AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON 29 MARCH 2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 5 TO
FORM F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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)
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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)
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
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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. [ ]
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.
[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
- 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
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 |
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.
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]
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
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.
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
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
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.
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.
- 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.
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
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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
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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.
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.
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
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
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.
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.
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
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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
======= =======
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CHF amounts have been translated into United States dollars at the rate of CHF 1 = USD1.6455.
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) ------------------------------------------------------------------------------------------------------------------ |
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
------------------------------------------------------------------------------------------------
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(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)
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 ---------------------------------------------------------------------------------------------------------------- |
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) -------------------------------------------------------------------------------------------------------------- |
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 |
(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.
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.
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.
UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
[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.
[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.
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.
[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.
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.
UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
[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.
[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.
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.
UBS
THE UBS GROUP--STRATEGY, STRUCTURE AND HISTORY
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.
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.
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
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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.
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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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.
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
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
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Total 440 439 434
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|
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
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Total 440 439 434
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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.
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.
UBS
THE BUSINESS GROUPS--UBS SWITZERLAND
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
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Total 155 165 165
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of which recovery 15 21 26
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|
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.
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
UBS
THE BUSINESS GROUPS--UBS SWITZERLAND
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.
UBS
THE BUSINESS GROUPS--UBS SWITZERLAND
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.
UBS
THE BUSINESS GROUPS--UBS SWITZERLAND
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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THE BUSINESS GROUPS--UBS SWITZERLAND
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
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Advisory 535 517 437
Discretionary 146 154 142
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Total 681 671 579
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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
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Total 681 671 579
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|
UBS
THE BUSINESS GROUPS--UBS SWITZERLAND
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
UBS
THE BUSINESS GROUPS--UBS SWITZERLAND
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.
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.
UBS
THE BUSINESS GROUPS--UBS ASSET MANAGEMENT
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
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|
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
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Total 300 376 360
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|
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
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Total 300 376 360
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|
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.
UBS
THE BUSINESS GROUPS--UBS ASSET MANAGEMENT
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
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Total 199 201 176
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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.
UBS
THE BUSINESS GROUPS--UBS ASSET MANAGEMENT
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.
UBS
THE BUSINESS GROUPS--UBS ASSET MANAGEMENT
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
UBS
THE BUSINESS GROUPS--UBS ASSET MANAGEMENT
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.
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.
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.
UBS
THE BUSINESS GROUPS--UBS WARBURG
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
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|
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
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|
(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;
UBS
THE BUSINESS GROUPS--UBS WARBURG
- 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
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.
UBS
THE BUSINESS GROUPS--UBS WARBURG
[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.
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.
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 ---------------------------------------------------------------------- |
UBS
THE BUSINESS GROUPS--UBS WARBURG
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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THE BUSINESS GROUPS--UBS WARBURG
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.
[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.
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
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.
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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THE BUSINESS GROUPS--CORPORATE CENTER
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.
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 BUSINESS GROUPS--CORPORATE CENTER--VALUE-BASED MANAGEMENT
[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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THE BUSINESS GROUPS--CORPORATE CENTER--VALUE-BASED MANAGEMENT
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 BUSINESS GROUPS--CORPORATE CENTER--VALUE-BASED MANAGEMENT
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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THE BUSINESS GROUPS--CORPORATE CENTER--VALUE-BASED MANAGEMENT
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.
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
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]
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 BUSINESS GROUPS--CORPORATE CENTER--UBS AND THE ENVIRONMENT
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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THE BUSINESS GROUPS--CORPORATE CENTER--UBS AND THE ENVIRONMENT
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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THE BUSINESS GROUPS--CORPORATE CENTER--UBS AND THE ENVIRONMENT
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.
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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CORPORATE GOVERNANCE--CORPORATE ORGANIZATION
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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CORPORATE GOVERNANCE--CORPORATE ORGANIZATION
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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CORPORATE GOVERNANCE--CORPORATE ORGANIZATION
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.
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
---------------------------------------------------------------------------------------------------------------
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(1) Alex Krauer and Andreas Reinhart will step down from their functions at the Annual General Meeting in April 2001.
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CORPORATE GOVERNANCE--DIRECTORS AND OFFICERS OF UBS
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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CORPORATE GOVERNANCE--DIRECTORS AND OFFICERS OF UBS
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
-----------------------------------------------------------------------------------------------
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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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CORPORATE GOVERNANCE--DIRECTORS AND OFFICERS OF UBS
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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CORPORATE GOVERNANCE--DIRECTORS AND OFFICERS OF UBS
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
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
+ 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
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
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
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.
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.
UBS
CORPORATE GOVERNANCE--FINANCIAL DISCLOSURE PRINCIPLES
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.
UBS
CORPORATE GOVERNANCE--FINANCIAL DISCLOSURE PRINCIPLES
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.
