563 63,624 40,321
Other fixed income securities contracts
including futures, forwards, and options
written and purchased..................... 16,163 6,017 11,932 49,800
Interest rate swaps and caps................ 29,344 26,051 18,593 6,754
The Company also sells securities, at predetermined prices, which have not yet
been purchased. The Company is exposed to market risk since to satisfy the
obligation, the Company must acquire the securities at market prices, which may
exceed the values reflected on the Condensed Consolidated Statements of
Financial Condition.
The off-balance-sheet derivative trading transactions are generally short-term.
At June 30, 2000 substantially all of the off-balance-sheet trading-related
derivative and other financial instruments had remaining maturities of less than
one year.
The Company's risk of loss in the event of counterparty default is limited to
the current fair value or the replacement cost on contracts in which the Company
has recorded an unrealized gain. These amounts are reflected as assets on the
Company's Condensed Consolidated Statements of Financial Condition and amounted
to $189,656 and $392,679 at June 30, 2000 and December 31, 1999, respectively.
Options written do not expose the Company to credit risk since they do not
obligate the counterparty to perform. Transactions in futures contracts are
conducted through regulated exchanges
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426
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
which have margin requirements, and are settled in cash on a daily basis,
thereby minimizing credit risk.
The following table summarizes the Company's principal transactions revenues by
business activity for the three months and six months ended June 30, 2000 and
1999. Principal transactions revenues include realized and unrealized gains and
losses on trading positions and principal investing activities, including
hedges. In assessing the profitability of its trading activities, the Company
views net interest and principal transactions revenues in the aggregate.
PRINCIPAL TRANSACTIONS REVENUES
--------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Taxable fixed income (includes futures,
forwards, options contracts and other
securities)............................... $ 61,901 $137,646 $119,672 $332,050
Equities (includes stock index futures,
forwards and options contracts)........... 71,983 107,424 278,805 192,331
Municipals (includes futures and options
contracts)................................ 47,544 34,776 92,240 69,673
-------- -------- -------- --------
$181,428 $279,846 $490,717 $594,054
======== ======== ======== ========
Held or Issued for Purposes Other Than Trading
The Company enters into interest rate swap agreements to manage the interest
rate characteristics of its assets and liabilities. As of June 30, 2000 and
December 31, 1999, the Company had outstanding interest rate swap agreements
with commercial banks with notional amounts of $3,896,010 and $4,206,010,
respectively. These agreements effectively converted substantially all of the
Company's fixed rate debt at June 30, 2000 into floating rate debt. The interest
rate swap agreements entered into have had the effect of increasing net interest
expense on the Company's fixed rate debt by $2,359 for the six months ended June
30, 2000, and decreasing net interest expense by $13,791 for the six months
ended June 30, 1999. The Company had no deferred gains or losses related to
terminated swap agreements on the Company's long-term borrowings at June 30,
2000 and December 31, 1999. The Company is subject to market risk as interest
rates fluctuate. The interest rate swaps contain credit risk to the extent the
Company is in a receivable or gain position and the counterparty defaults.
However, the counterparties to the agreements generally are large financial
institutions, and the Company has not experienced defaults in the past, and
management does not anticipate any counterparty defaults in the foreseeable
future. See Note 5 for further discussion of interest rate swap agreements used
for hedging purposes.
NOTE 8: RISK MANAGEMENT
Transactions involving derivative and non-derivative financial instruments
involve varying degrees of both market and credit risk. The Company monitors its
exposure to market and credit risk on a daily basis and through a variety of
financial, security position and credit exposure reporting and control
procedures.
Market Risk
Market risk is the potential change in value of the financial instrument caused
by unfavorable changes in interest rates, equity prices, and foreign currency
exchange rates. The Company has a variety of methods to monitor its market risk
profile. The senior management of each business group is
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427
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
responsible for reviewing trading positions, exposures, profits and losses, and
trading strategies. The Company also has an independent risk management group
which reviews the Company's risk profile and aids in setting and monitoring risk
management policies of the Company, including monitoring adherence to the
established limits, performing market risk modeling, and reviewing trading
positions and hedging strategies. The Asset/Liability Management Committee,
comprised of senior corporate and business group managers, is responsible for
establishing trading position and exposure limits.
Market risk modeling is based on estimating loss exposure through sensitivity
testing. These results are compared to established limits, and exceptions are
subject to review and approval by senior management. Other market risk control
procedures include monitoring inventory agings, reviewing traders' marks and
holding regular meetings between the senior management of the business groups
and the risk management group.
Credit Risk in Proprietary Transactions
Counterparties to the Company's proprietary trading, hedging, financing and
arbitrage activities are primarily financial institutions, including banks,
brokers and dealers, investment funds and insurance companies. Credit losses
could arise should counterparties fail to perform and the value of any
collateral proves inadequate. The Company manages credit risk by monitoring net
exposure to individual counterparties on a daily basis, monitoring credit limits
and requiring additional collateral where appropriate.
Derivative credit exposures are calculated, aggregated and compared to
established limits by the credit department. Credit reserve requirements are
determined by senior management in conjunction with the Company's continuous
credit monitoring procedures. Historically, reserve requirements arising from
instruments with off-balance-sheet risk have not been material.
Receivables and payables with brokers and dealers, agreements to resell and
repurchase securities, and securities borrowed and loaned are generally
collateralized by cash, government and government-agency securities, and letters
of credit. The market value of the initial collateral received approximates or
is greater than the contract value. Additional collateral is requested when
considered necessary. The Company may pledge clients' margined securities as
collateral in support of securities loaned and bank loans, as well as to satisfy
margin requirements at clearing organizations. The amounts loaned or pledged are
limited to the extent permitted by applicable margin regulations. Should the
counterparty fail to return the clients' securities, the Company may be required
to replace them at prevailing market prices. At June 30, 2000, the market value
of client securities loaned to other brokers approximated the amounts due or
collateral obtained.
Credit Risk in Client Activities
Client transactions are entered on either a cash or margin basis. In a margin
transaction, the Company extends credit to a client for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Receivables from customers
are substantially collateralized by customer securities. Amounts loaned are
limited by margin regulations of the Federal Reserve Board and other regulatory
authorities and are subject to the Company's credit review and daily monitoring
procedures. Market declines could, however, reduce the value of any collateral
below the principal amount loaned, plus accrued interest, before the collateral
can be sold.
Client transactions include positions in commodities and financial futures,
trading liabilities and written options. The risk to the Company's clients in
these transactions can be substantial, principally due to price volatility which
can reduce the clients' ability to meet their obligations. Margin deposit
requirements pertaining to commodity futures and exchange-traded options
transactions are generally
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
lower than those for exchange-traded securities. To the extent clients are
unable to meet their commitments to the Company and margin deposits are
insufficient to cover outstanding liabilities, the Company may take market
action and credit losses could be realized.
Client trades are recorded on a settlement date basis. Should either the client
or broker fail to perform, the Company may be required to complete the
transaction at prevailing market prices. Trades pending at June 30, 2000 were
settled without material adverse effect on the Company's consolidated financial
statements, taken as a whole.
Concentrations of Credit Risk
Concentrations of credit risk that arise from financial instruments (whether
on-or off-balance-sheet) exist for groups of counterparties when they have
similar economic characteristics that would cause their ability to meet
obligations to be similarly affected by economic, industry or geographic
factors. As a major securities firm, the Company engages in underwriting and
other financing activities with a broad range of clients, including other
financial institutions, municipalities, governments, financing companies, and
commercial real estate investors and operators. These activities could result in
concentrations of credit risk with a particular counterparty, or group of
counterparties operating in a particular geographic area or engaged in business
in a particular industry. The Company seeks to control its credit risk and the
potential for risk concentration through a variety of reporting and control
procedures described above.
The Company's most significant industry concentration, which arises within its
normal course of business activities, is financial institutions including banks,
brokers and dealers, investment funds, and insurance companies.
