<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 2000
REGISTRATION NOS. 2-99979; 33-7738; 33-29253; 33-39818; 33-47267; 33-51149;
33-58124; 333-13831; 333-13831-01 TO -04; 333-17913; 333-63107; 333-67187;
333-67187-01 TO -03
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
<TABLE>
<S> <C> <C> <C>
UBS AG UBS AMERICAS INC. PWG CAPITAL TRUST I
(EXACT NAME OF REGISTRANT AS (EXACT NAME OF REGISTRANT AS (EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER) SPECIFIED IN ITS CHARTER) SPECIFIED IN ITS CHARTER)
SWITZERLAND DELAWARE DELAWARE
(STATE OR OTHER JURISDICTION OF (STATE OR OTHER JURISDICTION OF (STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) INCORPORATION OR ORGANIZATION) INCORPORATION OR ORGANIZATION)
6021 6211 6211
(PRIMARY STANDARD INDUSTRIAL (PRIMARY STANDARD INDUSTRIAL (PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER) CLASSIFICATION CODE NUMBER) CLASSIFICATION CODE NUMBER)
98-0186363 06-1595848 13-7099828
(I.R.S. EMPLOYER (I.R.S. EMPLOYER (I.R.S. EMPLOYER
IDENTIFICATION NUMBER) IDENTIFICATION NUMBER) IDENTIFICATION NUMBER)
BAHNHOFSTRASSE 45, ZURICH, 677 WASHINGTON BOULEVARD 677 WASHINGTON BOULEVARD
SWITZERLAND, 011 41-1-234 11 11 AND STAMFORD, CONNECTICUT 06901 STAMFORD, CONNECTICUT 06901
AESCHENVORSTADT 1, BASEL, (203) 719-3000 (203) 719-3000
SWITZERLAND, 011 41-61-288 20 20 (ADDRESS, INCLUDING ZIP CODE, (ADDRESS, INCLUDING ZIP CODE,
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, AND TELEPHONE NUMBER,
AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF INCLUDING AREA CODE, OF
INCLUDING AREA CODE, OF REGISTRANT'S REGISTRANT'S
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) PRINCIPAL EXECUTIVE OFFICES)
PRINCIPAL EXECUTIVE OFFICES)
<S> <C>
PWG CAPITAL TRUST II
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
6211
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
13-7099829
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
677 WASHINGTON BOULEVARD
STAMFORD, CONNECTICUT 06901
(203) 719-3000
(ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF
REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
------------------------
ROBERT C. DINERSTEIN, ESQ.
UBS AG
299 PARK AVENUE
NEW YORK, NEW YORK 10171-0026
TELEPHONE: 212-821-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPY TO:
REBECCA J. SIMMONS, ESQ.
SULLIVAN & CROMWELL
125 BROAD STREET
NEW YORK, NY 10004-2498
212-558-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Pursuant to Rule 429 under the Securities Act, this Registration Statement
constitutes a new registration statement in respect of the guarantees of UBS AG
described in the prospectuses contained in this Registration Statement, and a
post-effective amendment to the registration statement described below. Filing
fees were paid in respect of all of the securities of UBS Americas Inc. (as
successor by merger to Paine Webber Group Inc.), PWG Capital Trust I and PWG
Capital Trust II at or prior to the effectiveness of the registration statement
relating to each of such securities. No filing fee is payable in respect of the
UBS AG guarantees, as no separate consideration will be paid or received in
respect of such guarantees.
(continued on following page)
<PAGE> 2
(continued from previous page)
As noted above, this Registration Statement is a new registration statement
and also constitutes Post-Effective Amendment No. 1 to Registration Statement
No. 2-99979, which was declared effective on 31 October 1985; Post-Effective
Amendment No. 1 to Registration Statement No. 33-7738, which was declared
effective on 26 August 1986; Post-Effective Amendment No. 1 to Registration
Statement No. 33-29253, which was declared effective on 22 June 1989;
Post-Effective Amendment No. 1 to Registration Statement No. 33-39818, which was
declared effective on 29 July 1991; Post-Effective Amendment No. 1 to
Registration Statement No. 33-47267, which was declared effective on 22 June
1989; Post-Effective Amendment No. 1 to Registration Statement No. 33-51149,
which was declared effective on 29 November 1993; Post-Effective Amendment No. 1
to Registration Statement No. 33-58124, which was declared effective on 25
February 1993; Post-Effective Amendment No. 1 to Registration Statement Nos.
333-13831 and 333-13831-01 to -04, which was declared effective on 29 November
1996; Post-Effective Amendment No. 1 to Registration Statement No. 333-17913,
which was declared effective on 23 December 1996; Post-Effective Amendment No. 1
to Registration Statement No. 333-63107, which was declared effective on 23
September 1998; and Post-Effective Amendment No. 1 to Registration Statement
Nos. 333-67187 and 333-67187-01 to -03, which was declared effective on 23
February 1999.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 3
EXPLANATORY NOTE
The Registration Statement relates to and constitutes Post-Effective Amendment
No. 1 to Registration Statement No. 2-99979, which was declared effective on 31
October 1985; Post-Effective Amendment No. 1 to Registration Statement No.
33-7738, which was declared effective on 26 August 1986; Post-Effective
Amendment No. 1 to Registration Statement No. 33-29253, which was declared
effective on 22 June 1989; Post-Effective Amendment No. 1 to Registration
Statement No. 33-39818, which was declared effective on 29 July 1991;
Post-Effective Amendment No. 1 to Registration Statement No. 33-47267, which was
declared effective on 22 June 1989; Post-Effective Amendment No. 1 to
Registration Statement No. 33-51149, which was declared effective on 29 November
1993; Post-Effective Amendment No. 1 to Registration Statement No. 33-58124,
which was declared effective on 25 February 1993; Post-Effective Amendment No. 1
to Registration Statement Nos. 333-13831 and 333-13831-01 to -04, which was
declared effective on 9 November 1996; Post-Effective Amendment No. 1 to
Registration Statement No. 333-17913, which was declared effective on 23
December 1996; Post-Effective Amendment No. 1 to Registration Statement No.
333-63107, which was declared effective on 23 September 1998; and Post-Effective
Amendment No. 1 to Registration Statement Nos. 333-67187 and 333-67187-01 to
-03, which was declared effective on 23 February 1999. These registration
statements were filed by Paine Webber Group Inc. and, in the case of
Registration Statements Nos. 333-13831 and 333-13831-01 to -04 and 333-67187 and
333-67187-01 to -03, by PWG Capital Trust I and PWG Capital Trust II, in
connection with the initial issuance of the securities covered by this
Registration Statement.
This Post-Effective Amendment No. 1 is being filed to:
-amend the prospectuses contained in such registration statements to reflect the
issuance of the guarantees of such securities by UBS AG, following the
acquisition of Paine Webber Group Inc. by UBS AG, and the merger of Paine
Webber Group Inc. with and into UBS Americas Inc., a wholly owned subsidiary of
UBS AG,
-to add UBS AG as a registrant under the Registration Statement,
-to file the Registration Statement on Form F-1, rather than Form S-3, because
UBS AG and, as a result of the guarantees provided by UBS AG, UBS Americas
Inc., PWG Capital Trust I and PWG Capital Trust II, are eligible to file on
Form F-1, and
-to amend the plan of distribution to reflect that any affiliate of UBS AG may
engage in market-making transactions with respect to the securities.
This registration statement contains two prospectuses relating to market-making
transactions that may occur on an ongoing basis in securities that have been
previously issued.
The first prospectus, which is included in its entirety, relates to the debt
securities previously issued by UBS Americas Inc. (the successor by merger to
Paine Webber Group Inc.). The second prospectus, for which only alternate pages
are included, relates to preferred trust securities previously issued by PWG
Capital Trust I and PWG Capital Trust II, the junior subordinated debentures
issued by UBS Americas Inc., the preferred trust securities guarantees by UBS
Americas Inc. and the guarantees of UBS AG.
These prospectuses are 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.
<PAGE> 4
PROSPECTUS Prospectus dated 27 December 2000
--------------------------------------------------------------------------------
[UBS AG LOGO]
UBS Americas Inc.
Certain Debt Securities
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED IN THIS PROSPECTUS, BY
UBS AG
--------------------------------------------------------------------------------
This prospectus relates to outstanding debt securities of UBS Americas Inc. UBS
Americas Inc. is the successor by merger to Paine Webber Group Inc. Before the
merger, Paine Webber Group Inc. issued the following debt securities, of which
the indicated aggregate principal amounts are outstanding:
- $150,000,000 of 9 1/4% Notes Due 2001
- $100,000,000 of 7 7/8% Notes Due 2003
- $200,000,000 of 6 1/2% Notes Due 2005
- $100,000,000 of 6 3/4% Notes Due 2006
- $200,000,000 of 7 5/8% Notes Due 2014
- $125,000,000 of 8 7/8% Notes Due 2005
- $125,000,000 of 8 1/4% Notes Due 2002
- $150,000,000 of 7 5/8% Notes Due 2008
- $250,000,000 of 6.55% Notes Due 2008
- $340,000,000 of 6.45% Notes Due 2003
- $525,000,000 of 6 3/8% Notes Due 2004
- $275,000,000 of 7 5/8% Notes Due 2009
- $175,000,000 of 7 3/4% Subordinated Notes Due 2002
- Varying principal amounts and maturities of Medium-Term Senior
Notes, Series C
- Varying principal amounts and maturities of Medium-Term
Subordinated Notes, Series D
As a result of the merger of Paine Webber Group Inc. into UBS Americas Inc., UBS
Americas is now the issuer of all the debt securities listed above.
UBS Americas is a wholly owned subsidiary of UBS AG. Following the merger of UBS
Americas and Paine Webber Group, UBS AG issued its guarantee of the payment
obligations of UBS Americas under all the debt securities issued above. Under
this guarantee, UBS AG has fully and unconditionally guaranteed all the
obligations of UBS Americas under these securities. However, the obligations of
UBS AG under its guarantee of the subordinated debt securities listed above are
subordinated as well, as described in this prospectus.
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.
The debt securities are not deposit liabilities of UBS AG and are not insured by
the Federal Deposit Insurance Corporation or any other governmental agency of
the United States, Switzerland or any other jurisdiction.
This prospectus is to be used by UBS AG and its affiliates, including UBS
Warburg LLC and PaineWebber Incorporated, in connection with offers and sales of
the debt securities when UBS AG and its affiliates engage in market-making
transactions. These transactions may be executed at negotiated prices that are
related to market prices at the time of purchase or sale, or at other prices.
UBS AG and its affiliates may act as principal or agent in these transactions.
No new debt securities are being offered.
UBS WARBURG LLC PAINEWEBBER INCORPORATED
<PAGE> 5
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary.................... 3
Use of Proceeds....................... 7
Cautionary Note Regarding Forward-
Looking Information................. 8
Capitalization of UBS................. 9
Recent Developments................... 10
UBS................................... 11
UBS Americas.......................... 128
Unaudited Pro Forma Condensed
Consolidated Financial
Information......................... 129
Description of the Debt Securities.... 155
The Guarantees........................ 181
Foreign Currency Risks................ 184
Certain United States Federal Income
Tax Considerations.................. 187
Tax Considerations Under the Laws of
Switzerland......................... 193
ERISA Matters......................... 194
Plan of Distribution.................. 195
Validity of the Securities............ 196
Experts............................... 196
Limitations on Enforcement of U.S.
Laws Against UBS AG, Its Management
and Others.......................... 196
Where You Can Find More Information... 197
Presentation of Financial
Information......................... 197
Financial Statements of UBS........... F-i
Third Quarter Report 2000............. A-1
</TABLE>
<PAGE> 6
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.
UBS AG
UBS AG is a global, integrated investment services firm and the leading bank in
Switzerland. UBS's business is managed through three main business groups and
its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and
UBS Asset Management. UBS's clients include international corporations, small-
and medium-sized businesses in Switzerland, governments and other public bodies,
financial institutions, market participants and individuals. UBS AG's ordinary
shares are listed on the New York Stock Exchange under the symbol "UBS.N," on
the Zurich Stock Exchange under the symbol "UBSNZn.S" and on the Tokyo Stock
Exchange under the symbol "UBS.T."
On 3 November 2000, UBS acquired Paine Webber Group Inc., one of the largest
full-service securities firms in the United States. UBS purchased all
outstanding shares of PaineWebber stock for a combination of cash and stock
representing a total purchase price of $11.8 billion (based on the UBS share
price on 3 November 2000).
The principal executive offices of UBS AG are located at Bahnhofstrasse 45,
Zurich, Switzerland and Aeschenvorstadt 1, Basel, Switzerland. Its telephone
numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20.
UBS AMERICAS
UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine
Webber Group Inc. was the holding company for the PaineWebber group of
companies. UBS Americas is a direct, wholly owned subsidiary of UBS AG, and
continues to act as the holding company for the U.S. onshore private banking
operations of UBS. UBS Americas' principal executive offices are located at 677
Washington Boulevard, Stamford, Connecticut 06901, and its telephone number is
203-719-3000.
3
<PAGE> 7
THE OFFERING
This prospectus relates to the outstanding debt securities of UBS Americas and
the related guarantees of UBS. The specific terms of each debt security are
described under "Description of the Debt Securities" below in this prospectus.
The Debt Securities........... This prospectus relates to the following
outstanding debt securities of UBS Americas:
$150,000,000 of 9 1/4% Notes Due 2001
$100,000,000 of 7 7/8% Notes Due 2003
$200,000,000 of 6 1/2% Notes Due 2005
$100,000,000 of 6 3/4% Notes Due 2006
$200,000,000 of 7 5/8% Notes Due 2014
$125,000,000 of 8 7/8% Notes Due 2005
$125,000,000 of 8 1/4% Notes Due 2002
$150,000,000 of 7 5/8% Notes Due 2008
$250,000,000 of 6.55% Notes Due 2008
$340,000,000 of 6.45% Notes Due 2003
$525,000,000 of 6 3/8% Notes Due 2004
$275,000,000 of 7 5/8% Notes Due 2009
$175,000,000 of 7 3/4% Subordinated Notes Due
2002
Varying principal amounts and maturities of
Medium-Term Senior Notes, Series C
Varying principal amounts and maturities of
Medium-Term Subordinated Notes, Series D.
Issuer........................ UBS Americas Inc.
Guarantor..................... UBS AG.
Terms of the Debt
Securities.................... As stated in the applicable description
below.
Market for the Debt
Securities.................... UBS Warburg LLC and PaineWebber Incorporated
currently make a market in the debt
securities. However, they are not required to
do so, and they can stop doing so at any time
without notice. As a result, there is no
assurance as to the liquidity of any market
for the debt securities.