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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OPERATING AND FINANCIAL REVIEW--INFORMATION FOR READERS
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
UBS
OPERATING AND FINANCIAL REVIEW--INFORMATION FOR READERS
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.
UBS
OPERATING AND FINANCIAL REVIEW--INFORMATION FOR READERS
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
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.
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.
UBS
OPERATING AND FINANCIAL REVIEW--GROUP FINANCIAL REVIEW--GROUP PERFORMANCE
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.
UBS
OPERATING AND FINANCIAL REVIEW--GROUP FINANCIAL REVIEW--GROUP PERFORMANCE
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
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UBS SWITZERLAND
Private and Corporate Clients 440 439 0
Private Banking 681 671 (1) 1
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UBS ASSET MANAGEMENT
Institutional Asset
Management(5) 496 574 (67) (50)
Investment Funds / GAM 219 225 4 1
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UBS WARBURG
US Private Clients(6) 794 8
International Private Clients 33 36 10 4
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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).
(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
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.
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.
UBS
OPERATING AND FINANCIAL REVIEW--GROUP FINANCIAL REVIEW--GROUP PERFORMANCE
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
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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
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Total 51,745 35,604 37,442 45
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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
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Total 43,615 29,695 32,424 47
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NET INTEREST INCOME 8,130 5,909 5,018 38
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(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).
UBS
OPERATING AND FINANCIAL REVIEW--GROUP FINANCIAL REVIEW--GROUP PERFORMANCE
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
UBS
OPERATING AND FINANCIAL REVIEW--GROUP FINANCIAL REVIEW--GROUP PERFORMANCE
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.
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
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
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.
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
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.
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
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.
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.
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
-------------------------------------------------------------------------------------------------
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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.
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--PRINCIPLES
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.
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.
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS SWITZERLAND
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.
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS SWITZERLAND
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.
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS SWITZERLAND
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.
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.
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
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.
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.
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.
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS ASSET MANAGEMENT
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.
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS ASSET MANAGEMENT
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
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS ASSET MANAGEMENT
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.
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS ASSET MANAGEMENT
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.
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS ASSET MANAGEMENT
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
UBS
REVIEW OF BUSINESS GROUP PERFORMANCE--UBS ASSET MANAGEMENT
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.
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).
(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.
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 -------------------------------------------------------------------------------------------- |
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.
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
-------------------------------------------------------------------------------------------
|
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
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
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.
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,
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.
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
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|
(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
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.
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.
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.
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.
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).
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.
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.
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
------
|
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
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)
====== ======
|
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)
====== ====== ====== ====== ====== ======
|
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.
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.
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.
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.
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.
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
|
(2) Tradeable assets consist of equity and fixed income financial instruments held for trading purposes, which are marked to market on a daily basis.
SUMMARY OF MOVEMENTS IN ALLOWANCES AND PROVISIONS FOR CREDIT LOSSES
The following table provides an analysis of movements in allowances and provisions for credit losses.
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)
-------- -------- -------- -------- ------ ------
|
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.
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
======== ======== ======== ======== ===== =====
|
(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.
(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
======== ======== ======== ======== ===== =====
|
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
|
(2) Allowances relating to non-performing loans only
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.
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
UBS
RISK--RISK MANAGEMENT AND CONTROL
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.
UBS
RISK--RISK MANAGEMENT AND CONTROL
[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.
UBS
RISK--RISK MANAGEMENT AND CONTROL
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.
[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;
- 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]
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.
UBS
RISK--RISK ANALYSIS
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.
UBS
RISK--RISK ANALYSIS
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
---------------------------------------------------------------------------------------------------------------
|
UBS
RISK--RISK ANALYSIS
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.
[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.
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
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.
UBS
RISK--RISK ANALYSIS
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
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
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
UBS
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
UBS
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.
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
---------------------------------------------------------------------------------------------------------------------------
|
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.
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.
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.
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 |
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.
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.
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.
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
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TOTAL 2 127 215 502 538 1,384
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of which equity replicating portfolio
----------------------------------------------------------------------------------------------------
CHF 28 11 288 7,295 2,981 10,603
----------------------------------------------------------------------------------------------------
Bank Book without equity replicating
portfolio
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TOTAL (26) 116 (73) (6,793) (2,443) (9,219)
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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
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".
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)
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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.
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
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;
- 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 --------------------------------------------------------------------------------------------- BIS Tier 1 capital 31,892 28,952 28,220 BIS Tier 1 and Tier 2 capital 42,860 39,682 40,306 --------------------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------------------- Total BIS risk-weighted assets 273,290 273,107 303,719 --------------------------------------------------------------------------------------------- |
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.
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.
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.
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".
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
- 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
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.
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.
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.
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
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
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.
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
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
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.
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.
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
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
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.
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.
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."
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
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.
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.