NOTE 9: COMMITMENTS AND CONTINGENCIES
At June 30, 2000 and December 31, 1999, the Company was contingently liable
under unsecured letters of credit totaling $204,868 and $139,156, respectively,
which approximated fair value. At June 30, 2000 and December 31, 1999 certain of
the Company's subsidiaries were contingently liable as issuer of approximately
$45,000 of notes payable to managing general partners of various limited
partnerships pursuant to certain partnership agreements. In addition, as part of
the 1995 limited partnership settlements, the Company has agreed, under certain
circumstances, to provide to class members additional consideration including
assignment of fees the Company is entitled to receive from certain partnerships.
In the opinion of management, these contingencies will not have a material
adverse effect on the Company's consolidated financial statements, taken as a
whole.
In meeting the financing needs of certain of its clients, the Company may also
issue standby letters of credit which are collateralized by customer margin
securities. At June 30, 2000 and December 31, 1999, the Company had outstanding
$142,503 and $101,400, respectively, of such standby letters of credit. At June
30, 2000 and December 31, 1999, securities with fair value of $3,414,277 and
$2,536,073, respectively, had been loaned or pledged as collateral for
securities borrowed of approximately equal fair value.
In the normal course of business, the Company enters into when-issued
transactions, underwriting and other commitments. Also, at June 30, 2000 and
December 31, 1999, the Company had commitments of $1,411,297 and $858,122,
respectively, consisting of secured credit lines to real estate operators,
mortgage and asset-backed originators, and commitments to investment
partnerships, in certain of which key employees are limited partners. Settlement
of these transactions at June 30, 2000 would not have had a material impact on
the Company's consolidated financial statements, taken as a whole.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The Company has been named as defendant in numerous legal actions in the
ordinary course of business. While the outcome of such matters cannot be
predicted with certainty, in the opinion of management of the Company, after
consultation with various counsel handling such matters, these actions will be
resolved with no material adverse effect on the Company's consolidated financial
statements, taken as a whole.
NOTE 10: COMPREHENSIVE INCOME
Comprehensive income is calculated in accordance with SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income combines net income and certain
items that directly affect stockholders' equity, such as foreign currency
translation adjustments. The components of comprehensive income for the three
months and six months ended June 30, 2000 and 1999 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income.......................... $127,506 $163,504 $303,855 $324,103
Foreign currency translation
adjustment........................ (2,396) (1,419) (3,278) (2,931)
-------- -------- -------- --------
Total comprehensive income.......... $125,110 $162,085 $300,577 $321,172
-------- -------- -------- --------
NOTE 11: EARNINGS PER COMMON SHARE
Earnings per common share are computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share excludes the dilutive effects of
options and convertible securities and is calculated by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects all potentially
dilutive securities.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Set forth below is the reconciliation of net income applicable to common shares
and weighted-average common and common equivalent shares of the basic and
diluted earnings per common share computations:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
NUMERATOR:
Net income................. $ 127,506 $ 163,504 $ 303,855 $ 324,103
Preferred stock
dividends................ -- (5,949) -- (11,898)
------------ ------------ ------------ ------------
Net income applicable to
common shares for basic
earnings per share....... 127,506 157,555 303,855 312,205
============ ============ ============ ============
Net income applicable to
common shares for diluted
earnings per share....... $ 127,506 $ 157,555 $ 303,855 $ 312,205
============ ============ ============ ============
DENOMINATOR:
Weighted-average common
shares for basic earnings
per share................ 146,067,820 145,742,741 145,324,940 145,631,920
Weighted-average effect of
dilutive employee stock
options and awards....... 8,508,584(1) 9,217,656 7,908,935(1) 8,673,875
------------ ------------ ------------ ------------
Dilutive potential common
shares................... 8,508,584 9,217,656 7,908,935 8,673,875
------------ ------------ ------------ ------------
Weighted-average common and
common equivalent shares
for diluted earnings per
share.................... 154,576,404 154,960,397 153,233,875 154,305,795
============ ============ ============ ============
EARNINGS PER SHARE:
Basic...................... $ 0.87 $ 1.08 $ 2.09 $ 2.14
============ ============ ============ ============
Diluted.................... $ 0.82 $ 1.02 $ 1.98 $ 2.02
============ ============ ============ ============
- ------------
(1) Included in the calculation of employee stock options and awards was the
dilutive effective of 1,931,250 instruments related to convertible
debentures.
NOTE 12: SEGMENT REPORTING DATA
The Company offers a wide variety of products and services, primarily those of a
full service domestic broker-dealer to a domestic market, through its two
operating segments: Individual and Institutional. The Individual segment offers
brokerage services and products (such as the purchase and sale of securities,
insurance annuity contracts, mutual funds, wrap fee products, and margin and
securities lending), 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 market products and services (such as the placing
of securities and other financial instruments for--and the execution of trades
on behalf of--institutional clients, investment banking services such as the
underwriting of debt and equity securities, and mergers and acquisitions
advisory services).
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Segment revenues and expenses in the table below consist of those that are
directly attributable to the segment under which they are reported, combined
with segment amounts based on Company allocation methodologies (for example,
allocating a portion of investment banking revenues to the Individual segment;
relative utilization of the Company's square footage for certain cost
allocations).
THREE MONTHS ENDED JUNE 30, 2000
-----------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ----------
Total revenues....................................... $1,422,061 $894,365 $2,316,426
Net revenues......................................... 1,142,750 268,422 1,411,172
Income before taxes and minority interest............ 199,050 13,020 212,070
THREE MONTHS ENDED JUNE 30, 1999
-----------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ----------
Total revenues....................................... $1,135,946 $835,032 $1,970,978
Net revenues......................................... 980,018 367,889 1,347,907
Income before taxes and minority interest............ 152,980 116,687 269,667
SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ----------
Total revenues...................................... $2,892,812 $1,828,735 $4,721,547
Net revenues........................................ 2,394,028 614,249 3,008,277
Income before taxes and minority interest........... 398,244 104,045 502,289
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ----------
Total revenues...................................... $2,240,355 $1,653,933 $3,894,288
Net revenues........................................ 1,935,131 727,667 2,662,798
Income before taxes and minority interest........... 304,873 229,813 534,686
Total assets for the Individual and Institutional segments were $26,786,776 and
$39,615,726, respectively, at June 30, 2000 and $21,828,324 and $39,784,052,
respectively at December 31, 1999.