Use of Proceeds............... All of the sales of debt securities under
this prospectus will be market-making
transactions -- that is, transactions in
which UBS AG, UBS Warburg LLC, PaineWebber
Incorporated, or one of UBS AG's other
affiliates, resells securities that the
seller, or one of its affiliates, has
previously bought from another party. UBS
Americas will not receive any of the proceeds
from these resales of the debt securities. In
general, we expect that the entity that
resells any particular debt securities will
retain the proceeds of its market-making
resales and will not pay the proceeds to UBS
Americas or, if the resales are not made by
UBS AG, to UBS AG.
4
<PAGE> 8
Plan of Distribution.......... This prospectus relates to market-making
transactions in the debt securities by UBS AG
and its affiliates. The affiliates that may
engage in these transactions include, but are
not limited to, UBS AG itself, UBS Warburg
LLC and PaineWebber Incorporated. These
transactions may be executed at negotiated
prices that are related to prevailing market
prices at the time of sale, or at other
prices. UBS AG and its affiliates may act as
principal or agent in these transactions. No
new securities are offered.
5
<PAGE> 9
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth UBS AG's ratio of earnings to fixed charges, for
the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED 31 DECEMBER 30 JUNE
1997 1998 1999 1999 2000
CHF in millions, except ratios
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTERNATIONAL ACCOUNTING STANDARDS ("IAS")(1)
RATIO OF EARNINGS TO FIXED CHARGES(2).............. 0.95 1.11 1.25 1.36 1.28
US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
("GAAP")(1)
RATIO OF EARNINGS TO FIXED CHARGES(3).............. x 0.80 1.14 x 1.16
</TABLE>
------------
(1) The ratio is provided using both IAS and US GAAP values, as the ratio is
materially different between the two accounting standards. No US GAAP
information is provided for 31 December 1997 and 30 June 1999 as a US GAAP
reconciliation was not required for those periods.
(2) The deficiency in the coverage of fixed charges by earnings before fixed
charges on an IAS basis at 31 December 1997 of CHF 851 million is due to
restructuring charges of CHF 7,000 million under IAS charged in that
period. Without that charge, the ratio would have been 1.36.
(3) The deficiency in the coverage of fixed charges by earnings before fixed
charges at 31 December 1998 of CHF 5,319 million is due to restructuring
charges of CHF 3,982 million under US GAAP, as well as 1,706 million of
pre-tax losses from significant financial events charged for that period.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Introduction." Without those charges the ratio
would have been 1.01.
6
<PAGE> 10
Use of Proceeds
All of the sales of debt securities under this prospectus will be market-making
transactions--that is, transactions in which UBS AG, UBS Warburg LLC,
PaineWebber Incorporated, or one of UBS AG's other affiliates, resells
securities that the seller, or one of its affiliates, has previously bought from
another party. UBS Americas will not receive any of the proceeds from these
resales of the debt securities. In general, we expect that the entity that
resells any particular debt securities will retain the proceeds of its
market-making resales and will not pay the proceeds to UBS Americas or, when the
resales are not made by UBS AG, to UBS AG.
--------------------------------------------------------------------------------
7
<PAGE> 11
--------------------------------------------------------------------------------
Cautionary Note Regarding Forward-Looking Information
This prospectus contains forward-looking information. The Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking
information to encourage companies to provide prospective information about
themselves without fear of litigation so long as the information is identified
as forward looking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in the information. Forward-looking information
is indicated by the use of words such as "anticipates," "expects," "believes,"
"should," "could," "intends," "estimates" and "may," or other comparable
language.
We identify the following important factors that could cause UBS's actual
results to differ materially from any results that might be projected by UBS in
forward-looking information. All of these factors are difficult to predict, and
many are beyond the control of UBS. Accordingly, although we believe that the
assumptions underlying the forward-looking information are reasonable, there can
be no assurance that those assumptions will approximate actual experience. The
important factors include the following:
- general economic conditions, including prevailing interest rates and
performance of financial markets, which may affect UBS's ability to sell its
products,
- the market value of UBS's investments,
- UBS's and PaineWebber's ability to 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,
- changes in federal tax laws, which could adversely affect the tax advantages
of certain of UBS's products and subject it to increased taxation,
- industry consolidation and competition,
- changes affecting the banking industry generally and UBS's banking operations
specifically, including asset quality,
- increasing levels of competition in emerging markets and general competitive
factors, locally, nationally, regionally and globally, and
- changes in currency exchange rates, including the exchange rate for the Swiss
franc into U.S. dollars.
You should also consider other risks and uncertainties discussed in documents
filed by UBS with the SEC, including UBS's Annual Report on Form 20-F for the
fiscal year ended December 31, 1999. We have no obligation to update
forward-looking information to reflect actual results.
8
<PAGE> 12
--------------------------------------------------------------------------------
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, at the rate of CHF 1 = $0.5532, the exchange rate as of 31 October
2000.
<TABLE>
<CAPTION>
AS OF
31 OCTOBER 2000
-----------------------
CHF U.S.$
(in millions)
-------------------------------------------------------------------------------------
<S> <C> <C>
Debt
Money market paper issued................................. 66,811 36,960
Due to banks.............................................. 103,370 57,184
Cash collateral on securities lent........................ 21,416 11,847
Due to customers.......................................... 298,839 165,318
Long-term debt............................................ 50,670 28,031
------- ----------
Total Debt................................................ 541,106 299,340
Minority Interest........................................... 3,134 1,734
Shareholders' Equity........................................ 35,325 19,542
------- ----------
Total Capitalization........................................ 579,565 320,616
======= ==========
</TABLE>
None of the indebtedness listed above is secured.
--------------------------------------------------------------------------------
9
<PAGE> 13
--------------------------------------------------------------------------------
Recent Developments
On 28 November 2000, UBS announced its results for the third quarter of 2000.
These results, and certain changes to the composition of UBS's Board of
Directors and senior management, are set forth in an appendix to this
prospectus, beginning at page A-1. This annex also updates some of the other
information provided elsewhere in this prospectus.
In addition, on 14 December 2000, UBS announced that Joseph J. Grano Jr., the
former President and Chief Executive Officer of PaineWebber and now President
and CEO of the Private Clients and Asset Management division in UBS Warburg,
will join UBS's Group Executive Board as of January 1, 2001.
--------------------------------------------------------------------------------
10
<PAGE> 14
--------------------------------------------------------------------------------
UBS
DESCRIPTION OF BUSINESS
Mission
The UBS mission is to:
- provide clients with superior value-added investment services;
- provide above average rewards to shareholders;
- be an employer of choice; and
- be a good corporate citizen.
Overview
UBS is a global, integrated investment services firm and the leading bank in
Switzerland. UBS's business is managed through three main business groups and
UBS's Corporate Center. The business groups are:
- UBS Switzerland;
- UBS Warburg; and
- UBS Asset Management.
The philosophy of UBS's business model is that each of the business groups holds
primary responsibility for managing relationships with well-defined client
segments, while ensuring appropriate access to the products and services of the
entire Group. UBS's clients include international corporations, small- and
medium-sized businesses in Switzerland, governments and other public bodies,
financial institutions, market participants and individuals. Individuals include
high net worth individuals, affluent clients and retail customers. UBS provides
its clients with a broad range of products and services. These include:
- wealth management services;
- investment funds;
- corporate advisory (mergers and acquisitions) services;
- equity and debt underwriting;
- securities and financial market research;
- securities and derivatives sales and trading;
- structured risk management;
- retail, commercial and transaction banking in Switzerland;
- asset management; and
- private equity funds.
Each of the business groups is one of the leaders in its field. UBS has the
world's largest private banking business and is a leading global asset manager,
as measured by assets under management. UBS Warburg is among the leading
corporate and institutional investment banks, and it is differentiated by its
European roots. UBS is the leading retail and commercial bank in Switzerland.
--------------------------------------------------------------------------------
11
<PAGE> 15
UBS
--------------------------------------------------------------------------------
UBS's Corporate Center encompasses Group level functions that cannot be
delegated to the business groups.
All of UBS's business groups work together in an integrated investment services
firm. UBS believes this allows it to provide several types of services to its
clients, resulting in additional profits. Examples of inter-group synergies
include:
- UBS Warburg provides research, securities brokerage and foreign exchange
execution services to clients of UBS Switzerland.
- UBS Switzerland and UBS Warburg banking clients also have the opportunity to
invest in UBS Capital and UBS Asset Management funds.
- UBS Asset Management researches and recommends the asset allocation
strategies employed by UBS Warburg and UBS Switzerland, in particular with
respect to investment funds.
- Technology and premises infrastructure, operations and other support services
are generally shared between all business groups in a given country,
especially in Switzerland.
Set forth below is summary information relating to UBS.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR ENDED
ENDED 30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions, except per share data)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income................................. 18,557 15,102 28,425 22,247
Operating expenses............................... 12,997 10,071 20,532 18,376
------- ------ ------- -------
Operating profit before tax and minority
interests...................................... 5,560 5,031 7,893 3,871
------- ------ ------- -------
Net profit....................................... 4,268 3,859 6,153 2,972
======= ====== ======= =======
Basic earnings per share......................... 10.91 9.38 15.20 7.33
======= ====== ======= =======
(at period end)
Total assets..................................... 946,307 898,888 861,282
Shareholders' equity............................. 31,876 30,608 28,794
Assets under management (CHF billion)(2)......... 1,711 1,744 1,572
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
(2) Assets under management is defined as third-party on- and off-balance sheet
assets for which UBS has investment responsibility, as well as deposits and
current accounts. This includes discretionary assets (deposited with UBS or
externally), where UBS has a mandate to invest and manage the assets, as
well as advisory assets. The major product categories of assets under
management are mutual funds, securities (bonds and equities) and deposit and
current accounts.
UBS's financial stability stems from the fact that it is one of the most well
capitalized banks in the world. UBS believes that this financial strength is a
key part of the value proposition offered to both clients and investors. The
long-term credit ratings assigned to UBS by rating agencies are set out below.
<TABLE>
<CAPTION>
AT AT AT
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Moody's, New York................ Aa1 Aa1 Aa1
Fitch/IBCA, London............... AAA AAA AAA
Standard & Poor's, New York...... AA+ AA+ AA+
Thomson BankWatch, New York...... AA AA AA
</TABLE>
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12
<PAGE> 16
UBS
--------------------------------------------------------------------------------
Each of these ratings reflects only the view of the applicable rating agency at
the time the rating was issued, and any explanation of the significance of such
rating may be obtained only from such rating agency. There is no assurance that
any such credit rating will remain in effect for any given period of time or
that such rating will not be lowered, suspended or withdrawn entirely by the
applicable rating agency, if in such rating agency's judgment, circumstances so
warrant.
Strategy
UBS seeks to grow the profitability and enhance the efficiency of all of its
businesses, while continuously improving the provision of products and services
to its clients. UBS will build its franchise either through investments in
internal growth or, where appropriate, through selected acquisitions, such as
the merger with PaineWebber. UBS believes that its business model and its recent
history of embracing and managing change will enable flexible responses to the
rapid and unpredictable changes taking place in the financial services industry.
In order to maintain an edge in the highly competitive markets in which UBS
operates, UBS will continue to make ongoing investments in top quality staff and
technology.
In addition to the delivery of products and services through traditional
channels, UBS is strengthening its e-commerce initiatives. UBS's business groups
are well advanced in formulating and implementing their e-commerce strategies.
- UBS Switzerland will invest CHF 90-100 million annually over the next few
years to extend its electronic banking and mobile phone banking initiatives.
Since April 2000, a single unit has been responsible for handling all the
business group's e-banking activities with its primary goal being to bring
personalized service to private clients. A further goal is to expand
relationships with active online clients, strengthening cross-selling in the
process.
- UBS Warburg has launched its web-based business-to-business solution,
Investment Banking On-Line or "IBOL." From the IBOL homepage, corporate and
institutional clients can access services and content electronically and link
to execution capabilities across all product areas.
Background
On 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation merged to
form UBS. Union Bank of Switzerland was created by the merger of two Swiss
regional banks in 1912; these two Swiss regional banks can trace their history
back to 1862 and 1863. Swiss Bank Corporation was incorporated in Basel in 1872
and its history can be traced back to the creation of "Bankverein" from six
private banking houses in 1854.
Prior to the 1998 merger, Union Bank of Switzerland developed primarily through
internal growth, although it made certain significant acquisitions such as
Phillips & Drew in 1985. Swiss Bank Corporation expanded mainly through
acquisitions. These included the acquisitions of:
- O'Connor & Associates, a group of affiliated firms specializing in the trading
of options and other derivative instruments (1992);
- Brinson Partners, a leading institutional investment management firm in terms
of assets under management (1995);
- the investment banking operating subsidiaries of S.G. Warburg Group p.l.c.
(1995); and
- Dillon Read & Co., Inc., a United States-based investment bank (1997).
--------------------------------------------------------------------------------
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<PAGE> 17
UBS
--------------------------------------------------------------------------------
The integration of Union Bank of Switzerland and Swiss Bank Corporation was
largely completed within one year, despite the additional challenges presented
by preparation for the Year 2000 and the introduction of the euro.
Merger with PaineWebber
On 3 November 2000, UBS acquired Paine Webber Group Inc. UBS purchased all
outstanding shares of PaineWebber stock for a combination of cash and stock
representing a total purchase price of $11.8 billion (based on the UBS share
price on 3 November 2000).
PaineWebber was one of the largest full-service securities and commodities firms
in the United States. Founded in 1879, PaineWebber employed approximately 23,175
people in 385 offices worldwide at the time of the merger.
At the time of the merger, PaineWebber offered a wide variety of products and
services, consisting of those of a full service broker-dealer to primarily a
domestic market, through its two operating segments: Individual and
Institutional. The Individual segment offered brokerage services and products,
asset management and other investment advisory and portfolio management products
and services, and execution and clearing services for transactions originated by
individual investors. The Institutional segment principally included capital
markets products and services such as securities dealer activities and
investment banking.
Business and Management Structure
Prior to the 1998 merger, Union Bank of Switzerland operated four strategic
business segments:
- private banking and institutional asset management;
- corporate and institutional finance;
- trading, sales and risk management services; and
- retail banking.
Swiss Bank Corporation also operated in four divisions prior to the 1998 merger:
- SBC Private Banking;
- SBC Warburg Dillon Read (investment banking);
- SBC Switzerland (corporate and retail banking); and
- SBC Brinson (investment management).
The combined entity following the 1998 merger initially had the following five
operating divisions and the Corporate Center:
- UBS Private Banking;
- Warburg Dillon Read;
- UBS Private and Corporate Clients;
- UBS Brinson, which was renamed UBS Asset Management; and
- UBS Private Equity.