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
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
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
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
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.
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.
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
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
- 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
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,
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.
"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
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.
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
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.
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.
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
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.
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.
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
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
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.
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.
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.
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
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.
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.
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
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.
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.
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,
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.
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
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.
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
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.
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.
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
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.
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
------ ------ ------ ------
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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
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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
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F- i
UBS GROUP FINANCIAL STATEMENTS
YEARS ENDED 31 DECEMBER 2000, 1999 AND 1998
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
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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.
UBS GROUP BALANCE SHEET
% change from
CHF MILLION NOTE 31.12.00 31.12.99( 1) 31.12.99
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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)
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TOTAL ASSETS 1,087,552 896,556 21
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Total subordinated assets 475 600 (21)
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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
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TOTAL LIABILITIES 1,039,834 865,514 20
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Minority interests 25 2,885 434 565
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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)
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TOTAL SHAREHOLDERS' EQUITY 44,833 30,608 46
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TOTAL LIABILITIES, MINORITY
INTERESTS AND SHAREHOLDERS' EQUITY 1,087,552 896,556 21
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Total subordinated liabilities 14,508 14,801 (2)
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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).
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 --------------------------------------------------------------------------------------------- |
RECONCILIATION OF SHARES ISSUED
Number of shares % change from
----------------------------------------------------------------------------------------------
AS OF 31.12.00 31.12.99 31.12.98 31.12.99
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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
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TOTAL ORDINARY SHARES ISSUED, AT THE
END OF THE YEAR 444,379,729 430,893,162 429,952,612 3
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(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.
UBS GROUP STATEMENT OF CASH FLOWS
CHF million
FOR THE YEAR ENDED 31.12.00 31.12.99( 1) 31.12.98( 1)
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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)
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NET CASH FLOW FROM / (USED IN) OPERATING ACTIVITIES 11,697 3,338 (1,704)
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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
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NET CASH FLOW (USED IN) / FROM INVESTING ACTIVITIES (19,135) 1,478 5,750
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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
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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.
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.
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.
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
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.
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.
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.
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
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.
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.
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.
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
----------------------------------------------------------------------------------------------------
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(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
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
----------------------------------------------------------------------------------------------
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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).
(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.
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
------------------------------------------------------------------------------------------------------
|
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).
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).
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.
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.
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
---------------------------------------------------------------------------------------------------
|
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
---------------------------------------------------------------------------------------------------
|
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.
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
-----------------------------------------------------------------------------------------
|
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
---------------------------------------------------------------------------------------
|
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
-----------------------------------------------------------------------------------------
|
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.
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.
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
---------------------------------------------------------------------------------------------------
|
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).
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 ---------------------------------------------------------------------------------------------- |
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 -------------------------------------------------------------------------------- |
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)
|
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
|
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
|
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
|
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
|
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
---------------------------------------------------------------------------------------------
|
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
(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) |
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.
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
--------------------------------------------------------------
|
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.
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.
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.
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.
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.
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.
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.
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.
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
---------------------------------------------------------------------------------------------------
|
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.
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)
--------------------------------------------------------------------------------------------------------------
|
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.
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
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
---------------------------------------------------------------------------------------------
|
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.)
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.
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.
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
--------------------------------------------------------------------------------------------------------------
|
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.
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
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
-----------------------------------------------------------------------------------------------------
|
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
-----------------------------------------------------------------------------------------------------
|
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).
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
------------------------------------------------------------------------------------------------------
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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)
---------------------------------------------------------------------------------------------
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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
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.
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
-------------------------------------------------------------------------------------------------
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(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.
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
-----------------------------------------------------------------------------------------------------------------------
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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.
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
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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.
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.
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
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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
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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
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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
Mitchell Hutchins Asset Management Inc, Delaware(1)
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 ---------------------------------------------------------------------------------------- |
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
-----------------------------------------------------------------------------------------------------
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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.
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
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.
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).
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.
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).
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.
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)
-------------------------------------------------------------------------------------------------------------
|
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.
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.
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.
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.
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.
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.
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)
--------------------------------------------------------------------------------------------------
|
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.
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.
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.
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.
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.
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.
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.
PAINE WEBBER GROUP INC. FINANCIAL STATEMENTS
YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
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.
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.
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
========= ======== ==========
|
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)
========== =========== ======= ========== =========== ===========
|
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.
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.
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
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.
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,
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
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
========== ==========
|
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
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
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.
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
|
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
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
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
==========
|
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
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
========== ============== ======
|
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 |
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
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
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
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
======== ======== ========
|
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.
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
============ ============ ============
|
(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
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
=========== =========== ===========
|
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
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
----------- ----------- ----------- ----------- -----------
|
(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.
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.
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
|
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.
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
============
|
(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.
PAINE WEBBER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER 2000
MARCH 31, 2000
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.
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.