- --------------------------------------------------------------------------------
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432
PAINE WEBBER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER 2000
SEPTEMBER 30, 2000
- --------------------------------------------------------------------------------
F- 164
433
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands of dollars except share and per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUES
Commissions........................ $ 528,948 $ 451,341 $ 1,765,630 $ 1,419,092
Principal transactions............. 287,931 235,914 778,648 829,968
Asset management................... 314,083 235,712 893,076 666,250
Investment banking................. 107,502 134,235 385,329 420,321
Interest........................... 1,167,415 762,205 3,223,170 2,289,636
Other.............................. 39,367 40,785 120,940 129,213
------------ ------------ ------------ ------------
Total revenues................ 2,445,246 1,860,192 7,166,793 5,754,480
Interest expense................... 1,002,567 623,025 2,715,837 1,854,515
------------ ------------ ------------ ------------
Net revenues.................. 1,442,679 1,237,167 4,450,956 3,899,965
------------ ------------ ------------ ------------
NON-INTEREST EXPENSES
Compensation and benefits.......... 875,012 711,783 2,664,401 2,260,575
Office and equipment............... 111,933 89,159 308,220 259,941
Communications..................... 49,408 42,331 140,338 127,179
Business development............... 34,172 30,861 114,849 83,262
Brokerage, clearing & exchange
fees............................. 16,203 23,391 63,806 71,268
Professional services.............. 42,215 33,469 142,096 96,318
Other.............................. 93,536 80,188 294,757 240,751
------------ ------------ ------------ ------------
Total non-interest expenses... 1,222,479 1,011,182 3,728,467 3,139,294
------------ ------------ ------------ ------------
INCOME BEFORE TAXES AND MINORITY
INTEREST......................... 220,200 225,985 722,489 760,671
Provision for income taxes....... 76,370 79,722 258,682 274,183
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST.... 143,830 146,263 463,807 486,488
Minority interest................ 8,061 8,061 24,183 24,183
------------ ------------ ------------ ------------
NET INCOME......................... $ 135,769 $ 138,202 $ 439,624 $ 462,305
============ ============ ============ ============
Net income applicable to common
shares........................... $ 135,769 $ 132,253 $ 439,624 $ 444,458
============ ============ ============ ============
Earnings per common share:
Basic............................ $ 0.92 $ 0.91 $ 3.01 $ 3.05
Diluted.......................... $ 0.85 $ 0.86 $ 2.83 $ 2.88
Weighted-average common shares:
Basic............................ 148,019,200 145,633,697 146,143,267 145,583,134
Diluted.......................... 159,911,113 153,857,503 155,100,328 154,106,985
Dividends declared per common
share............................ $ 0.12 $ 0.11 $ 0.36 $ 0.33
See notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
F- 165
434
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS
Cash and cash equivalents................................... $ 214,593 $ 176,401
Cash and securities segregated and on deposit for federal
and other regulations..................................... 1,426,661 823,059
Financial instruments owned................................. 23,793,940 21,144,830
Securities received as collateral........................... 894,448 1,079,976
Securities purchased under agreements to resell............. 15,678,483 15,923,948
Securities borrowed......................................... 10,260,714 10,526,638
Receivables, net of allowance for doubtful accounts of
$18,903 and $30,039 at September 30, 2000 and December 31,
1999, respectively........................................ 12,367,901 10,287,937
Office equipment and leasehold improvements, net of
accumulated depreciation and amortization of $622,888 and
$527,718 at September 30, 2000 and December 31, 1999,
respectively.............................................. 823,326 579,819
Other assets................................................ 1,988,201 1,069,768
----------- -----------
$67,448,267 $61,612,376
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings....................................... $ 1,810,822 $ 1,884,250
Financial instruments sold, not yet purchased............... 3,467,766 7,099,208
Securities sold under agreements to repurchase.............. 29,377,087 25,740,196
Securities loaned........................................... 6,419,531 5,661,200
Obligation to return securities received as collateral...... 894,448 1,079,976
Payables.................................................... 13,514,944 8,448,217
Other liabilities and accrued expenses...................... 3,233,534 3,164,496
Long-term borrowings........................................ 4,943,484 5,223,826
----------- -----------
63,661,616 58,301,369
----------- -----------
Commitments and contingencies
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts holding solely Company
Guaranteed Related Subordinated Debt...................... 393,750 393,750
Stockholders' Equity:
Common stock, $1 par value, 400,000,000 shares authorized,
issued 197,727,238 shares and 193,145,152 shares at
September 30, 2000 and December 31, 1999,
respectively........................................... 197,727 193,145
Additional paid-in capital................................ 1,833,623 1,672,085
Retained earnings......................................... 2,557,928 2,171,080
Treasury stock, at cost; 48,752,322 shares and 47,557,064
shares at September 30, 2000 and December 31, 1999,
respectively........................................... (1,186,605) (1,113,736)
Accumulated other comprehensive income.................... (9,772) (5,317)
----------- -----------
3,392,901 2,917,257
----------- -----------
$67,448,267 $61,612,376
=========== ===========
See notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
F- 166
435
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 439,624 $ 462,305
Adjustments to reconcile net income to cash provided by
(used for) operating activities:
Noncash items included in net income:
Depreciation and amortization............................. 105,370 73,035
Deferred income taxes..................................... 2,138 (45,757)
Amortization of deferred charges.......................... 99,584 81,708
Stock-based compensation.................................. (5,116) 12,680
(Increase) decrease in operating assets:
Cash and securities on deposit............................ (603,325) (87,157)
Financial instruments owned............................... (2,366,989) (1,582,711)
Securities purchased under agreements to resell........... 245,465 1,405,018
Securities borrowed....................................... 491,110 (651,622)
Receivables............................................... (1,180,787) (1,548,063)
Other assets.............................................. (360,248) (282,626)
Increase (decrease) in operating liabilities:
Financial instruments sold, not yet purchased............. (3,631,443) 445,507
Securities sold under agreements to repurchase............ 3,636,891 2,227,316
Securities loaned......................................... 490,408 199,468
Payables.................................................. 4,236,051 (1,249,085)
Other..................................................... (168,013) 134,438
----------- -----------
Cash provided by (used for) operating activities.......... 1,430,720 (405,546)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Net assets acquired in business acquisition............... (621,667) --
Office equipment and leasehold improvements............... (306,217) (179,731)
----------- -----------
Cash used for investing activities........................ (927,884) (179,731)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) short-term borrowings....... (107,630) 10,483
Proceeds from:
Long-term borrowings...................................... 471,761 1,010,984
Employee stock transactions............................... 130,917 72,410
Payments for:
Long-term borrowings...................................... (792,150) (300,575)
Repurchases of common stock............................... (114,767) (151,446)
Dividends................................................. (52,775) (65,373)
----------- -----------
Cash (used for) provided by financing activities.......... (464,644) 576,483
----------- -----------
Increase (decrease) in cash and cash equivalents............ 38,192 (8,794)
Cash and cash equivalents, beginning of period............ 176,401 228,359
----------- -----------
Cash and cash equivalents, end of period.................. $ 214,593 $ 219,565
=========== ===========
See notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
F- 167
436
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Paine
Webber Group Inc. ("PWG") and its wholly owned subsidiaries, including its
principal subsidiary PaineWebber Incorporated ("PWI") (collectively, the
"Company"). All material intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior year amounts to
conform to current year presentations. The December 31, 1999 Condensed
Consolidated Statement of Financial Condition was derived from the audited
consolidated financial statements of the Company. The financial information as
of and for the periods ended September 30, 2000 and 1999 is unaudited. All
normal recurring adjustments which, in the opinion of management, are necessary
for a fair presentation have been made.
Certain financial information that is normally in annual financial statements
but is not required for interim reporting purposes has been condensed or
omitted. The condensed consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
which require management to make estimates and assumptions that affect the
amounts reported in the condensed consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and the Company's
Quarterly Reports on Form 10-Q for the quarters ended June 30, and March 31,
2000. The results of operations reported for interim periods are not necessarily
indicative of the results of operations for the entire year.
Statement of Cash Flows
Total interest payments, which relate principally to agreements to repurchase,
short-term borrowings, securities loaned and long-term borrowings, were
$2,782,961 and $1,834,039 for the nine months ended September 30, 2000 and 1999,
respectively. Income taxes paid were $232,558 and $268,289 for the nine months
ended September 30, 2000 and 1999, respectively.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes revised accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity measure all derivative instruments at fair value and
recognize such instruments as either assets or liabilities in the consolidated
statements of financial condition. The accounting for changes in the fair value
of a derivative instrument will depend on the intended use of the derivative as
either a fair value hedge, a cash flow hedge or a foreign currency hedge. The
effect of the changes in fair value of the derivatives and, in certain cases,
the hedged items are to be reflected in either the consolidated statements of
income or as a component of other comprehensive income, based upon the resulting
designation. As issued, SFAS No. 133 was effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133
for one year to fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities--an Amendment to FASB Statement No. 133". The
Company expects that the adoption of these statements will not have a material
effect on the Company's Consolidated Financial Statements, taken as a whole.
- --------------------------------------------------------------------------------
F- 168
437
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". SFAS No. 140 revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of the
provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001 and is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company has not
yet determined the impact of this statement on the Company's Consolidated
Financial Statements, taken as a whole.
NOTE 2: RECENT EVENTS
On October 23, 2000, the stockholders of PWG adopted the Agreement and Plan of
Merger (the "Merger Agreement"), dated as of July 12, 2000, by and among PWG,
UBS AG ("UBS") and a subsidiary of UBS, pursuant to which PWG will merge with
and into that subsidiary. Under the terms of the agreement, PWG's stockholders
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 PWG's common stock, $1 par
value ("common stock") that they own. The percentage of PWG's common stock that
will be converted into the right to receive UBS AG stock is fixed at 50 percent.
Adjustments to elections may therefore be necessary so that, in the aggregate,
50 percent of the shares of PWG's common stock is converted into the right to
receive UBS AG stock, and 50 percent is converted into the right to receive
cash. The transaction, which is expected to be completed in November of 2000, is
subject to customary closing conditions, including certain regulatory approvals.