--------------------------------------------------------------------------------
14
<PAGE> 18
UBS
--------------------------------------------------------------------------------
On 18 February 2000, UBS regrouped its businesses into the following three main
business groups to align itself as closely as possible to client needs.
- UBS Switzerland, which is now composed of two business units:
- Private and Corporate Clients: Swiss retail and commercial banking.
- Private Banking: private banking services offered to all Swiss and
international high net worth clients who bank in Switzerland or
offshore centers.
- UBS Asset Management, which now includes:
- Institutional Asset Management: Brinson Partners and Phillips & Drew
business areas, which are now integrated to form a single global
investment platform.
- Investment Funds/GAM: The Investment Funds and Global Asset
Management, or "GAM," business areas, transferred from UBS Private
Banking.
- UBS Warburg, which is now comprised of four business units:
- Corporate and Institutional Clients: securities and investment banking
products and services for institutional and corporate clients. This
includes the Corporate Finance, Equities, Fixed Income and Treasury
Products businesses.
- UBS Capital: investment of UBS and third-party funds in a diverse
range of private, and occasionally public, companies on a global
basis.
- Private Clients: UBS's onshore private banking services for high net
worth individuals worldwide, outside of Switzerland.
- e-services: personalized investment and advisory services at
competitive fees for affluent clients in Europe, delivered via a
multi-channel structure that integrates internet, call centers and
investment centers.
UBS's board of directors, which consists exclusively of non-executive directors
in accordance with Swiss Banking Law, has the ultimate responsibility for the
strategic direction of UBS's business and the supervision and control of
executive management. The Group Executive Board, which is UBS's most senior
executive body, assumes overall responsibility for the development of UBS's
strategies and its implementation and results.
The Chief Executive Officer of each business group is a member of the Group
Executive Board and is responsible and accountable for the results of the
business group as a whole. However, when the new business group structure was
introduced, UBS committed to continue to provide summary financial and
management information about the business units, in order to maintain
transparency in its affairs and allow shareholders to make meaningful
comparisons to the performance of the Group under its previous structure.
Therefore, the discussion in this section describes the business groups mainly
in terms of their constituent business units.
In the remainder of this section, the discussion will be divided into the three
business groups and their constituent business units, as they exist now, not the
five divisions as they existed on 31 December 1999.
--------------------------------------------------------------------------------
15
<PAGE> 19
UBS
--------------------------------------------------------------------------------
UBS Switzerland
The UBS Switzerland business group is made up of two business units:
- Private and Corporate Clients -- The leading retail and commercial bank in
Switzerland.
- Private Banking -- Covers all Swiss and international high net worth clients
who bank in Switzerland or offshore centers.
The onshore Private Clients business, formerly part of Private Banking, is now
managed within the UBS Warburg business group.
UBS Switzerland is the leading Swiss bank for individual and corporate clients
and a premier Swiss private banking institution. UBS Switzerland offers a
continuum of services to all Swiss-based clients. It benefits from an integrated
infrastructure and the opportunity for shared distribution via its developing
multi-channel architecture.
To drive forward its e-commerce vision and strategy, UBS Switzerland has created
a single business area called "e-Channels and Products" to lead all its
e-banking activities. The new business area will be responsible for all
electronic channels and products as well as associated service and support
centers and will oversee all e-banking functions of UBS Switzerland. Its costs
are shared between Private Banking and Private and Corporate Clients, based on
service level agreements.
Private and Corporate Clients. The Private and Corporate Clients business unit
of UBS Switzerland is the leading retail bank in Switzerland and targets
individual clients with assets of up to approximately CHF 1 million as well as
business and corporate clients in Switzerland. At 30 June 2000, this business
unit had about CHF 439 billion in assets under management and a loan portfolio
of approximately CHF 163 billion. Private and Corporate Clients employs over
22,000 people in its headquarters in Zurich and its offices throughout
Switzerland.
Set forth below is summary information, based on management accounting data,
relating to the Private and Corporate Clients business unit, which is discussed
in greater detail under "--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations by Business Unit--UBS
Switzerland--Private and Corporate Clients."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS YEAR ENDED
ENDED 30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income before credit loss
expense.................................... 3,803 3,599 7,193 7,025
Credit loss expense.......................... 412 554 1,050 1,170
Personnel, general and administrative
expenses................................... 2,154 2,224 4,486 4,263
Depreciation and amortization................ 219 200 386 684
------- ------- ------- -------
Operating profit before tax.................. 1,018 621 1,271 908
======= ======= ======= =======
Average regulatory equity used............... 8,850 8,400 8,550 8,250
(at period end)
Assets under management (CHF in billions).... 439 443 439 434
Numbers of employees......................... 22,270 24,186 24,098 24,043
Total loans.................................. 162,752 167,004 164,743 164,840
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
--------------------------------------------------------------------------------
16
<PAGE> 20
UBS
--------------------------------------------------------------------------------
Organizational Structure. Private and Corporate Clients operates four main
business areas:
- Individual Clients -- This business area includes over 4,000,000 client
accounts, of which over 25% are client accounts that relate to clients with
assets over CHF 50,000.
- Corporate Clients -- This business area focuses on Swiss corporate clients and
includes 160 top corporations, over 7,500 large corporate clients and 180,000
small- and medium-sized businesses.
- Operations -- In addition to providing operational support to the retail
banking business and other Swiss-based UBS units, this business area provides
payment and custodial services to approximately 1,800 banking institutions
throughout the world.
- Risk Transformation and Capital Management -- This business area has
responsibility for clients with impaired or non-performing loans and manages
the risk in Private and Corporate Clients' loan portfolio. It is also
responsible for optimizing capital utilization.
Private and Corporate Clients also includes the Resources business area, which
provides real estate, marketing, personnel and administrative services to
Private and Corporate Clients and the other UBS business units in Switzerland,
particularly Private Banking, and the Information Technology business area,
which provides information technology services to Private and Corporate Clients
and the other Swiss-based UBS offices, again with Private Banking as the main
recipient.
Profit Enhancement Initiatives. The domestic retail banking sector in
Switzerland has historically been a high-cost, low-return business. In order to
further enhance the profitability of the retail business and to exploit the
synergies after the 1998 merger, UBS has developed and commenced a number of
initiatives that are intended to reduce the costs and increase the revenues of
this business unit. These include:
- The further development and enhancement of alternative distribution
channels, including:
- UBS e-banking, on-line internet and teletext banking, and telephone
banking.
- UBS Multimat and UBS Bancomat Plus, which together offer a direct
electronic link to the customer's account and to a full range of
traditional ATM services, including accepting cash deposits, and
permits additional functions, such as the set-up and maintenance of
payment and standing orders.
- Increasing revenue principally through improvements in pricing, increased
focus on higher yielding investment products and fee-based businesses,
and improvements in the distribution of UBS's products, including
implementing risk-adjusted pricing in its new and maturing loan business
and by expanding its e-banking services.
- Reducing costs by continuing to close branches. Since the 1998 merger,
UBS has closed 200 branches, or 36%, still leaving UBS with more branches
than either predecessor institution.
- Increasing the efficiency and productivity of Private and Corporate
Clients' processes by standardizing its products and taking advantage of
automation and other technological developments.
Clients. Private and Corporate Clients has a diverse client base, ranging from
individual clients to corporate clients and international banking institutions.
Private and Corporate Clients provides a broad range of products and services to
these clients, including retail banking, investment services and lending. UBS
believes that clients choose Private and Corporate Clients primarily based on
UBS's leading position as a bank and an asset manager in Switzerland, its broad
distribution network and its ability to provide a comprehensive range of
financial products and services. Based on market surveys, over 96% of the Swiss
market readily recognizes the UBS brand, which has a long history and is well
established in Switzerland.
--------------------------------------------------------------------------------
17
<PAGE> 21
UBS
--------------------------------------------------------------------------------
The table below sets forth assets under management attributable to each of
Private and Corporate Client's main client areas at 30 June 2000 and 31 December
1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in billions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Individual Clients...................... 221 223 229
Corporate Clients....................... 213 212 178
Banks................................... 5 4 27
------------ ---------------- ----------------
Total................................. 439 439 434
============ ================ ================
</TABLE>
Client/Product Initiatives. Rapid growth of technology has made available a
number of alternative distribution channels. UBS has offered telebanking since
1985 and, based upon its market research, UBS has the leading position in the
Swiss telebanking market, initiating in excess of one-half of all telebanking
transactions in Switzerland during 1998.
Since 1997, UBS has expanded its product offerings and taken steps to market
additional services to its client base. Key initiatives include:
- The launch of UBS Tradepac, an expanded all-inclusive internet-based offering
aimed at serving the on-line trading needs of UBS's customers and providing
access to six international exchanges. As part of UBS Tradepac, UBS has
established a partnership with Intuit Inc. that has permitted it to introduce
UBS Quicken, a specially adapted version of the Quicken software that includes
enhanced financial management functions and adds to the attractiveness of its
product offering.
- The launch of UBS's small- and medium-sized business enterprises initiative,
which is intended to respond to the lack of risk capital for small business
enterprises.
Investment Services. UBS's investment services for Private and Corporate
Clients are a collaborative effort among:
- UBS Asset Management, which manages the UBS mutual fund portfolio and
determines the investment strategy for, delivers monthly tactical asset
allocations to, and manages discretionary mandates of, Private and Corporate
Clients' institutional clients.
- UBS Warburg, which provides research and access to the securities exchanges.
- UBS Switzerland, which actively markets and distributes investment products to
its clients after making the appropriate revisions to take into account the
needs of those clients.
The principal result is a full range of investment options to offer UBS's
clients including those of Private and Corporate Clients.
The following table illustrates Private and Corporate Clients' assets under
management by asset class at 30 June 2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in billions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deposit and current accounts............ 125 129 153
Securities accounts..................... 314 310 281
------------ ---------------- ----------------
Total................................. 439 439 434
============ ================ ================
</TABLE>
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18
<PAGE> 22
UBS
--------------------------------------------------------------------------------
Loan Portfolio. The following table shows the loan portfolio (excluding
Solothurner Bank) before all allowances, in Private and Corporate Clients,
broken down by Private and Corporate Clients' main business areas at 30 June
2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in billions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Individual Clients...................... 77 76 90
Corporate Clients....................... 68 68 49
Recovery Portfolio...................... 18 21 26
------------ ---------------- ----------------
Total................................. 163 165 165
============ ================ ================
</TABLE>
The following table shows the loan portfolio in Private and Corporate Clients,
broken down by loan category at 30 June 2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in billions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed rate mortgages.................... 79 81 80
Commercial credits...................... 40 44 44
Variable rate mortgages................. 28 30 36
Other................................... 16 10 5
------------ ---------------- ----------------
Total................................. 163 165 165
============ ================ ================
</TABLE>
At 30 June 2000, about CHF 107 billion (or 66%) of the CHF 163 billion loan
portfolio in Private and Corporate Clients related to mortgages, of which
approximately 81% were secured by residential real estate. A discussion of UBS's
loan portfolio classified by industry is included under "--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Selected Statistical Information--Loans."
Private and Corporate Clients' impaired loans, which include non-performing
loans, are transferred to the Risk Transformation and Capital Management
business area to be managed by UBS's Recovery Group, which specializes in
working-out or otherwise recovering the value of those loans. At 30 June 2000,
Private and Corporate Clients' loan portfolio included approximately a CHF 18
billion recovery portfolio. Approximately CHF 16 billion of Private and
Corporate Clients' 30 June 2000 recovery portfolio was impaired and related to
provisional positions and positions stemming back to weakness in the Swiss
commercial real estate markets during the 1990s. A provision of CHF 9 billion
has been established against the portion of impaired loans not secured by
collateral or otherwise deemed uncollectible. Approximately CHF 2 billion of
UBS's 30 June 2000 recovery portfolio is performing and unimpaired. The
unimpaired loans included in UBS's recovery portfolio are outstanding with
counterparties for whom other loans have become impaired. No provisions have
been established against these loans. UBS's lending officers actively manage the
recovery portfolio, seeking to restructure the lending relationship with a goal
of removing the loan from the recovery portfolio. The following table describes
the development in UBS's recovery portfolio from 1 January 1998 to 30 June 2000.
--------------------------------------------------------------------------------
19
<PAGE> 23
UBS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(CHF in billions)
---------------------------------------------------------------------------------
<S> <C>
Balance, 1 January 1998..................................... 29
Changes in 1998:
New recovery loans added.................................. 7
Settlements of outstanding recovery loans................. (10)
---
Balance, 31 December 1998................................... 26
Changes in 1999:
New recovery loans added.................................. 5
Settlements of outstanding recovery loans................. (10)
---
Balance, 31 December 1999................................... 21
Changes in 2000:
New recovery loans added.................................. 1
Settlements of outstanding recovery loans................. (4)
---
Balance, 30 June 2000....................................... 18
===
</TABLE>
Approximately 60% of the loans that were originally included in UBS's recovery
portfolio in 1997 have been worked out and removed. See "--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Analysis of Risks--Credit Risk" for a further description of UBS's
process for credit risk management and control and a discussion of impaired and
non-performing loans.
Private and Corporate Clients' continued implementation of "risk-adjusted
pricing," which differentiates loan pricing based on risk profiles, has led to
improved margins on UBS's lending portfolio and has resulted in more effective
use of UBS's capital. For a discussion of UBS's credit approval process and how
UBS manages interest rate risk, see "--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Asset and Liability
Management--Interest Rate Management."
The credit approval activities of Private and Corporate Clients are the
responsibility of the business area, coordinated by a separate chief credit
officer who is accountable to the Chief Credit Officer, or "CCO." Generally,
loans are approved by a credit officer who does not participate in the client
relationship, but works with the lending officer to establish a set of lending
criteria that are applicable to the risk profile rating of the borrower. The
exception is for certain high-risk lending relationships, in which case the
credit officer directly corresponds with the borrower. Private and Corporate
Clients' chief credit officer reviews the business area's loans on a periodic
basis (annually for most loans and at least quarterly for high-risk loans) to
confirm the ratings. The CCO further coordinates Private and Corporate Clients'
lending activities and credit exposure with the lending activities and credit
exposure of UBS Warburg and the remainder of UBS Switzerland.
Private Banking. UBS is one of the leading international private banks, as
measured by assets under management. At 30 June 2000, Private Banking had CHF
683 billion in assets under management. Private Banking serves high net worth
individuals with a broad range of comprehensive wealth management services and
financial products. Private Banking's approach is to focus on establishing
long-term client relationships and emphasizing the life-time value of these
relationships.