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.
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.
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.
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
|
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.
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.
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.
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
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
============ ============
|
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.
PAINE WEBBER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER 2000
JUNE 30, 2000
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.
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.
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.
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.
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
=========== ===========
|
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.
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
|
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
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
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
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.
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.
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
============ ============ ============ ============
|
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).
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.
PAINE WEBBER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER 2000
SEPTEMBER 30, 2000
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.
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.
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.
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.
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.
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.
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.
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
|
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
======== ======== ======== ========
|
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.
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.
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
======== ======== ======== ========
|
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.
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.
[UBS AG LOGO]
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.
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.
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.
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
|
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.
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
|
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
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
|
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
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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
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/s/ ROBERT MILLS President and Managing Director 29 March 2001
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Robert Mills
* Treasurer and Director 29 March 2001
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Per Dyrvik
* Secretary and Director 29 March 2001
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Robert Dinerstein
/s/ ROBERT MILLS 29 March 2001
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* By Robert Mills as attorney-in-fact
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Index to Exhibits
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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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)
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(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
Exhibit 8.1
[SULLIVAN & CROMWELL LETTERHEAD]
March 29, 2001
UBS AG,
Bahnhofstrasse 45,
Zurich, Switzerland
Ladies and Gentlemen:
We have acted as your counsel in connection with your Registration Statement, filed with the Securities and Exchange Commission on the date hereof.
We hereby confirm to you that our opinion is as set forth under the caption "Certain U.S. Tax Considerations" in the Prospectus included in the related Registration Statement, subject to the limitations set forth therein.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the references to us under the heading "Certain U.S. Tax Considerations" in the Prospectus. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act.
Very truly yours,
/s/ Sullivan & Cromwell |
Exhibit 12
Ratio of Earnings to Fixed Charges
The following table sets forth UBS AG’s ratio of earnings to fixed charges, for the years indicated.
| For the year ended 31 December | 2000 | 1999 | 1998 | 1997 | |||||||||||||
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IAS(1)
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Pre-tax earnings from continuing operations(2)
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10,109 | 7,709 | 3,560 | (851 | ) | ||||||||||||
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Add: Fixed Charges
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44,251 | 30,246 | 32,958 | 17,273 | |||||||||||||
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Pre-Tax Earnings Before Fixed Charges
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54,360 | 37,955 | 36,518 | 16,422 | |||||||||||||
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Fixed charges:
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Interest
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43,615 | 29,695 | 32,424 | 16,733 | |||||||||||||
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Other(3)
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636 | 551 | 534 | 540 | |||||||||||||
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Total Fixed Charges
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44,251 | 30,246 | 32,958 | 17,273 | |||||||||||||
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Ratio of Earnings to Fixed Charges(4)
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1.23 | 1.25 | 1.11 | 0.95 | |||||||||||||
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U.S. GAAP(1)
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Pre-tax earnings from continuing operations(1)
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6,617 | 4,216 | (5,319 | ) | |||||||||||||
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Add: Fixed charges
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44,220 | 30,211 | 26,307 | ||||||||||||||
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Pre-Tax Earnings Before Fixed Charges
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50,837 | 34,427 | 20,988 | ||||||||||||||
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Fixed charges:
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Interest
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43,584 | 29,660 | 25,773 | ||||||||||||||
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Other(3)
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636 | 551 | 534 | ||||||||||||||
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Total Fixed Charges
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44,220 | 30,211 | 26,307 | ||||||||||||||
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Ratio of Earnings to Fixed Charges(5)
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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) | Pre-tax earnings from continuing operations includes the elimination of subsidiary, associate, and minority interest income and the addition of dividends received from associates. |
| (3) | Other fixed charges is the interest component of rental expense. |
| (4) | The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1997 was CHF 851 million. |
| (5) | The deficiency in the coverage of fixed charges by earnings before fixed charges at 31 December 1998 was CHF 5,319 million. |
Exhibit 23.5
Consent of Independent Auditors
We consent to the references to our firm under the captions "Experts". "Corporate Governance" and "Operating and Financial Review" and to the use of our report dated 5 March 2001 in Post-Effective Amendment No. 5 to the Registration Statement (Form F-1 No. 333-46216) and related Prospectus of UBS AG for Noncumulative Trust Preferred Securities.
Ernst & Young Ltd.
Peter Heckendorn Thomas Schneider
lic.oec. Certified Accountant
in charge of the audit in charge of the audit
Basel Switzerland
28 March 2001
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Exhibit 23.6
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 31, 2000, with respect to the consolidated financial statements of Paine Webber Group Inc. in Post-Effective Amendment No. 5 to the Registration Statement (Form F-1 No. 333-46216) and related Prospectus of UBS AG for Noncumulative Trust Preferred Securities.
Ernst & Young LLP
New York, New York
March 29, 2001