NOTE 3: MERGER WITH J.C. BRADFORD
On June 9, 2000, the Company completed its merger with J.C. Bradford & Co.
L.L.C. ("J.C. Bradford"), a leading privately-held brokerage firm in the
Southeastern U.S., for approximately $622,000 in cash. The merger was accounted
for as a purchase and, accordingly, the excess of the purchase cost over the
fair value of the net assets acquired of approximately $185,000, resulted in the
Company recording $560,000 in goodwill, which is being amortized over 25 years
on a straight-line basis. The consolidated financial statements of the Company
include the results of J.C. Bradford from the closing date. As a result of the
merger, in the second quarter of 2000, the Company recorded after-tax costs of
approximately $18,800 ($30,000 pre-tax) relating primarily to the elimination of
the Company's duplicate facilities, severance and other costs.
- --------------------------------------------------------------------------------
F- 169
438
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: FINANCIAL INSTRUMENTS OWNED AND SOLD, NOT YET PURCHASED
At September 30, 2000 and December 31, 1999, financial instruments owned and
financial instruments sold, not yet purchased consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
Financial instruments owned:
U.S. government and agencies......................... $ 7,724,521 $ 5,864,331
Mortgages and mortgage-backed........................ 10,426,454 9,012,415
Corporate debt....................................... 671,925 1,875,361
Commercial paper and other short-term debt........... 1,890,638 1,744,036
Equities and other................................... 2,363,490 2,030,986
State and municipals................................. 716,912 617,701
----------- -----------
$23,793,940 $21,144,830
=========== ===========
Financial instruments sold, not yet purchased:
U.S. government and agencies......................... $ 2,768,820 $ 5,804,259
Mortgages and mortgage-backed........................ 145,255 123,049
Corporate debt....................................... 283,084 785,890
Equities............................................. 257,343 348,485
State and municipals................................. 13,264 37,525
----------- -----------
$ 3,467,766 $ 7,099,208
=========== ===========
NOTE 5: LONG-TERM BORROWINGS
Long-term borrowings at September 30, 2000 and December 31, 1999 consisted of
the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
U.S. Dollar-Denominated:
Fixed Rate Notes........................................ $2,607,009 $2,757,851
Fixed Rate Subordinated Notes........................... 174,831 174,765
Medium-Term Senior Notes................................ 1,950,850 2,143,010
Medium-Term Subordinated Notes.......................... 84,200 148,200
Other................................................... 10,044 --
Non-U.S. Dollar-Denominated:
Medium-Term Notes....................................... 116,550 --
---------- ----------
$4,943,484 $5,223,826
========== ==========
At September 30, 2000, interest rates on the U.S. dollar-denominated fixed rate
notes and fixed rate subordinated notes ranged from 6.25 percent to 9.25 percent
and the weighted-average interest rate was 7.19 percent. Interest on the notes
is payable semi-annually. The fixed rate notes and fixed rate subordinated notes
outstanding at September 30, 2000 had an average maturity of 5.3 years.
At September 30, 2000, the Company had outstanding U.S. dollar-denominated fixed
rate Medium-Term Notes of $1,071,100 and variable rate Medium-Term Notes of
$963,950. The Medium-Term Notes outstanding at September 30, 2000 had an average
maturity of 4.2 years and a weighted-average interest rate of 5.97 percent.
- --------------------------------------------------------------------------------
F- 170
439
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 2000, the Non-U.S. dollar-denominated Medium-Term Notes
outstanding had a weighted-average interest rate of 1.18 percent and an average
maturity of 2.16 years.
In 2000, the Company issued to certain employees, 6.25% Convertible Debentures
due 2007 (the "Debentures"). The Debentures were initially convertible, at the
option of the holders beginning on January 20, 2003, into 1,931,250 shares of
Convertible Preferred Stock, which were then convertible into 1,931,250 shares
of common stock of the Company.
As a result of the Company entering into the Merger Agreement, the Debentures
became convertible effective upon the adoption by the stockholders of the
Company of the Merger Agreement, which occurred on October 23, 2000. Pursuant to
their terms, on October 16, 2000, the Company called for redemption on October
23, 2000 all of the outstanding Debentures. All outstanding Debentures were
converted into common stock.
At September 30, 2000 and December 31, 1999, the fair values of long-term
borrowings were $4,924,528 and $5,140,331, respectively, as compared to the
carrying amounts of $4,943,484 and $5,223,826, respectively. The estimated fair
value of long-term borrowings is based upon quoted market prices for the same or
similar issues and pricing models. However, for substantially all of its fixed
rate debt, the Company enters into interest rate swap agreements to convert its
fixed rate payments into floating rate payments.
The net fair values of the interest rate swaps were $61,739 and $127,097 payable
at September 30, 2000 and December 31, 1999, respectively. The fair value of
interest rate swaps used to hedge the Company's long-term borrowings is based
upon the amounts the Company would receive or pay to terminate the agreements,
taking into account current interest rates.
The carrying amounts of the interest rate swap agreements included in the
Company's Condensed Consolidated Statements of Financial Condition at September
30, 2000 and December 31, 1999 were net receivables of $4,780 and $12,075,
respectively. See Note 7 for further discussion of interest rate swap agreements
used for hedging purposes.
NOTE 6: CAPITAL REQUIREMENTS
PWI, a registered broker-dealer, is subject to the Securities and Exchange
Commission Uniform Net Capital Rule and New York Stock Exchange Growth and
Business Reduction capital requirements. Under the method of computing capital
requirements adopted by PWI, minimum net capital shall not be less than 2
percent of combined aggregate debit items arising from client transactions, plus
excess margin collected on securities purchased under agreements to resell, as
defined. A reduction of business is required if net capital is less than 4
percent of such aggregate debit items. Business may not be expanded if net
capital is less than 5 percent of such aggregate debit items. As of September
30, 2000, PWI's net capital of $1,608,364 was 10.1 percent of aggregate debit
items and its net capital in excess of the minimum required was $1,281,410.
- --------------------------------------------------------------------------------
F- 171
440
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Held or Issued for Trading Purposes
Set forth below are the gross contract or notional amounts of the Company's
outstanding off-balance-sheet derivative and other financial instruments held or
issued for trading purposes. These amounts are not reflected in the Condensed
Consolidated Statements of Financial Condition and are indicative only of the
volume of activity at September 30, 2000 and December 31, 1999. They do not
represent amounts subject to market risks, and in many cases, limit the
Company's overall exposure to market losses by hedging other on- and
off-balance-sheet transactions.
NOTIONAL OR CONTRACT AMOUNT
-----------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------- -------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ----------- -----------
Mortgage-backed forward contracts and
options written and purchased........ $18,963,831 $26,909,451 $14,417,186 $17,540,786
Foreign currency forward contracts,
futures contracts, and options
written and purchased................ 2,119,724 2,133,310 1,380,925 1,373,981
Equity securities contracts including
stock index futures, forwards, and
options written and purchased........ 184,066 271,879 144,034 239,682
Other fixed income securities contracts
including futures, forwards, and
options written and purchased........ 1,742,936 4,252,001 3,557,193 5,538,887
Interest rate swaps and caps........... 1,850,008 3,643,008 1,688,762 419,989
Set forth below are the fair values of derivative financial instruments held or
issued for trading purposes as of September 30, 2000 and December 31, 1999. The
fair value amounts are netted by counterparty when specific conditions are met.
FAIR VALUE AT FAIR VALUE AT
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- -------- -----------
Mortgage-backed forward contracts and options
written and purchased............................ $88,571 $105,027 $159,228 $114,838
Foreign currency forward contracts, futures
contracts, and options written and purchased..... 20,304 17,001 20,274 20,158
Equity securities contracts including stock index
futures, forwards, and options written and
purchased........................................ 16,074 16,246 152,024 48,835
Other fixed income securities contracts including
futures, forwards, and options written and
purchased........................................ 2,100 378 29,584 20,177
Interest rate swaps and caps....................... 20,022 46,841 31,569 11,087
- --------------------------------------------------------------------------------
F- 172
441
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Set forth below are the average fair values of derivative financial instruments
held or issued for trading purposes for the three months ended September 30,
2000 and the twelve months ended December 31, 1999. The average fair value is
based on the average of the month-end balances during the periods indicated.