The private banking industry is in the process of undergoing some fundamental
changes resulting from the changing profile of high net worth individuals,
emerging technologies and increased competition. Clients are increasingly taking
a more active role in managing their wealth and are demanding more sophisticated
products and a broader geographic range of services. They are focused on asset
--------------------------------------------------------------------------------
20
<PAGE> 24
UBS
--------------------------------------------------------------------------------
performance and allocation, quality of information and advice and extended
availability of services, such as 24-hour, remote and internet access. The
private banking industry is also experiencing an increase in the wealth that
remains in onshore markets, particularly in the form of equity and equity-linked
investments, as domestic capital markets become more developed and generate
higher returns.
To address this changing environment, Private Banking is seeking to further
penetrate its existing client base with enhanced wealth management solutions.
Private Banking's size provides it with the flexibility to offer its clients
customized and expanded service offerings tailored to their particular needs. To
further increase its assets under management in its private banking business,
UBS will also continue to consider select acquisition opportunities that may
arise, as evidenced by the acquisition in 1999 of Bank of America's
international private banking activities. Set forth below is summary
information, based on management accounting data, relating to the Private
Banking business unit of UBS Switzerland, which is discussed in greater detail
under "--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations by Business Unit--UBS Switzerland--Private
Banking."
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999 1999 1998
(CHF in millions)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income before credit loss expense............... 3,471 2,728 5,568 6,933
Credit loss expense....................................... 11 6 21 16
Personnel, general and administrative expenses............ 1,425 1,147 2,513 2,411
Depreciation and amortization............................. 55 38 97 91
----- ----- ----- -----
Operating profit before tax............................... 1,980 1,537 2,937 4,415
===== ===== ===== =====
(at period end)
Assets under management (CHF in billions)................. 683 630 671 579
Number of employees....................................... 7,447 6,697 7,256 6,546
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Marketing and Distribution. Private Banking provides wealth management services
to its clients in a number of geographic regions and seeks to tailor its service
offerings to meet the specific needs of particular client segments and markets.
To better understand the needs of its existing and prospective clients, Private
Banking differentiates its clients by geographic location and the amount of
assets under management and then based on their product needs and utilization
and service requirements. The client advisors who serve Private Banking's
clients are principally organized by client market, which allows them a higher
level of client focus. Private Banking believes that this approach fosters
valued long-term client relationships.
Private Banking's client advisors retain primary responsibility for introducing
products and services to its existing and prospective private banking clients.
The business areas that deal directly with clients are generally responsible for
their own marketing activities. The client advisors are central to the delivery
of services to Private Banking's clients and are responsible for increasing the
penetration of Private Banking service offerings within its existing customer
base. The client advisors are supported by a separate marketing department,
which is responsible for market research and the preparation of standardized
marketing materials.
Products and Services. Private Banking provides a number of asset-based,
transaction-based and other services to its clients. Asset-based services
include custodial services, deposit accounts, loans and
--------------------------------------------------------------------------------
21
<PAGE> 25
UBS
--------------------------------------------------------------------------------
fiduciary services while transaction-based services include trading and
brokerage and investment fund services. Private Banking also provides financial
planning and consulting and offers financial planning instruments to its
clients. These services include establishing proprietary trusts and foundations,
the execution of wills, corporate and personal tax structuring and tax efficient
investments. Private Banking has the following three core product and service
business areas:
- Financial Planning and Wealth Management -- Responsible for developing
integrated comprehensive wealth management services in the form of tax
and estate planning, liquidity and retirement lifestyle planning,
insurance products, art and real estate advisory services and a variety
of sophisticated capital enhancement and asset protection strategies.
- Portfolio Management -- Responsible for providing portfolio management
services to Private Banking clients and for the investment clients of
Private and Corporate Clients.
- Active Advisory Team -- Provides sales brokerage, investment advisory
services and products to key private banking locations worldwide. The
Active Advisory Team provides information concerning, and facilitates
investments in, primary initial public offerings and secondary
placements. This team also provides fiduciary services and the execution
of private banking orders outside Switzerland.
At 30 June 2000, slightly more than one-fifth of Private Banking's assets under
management were managed on a discretionary basis. The remaining assets under
management related to advisory engagements.
The following table shows information concerning assets under management by type
of engagement and asset class in Private Banking at 30 June 2000 and 31 December
1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TYPE OF ENGAGEMENT
Advisory................................ 533,000 501,000 437,000
Discretionary........................... 150,000 170,000 142,000
------------ ---------------- ----------------
Total................................. 683,000 671,000 579,000
============ ================ ================
ASSET CLASS
Deposit and current accounts............ 59,000 59,000 50,000
Equities................................ 199,000 196,000 148,000
Bonds................................... 194,000 187,000 187,000
Investment Funds........................ 106,000 119,000 93,000
Other(1)................................ 125,000 110,000 101,000
------------ ---------------- ----------------
Total................................. 683,000 671,000 579,000
============ ================ ================
</TABLE>
---------------
(1) Includes money market instruments, UBS medium-term notes, derivatives,
mutual funds not managed by UBS and precious metals.
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<PAGE> 26
UBS
--------------------------------------------------------------------------------
UBS Asset Management
UBS Asset Management brings together UBS's asset management activities. It
consists of two business units:
- Institutional Asset Management -- One of the largest institutional asset
managers in the world.
- Investment Funds/GAM -- Investment Funds is one of the leading funds
providers in Europe and the seventh largest in the world. GAM is a
diversified asset management group with assets composed primarily of
private client accounts, institutional and mutual funds.
UBS Asset Management benefits from an integrated business model and single
management team.
Institutional Asset Management. Based on assets under management, Institutional
Asset Management is one of the largest institutional asset managers in the world
and among the industry leaders in the United States, the United Kingdom and
Switzerland. At 30 June 2000, Institutional Asset Management had over CHF 525
billion in assets under management, including CHF 326 billion of institutional
assets and CHF 199 billion of non-institutional assets, including the UBS
Investment Funds offered by the Investment Funds business area of the Investment
Funds/GAM business unit, which are managed by Institutional Asset Management.
Institutional Asset Management is headquartered in Chicago and has offices in
Dallas/Houston, Frankfurt, Geneva, Hartford, Hong Kong, London, Melbourne, New
York, Paris, Rio de Janeiro, San Francisco, Singapore, Sydney, Tokyo and Zurich.
Institutional Asset Management markets its services under the UBS Asset
Management name, with Brinson Partners and Phillips & Drew serving as sub-brands
within the Americas and the United Kingdom, respectively. Institutional Asset
Management believes that its broad geographic spread of operations and strong
brand names will help it pursue growth opportunities in Continental Europe,
Asia-Pacific and Latin America and maintain its strong positions in the mature
markets it serves in the United States, the United Kingdom and Switzerland.
Set forth below is summary information, based on management accounting data,
relating to Institutional Asset Management, which is discussed in greater detail
under "--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations by Business Unit--UBS Asset
Management--Institutional Asset Management."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS YEAR ENDED
ENDED 30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income.................................. 638 542 1,099 1,163
Personnel, general and administrative expenses.... 402 331 636 619
Depreciation and amortization..................... 98 63 138 107
----- ----- ----- -----
Operating profit before tax....................... 138 148 325 437
===== ===== ===== =====
(at period end)
Assets under management (CHF in billions)......... 525 563 574 531
Number of employees............................... 1,712 1,507 1,653 1,497
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Organizational Structure. During 1999, Institutional Asset Management
implemented a client-centric business model and modified its organizational
structure to strengthen local and regional roles. Institutional Asset Management
believes that its new organizational structure will improve
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UBS
--------------------------------------------------------------------------------
accountability for results and the business group's effectiveness and
efficiency. At 30 June 2000, Institutional Asset Management's organizational
structure consisted of the following business areas:
- Brinson Partners and Phillips & Drew -- These business areas have the mandate
to optimize the contribution from the Americas and the United Kingdom,
respectively, and to further develop their investment capabilities and to
contribute to global business development efforts in Europe and the
Asia-Pacific region.
- Europe, Middle East & Africa and Asia Pacific -- These two business areas have
a mandate to capture profitable growth opportunities in their assigned
geographic markets and to optimize the contribution from existing businesses
in these regions. These mandates strengthen the regional accountability for
results and resources. At the same time, both regional business areas continue
to contribute to the UBS Asset Management global investment process as well as
ensure their adaptation to regional client needs where appropriate.
- O'Connor -- Launched at the beginning of June 2000, O'Connor is comprised of
part of the proprietary equity trading group of UBS Warburg, as well as the
Fund of Funds and Currency Funds businesses of UBS Warburg. O'Connor will
focus on alternative investments, or investment strategies designed to provide
attractive risk-adjusted returns with a low correlation to traditional
investments.
- IT and Operations -- This business area is responsible for implementing and
maintaining information technology and delivery platforms for the
Institutional Asset Management business unit.
Clients. Institutional Asset Management has a diverse institutional client base
located throughout Europe, the Middle East, Africa, the Asia-Pacific region and
the Americas. Its clients consist of:
- corporate and public pension plans;
- endowments and private foundations;
- insurance companies;
- central banks and supranationals; and
- financial advisers.
Externally managed pension assets constitute the majority of worldwide available
institutional assets. The pension market is undergoing a shift from traditional
defined benefit plans to defined contribution schemes. One of Institutional
Asset Management's strategic initiatives is to position itself to take advantage
of the opportunities created in this changing environment.
The following table shows assets under management broken down between
institutional assets and non-institutional assets at 30 June 2000 and 31
December 1999 and 1998. Non-institutional assets include the UBS Investment
Funds, which are managed by Institutional Asset Management.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional............................... 326,000 376,000 360,000
Non-institutional........................... 199,000 198,000 171,000
--------- --------- ---------
Total.................................. 525,000 574,000 531,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
Institutional Asset Management is well represented in the United States, Europe
and Australia, and is one of the largest foreign investment managers in Japan.
Institutional Asset Management believes this gives it a strong platform to meet
the increasingly complex global investment and servicing needs of its major
clients, and to expand its presence in growth markets.
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--------------------------------------------------------------------------------
The following table shows Institutional Asset Management's institutional assets
under management by the geographic location of its clients at 30 June 2000 and
31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Europe, Middle East & Africa................ 171,000 185,000 202,000
The Americas................................ 110,000 140,000 122,000
Asia-Pacific................................ 45,000 51,000 36,000
--------- --------- ---------
Total.................................. 326,000 376,000 360,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
Marketing and Distribution. Clients differentiate among institutional asset
managers based on client service, investment performance, process and
philosophy, fees and continuity of staff. Institutional Asset Management seeks
to use its long-term track record and strong client franchise to increase the
penetration of its services with both new and existing clients. It is a full
service institutional asset management firm, offering its clients a
comprehensive range of research and investment analysis as part of its overall
service and capability package.
Consultants advise institutional investors based on their expert knowledge of
managers' investment performance, process and client service capabilities, as
well as other factors. In consultant-driven markets, such as the United States
and the United Kingdom, Institutional Asset Management relies on its strong
relationships with the major consultants that advise corporate and public
pension plans, endowments, foundations, and other institutions. It also
dedicates resources to generating new business directly with large clients.
Institutional Asset Management also seeks to increase its revenues from existing
clients. Each of its client-facing business areas has dedicated account
management teams that service existing clients and seek to find new ways to
address client needs. These account managers are also focused on further
developing and solidifying the relationships that Institutional Asset Management
has with the major consultants that serve its clients.
Client Mandates. Institutional Asset Management seeks to deliver sustained
value-added investment performance relative to client-mandated benchmarks. Its
client mandates range from fully discretionary global asset allocation
portfolios to equity or fixed income portfolios with a single country emphasis
to other asset classes, including real estate, timber, oil and gas, and private
equity. These portfolios are available through separately managed portfolios as
well as through a comprehensive range of pooled investment funds.
The following table sets forth institutional assets under management for
Institutional Asset Management by client mandate at 30 June 2000 and 31 December
1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity.................................. 100,000 125,000 115,000
Asset Allocation........................ 110,000 130,000 148,000
Fixed Income............................ 79,000 90,000 83,000
Private Markets......................... 37,000 31,000 14,000
--------- --------- ---------
Total.............................. 326,000 376,000 360,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
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--------------------------------------------------------------------------------
Within each of these broad client mandate categories, Institutional Asset
Management has a diverse range of particular mandates that it provides to its
clients without a high concentration of business in any particular segment. For
example, within the equity, asset allocation and fixed income areas, it offers a
range of mandates on global, regional, emerging market and sector-specific
bases. The private markets category includes such mandates as direct
investments, oil and gas, partnership investments, real estate and timber.
Investment Process and Research. At the beginning of March 2000, Institutional
Asset Management announced that Brinson Partners and Phillips & Drew were being
combined to establish a common global investment management platform. This
decision reflected the shared investment philosophies of Phillips & Drew and
Brinson Partners, based on capturing price-value discrepancies identified
through fundamental research as well as similar cultures. The initial
integration was completed according to schedule at the beginning of May 2000.
The investment process is based on Institutional Asset Management efforts to
determine and quantify investment value. Senior investment professionals set
policy and oversee research activity within the units, drawing upon the
expertise of investment specialists in each asset class. These specialists
consult with external analysts, economists, consultants and academics. They
develop research and provide input into Institutional Asset Management's
quantitative valuation models. Institutional Asset Management estimates
long-term expected returns for asset classes, markets, and securities using
proprietary valuation models that consider cash flows discounted at
risk-adjusted rates and then evaluates potential strategies in the context of
forecasted returns as well as its forecasted risks and correlations.
Institutional Asset Management creates portfolios and monitors and adjusts them
based on relative price/value discrepancies. Its method is to identify periodic
discrepancies between market price and investment value and turn them to its
clients' advantage. Where no significant discrepancies exist between price and
value, Institutional Asset Management continues its research and analysis.
Institutional Asset Management believes that its approach allows it to respond
to market changes, while providing its clients with the benefit of its knowledge
and experience and maintains the flexibility to customize portfolios to meet
their requirements.
Investment Funds/GAM. As part of the re-grouping announced in February 2000,
the Global Asset Management, or GAM, and Investment Funds areas of the former
Private Banking division were transferred to UBS Asset Management, bringing
together all of UBS's asset management activities.
UBS Asset Management will benefit from an integrated business model and single
management team. Within this framework GAM will be distinctly positioned and
maintain its brand identity as well as its unique investment styles.
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--------------------------------------------------------------------------------
Set forth below is summary information, based on management accounting data,
relating to the Investment Funds/GAM business unit, which is discussed in
greater detail under "--Management's Discussion and Analysis of Financial
Condition and Results of Operations--UBS Asset Management--Investment
Funds/GAM."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income.................................... 334 102 270 195
Personnel, general and administrative expenses...... 215 75 151 124
Depreciation and amortization....................... 55 3 7 6
----- --- --- ---
Operating profit before tax......................... 64 24 112 65
===== === === ===
(at period end)
Assets under management (CHF in billions)........... 225 190 225 176
Number of employees................................. 1,038 392 923 366
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
The following table sets forth assets under management by business area within
the Investment Funds/GAM business unit at 30 June 2000 and 31 December 1999 and
1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Funds............................ 202,500 201,000 175,600
GAM......................................... 22,100 23,500 0
------------ ---------------- ----------------
Total..................................... 224,600 224,500 175,600
============ ================ ================
</TABLE>
Investment Funds. As a result of the merger between the Union Bank of
Switzerland and Swiss Bank Corporation, Investment Funds became the leading
investment fund provider in Europe and Switzerland in terms of investment fund
assets under management. By year-end 1999, Investment Funds' assets under
management increased 15% with growth primarily attributable to investment
performance. UBS has received numerous awards, including being named
"Switzerland's Best Overall Management Group" by Standard & Poor's Fund Services
in 1999.
Marketing and Distribution. Investment Funds are distributed primarily through
UBS Switzerland and UBS Warburg, with a minority of assets distributed through
third-party distribution partners. As of 30 June 2000, Investment Funds had CHF
203 billion in assets under management, including CHF 9.2 billion in assets
under management distributed through third-party distribution partners. In
addition, Investment Funds has a significant business administering assets for
third-parties.
As part of the Group reorganization, Investment Funds is evolving towards an
open, multi-channel distribution architecture. Initiatives include establishing
additional third-party distribution partnerships, developing electronic sales
channels and combining distribution efforts with Institutional Asset Management
in various markets to better capture defined contribution opportunities.
Additionally, the Investment Funds business unit is currently developing an
e-based investment fund distribution strategy. This channel will offer clients
personalized advisory services, investor education content, online decision
support tools, and automated trade execution, delivered through intermediaries.
--------------------------------------------------------------------------------
27
<PAGE> 31
UBS
--------------------------------------------------------------------------------
Client Mandates. Investment Funds has an extensive product range of
approximately 163 funds. The following table shows total assets under management
in these investment funds by fund category at 30 June 2000 and 31 December 1999
and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Allocation................ 46,700
44,200 35,000
Money Market.................... 44,100
46,200 45,500
Bond............................ 37,100
40,200 42,500
Equity.......................... 61,900
52,300 35,400
Capital Preservation............ 7,600
12,100 12,400
Real Estate..................... 5,100
6,000 4,800
--------- --------- ---------
Total......................... 202,500 201,000 175,600
--------- --------- ---------
--------- --------- ---------
</TABLE>
The continuing trend toward equity investments helped increase equity funds by
75% since the end of 1998, making Equity Investment Funds' largest asset
category, accounting for 31% of total Investment Funds volume. The number of
Investment Fund accounts, which make it easy for clients to make regular savings
in UBS Investment Funds, has grown by 80% to 90,000, with assets invested
through them increasing by 39% to a total of CHF 2.5 billion in 1999.
Investment Process and Research. The Institutional Asset Management business
unit is responsible for managing the investment funds offered by the Investment
Funds business unit, other than some real estate funds. However, Investment
Funds is responsible for managing its product range, which is tailored to meet
the needs of individual investors, and for the development and marketing of
individual funds.
Global Asset Management. Acquired in late 1999, Global Asset Management, or
"GAM," is a diversified asset management group with approximately 600 employees
and operations in Europe, North America, Asia and the Middle East. It manages
assets comprised of private client portfolios and over 170 private client mutual
funds, as well as institutional mandates. GAM continues to operate under its
established brand name within UBS Asset Management and continues to employ its
own distinctive investment style.
UBS Asset Management will increasingly take advantage of GAM's range of mutual
funds and its multi-manager selection process, in which it selects the top 90
out of about 6,000 third-party fund providers, to enhance the range of its
investment styles and products.
Marketing and Distribution. Marketing and distribution for GAM is divided into
three areas: Private Clients, Mutual Funds and Institutional. Each area markets
and services clients within its specific segment.
- Private Clients -- Offers and manages a broad range of tailored investment
strategies for its clients across the risk/return spectrum and from all major
reference currency perspectives. Implementation is through a combination of
GAM funds, under guidance established by GAM's investment committee.
The private client area seeks clients from a variety of sources including
referrals from its existing client base, intermediaries, and professional
advisors. Clients receive a high level of service from a dedicated team of
portfolio managers. Communication is ongoing and includes regular formal
review meetings.
- Mutual Funds -- GAM distributes mutual funds on a global basis, including
within the United States. GAM's Mutual Funds area seeks clients at the high
end of the market. Mutual funds are
--------------------------------------------------------------------------------
28
<PAGE> 32
UBS
--------------------------------------------------------------------------------
distributed through multiple channels, including brokerage firms, banks,
portfolio and fund managers, financial advisors, family offices, employee
pension plans, and directly to major investors.
- Institutional -- GAM provides a full range of services to its institutional
clients through dedicated account managers. Institutions are offered the same
products developed to support GAM's private client and fund distributions
businesses. This includes traditional equity portfolio management, as well as
multi-manager funds and alternative assets classes.
Investment Process and Research. GAM was founded in 1983 to give private
clients "access to great investment talent." As a result, the investment process
is based on selecting the world's leading investment talent, whether the manager
selected for a particular fund or mandate is internal to GAM or an external
manager. Beginning in 1989, GAM extended its investment process to pioneer the
development of the multi-manager concept.
An in-house team of investment professionals is responsible for managing the
various internally managed mandates or funds. Members of this team also create
multi-manager mandates using a quantitative database of 50,000 funds, and by
carefully scrutinizing all aspects of external managers employing a qualitative
database of 6,000 investment managers. The investment objective of multi-
manager funds or mandates is diversifying risk by employing complementary
managers using different strategies.
The range of funds and mandates extends from traditional equity and bond funds
to a comprehensive range of alternative investment funds.
UBS Warburg
UBS Warburg is composed of four business units:
- Corporate and Institutional Clients -- Securities and investment banking
products and services for institutional and corporate clients.
- UBS Capital -- Investment of UBS and third-party funds in a diverse range of
private, and occasionally public, companies on a global basis.
- Private Clients -- Onshore private banking services for high net worth
individuals worldwide, outside of Switzerland.
- e-services -- Personalized investment and advisory services at competitive
fees for affluent clients in Europe, delivered via a multi-channel structure
that integrates internet, call centers and investment centers.
Corporate and Institutional Clients. The Corporate and Institutional Clients
business unit is one of the leading global investment banks. It provides
wholesale financial and investment products and advisory services globally to a
diversified client base, which includes institutional investors (including
institutional asset managers and broker-dealers), corporations, sovereign
governments and supranational organizations. Corporate and Institutional Clients
also manages cash and collateral trading and interest rate risks on behalf of
UBS and executes the vast majority of UBS's retail securities, derivatives and
foreign currency exchange transactions. Corporate and Institutional Clients's
headquarters are in London and, at 30 June 2000, it employed about 13,000 people
in over 40 countries throughout the world.
In the 1998 merger, the investment banking businesses of the two banks came
together to form what is now the Corporate and Institutional Clients business
unit. Within Union Bank of Switzerland, securities trading began in New York and
London in the 1970s and grew in the 1980s with the
--------------------------------------------------------------------------------
29
<PAGE> 33
UBS
--------------------------------------------------------------------------------
acquisition of Phillips & Drew in 1985. Within Swiss Bank Corporation, the
acquisition of O'Connor & Associates in 1992 and the investment banking
businesses of S.G. Warburg Group p.l.c. in 1995 led to the formation of SBC
Warburg as a global investment bank, which was further strengthened in the
United States with the 1997 acquisition of Dillon Read & Co., Inc.
Corporate and Institutional Clients has a large corporate client financing and
advisory business and is one of the top-ranked investment banking businesses
engaged in institutional client business. The business area has achieved
industry-wide recognition for its performance in the following areas:
- equity sales and trading (ranked number two globally in the first quarter of
2000 based on equity commission revenues based on an independent survey);
- cash and derivative fixed income sales and trading with institutional
investors (ranked number four globally in 1999 based on information compiled
and classified by the Securities Data Company and other publicly available
information);
- eurobond trading (named Best Foreign Bond Firm in the Eurozone, the United
Kingdom and Australia in July 2000 by Euromoney);
- global foreign exchange (ranked number four in May 2000 by Euromoney FX poll,
which ranks investment banks and banks on a global basis by market share);
- research, with a global research sales team that includes about 630 specialist
analysts based in over 30 countries and covering over 4,600 companies (ranked
fourth in Institutional Investor Global Research in December 1999 and third in
European Research in February 2000 as well as receiving Euromoney's award in
October 1999 for best overall Asian research);
- debt and equity capital markets (1999, ranked number five in international
equity; number three in international equity-linked issuances; number two in
eurobond origination; and number one in its target franchise segments of
international bonds by Bondware. Corporate and Institutional Clients's target
franchise markets exclude asset-backed, self-issuance and U.S. agencies); and
- privatizations (including its role as lead manager in the Swisscom
privatization, which was named privatization of the year by Institutional
Investor and International Financing Review in 1998).
Set forth below is summary information, based on management accounting data,
relating to Corporate and Institutional Clients, which is discussed in greater
detail under "--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations by Business Unit--UBS
Warburg--Corporate and Institutional Clients."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income before credit loss expense.......... 9,909 6,966 12,729 6,906
Credit loss expense.................................. 113 171 330 500
Personnel, general and administrative expenses....... 6,601 4,972 9,290 6,816
Depreciation and amortization........................ 330 393 763 692
------ ------ ------ ------
Operating profit (loss) before tax................... 2,865 1,430 2,346 (1,102)
====== ====== ====== ======
(at period end)
Average regulatory equity used....................... 9,850 10,750 10,050 13,300
Number of employees.................................. 12,730 13,148 12,694 13,794
</TABLE>
------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
--------------------------------------------------------------------------------
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UBS
--------------------------------------------------------------------------------
Business Areas. At 30 June 2000, Corporate and Institutional Clients operated
four main business areas that have been organized by the type of products and
services offered and their risk exposure. These four business areas consist of
Equities, Fixed Income, Corporate Finance and Treasury Products. The Corporate
Finance business area works with the Equities and Fixed Income business areas
through the Equity Capital Markets Group, the Debt Capital Markets Group and
Leveraged Finance to originate new equities capital markets business, fixed
income capital markets business and leveraged finance business. Consequently,
operating income from the Equity Capital Markets Group is shared between
Equities and Corporate Finance and operating income from the Debt Capital
Markets Group and Leveraged Finance is shared between Fixed Income and Corporate
Finance. The table below sets forth the operating income before credit loss
expense attributable to each of Corporate and Institutional Clients's main
business areas for the years ended 31 December 1999 and 1998:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
31 DECEMBER(1)
1999 1998
(CHF in millions)
---------------------------------------------------------------------------------
<S> <C> <C>
Equities.................................................... 5,724 3,253
Fixed Income................................................ 2,464 (267)
Corporate Finance........................................... 2,054 1,665
Treasury Products........................................... 1,805 2,351
Non-core business........................................... 682 (96)
------ -----
Total.................................................. 12,729 6,906
====== =====
</TABLE>
------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Equities. Equities is a leader in equity, equity-linked and equity derivative
products in primary markets and a large cross-border trader in secondary equity
markets. Equities' secondary market business represented over 60% of the
operating income from Equities in 1999. Equities' primary areas of
responsibility include:
- researching companies, industry sectors, geographic markets and macro and
economic trends;
- sales and trading of cash and derivative equity securities and equity
structured products; and
- structuring, originating, distributing and trading newly issued equity,
equity-linked and equity derivative products.
Through UBS's branches and affiliates, UBS is a member of most major stock
exchanges, including New York, London, Tokyo and Zurich. UBS also participates
in a number of electronic exchange ventures, including Tradepoint, through its
equity investment in TP Group Limited, and NYFIX Millennium L.L.C.
Fixed Income. Fixed Income structures, originates, trades and distributes a
variety of fixed income, banking and structured products. It also is responsible
for loan syndication and core-loan portfolio functions. Fixed Income serves a
broad client base consisting of investors and borrowers and offers a range of
fixed income products and services, including:
- interest rate based credit products, including loans and government bonds;
- a variety of banking products, such as structured finance and leveraged
finance products;
- principal finance services, which involves the purchase, origination and
securitization of credit products;
- investment grade, high-yield and emerging market bonds;
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UBS
--------------------------------------------------------------------------------
- credit-structured vehicles and credit derivatives, including credit-linked
notes and total return swaps;
- various derivative products; and
- structured products to meet clients' risk management needs.
Corporate Finance. Corporate Finance manages the relationships with UBS's large
supranational, corporate and sovereign clients. It provides a variety of
advisory services in areas such as mergers and acquisitions, strategic advisory
and restructuring. Corporate Finance also provides capital markets and leveraged
financing services in conjunction with the Equity Capital Markets Group, the
Debt Capital Markets Group and Leveraged Finance, as described above. Utilizing
UBS's existing resources, Corporate Finance's strategy is to further expand its
presence in targeted global sectors in the areas of mergers and acquisitions and
primary capital markets activities, including targeted sectors in the United
States. Corporate Finance's responsibilities include:
- mergers and acquisitions;
- country and global sector coverage;
- equity and equity-linked capital offerings, initial public offerings and
other public and private equity offerings in conjunction with the Equity
Capital Markets Group;
- investment grade and high-yield debt offerings in conjunction with the Debt
Capital Markets Group;
- leveraged debt offerings in conjunction with Leveraged Finance; and
- structured finance.
Treasury Products. Treasury Products serves institutional investors, banks,
sovereigns, corporate clients, as well as other retail and wholesale clients of
UBS's other divisions. Treasury Products' primary areas of responsibility
include:
- sales and trading of foreign exchange (spot and derivatives), precious
metals, short-term interest rate cash and derivative products and
exchange-traded derivatives;
- collateral trading, securities lending and repurchase agreements;
- bank note sales and distribution;
- foreign currency research; and
- UBS's alternative asset management business.
Clients. Corporate and Institutional Clients has a diverse global client base,
including institutional investors, corporations, governments and supranational
organizations. This diversity has allowed UBS to establish itself as a leading
investment bank headquartered in Europe and the leading distributor of non-U.S.
investment products to United States investors.