AVERAGE FAIR VALUE AVERAGE FAIR VALUE
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- -------- -----------
Mortgage-backed forward contracts and options written
and purchased...................................... $65,054 $69,284 $171,113 $163,954
Foreign currency forward contracts, futures
contracts, and options written and purchased....... 25,445 25,016 22,549 22,377
Equity securities contracts including stock index
futures, forwards, and options written and
purchased.......................................... 60,256 19,098 63,624 40,321
Other fixed income securities contracts including
futures, forwards, and options written and
purchased.......................................... 3,686 23 11,932 49,800
Interest rate swaps and caps......................... 19,871 43,877 18,593 6,754
The Company also sells securities, at predetermined prices, which have not yet
been purchased. The Company is exposed to market risk since to satisfy the
obligation, the Company must acquire the securities at market prices, which may
exceed the values reflected on the Condensed Consolidated Statements of
Financial Condition.
The off-balance-sheet derivative trading transactions are generally short-term.
At September 30, 2000 substantially all of the off-balance-sheet trading-related
derivative and other financial instruments had remaining maturities of less than
one year.
The Company's risk of loss in the event of counterparty default is limited to
the current fair value or the replacement cost on contracts in which the Company
has recorded an unrealized gain. These amounts are reflected as assets on the
Company's Condensed Consolidated Statements of Financial Condition and amounted
to $147,071 and $392,679 at September 30, 2000 and December 31, 1999,
respectively. Options written do not expose the Company to credit risk since
they do not obligate the counterparty to perform. Transactions in futures
contracts are conducted through regulated exchanges which have margin
requirements, and are settled in cash on a daily basis, thereby minimizing
credit risk.
The following table summarizes the Company's principal transactions revenues by
business activity for the three months and nine months ended September 30, 2000
and 1999. Principal transactions revenues include realized and unrealized gains
and losses on trading positions and principal investing activities, including
hedges. In assessing the profitability of its trading activities, the Company
views net interest and principal transactions revenues in the aggregate.
PRINCIPAL TRANSACTIONS REVENUES
-----------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Taxable fixed income (includes futures, forwards,
options contracts and other securities)......... $ 64,685 $ 72,228 $184,357 $404,278
Equities (includes stock index futures, forwards
and options contracts).......................... 179,232 119,968 458,037 312,299
Municipals (includes futures and options
contracts)...................................... 44,014 43,718 136,254 113,391
-------- -------- -------- --------
$287,931 $235,914 $778,648 $829,968
======== ======== ======== ========
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F- 173
442
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Held or Issued for Purposes Other Than Trading
The Company enters into interest rate swap agreements to manage the interest
rate characteristics of its assets and liabilities. As of September 30, 2000 and
December 31, 1999, the Company had outstanding interest rate swap agreements
with commercial banks with notional amounts of $3,706,010 and $4,206,010,
respectively. These agreements effectively converted substantially all of the
Company's fixed rate debt at September 30, 2000 into floating rate debt. The
interest rate swap agreements entered into have had the effect of increasing net
interest expense on the Company's fixed rate debt by $7,737 for the nine months
ended September 30, 2000, and decreasing net interest expense by $20,370 for the
nine months ended September 30, 1999. The Company had no deferred gains or
losses related to terminated swap agreements on the Company's long-term
borrowings at September 30, 2000 and December 31, 1999. The Company is subject
to market risk as interest rates fluctuate. The interest rate swaps contain
credit risk to the extent the Company is in a receivable or gain position and
the counterparty defaults. However, the counterparties to the agreements
generally are large financial institutions, and the Company has not experienced
defaults in the past, and management does not anticipate any counterparty
defaults in the foreseeable future. See Note 5 for further discussion of
interest rate swap agreements used for hedging purposes.
NOTE 8: RISK MANAGEMENT
Transactions involving derivative and non-derivative financial instruments
involve varying degrees of both market and credit risk. The Company monitors its
exposure to market and credit risk on a daily basis and through a variety of
financial, security position and credit exposure reporting and control
procedures.
Market Risk
Market risk is the potential change in value of the financial instrument caused
by unfavorable changes in interest rates, equity prices, and foreign currency
exchange rates. The Company has a variety of methods to monitor its market risk
profile. The senior management of each business group is responsible for
reviewing trading positions, exposures, profits and losses, and trading
strategies. The Company also has an independent risk management group which
reviews the Company's risk profile and aids in setting and monitoring risk
management policies of the Company, including monitoring adherence to the
established limits, performing market risk modeling, and reviewing trading
positions and hedging strategies. The Asset/Liability Management Committee,
comprised of senior corporate and business group managers, is responsible for
establishing trading position and exposure limits.
Market risk modeling is based on estimating loss exposure through sensitivity
testing. These results are compared to established limits, and exceptions are
subject to review and approval by senior management. Other market risk control
procedures include monitoring inventory agings, reviewing traders' marks and
holding regular meetings between the senior management of the business groups
and the risk management group.
Credit Risk in Proprietary Transactions
Counterparties to the Company's proprietary trading, hedging, financing and
arbitrage activities are primarily financial institutions, including banks,
brokers and dealers, investment funds and insurance companies. Credit losses
could arise should counterparties fail to perform and the value of any
collateral proves inadequate. The Company manages credit risk by monitoring net
exposure to individual counterparties on a daily basis, monitoring credit limits
and requiring additional collateral where appropriate.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Derivative credit exposures are calculated, aggregated and compared to
established limits by the credit department. Credit reserve requirements are
determined by senior management in conjunction with the Company's continuous
credit monitoring procedures. Historically, reserve requirements arising from
instruments with off-balance-sheet risk have not been material.
Receivables and payables with brokers and dealers, agreements to resell and
repurchase securities, and securities borrowed and loaned are generally
collateralized by cash, government and government-agency securities, and letters
of credit. The market value of the initial collateral received approximates or
is greater than the contract value. Additional collateral is requested when
considered necessary. The Company may pledge clients' margined securities as
collateral in support of securities loaned and bank loans, as well as to satisfy
margin requirements at clearing organizations. The amounts loaned or pledged are
limited to the extent permitted by applicable margin regulations. Should the
counterparty fail to return the clients' securities, the Company may be required
to replace them at prevailing market prices. At September 30, 2000, the market
value of client securities loaned to other brokers approximated the amounts due
or collateral obtained.
Credit Risk in Client Activities
Client transactions are entered on either a cash or margin basis. In a margin
transaction, the Company extends credit to a client for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Receivables from customers
are substantially collateralized by customer securities. Amounts loaned are
limited by margin regulations of the Federal Reserve Board and other regulatory
authorities and are subject to the Company's credit review and daily monitoring
procedures. Market declines could, however, reduce the value of any collateral
below the principal amount loaned, plus accrued interest, before the collateral
can be sold.
Client transactions include positions in commodities and financial futures,
trading liabilities and written options. The risk to the Company's clients in
these transactions can be substantial, principally due to price volatility which
can reduce the clients' ability to meet their obligations. Margin deposit
requirements pertaining to commodity futures and exchange-traded options
transactions are generally lower than those for exchange-traded securities. To
the extent clients are unable to meet their commitments to the Company and
margin deposits are insufficient to cover outstanding liabilities, the Company
may take market action and credit losses could be realized.
Client trades are recorded on a settlement date basis. Should either the client
or broker fail to perform, the Company may be required to complete the
transaction at prevailing market prices. Trades pending at September 30, 2000
were settled without material adverse effect on the Company's consolidated
financial statements, taken as a whole.