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--------------------------------------------------------------------------------
The table below sets forth the percentage of operating income attributable to
each category of clients for 1999 and 1998. The total operating income used to
calculate the percentage of operating income by client type includes only
operating income generated from or attributed to clients.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
31 DECEMBER
1999 1998
(% of total)
--------------------------------------------------------------------------
<S> <C> <C>
Corporations................................................ 26% 33%
Institutional investors..................................... 70% 61%
Governments and supranational organizations................. 4% 6%
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
e-commerce/Product Initiatives. The institutional client business worldwide is
rapidly moving to an electronic basis. UBS believes Corporate and Institutional
Clients is well positioned to capitalize on this trend. Recent e-commerce
initiatives include:
- Investment Banking On-Line (IBOL). IBOL provides extensive client
desktop capability from a single home page with direct access to prices,
research, trade ideas and analytical tools for Corporate and
Institutional Clients' equities, fixed income and treasury products
businesses. Corporate and Institutional Clients delivers electronic
research to over 5,000 clients and has signed up over 10,000 users. UBS
intends to expand IBOL to include wireless and video links.
- Electronic Transactions for Securities (ETS) and Electronic Transactions
for OTC Products (ETOP). ETS and ETOP provide a further rollout of
on-line order routing and trading capabilities for all securities,
foreign exchange and derivatives products. 30% of all institutional
orders are sent via the internet and 90% of all retail orders are
executed using straight through processing, or "STP."
- Corporate Finance On-Line (CFOL). The CFOL initiative is intended to
establish a secure connection for the exchange of transactional and
pricing information with corporate clients to support the execution and
origination of advisory mandates, as well as to create on-line
connectivity for capital markets participants.
- Debtweb. Using Debtweb, about 25% of all new bond issue volume in the
first quarter of 2000 volume was delivered on-line.
- DealKey. Designed for primary equity investors, it uses the web as an
additional channel for the distribution of value-added information
relating to current equity and equity-linked offerings.
- Transactional Websites. UBS has established transactional websites for
euro commercial paper and euro medium-term notes, including consolidated
site information links to euro credit markets, credit indices and bond
analytics.
- New Web Services. Other new web services include:
- KeyLink Web, which provides secure international electronic banking
for cash, foreign exchange and securities;
- Adviser Web, which relates to Australian equities; and
- Global eHelp Service Desk, which provides support for clients 24
hours a day, 6 days a week.
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--------------------------------------------------------------------------------
Providing superior advice and maintaining contacts with clients will be key to
Corporate and Institutional Clients' future success. UBS believes its e-commerce
initiatives will enhance its ability to add value to clients, as well as allow
it to extract value from the processing power and scale of its core business
processes and development standards, in order to maximize the benefits it can
achieve from technological innovations. Corporate and Institutional Clients
already processes 100,000 domestic and cross-border securities trades per day
automatically, and has the capacity to increase this amount five-fold within the
existing infrastructure.
Loan Portfolio. In 1998, UBS decided that Corporate and Institutional Clients'
loans and commitments that were (1) not part of the loan trading portfolio, (2)
not issued in conjunction with leveraged finance transactions or (3) not
directly supporting its core client relationships, would be separated from the
core activities of Corporate and Institutional Clients and wound down. As a
result of this initiative, Corporate and Institutional Clients' total loans and
committed and undrawn lines of credit have been reduced.
The following table sets forth information regarding the Corporate and
Institutional Clients loan portfolio before allowance for loan loss at 31
December 1999 and 1998.
<TABLE>
<CAPTION>
AS OF 31 DECEMBER
1999 1998
(CHF in millions)
-------------------------------------------------------------------------------
<S> <C> <C>
Due from banks.............................................. 25,891 62,272
Loans to customers.......................................... 56,374 72,425
------ -------
Total loans............................................... 82,265 134,697
====== =======
</TABLE>
See "--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Analysis of Risks--Credit Risk" for a more in-depth review of
UBS's credit portfolio and business, including a discussion of its impaired and
non-performing loans.
UBS Capital. The UBS Capital business unit of UBS Warburg is the private equity
business of UBS.
UBS Capital has increased the value of its investments substantially in recent
years with the book value of its investments increasing from about CHF 400
million at 31 December 1994 to about CHF 3.8 billion at 30 June 2000.
Until earlier this year, UBS Capital was managed as an independent division
within UBS. Following UBS's realignment, UBS Capital now operates within the UBS
Warburg business group. This is expected to further strengthen the business
synergies between the investment banking and private equity businesses, while
maintaining strong links between UBS Capital and UBS Switzerland.
UBS Capital has a local presence throughout major industrialized regions in
Europe, North America, Latin America and the Asia-Pacific region, with about 113
employees as of 30 June 2000. UBS Capital has offices in London, Zurich, New
York, Sao Paolo, Buenos Aires, Paris, The Hague, Munich, Milan, Singapore, Hong
Kong, Seoul, Sydney and Tokyo.
As a private equity group, UBS Capital's business involves investing in unlisted
companies, managing these investments over a medium-term time horizon to
increase their value, and "exiting" the investment in a manner that will
maximize the capital gain. UBS Capital seeks to make both majority and minority
equity investments in established and emerging unlisted companies, either with
UBS's own capital or through sponsored investment funds. Although the main focus
of UBS's investments is late-stage financing, such as management buyouts,
expansion or replacement capital, a minority of the portfolio targets early
stage investments in the technology and telecommunications sectors. UBS Capital
generally targets medium-sized businesses with enterprise values in the range of
CHF 75 million to CHF 1.5 billion.
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UBS
--------------------------------------------------------------------------------
In addition to its international specialization, UBS Capital endeavors to
differentiate itself from its competitors by creating and adding value by
working together with an investee company's management over a three- to six-year
period to develop the business and optimize the company's performance.
Set forth below is summary information, based on management accounting data,
relating to UBS Capital, which is discussed in greater detail under
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations by Business Unit--UBS Warburg--UBS Capital."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income......................................... 151 120 315 585
Personnel, general and administrative expenses........... 76 60 151 156
Depreciation and amortization............................ 4 3 7 1
----- ----- ----- -----
Operating profit before tax.............................. 71 57 157 428
===== ===== ===== =====
Average regulatory equity used........................... 500 300 340 250
(at period end)
Investments (at book value).............................. 3,765 2,422 2,993 1,784
Number of employees...................................... 113 111 116 122
</TABLE>
------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Competitive Position. Superior returns and the widespread recognition of
private equity as an alternative asset class has led to a substantial growth in
the number of private equity funds raised in recent years. The number and amount
of private equity funds raised has exceeded the number and amount of attractive
and available private equity investments. This has led to increased competition
among investment banks, investment funds and insurance companies and decreased
returns for private equity investors.
In spite of the changing environment, UBS believes that opportunities for
profitable investment will continue to arise in the private equity business. UBS
believes this potential will be enhanced by a number of factors working in
combination to produce a favorable business environment for astute market
participants. These factors include the introduction of the euro, the worldwide
trend of industrial consolidation, a growing awareness of the importance of
shareholder value and the increasing need to solve succession issues in
family-owned businesses.
Organizational Structure. UBS Capital is structured on a country and sector
approach and, as of 30 June 2000, had fourteen individual teams covering around
30 countries. UBS believes that UBS Capital's established local presence and
expertise, coupled with the global reach of its operations, generates the early
identification of opportunities and their timely and effective development.
UBS Capital's teams are divided geographically between Western Europe, Asia and
the Americas, which includes Latin America. UBS Capital's presence in the
Asia-Pacific region started in Singapore and now includes Australia and its new
offices in South Korea and Hong Kong.
Last year, UBS Capital established two private equity investment funds in the
Americas. One of these investment funds makes private equity investments
primarily in North America, while the other investment fund makes private equity
investments in Latin America. UBS is the largest beneficial investor in each of
the North America and Latin America funds.
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UBS
--------------------------------------------------------------------------------
In connection with the establishment of the new funds, UBS and the team managing
the investments of UBS Capital in the Americas formed two limited liability
company advisors, one to advise each fund. Each fund's advisor is jointly owned
by the managers and principals of the management team and by UBS. Effective 31
December 1999, the managers and principals of the management team resident in
the United States are no longer employed by UBS and are not employed by either
advisor. The remaining employees of UBS Capital in the Americas are either
members or employees of the respective advisors.
Investment Portfolio. UBS Capital's investment portfolio had a book value of
approximately CHF 3.8 billion and an estimated fair value of approximately CHF
5.2 billion at 30 June 2000. To augment its competitive strengths, UBS Capital
plans to gradually increase its annual investment rate, targeting a portfolio
book value of CHF 5 billion in committed capital from UBS and CHF 5 billion from
third parties.
UBS Capital has designed its portfolio to reduce UBS's exposure to risk by:
- geographically diversifying its portfolio and minimizing concentration of
investment in specific locations;
- diversifying by industry sector to obtain a good mix between manufacturing and
services sectors;
- investing a minority of the portfolio in earlier stage growth opportunities,
such as technology and telecommunications; and
- focusing on later-stage investments, such as management buy-outs of existing
businesses.
The following table provides information regarding UBS Capital's investment
portfolio by geographic region, by industry sector and by age of investment at
30 June 2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions; all amounts are book values)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GEOGRAPHIC REGION (BY HEADQUARTERS OF
INVESTEE)
North America............................... 1,538 1,389 939
Europe...................................... 1,650 1,153 689
Latin America............................... 238 217 123
Asia-Pacific................................ 339 234 33
------ ------ ------
3,765 2,993 1,784
------ ------ ------
------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions; all amounts are book values)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INDUSTRY SECTOR (BY INDUSTRY CLASSIFICATION
CODE)
Consumer related............................ 820 610 400
Diversified industrials..................... 638 587 376
Transportation.............................. 768 605 186
Communications.............................. 369 326 208
Computer related............................ 353 282 109
Energy...................................... 190 167 153
Other electronics related................... 127 38 32
</TABLE>
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UBS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions; all amounts are book values)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other manufacturing......................... 67 45 53
Chemicals and materials..................... 21 23 52
Industrial products and services............ 84 48 60
Others...................................... 328 262 155
------ ------ ------
3,765 2,993 1,784
------ ------ ------
------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions; all amounts are book values)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AGING (BY DATE OF INITIAL INVESTMENT)
Pre-1994.................................... 70 89 112
1994........................................ 220 199 195
1995........................................ 310 308 282
1996........................................ 190 204 183
1997........................................ 492 496 450
1998........................................ 709 718 562
1999........................................ 1,071 979 --
2000........................................ 703 -- --
------ ------ ------
3,765 2,993 1,784
------ ------ ------
------ ------ ------
</TABLE>
At 30 June 2000, approximately 74% of the investment portfolio was three years
old or less. Generally, investments are sold, and operating income recognized,
between the third and the sixth year after the initial investment.
Investment Process. At 30 June 2000, 85% of the book value of UBS Capital's
investments were late-stage at the time of its investment. The following table
provides information about UBS Capital's investment portfolio by investment
stage, at 30 June 2000 and 31 December 1999 and 1998, as determined at the time
of UBS Capital's investment.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999
(CHF in millions) 31 DECEMBER 1998
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Early stage............................. 582 488 49
Late stage.............................. 3,183 2,505 1,735
------ ------ ------
3,765 2,993 1,784
------ ------ ------
------ ------ ------
</TABLE>
Investment opportunities originate from a variety of sources, including from UBS
Switzerland and UBS Warburg. UBS Capital's investment policy concentrates on
five "value drivers":
- negotiate an attractive entry price;
- increase the company's efficiency;
- implement a sales growth strategy;
- repay company debt and reduce leverage; and
- achieve an exit at a higher multiple than the entry price, or what UBS
Capital calls "multiple arbitrage."
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UBS
--------------------------------------------------------------------------------
Where appropriate, UBS Capital tries to participate actively with the management
of its investee companies in developing their businesses over the medium term
(three to six years) in order to optimize their performance. UBS Capital's exit
strategies for the businesses include direct sales to strategic buyers, initial
public offerings, leveraged recapitalizations and sales to other financial
sponsors.
More recently, given the industry trend toward larger sized transactions, UBS
Capital has also begun to concentrate on the formation of four regional
funds -- Europe, North America, Latin America and Asia -- including the two
investment funds in the Americas referred to above. In late 1999, UBS Capital
launched the $1 billion investment fund targeting North America to which it has
committed up to $500 million. In late 1999, UBS Capital also launched the $500
million fund targeting Latin America, which UBS has committed to fund fully with
the option to permit third-party investors to commit up to 25% of such funds. In
addition to these funds, two new funds were launched in Europe during 1999.
Phildrew Ventures V, a United Kingdom private equity fund with a fund size of
GBP 330 million, and CapVis Equity Partners, which is Switzerland's largest
private equity fund with a fund size of CHF 300 million. Phildrew Ventures is
UBS Capital's vehicle for investing in the United Kingdom and Ireland and CapVis
Equity Partners is UBS Capital's vehicle for investing in Switzerland and
Austria. A European fund and an Asian fund are expected to be launched in the
near future.
Private Clients. UBS Warburg's Private Clients business unit provides onshore
private banking services for high net worth individuals in key markets
worldwide.
Private Clients' target markets include Germany, France, Italy, Spain, the
United Kingdom, the United States, Japan, Australia and Taiwan.
Private Clients had CHF 37 billion of assets under management at 30 June 2000
and 1,277 employees. In the first half of 2000, Private Clients earned revenues
after credit loss expense of CHF 133 million.
The business is mainly in the relatively early stages of start-up operations
and, with the exception of Germany and Australia, where the businesses are based
around an established private bank and an existing domestic brokerage business,
Private Clients' franchise is small.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating income after credit loss expense........ 133 93 194 190
Personnel, general and administrative expenses.... 365 216 481 294
Depreciation and amortization..................... 14 18 40 29
----- ----- ----- ----
Operating loss before tax......................... (246) (141) (327) (133)
===== ===== ===== ====
Average regulatory equity used.................... 340 282 289 229
(at period end)
Assets under management (CHF in billions)......... 37 29 36 27
Number of employees............................... 1,277 1,167 1,386 722
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Organizational Structure. The offshore Private Clients business was moved to
UBS Warburg in February 2000. UBS Warburg aims to take advantage of the
considerable growth potential resulting from putting investment banking and
investment services activities for private clients under one roof.
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UBS
--------------------------------------------------------------------------------
The decision to bring Private Clients and the e-services business, described
below, closer together offers many potential synergies including the ability to
enrich the private banking offering with a full complement of online investment
information and execution capabilities. Significant savings are possible in the
medium term from a shared information technology platform as well as shared
operations and infrastructure and a coordinated sales and distribution process.
Products and Services. Private Clients will focus on delivering a sophisticated
product offering to its high net worth client base, including the specifically
targeted executive and entrepreneur segments. Traditional private banking
services will be combined with investment banking innovation. For example,
Private Clients will further develop its innovative products allowing clients to
release value from own-company shareholdings or options.
UBS believes that on-line capabilities should be an integrated part of the
service offering. As such, the e-services initiative described below, which will
target affluent, advice-seeking private investors, is moving towards an
integrated product and infrastructure approach with Private Clients in Europe.
Private Clients also will increasingly collaborate with UBS Warburg's Corporate
Finance team for client introductions and support on clients' corporate needs.
e-services. e-services is a new business initiative started in the third
quarter of 1999. e-services intends to offer personalized investment and
advisory services targeted at affluent European individuals, and will be
launched progressively in Germany and thereafter in the United Kingdom and other
European countries, starting in late 2000. e-services plans to implement an
integrated multi-channel "clicks and mortar" distribution concept, including
online channels, call centers and investment centers. e-services had 226
employees at 30 June 2000.
e-services intends to deliver a distinctive set of services, including advanced
financial planning and asset allocation, and investment products such as UBS and
third-party funds, securities and pension products.
Organizational Structure. e-services continues to build its organizational
structure and establish critical elements of its infrastructure, marketing
approach and product offering. The infrastructure component has long lead times
and e-services has made significant progress. e-services has formed major
alliances with major information technology vendors, including Siebel Systems
Incorporated, Broadvision Incorporated and Artificial Life Incorporated, which
have accelerated time-to-market considerably.
e-services has completed the full deployment of its technical platform and
software infrastructure and has established customer call centers in Edinburgh,
Scotland and Maastricht, Holland.
Total expenditures for e-services were CHF 144 million in the first half of 2000
and are expected to reach CHF 310 million this year, and comparable amounts over
the next few years, although future costs will depend on the exact roll-out
schedule, and the possibility of partnering to share cost. e-services does not
expect to record revenues until 2001.
Target Clients. e-services will target advice-seeking, affluent investors in
major European markets. The value proposition is tailored to investors with a
need for quick access, quality advice and flawless execution. The business will
use online channels, telephone service centers and investment centers to provide
multi-channel client service.
Products and Services. The e-services product offering will be based around a
central cash management account, with capabilities for a broad base of products,
services and advice using a sophisticated array of tools covering financial
planning, financial analysis, asset allocation and decision support.
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<PAGE> 43
UBS
--------------------------------------------------------------------------------
e-services is adopting an open architecture model, integrating and distributing
third-party content where this will enrich the service offering.
Marketing and Distribution. A key focus on acquiring clients will be directed
at establishing deeper relationships with intermediaries and aggregators.
These companies, be they full-service brokers, online discount brokers, online
banks, private banks or independent financial advisors, are increasingly faced
with greater demands for investment services and products in an intensively
competitive environment. UBS is strongly positioned to act as a lead supplier of
content, products, platforms and market access to these companies. Through this
channel UBS expects to be able to increase its order flow, generate incremental
revenues, improve its understanding of the mass market segment, and further
brand UBS Warburg as a leading supplier of investment advisory content and
investment products.
Corporate Center
In the context of a global integrated investment services firm, the role of
Corporate Center is to contribute to the long-term maximization of shareholder
value by:
- competitively positioning UBS in growing market places with an optimal
business model and adequate resources;
- maintaining an appropriate balance between risk and profit to provide
financial stability on a Group-wide basis; and
- ensuring that the divisions, while being accountable for their results,
operate as a coherent and effective Group with a common set of values and
principles.
To perform its role, Corporate Center establishes standards and principles to be
applied by the divisions, thereby permitting UBS to minimize staffing levels
within Corporate Center.
The following functions are part of Corporate Center:
- Group internal audit, which reports directly to the Chairman of the Board of
Directors in order to ensure its operational independence;
- functions reporting to the Chief Executive Officer, including human resources
policies and standards, communications with staff, public and media,
marketing and brand management, and the Group's general counsel; and
- functions reporting to the Chief Financial Officer, including risk control,
credit risk management, financial control and management, Group Treasury,
Group Strategy and communications with regulators, rating agencies, investors
and analysts.
Additionally, the Corporate Center plays an active role with regard to funding,
capital and balance sheet management and management of foreign currency
earnings.
Competition
UBS operates in a highly competitive environment in all of its businesses and
markets. Many large financial services groups compete with UBS in the provision
of sophisticated banking, investment banking and investment management services
to corporate, institutional and individual customers on a global basis, while
local banks and other financial services companies, which may be of substantial
size, often provide significant competition within national markets. UBS also
competes with other banks, money market funds and mutual funds for deposits,
investments, and other sources of funds. In
--------------------------------------------------------------------------------
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<PAGE> 44
UBS
--------------------------------------------------------------------------------
some jurisdictions, many of UBS's competitors are not subject to the same
regulatory restrictions that apply to UBS.
Employees
At 30 June 2000, UBS had 47,744 employees. Set forth below are the number of
employees of UBS broken down by its eight business units and Corporate Center at
30 June 2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
AS OF AS OF AS OF
30 JUNE 31 DECEMBER 31 DECEMBER
2000 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Private and Corporate Clients........................... 22,270 24,098 24,043
Private Banking......................................... 7,447 7,256 6,546
Institutional Asset Management.......................... 1,712 1,653 1,497
Investment Funds/GAM.................................... 1,038 923 366
Corporate and Institutional Clients..................... 12,730 12,694 13,794
UBS Capital............................................. 113 116 122
Private Clients......................................... 1,277 1,386 722
e-services.............................................. 226 70 0
Corporate Center........................................ 931 862 921
------- ----------- -----------
Total.............................................. 47,744 49,058 48,011
======= =========== ===========
</TABLE>
The decrease in headcount in the first half of 2000 was mainly attributable to
the transfer of the Systor business, an IT services provider, from Private and
Corporate Clients to become a venture capital investment of UBS Capital and to
1998 merger-related savings in Private and Corporate Clients. These were partly
offset by increases due to the continuing build up of the e-services business,
which will launch later this year, and to investment in growth initiatives in
the Investment Funds business area.
The increase in headcount in 1999 was mainly attributable to expansion of UBS
Warburg's Private Clients business unit, the onshore private banking business
outside Switzerland, and by the acquisitions of Global Asset Management and
Allegis Realty Investors LLC in December 1999, partially offset by decreases in
UBS Warburg's Corporate and Institutional Clients business unit, relating to the
winding down of non-core businesses and 1998 merger-related reductions.
UBS has not experienced any significant strike, work stoppage or labor dispute
in recent years. UBS considers its relations with employees to be good.
Regulation and Supervision
UBS's operations throughout the world are regulated and supervised by the
relevant central banks and regulatory authorities in each of the jurisdictions
in which it has offices, branches and subsidiaries. These authorities impose
reserve and reporting requirements and controls on banks, including those
relating to capital adequacy, depositor protection and prudential supervision.
In addition, a number of countries in which UBS operates impose additional
limitations on, or that affect, foreign or foreign-owned or controlled banks and
financial institutions, including:
- restrictions on the opening of local offices, branches or subsidiaries and
the types of banking and non-banking activities that may be conducted by
those local offices, branches or subsidiaries;
- restrictions on the acquisition of local banks or requiring a specified
percentage of local ownership; and
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41
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UBS
--------------------------------------------------------------------------------
- restrictions on investment and other financial flows entering or leaving the
country.
Changes in the supervisory and regulatory regimes of the countries where UBS
operates will determine to some degree its ability to expand into new markets,
the services and products that it will be able to offer in those markets and how
it structures specific operations.
The most important jurisdictions that regulate and supervise UBS's activities
are Switzerland, the United Kingdom and the United States.
Regulation and Supervision in Switzerland. UBS is regulated in Switzerland
under a system established by the Swiss Federal Law Relating to Banks and
Savings Banks of 8 November 1934, as amended, and the related Implementing
Ordinance of 17 May 1972, as amended, or the "FBL." Under the FBL, banks in
Switzerland are permitted to engage in a full range of financial services
activities, including commercial banking, investment banking and funds
management. Banking groups may also engage in insurance activities, but these
must be undertaken through a separate subsidiary.
The FBL establishes a framework for supervision by the Federal Banking
Commission, or "FBC." The FBC implements this framework through the issuance of
Ordinances or Circular Letters to the banks that it supervises. In addition, the
regulatory framework in Switzerland relies on self-regulation through the Swiss
Bankers Association, or "SBA." The SBA issues guidelines to banks on conduct of
business issues. Recent examples of such guidelines include:
- The Due Diligence Convention, which established know your customer standards
to protect against money laundering;
- Risk Management Guidelines for Trading and for the Use of Derivatives, which
set out standards based on the recommendations on this subject from the Group
of Thirty, The Basel Committee on Banking Supervision and The International
Organization of Securities Commissions; and
- Portfolio Management Guidelines, which set standards for banks when managing
customers funds and administering assets on their behalf.
Mandatory Annual Audits. The approach to supervising banks in Switzerland
places a particular emphasis on the role of the external auditor. UBS's
auditors, who must be approved by the FBC to perform this role, are required to
submit an annual report to the FBC that assesses UBS's financial situation as
well as its compliance with the regulations and self-regulatory guidelines that
are applicable to its business. If the audit reveals violations or other
irregularities, the independent auditors must (1) inform the FBC if a correction
is not carried out within a designated time limit or (2) inform the FBC
immediately in the case of serious violations or irregularities. The FBC may
issue directives as necessary to require a bank to address any issues identified
by the auditors and may also appoint an expert to act as an observer of a bank
if the claims of the bank's creditors appear to be seriously jeopardized.
Supervision by the FBC. Since July 1999, the FBC has established a dedicated
unit called the Large Banking Groups Department which focuses solely on the
supervision of UBS AG and the Credit Suisse Group. The group, which consists of
experts covering all the main business activities in which UBS operates,
supervises UBS directly through regular meetings with management as well as
on-site visits. The group also coordinates the activities of the FBC with those
of UBS's main overseas supervisors as well as with those of the external
auditors.
Capital Requirements. For purposes of complying with Swiss capital
requirements, bank capital is divided into three main categories:
- core (or Tier 1) capital,
- supplementary (or Tier 2) capital, and
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<PAGE> 46
UBS
--------------------------------------------------------------------------------
- additional (or Tier 3) capital.
Tier 1 capital primarily includes paid-in share capital, reserves (defined to
include retained earnings) and capital participations of minority shareholders
in fully consolidated subsidiaries, and is reduced by, among other items, the
bank's holdings of its own shares. Tier 1 capital is supplemented, for capital
adequacy purposes, by Tier 2 capital, which consists of, among other things, two
categories of subordinated debt instruments that may be issued by a bank, and by
Tier 3 capital, which consists of certain subordinated debt obligations. The use
of Tier 2 and Tier 3 capital in complying with capital ratio requirements is,
however, subject to limitations.
Under Swiss law, a bank must maintain a minimum capital ratio of 8%, calculated
by dividing adjusted core and supplementary capital by aggregate risk-weighted
assets. This standard must be met on both a consolidated and an unconsolidated
basis. UBS is required to file a statement of its required and existing capital
resources, together with its annual statement of condition and interim balance
sheet, with both the FBC and the Swiss National Bank.
Liquidity Requirements. Under Swiss law, banks are required to maintain
specified measures of primary and secondary liquidity. Primary liquidity is
measured by comparing Swiss franc-denominated liabilities to liquid assets in
Swiss francs. For this purpose, liabilities are defined as balances due to
banks, due on demand or due within three months, as well as 20% of deposits in
savings and similar accounts. Under current law, UBS's liquid assets must be
maintained at the level of at least 2.5% of these kinds of liabilities.
To measure secondary liquidity, assets maturing within one month which are
readily marketable and suitable for offsetting are subtracted from the
short-term and suitable for offsetting liabilities due to banks on demand or
maturing within one month, time deposits repayable within one month and certain
other liabilities maturing within one month (such as debentures, cash bonds and
cash certificates). Any excess of such liabilities remaining after this
calculation is then added to the sum of 50% of demand deposits and certain other
deposit accounts that have no restrictions on withdrawal, and 15% of thrift,
deposit and savings book accounts as well as similar accounts that are subject
to restrictions on withdrawal. The total of UBS's liquid and readily marketable
assets must be at least equal to 33% of the short-term liabilities as calculated
above.
UBS is required to file monthly statements reflecting its primary liquidity
position and quarterly statements reflecting its secondary liquidity position.
Disclosures to the Swiss National Bank. Although the primary responsibility for
supervision of banks under the FBL lies with the FBC, UBS also submits an annual
statement of condition and detailed monthly interim balance sheets to the Swiss
National Bank. The Swiss National Bank may require further disclosures from UBS
concerning its financial condition as well as other information relevant to
regulatory oversight by the Swiss National Bank.
Regulation and Supervision in the United States.
Banking Regulation. UBS's operations in the United States are subject to a
variety of regulatory regimes. UBS maintains branches in California,
Connecticut, Illinois and New York and agencies in Florida and Texas. UBS refers
to these as its U.S. "banking offices." UBS's California branches are located in
Los Angeles and San Francisco and are licensed by the Office of the Comptroller
of the Currency. Each of UBS's other U.S. banking offices is licensed by the
state banking authority of the state in which it is located. Each U.S. banking
office is subject to regulation and examination by its licensing authority. In
addition, the Board of Governors of the Federal Reserve System exercises
examination and regulatory authority over UBS's state-licensed U.S. banking
offices. None of UBS's U.S. banking offices are insured by the Federal Deposit
Insurance Corporation. The regulation of UBS's
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<PAGE> 47
UBS
--------------------------------------------------------------------------------
U.S. banking offices imposes restrictions on the activities of those offices, as
well as prudential restrictions, such as limits on extensions of credit to a
single borrower, including UBS subsidiaries.
The licensing authority of each U.S. banking office has the authority to take
possession of the business and property of the office it licenses in certain
circumstances. Such circumstances generally include violations of law, unsafe
business practices and insolvency. So long as UBS maintains one or more federal
branches, such as its California branches, state insolvency regimes that would
otherwise be applicable to its state licensed offices may be preempted by U.S.
federal law. As a result, if the Office of the Comptroller of the Currency
exercised its authority over UBS's U.S. banking offices pursuant to federal law
in the event of a UBS insolvency, all of UBS's U.S. assets would be applied
first to satisfy creditors of its U.S. banking offices as a group, and then made
available for application pursuant to any Swiss insolvency proceeding.
In addition to the direct regulation of its U.S. banking offices, operating its
U.S. banking offices subjects UBS to regulation by the Board of Governors of the
Federal Reserve System under various laws, including the International Banking
Act of 1978, as amended, and the Bank Holding Company Act of 1956, as amended.