Concentrations of Credit Risk
Concentrations of credit risk that arise from financial instruments (whether
on-or off-balance-sheet) exist for groups of counterparties when they have
similar economic characteristics that would cause their ability to meet
obligations to be similarly affected by economic, industry or geographic
factors. As a major securities firm, the Company engages in underwriting and
other financing activities with a broad range of clients, including other
financial institutions, municipalities, governments, financing companies, and
commercial real estate investors and operators. These activities could result in
concentrations of credit risk with a particular counterparty, or group of
counterparties operating in a particular geographic area or engaged in business
in a particular industry. The Company seeks to control its credit risk and the
potential for risk concentration through a variety of reporting and control
procedures described above.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's most significant industry concentration, which arises within its
normal course of business activities, is financial institutions including banks,
brokers and dealers, investment funds, and insurance companies.
NOTE 9: COMMITMENTS AND CONTINGENCIES
At September 30, 2000 and December 31, 1999, the Company was contingently liable
under unsecured letters of credit totaling $298,498 and $139,156, respectively,
which approximated fair value. At September 30, 2000 and December 31, 1999
certain of the Company's subsidiaries were contingently liable as issuer of
approximately $45,000 of notes payable to managing general partners of various
limited partnerships pursuant to certain partnership agreements. In addition, as
part of the 1995 limited partnership settlements, the Company has agreed, under
certain circumstances, to provide to class members additional consideration
including assignment of fees the Company is entitled to receive from certain
partnerships. In the opinion of management, these contingencies will not have a
material adverse effect on the Company's consolidated financial statements,
taken as a whole.
In meeting the financing needs of certain of its clients, the Company may also
issue standby letters of credit which are collateralized by customer margin
securities. At September 30, 2000 and December 31, 1999, the Company had
outstanding $182,712 and $101,400, respectively, of such standby letters of
credit. At September 30, 2000 and December 31, 1999, securities with fair value
of $2,416,428 and $2,536,073, respectively, had been loaned or pledged as
collateral for securities borrowed of approximately equal fair value.
In the normal course of business, the Company enters into when-issued
transactions, underwriting and other commitments. Also, at September 30, 2000
and December 31, 1999, the Company had commitments of $1,176,781 and $858,122,
respectively, consisting of secured credit lines to real estate operators,
mortgage and asset-backed originators, and commitments to investment
partnerships, in certain of which key employees are limited partners. Settlement
of these transactions at September 30, 2000 would not have had a material impact
on the Company's consolidated financial statements, taken as a whole.
The Company has been named as defendant in numerous legal actions in the
ordinary course of business. While the outcome of such matters cannot be
predicted with certainty, in the opinion of management of the Company, after
consultation with various counsel handling such matters, these actions will be
resolved with no material adverse effect on the Company's consolidated financial
statements, taken as a whole.
NOTE 10: COMPREHENSIVE INCOME
Comprehensive income is calculated in accordance with SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income combines net income and certain
items that directly affect stockholders' equity, such as foreign currency
translation adjustments. The components of comprehensive income for the three
months and nine months ended September 30, 2000 and 1999 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income.......................... $135,769 $138,202 $439,624 $462,305
Foreign currency translation
adjustment........................ (1,177) 2,046 (4,455) (885)
-------- -------- -------- --------
Total comprehensive income.......... $134,592 $140,248 $435,169 $461,420
======== ======== ======== ========
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: EARNINGS PER COMMON SHARE
Earnings per common share are computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share excludes the dilutive effects of
options and convertible securities and is calculated by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects all potentially
dilutive securities.
Set forth below is the reconciliation of net income applicable to common shares
and weighted-average common and common equivalent shares of the basic and
diluted earnings per common share computations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
NUMERATOR:
Net income.............. $ 135,769 $ 138,202 $ 439,624 $ 462,305
Preferred stock
dividends............. -- (5,949) -- (17,847)
------------ ------------ ------------ ------------
Net income applicable to
common shares for
basic earnings per
share................. 135,769 132,253 439,624 444,458
============ ============ ============ ============
Net income applicable to
common shares for
diluted earnings per
share................. $ 135,769 $ 132,253 $ 439,624 $ 444,458
============ ============ ============ ============
DENOMINATOR:
Weighted-average common
shares for basic
earnings per share.... 148,019,200 145,633,697 146,143,267 145,583,134
Weighted-average effect
of dilutive employee
stock options and
awards................ 11,891,913 8,223,806 8,957,061 8,523,851
------------ ------------ ------------ ------------
Weighted-average common
and common equivalent
shares for diluted
earnings per share.... 159,911,113 153,857,503 155,100,328 154,106,985
============ ============ ============ ============
EARNINGS PER SHARE:
Basic................... $ 0.92 $ 0.91 $ 3.01 $ 3.05
============ ============ ============ ============
Diluted................. $ 0.85 $ 0.86 $ 2.83 $ 2.88
============ ============ ============ ============
Pursuant to the terms and conditions of the Company's various Stock Option and
Award Plans which provide for the granting to officers and other key employees
nonqualified stock options, restricted stock awards, restricted stock units and
other stock based awards (the "Awards"), effective October 23, 2000, the date
the shareholders of the Company approved the Merger Agreement, the Awards that
were previously unvested or restricted became fully vested and no longer subject
to restrictions on sales and transfers.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12: SEGMENT REPORTING DATA
The Company offers a wide variety of products and services, primarily those of a
full service domestic broker-dealer to a domestic market, through its two
operating segments: Individual and Institutional. The Individual segment offers
brokerage services and products (such as the purchase and sale of securities,
insurance annuity contracts, mutual funds, wrap fee products, and margin and
securities lending), 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 market products and services (such as the placing
of securities and other financial instruments for--and the execution of trades
on behalf of--institutional clients, investment banking services such as the
underwriting of debt and equity securities, and mergers and acquisitions
advisory services).
Segment revenues and expenses in the table below consist of those that are
directly attributable to the segment under which they are reported, combined
with segment amounts based on Company allocation methodologies (for example,
allocating a portion of investment banking revenues to the Individual segment;
relative utilization of the Company's square footage for certain cost
allocations).
THREE MONTHS ENDED SEPTEMBER 30, 2000 THREE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------- ---------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ---------- ---------- ------------- ----------
Total revenues....... $1,556,834 $ 888,412 $2,445,246 $1,167,330 $ 692,862 $1,860,192
Net revenues......... 1,204,463 238,216 1,442,679 1,010,919 226,248 1,237,167
Income before taxes
and minority
interest........... 171,842 48,358 220,200 186,513 39,472 225,985
NINE MONTHS ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------- ---------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ---------- ---------- ------------- ----------
Total revenues....... $4,449,646 $2,717,147 $7,166,793 $3,407,685 $2,346,795 $5,754,480
Net revenues......... 3,598,490 852,466 4,450,956 2,946,050 953,915 3,899,965
Income before taxes
and minority
interest........... 570,086 152,403 722,489 491,386 269,285 760,671
Total assets for the Individual and Institutional segments were $30,141,208 and
$37,307,059, respectively, at September 30, 2000 and $21,828,324 and
$39,784,052, respectively at December 31, 1999.
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[UBS AG LOGO]
448
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Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS
UBS AG
Under Swiss law, directors and senior officers acting in violation of their
statutory duties - whether dealing with bona fide third parties or performing
any other acts on behalf of the corporation - may become liable to the
corporation, its shareholders and (in bankruptcy) its creditors for damages. The
directors' liability is joint and several but only to the extent the damage is
attributable to each director based on willful or negligent violation of duty.
If the board of directors lawfully delegated the power to carry out day-to-day
management to a different corporate body, e.g., the executive board, the board
of directors is not vicariously liable for the acts of the members of the
executive board. Instead, the directors can be held liable for their failure to
properly select, instruct or supervise the executive board members. If directors
and officers enter into a transaction on behalf of the corporation with bona
fide third parties in violation of their statutory duties, the transaction is
nevertheless valid as long as it is not excluded by the corporation's business
purpose.
Under Swiss law, a corporation may indemnify a director or officer of the
corporation against losses and expenses (unless arising from his gross
negligence or willful misconduct), including attorney's fees, judgments, fines
and settlement amounts actually and reasonably incurred in a civil or criminal
action, suit or preceding by reason of being of having been the representative
of or serving at the request of the corporation.
Because UBS AG is a Swiss company headquartered in Switzerland, many of the
directors and officers of UBS AG are residents of Switzerland and not the U.S.
As a result, U.S. investors may find it difficult in a lawsuit based on the
civil liability provisions of the U.S. federal securities laws to:
- effect service within the U.S. upon UBS AG and the directors and
officers of UBS AG located outside the U.S.,
- enforce in U.S. courts or outside the U.S. judgments obtained against
those persons in U.S. courts,
- enforce in U.S. courts judgments obtained against those persons in
courts in jurisdictions outside the U.S., and
- enforce against those persons in Switzerland, whether in original
actions or in actions for the enforcement of judgments of U.S. courts,
civil liabilities based solely upon the U.S. federal securities laws.
Neither the UBS articles of association nor Swiss statutory law contain
provisions regarding the indemnification of directors and officers.
According to general principles of Swiss employment law, an employer may, under
certain circumstances, be required to indemnify an employee against losses and
expenses incurred by him in the execution of his duties under the employment
agreement, unless the losses and expenses arise from the employee's gross
negligence or willful misconduct.
UBS maintains directors' and officers' insurance for its directors and officers.
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UBS PREFERRED FUNDING TRUST
The Amended and Restated Trust Agreement of UBS Preferred Funding Trust provides
that, to the fullest extent permitted by applicable law, UBS Preferred Funding
Company and UBS AG, jointly and severally, indemnify and defend the trustee, the
registrar and any paying agent and their directors, officers, employees and
agents against, and hold each of them harmless from, any liability, costs and
expenses (including reasonable attorneys' fees) that may arise out of or in
connection with its acting as the trustee or the registrar, transfer agent or
paying agent, respectively, under the Amended and Restated Trust Agreement and
the trust preferred securities, except for any liability arising out of gross
negligence, bad faith or willful misconduct on the part of any such person or
persons.
UBS PREFERRED FUNDING COMPANY
The Amended and Restated LLC Agreement of UBS Preferred Funding Company provides
that, to the fullest extent permitted by applicable law, each director and
officer shall be entitled to indemnification from UBS Preferred Funding Company
for any loss, damage, claim or expense (including reasonable attorney's fees)
incurred by such director or officer by reason of any act or omission performed
or omitted by such director or officer in good faith on behalf of UBS Preferred
Funding Company and in a manner reasonably believed to be within the scope of
authority conferred on such Director or Officer by this Agreement, except with
respect to any act or omission determined by a court of competent jurisdiction
to have constituted gross negligence or wilful misconduct of such director or
officer; provided, however, that any such indemnity shall be provided out of and
to the extent of the assets of UBS Preferred Funding Company only, and no holder
of company preferred securities, company common securities, company parity
preferred securities or company junior securities shall have any personal
liability on account thereof. UBS Preferred Funding Company may purchase and
maintain insurance to protect any director or officer against liability asserted
against him or her, or incurred by him or her, arising out of his or her status
as such.
Without limiting the foregoing, UBS Preferred Funding Company's directors shall
have no personal liability to UBS Preferred Funding Company or any holder of
company preferred securities, company common securities, company parity
preferred securities or company junior securities for monetary damages:
- for not voting to take enforcement action with respect to the
subordinated notes or other eligible investments owned by UBS Preferred
Funding Company, if any, prior to the occurrence of a bankruptcy event,
or
- at any time for breach of any such director's fiduciary duty (if any)
except for such director's gross negligence or willful misconduct.
ITEM 7. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, UBS AG
has sold the following securities that were not registered under the Securities
Act. UBS Warburg LLC or another affiliate thereof was the principal underwriter
for each of the following issuances and, except as otherwise described below,
the securities were offered to, and purchased by, institutional investors. The
following issuances were not subject to the registration requirements of the
Securities Act of 1933 because the securities were offered and sold either
outside the United States in a manner not requiring registration under the
Securities Act or within the United States in reliance upon the exemption
provided by Section 4(2) of the Securities Act of 1933 and/or Regulation D
thereunder.
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PART II
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1998
March, 1998: USD 250,000,000 5.75% debt.
March-December, 1998: convertible debt and reverse convertible debt that
combines a bond and a put option on a stock or stock index issued under the
"cash or share delivery" ("Geld-Oder-Aktien-Lieferung" or "GOAL") plan
through 14 separate GOALs, offered on various dates, at various interest rates,
with maturities at the time of initial issuance ranging from 2 to 10 years, and
denominated in CHF, DEM, USD, ITL and NLG. The aggregate amount issued over this
period was CHF 3,357,000,000, USD 275,000,000, DEM 300,000,000,
ITL 350,000,000,000 and NLG 275,000,000. One of the issuances was offered to,
and purchased by, retail clients and institutional investors, the other 13
issuances were offered to, and purchased by, only institutional investors.
July-December, 1998: 20,614 ordinary shares of UBS AG in accordance with the
management stock plan (management aktien programm).
July-December, 1998: 1,729 ordinary shares of UBS AG pursuant to exercise of
17,290 outstanding options (with 5,434,600 options remaining unexercised) in
accordance with the management stock option plan (optionen wahldividende).
1999
January-December, 1999: convertible debt and reverse convertible debt that
combines a bond and a put option on a stock or stock index issued under the GOAL
plan through 26 separate GOALs, offered on various dates, at various interest
rates, with maturities at the time of initial issuance ranging from 1 to 7
years, and denominated in CHF, EUR, USD and GBP. The aggregate amount issued
over this period was CHF 1,210,000,000, EUR 492,000,000, USD 451,000,000 and
GBP 95,000,000.
January-December, 1999: convertible and ordinary debt issued by the Jersey
branch of UBS AG under a medium term note program (the "European MTN Program")
through 9 separate issuances, offered on various dates, at various interest
rates, with maturities at the time of initial issuance ranging from 1 to 7
years, and denominated in EUR, USD, JPY, SEK and CHF. The aggregate amount
issued over this period was EUR 900,000,000, USD 150,000,000,
JPY 25,388,000,000, SEK 233,000,000 and CHF 250,000,000. Three of the issuances
were offered to, and purchase by, retail clients and institutional investors,
the other 6 issuances were offered to, and purchased by, only institutional
investors.
July, 1999: USD 100,000,000 1.50% convertible into AT&T shares issued by the
Stamford branch of UBS AG under a medium term note program.
January-December, 1999: 329,139 ordinary shares of UBS AG in accordance with
the management stock plan (management aktien programm).
January-December, 1999: 141,136 ordinary shares of UBS AG pursuant to exercise
of 1,411,360 outstanding options (with 4,023,240 options remaining unexercised)
in accordance with the management stock option plan (optionen wahldividende).
2000
January-June, 2000: convertible debt and reverse convertible debt that combines
a bond and a put option on a stock or stock index issued under the GOAL plan
issued through 19 separate GOALs, offered on various dates, at various interest
rates with maturities at the time of initial issuance ranging from 1 to 5 years,
and denominated in CHF, EUR and USD. The aggregate amount issued over this
period was CHF 340,000,000, EUR 430,000,000 and USD 75,000,000.
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PART II
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January-June, 1999: convertible and ordinary debt issued by the Jersey branch
of UBS AG under the European MTN Program through 12 separate issuances, offered
on various dates, at various interest rates with maturities at the time of
initial issuance ranging from 2 years to 5 years and 41 days, and denominated in
CHF, EUR, USD and JPY. The aggregate amount issued over this period was
CHF 13,000,000, EUR 57,000,000, USD 177,000,000 and JPY 15,000,000,000.
January-May, 2000: 101,826 ordinary shares of UBS AG (on a pre-split basis, in
respect of the 2 for 1 stock split in May, 2000) pursuant to exercise of
1,018,216 outstanding options (with 3,004,980 options remaining unexercised) in
accordance with the management stock option plan (optionen wahldividende).
May-July, 2000: 600,026 ordinary shares of UBS AG (on a post-split basis, in
respect of the 2 for 1 stock split in May, 2000) pursuant to exercise of
3,000,130 outstanding options (with 4,850 options remaining unexercised) in
accordance with the management stock option plan (optionen wahldividende).
ITEM 8. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION
- ----------------------------------------------------------------------
1 Form of Underwriting Agreement(1)
3.1 Articles of Association for UBS AG(2)
3.2 By-Laws of UBS AG(1)
3.3 Form of Amended and Restated Trust Agreement of UBS
Preferred Funding Trust I(1)
3.4 Form of Amended and Restated Limited Liability Company
Agreement of UBS Preferred Funding Company I(1)
3.5 By-Laws of UBS Preferred Funding Company I (included in
exhibit 3.4)
4.1 Form of UBS AG Subordinated Guarantee Agreement (included in
exhibit 3.4)
4.2 Form of Subordinated Notes of UBS AG (included in exhibit
3.4)
5.1 Opinion of Richards, Layton & Finger, P.A. as to the
validity of the trust preferred securities and the company
preferred securities(1)
5.2 Opinion of Sullivan & Cromwell as to the validity of the UBS
AG subordinated guarantee(1)
5.3 Opinion of Bar & Karrer as to certain matters of Swiss
law(1)
8.1 Opinion of Sullivan & Cromwell as to U.S. federal tax
matters (amended)
8.2 Opinion of ATAG Ernst and Young AG, Switzerland, as to Swiss
tax matters(1)
10 Agreement and Plan of Merger, dated as of July 12, 2000, by
and among Paine Webber Group Inc., UBS AG and Neptune Merger
Subsidiary Inc.(1)
12 Statement regarding ratio of earnings to fixed charges
21 Subsidiaries of UBS AG(2)
23.1 Consent of Richards, Layton & Finger, P.A. (included in
Exhibit 5.1)
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.2)
23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1)
23.4 Consent of ATAG Ernst & Young AG, Switzerland(1)
23.5 Consent of Ernst and Young Ltd.
23.6 Consent of Ernst & Young LLP
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EXHIBIT
NUMBER DESCRIPTION
- ----------------------------------------------------------------------
24.1 Power of Attorney(1)
25.1 Statement of Eligibility of Trustee(1)
25.2 Statement of Eligibility of Guarantee Trustee(1)
- ---------------
(1) Previously filed.
(2) Incorporated by reference to exhibits to the Annual Report on Form 20-F for
the year ended 31 December 2000.
ITEM 9. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
UBS AG, UBS Preferred Funding Trust and UBS Preferred Funding Company hereby
undertake that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrants pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act will be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus will be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time will be deemed to be the initial bona fide offering
thereof.
UBS Preferred Funding Trust hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, UBS AG certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form F-1 and has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, in the State of New York, on 29 March 2001.
UBS AG
By: /s/ ROBERT MILLS
------------------------------------
Name: Robert Mills
Title: Chief Financial
Officer -- Americas
and Regional Chief
Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement or Amendment has been signed below by the following
persons in the capacities and on the dates indicated.
NAME TITLE DATE
- -----------------------------------------------------------------------------------------------------
* President and Group Chief 29 March 2001
- --------------------------------------------------- Executive Officer
Marcel Ospel
* Chief Financial Officer 29 March 2001
- ---------------------------------------------------
Luqman Arnold
* Group Controller and Member of 29 March 2001
- --------------------------------------------------- Group Managing Board
Hugo Schaub
* Chairman and Member of Board of 29 March 2001
- --------------------------------------------------- Directors
Alex Krauer
* First Vice Chairman and Member of 29 March 2001
- --------------------------------------------------- Board of Directors
Alberto Togni
* Second Vice Chairman and Member 29 March 2001
- --------------------------------------------------- of Board of Directors
Markus Kundig
* Member of Board of Directors 29 March 2001
- ---------------------------------------------------
Peter Bockli
* Member of Board of Directors 29 March 2001
- ---------------------------------------------------
Rolf A. Meyer
* Member of Board of Directors 29 March 2001
- ---------------------------------------------------
Hans Peter Ming
* Member of Board of Directors 29 March 2001
- ---------------------------------------------------
Andreas Reinhart
* Member of Board of Directors 29 March 2001
- ---------------------------------------------------
Eric Honegger
/s/ ROBERT MILLS 29 March 2001
- ---------------------------------------------------
*By Robert Mills as attorney-in-fact
- --------------------------------------------------------------------------------
II- 6
454
PART II
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the
Authorized Representative has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, solely in its capacity
as the duly authorized representative of UBS AG, in the United States, in The
City of New York, State of New York, on 29 March 2001.
By: /s/ ROBERT MILLS
------------------------------------
Name: Robert Mills
Title:Chief Financial
Officer -- Americas
and Regional Chief Operating
Officer
- --------------------------------------------------------------------------------
II- 7
455
PART II
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, UBS Preferred
Funding Trust I certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form F-1 and has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on 29 March 2001.
UBS Preferred Funding Trust I
By: UBS Preferred Funding Company LLC
I
By: /s/ ROBERT MILLS
----------------------------------
Name: Robert Mills
Title: President and Managing
Director
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement or Amendment has been signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
- -----------------------------------------------------------------------------------------------------
UBS Preferred Funding Grantor 29 March 2001
Company LLC I
By: /s/ ROBERT MILLS 29 March 2001
- --------------------------------------------------
Name: Robert Mills
Title: President and Managing Director
- --------------------------------------------------------------------------------
II- 8
456
PART II
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, UBS Preferred
Funding Company LLC I certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form F-1 and has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on 29 March 2001.
UBS Preferred Funding Company LLC I
By: /s/ ROBERT MILLS
------------------------------------
Name: Robert Mills
Title: President and Managing
Director
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement or amendment has been signed below by the following
persons in the capacities and on the dates indicated.
NAME TITLE DATE
- -----------------------------------------------------------------------------------------------------
/s/ ROBERT MILLS President and Managing Director 29 March 2001
- ---------------------------------------------------
Robert Mills
* Treasurer and Director 29 March 2001
- ---------------------------------------------------
Per Dyrvik
* Secretary and Director 29 March 2001
- ---------------------------------------------------
Robert Dinerstein
/s/ ROBERT MILLS 29 March 2001
- ---------------------------------------------------
* By Robert Mills as attorney-in-fact
- --------------------------------------------------------------------------------
II- 9
457
Index to Exhibits
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------------------------------------------------------------------------------------
1 Form of Underwriting Agreement(1)
3.1 Articles of Association for UBS AG(2)
3.2 By-Laws of UBS AG(1)
3.3 Form of Amended and Restated Trust Agreement of UBS
Preferred Funding Trust(1)
3.4 Form of Amended and Restated Limited Liability Company
Agreement of UBS Preferred Funding Company I(1)
3.5 By-Laws of UBS Preferred Funding Company I (included in
exhibit 3.4)
4.1 Form of UBS AG Subordinated Guarantee Agreement (included in
exhibit 3.4)
4.2 Form of Subordinated Notes of UBS AG (included in exhibit
3.4)
5.1 Opinion of Richards, Layton & Finger, P.A. as to the
validity of the trust preferred securities and the company
preferred securities(1)
5.2 Opinion of Sullivan & Cromwell as to the validity of the UBS
AG subordinated guarantee(1)
5.3 Opinion of Bar & Karrer as to certain matters of Swiss
law(1)
8.1 Opinion of Sullivan & Cromwell as to U.S. federal tax
matters (amended)
8.2 Opinion of ATAG Ernst and Young AG, Switzerland, as to Swiss
tax matters(1)
10 Agreement and Plan of Merger, dated as of July 12, 2000, by
and among Paine Webber Group Inc., UBS AG and Neptune Merger
Subsidiary Inc.(1)
12 Statement regarding ratio of earnings to fixed charge
21 Subsidiaries of UBS AG(2)
23.1 Consent of Richards, Layton & Finger, P.A. (included in
Exhibit 5.1)
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.2)
23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1)
23.4 Consent of ATAG Ernst & Young AG, Switzerland(1)
23.5 Consent of Ernst and Young Ltd.
23.6 Consent of Ernst & Young LLP
24.1 Power of Attorney(1)
25.1 Statement of Eligibility of Trustee(1)
25.2 Statement of Eligibility of Guarantee Trustee(1)
- ---------------
(1) Previously filed.
(2)Incorporated by reference to exhibits to the Annual Report on Form 20-F for
the year ended 31 December 2000.
- --------------------------------------------------------------------------------
II- 10