The Bank Holding Company Act imposes significant restrictions on UBS's U.S.
nonbanking operations and on its worldwide holdings of equity in companies
operating in the United States. Historically, UBS's U.S. nonbanking activities
were principally limited to activities that the Board of Governors of the
Federal Reserve System found to be so "closely related to banking as to be a
proper incident thereto." Moreover, prior approval by the Board of Governors of
the Federal Reserve System has been required to engage in new activities and to
make acquisitions in the United States.
The Gramm-Leach-Bliley Financial Modernization Act of 1999 was recently enacted,
liberalizing the restrictions on the nonbanking activities of banking
organizations, including non-U.S. banks operating U.S. Banking Offices. The
Gramm-Leach-Bliley Act:
- allows bank holding companies meeting management, capital and, in the case of
companies owning FDIC-insured banks, Community Reinvestment Act standards to
engage in a substantially broader range of nonbanking activities than
previously was permissible, including insurance underwriting and making
merchant banking investments;
- allows insurers and other financial services companies to acquire banks;
- removes various restrictions that previously applied to bank holding company
ownership of securities firms and mutual fund advisory companies; and
- revised the overall regulatory structure applicable to bank holding
companies, including those that also engage in insurance and securities
operations.
This part of the Gramm-Leach-Bliley Act became effective on 11 March 2000. On 10
April 2000, UBS AG was designated a "financial holding company" under the
Gramm-Leach-Bliley Act, which generally permits it to exercise the new powers
granted by that act.
The Gramm-Leach-Bliley Act will also modify other current financial laws,
including laws related to the conduct of securities activities by U.S. banks and
U.S. banking offices. As a result, UBS may relocate certain activities now
conducted by its U.S. banking offices to a UBS subsidiary or elsewhere.
Other. In the United States, UBS's U.S. registered broker-dealer is regulated
by the SEC as a registered broker-dealer. Broker-dealers are subject to
regulations that cover all aspects of the securities business, including:
- sales methods,
- trade practices among broker-dealers,
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UBS
--------------------------------------------------------------------------------
- use and safekeeping of customers' funds and securities,
- capital structure,
- record-keeping,
- the financing of customers' purchases, and
- the conduct of directors, officers and employees.
In addition, UBS's U.S. registered broker-dealer is a member of and regulated by
the New York Stock Exchange and is regulated by the individual state securities
authorities in the states in which it operates.
These U.S. government agencies and self-regulatory organizations, as well as
state securities commissions in the United States, are empowered to conduct
administrative proceedings that can result in censure, fine, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer or its
directors, officers or employees. UBS's U.S. commodities-related businesses are
subject to similar regulation.
Regulation and Supervision in the United Kingdom. UBS operates in the United
Kingdom under a regulatory regime that is undergoing comprehensive restructuring
aimed at implementing the Financial Services Authority as the United Kingdom's
unified regulator. Through 1999, UBS was regulated by the Securities and Futures
Authority Limited in respect of its investment banking, individual asset
management, brokerage and principal trading activities, and by the Investment
Management Regulatory Organization in respect of its institutional asset
management and fund management activities. Commencing in 2000, however, the
responsibilities of the Securities and Futures Authority Limited and Investment
Management Regulatory Organization have been taken over by the Financial
Services Authority. Some of UBS's subsidiaries and affiliates are also regulated
by the London Stock Exchange and other United Kingdom securities and commodities
exchanges of which UBS is a member. The investment services that are subject to
oversight by United Kingdom regulators are regulated in accordance with European
Union directives requiring, among other things, compliance with certain capital
adequacy standards, customer protection requirements and conduct of business
rules. These standards, requirements and rules are similarly implemented, under
the same directives, throughout the European Union and are broadly comparable in
scope and purpose to the regulatory capital and customer protection requirements
imposed under applicable U.S. law.
DESCRIPTION OF PROPERTY
At 30 June 2000, UBS operated about 1,230 offices and branches worldwide, of
which about 82.7% were in Switzerland. Of the remaining 17.3%, 8.6% were in
Europe, 5.8% were in the Americas and 2.9% were in Asia. Approximately 43% of
the offices and branches in Switzerland are owned directly by UBS with the
remainder, along with most of UBS's offices outside Switzerland, being held
under commercial leases. The premises are subject to continuous maintenance and
upgrading and are considered suitable and adequate for UBS's current and
anticipated operations.
LEGAL PROCEEDINGS
Except as described below, there are no legal or arbitration proceedings pending
or threatened of which UBS is aware involving UBS which may have or have had a
significant effect on the financial position of UBS taken as a whole.
In the United States, several class action lawsuits, in relation to what is
known as the Holocaust affair, have been brought against UBS, as legal successor
to Swiss Bank Corporation and Union Bank of Switzerland, in the United States
District Court for the Eastern District of New York (Brooklyn). These
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UBS
--------------------------------------------------------------------------------
lawsuits were initially filed in October 1996. Credit Suisse Group has been
designated as a defendant alongside UBS. On 12 August 1998, a settlement was
reached between the parties. This settlement provides for a payment by the
defendant banks to the plaintiffs, under certain terms and conditions, of an
aggregate amount of $1.25 billion. UBS agreed to contribute up to two-thirds of
this amount.
To the extent that other Swiss companies agreed to participate in this fund, and
to the extent of applicable payments to beneficiaries of eligible dormant
accounts, UBS's share was to be reduced. For these purposes, dormant accounts
are defined as accounts with banks and other financial institutions prior to 9
May 1945 which are part of the settlement agreement. In Switzerland, dormant or
abandoned accounts remain on the books of the bank in perpetuity, until claimed
or settled. Therefore, if such dormant or abandoned accounts are identified as
balances that should be used to fund the settlement, the payment of cash to
claimants causes the account to be liquidated from the company's records,
thereby reducing cash and reducing the dormant account liability, as well as the
remaining settlement amount liability. Accordingly, to the extent that such
accounts are identified at institutions other than UBS, UBS's exposure to this
matter will be reduced. Based on UBS's estimate of such expected contributions,
UBS provided a reserve of $610 million (CHF 842 million) in 1998 and an
additional $95 million (CHF 154 million) in 1999.
During the second quarter of 2000, as part of the continuing review of this
matter, UBS recognized that the amounts in dormant accounts attributable to
Holocaust victims at UBS as well as at other Swiss banks are vastly below the
initially expected level, and that UBS needed to adjust its reserve. In
addition, on 26 July 2000, Judge Korman, the presiding judge in this matter,
approved the settlement agreement. The final settlement approved by the judge
describes a new mechanism to include Holocaust-related insurance claims for
insurance companies. As a consequence, contributions by insurance companies will
not serve to offset the banks' liabilities, contrary to UBS's previous
understanding. As a result, in the second quarter of 2000, UBS provided an
additional reserve of $122 million (CHF 200 million), bringing the total
provision to $827 million (CHF 1,196 million). The difference between the amount
accrued and the maximum potential liability of $833 million represents amounts
specifically identified in UBS's customer accounts that are eligible for offset.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no restrictions under UBS's Articles of Association or Swiss law,
presently in force, that limit the right of non-resident or foreign owners to
hold UBS's securities freely or, when entitled, to vote UBS's securities freely.
There are currently no Swiss foreign exchange controls or laws restricting the
import or export of capital. In addition, there are currently no restrictions
under Swiss law affecting the remittance of dividends, interest or other
payments to non-resident holders of UBS securities.
CONTROL OF UBS
As far as UBS is aware, UBS is neither directly nor indirectly owned nor
controlled by another corporation or any government and there are no
arrangements in place the operation of which may result in a change in control.
As of 31 August 2000, UBS's directors and executive officers as a group
beneficially held 2,368,412 of UBS's issued and outstanding ordinary shares.
However, none of UBS's directors or officers owns 1% or more of any class of
UBS's securities. For the purposes of this analysis, UBS's executive officers
are the members of the UBS Group Managing Board. The Group Managing Board
consists of the seven members of the Group Executive Board, and 26 members who
hold senior positions at the top level of UBS's organization in the Business
Groups and Corporate Center. See also "--Options to Purchase Securities from
UBS" on page 51 for a discussion of options and warrants issued by UBS.
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--------------------------------------------------------------------------------
DIRECTORS AND OFFICERS OF UBS
The UBS Board of Directors has ultimate responsibility for the strategic
direction of UBS's business and the supervision and control of UBS's executive
management. The Board of Directors consists exclusively of non-executive
directors in accordance with the Swiss Banking Law. Each member of the Board is
elected at the annual general meeting of shareholders for a four-year term.
However, at the initial annual general meeting, the terms varied between one and
four years to provide for staggered terms for Board members. In order to ensure
its independence, the Chief Executive Officer of UBS is not permitted to be a
member of the Board of Directors. The UBS Articles of Association and the UBS
Organizational Regulations prescribe the presentation of information on UBS's
affairs to the members of the Board of Directors.
The UBS Group Executive Board is UBS's most senior executive body. It assumes
overall responsibility for the development of UBS's strategies, and the
implementation of the results of these strategies. The UBS Group Executive Board
is comprised of seven members, namely the UBS Chief Executive Officer, the Chief
Executive Officer of the three Business Groups, the Private Banking business
unit and of UBS Capital, and the UBS Chief Financial Officer. The UBS Group
Executive Board normally convenes bi-weekly.
THE BOARD OF DIRECTORS
Information concerning the members of the Board of Directors is set forth in the
table below.
<TABLE>
<CAPTION>
EXPIRATION OF
YEAR OF INITIAL CURRENT TERM
NAME AND BUSINESS ADDRESS POSITION HELD APPOINTMENT OF OFFICE
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alex Krauer Chairman
UBS AG Member of the Audit Supervisory Board 1998 2002*
Bahnhofstrasse 45
8021 Zurich
Alberto Togni Vice Chairman
UBS AG Chairman of the Audit Supervisory Board 1998 2001
Bahnhofstrasse 45
8021 Zurich
Markus Kundig Vice Chairman
P.O. Box 4463 Member of the Audit Supervisory Board 1998 2002
6304 Zug
Peter Bockli Chairman of the Audit Committee 1998 2003
Bockli, Thomann & Partners
St. Jakobs-Strasse 41
P.O. Box 2348
4002 Basle
</TABLE>
---------------
<TABLE>
<S> <C> <C> <C>
*On 11 October 2000, Alex Krauer announced that he would step down from his function as Chairman of
the Board of Directors after the Annual General Meeting in April 2001. See Appendix A for more
information.
</TABLE>
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UBS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXPIRATION OF
YEAR OF INITIAL CURRENT TERM
NAME AND BUSINESS ADDRESS POSITION HELD APPOINTMENT OF OFFICE
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rolf A. Meyer Member of the Audit Committee 1998 2003
Ciba Spezialitatenchemise
AG
P.O. Box 343
4002 Basle
Hans Peter Ming Board Member 1998 2004
Silka Finanz AG
Wiesenstrasse 7
8008 Zurich
Andreas Reinhart Member of the Audit Committee 1998 2004
Gebruder Volkart Holding AG
P.O. Box 343
8401 Winterhur
Eric Honegger Board Member 1999 2003
SAir Group
8058 Zurich-Airport
</TABLE>
Alex Krauer, the Chairman of the Board of Directors, joined the Board of
Directors of Swiss Bank Corporation in 1988. In 1994, he became First
Vice-Chairman of Swiss Bank Corporation, and he became Vice-Chairman of UBS AG
in 1998. Mr. Krauer was born on June 3, 1931.
Alberto Togni, Vice Chairman of the Board of Directors, has served with UBS
since 1959. Most recently, Mr. Togni served from 1994 to 1997 as the Chief Risk
Officer and a member of the Group Executive Committee for Swiss Bank
Corporation. In 1993, he was the Head of Commercial Division, and in 1987, he
became the General Manager and a member of the Executive Board. Prior to that,
he was the Central Manager and a Member of the Executive Board; a Senior Vice
President, Zurich Office, from 1978 to 1980; a Senior Vice President and Head of
the New York Branch from 1976 to 1978; and from 1970 to 1975 he was in the Tokyo
Office, serving as the head of that office from 1971. In 1969, Mr. Togni was
Swiss Bank Corporation's Representative for the Middle East in Beirut; and from
1959 to 1969, he completed professional training at the Lausanne and New York
offices of Swiss Bank Corporation, and completed assignments in various
divisions of the Zurich Office and General Management. Mr. Togni serves as a
director of Daimler-Benz Holding AG, Zurich; Danzas Holding AG, Basel; Unilever
(Schweiz) AG, Zurich; and Swiss National Bank, Zurich. Mr. Togni was born on
October 30, 1938.
Markus Kundig, Vice Chairman of the Board of Directors, also serves as the
Chairman of the Board of Directors of LZ Medien Holding AG; the Vice Chairman of
the Board of Directors of Clariant; and as a member of the Boards of Directors
of Metro International AG, Merck AG and Pelikan Holding AG. Mr. Kundig was born
on October 12, 1931.
Peter Bockli, the Chairman of the Audit Committee and a member of the Board of
Directors, is a partner in the law office of Bockli Thomann & Partners. He is a
member of the Board of Directors of Nestle SA, and Firmenich. Mr. Bockli was
born on May 7, 1936.
Rolf A. Meyer, who is a member of the Audit Committee, is the Chairman of the
Board of Ciba Specialty Chemicals. He is also a member of the Board of the Swiss
Stock Exchange. Mr. Meyer was born on October 31, 1943.
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UBS
--------------------------------------------------------------------------------
Hans Peter Ming, a member of the Board of Directors, is the Chairman of the
Board of Directors of SIKA Finanz AG. Mr. Ming is also a member of the Board of
Directors of Swiss Steel. Mr. Ming was born on October 12, 1938.
Andreas Reinhart, a member of the Audit Committee, is the owner and Chairman of
Volkart Group. He is also a member of the Board of Directors of Volkart
Foundation and Volkart Vision. Mr. Reinhart was born on December 24, 1944.
Eric Honneger, a member of the Board of Directors, is the Vice Chairman (and
Chairman designate) of the Board of Directors of SAirGroup. He is also the
Chairman of the Board of Directors of Neue Zurcher Zeitung. Mr. Honneger was
born on April 29, 1946.
THE GROUP EXECUTIVE BOARD
Information concerning the members of the Group Executive Board is set forth
below:
<TABLE>
<CAPTION>
YEAR OF INITIAL
NAME POSITION HELD APPOINTMENT
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Marcel Ospel President and Group Chief Executive Officer 1998
Luqman Arnold Chief Financial Officer 1999
Georges Gagnebin Chief Executive Officer of Private Banking Business 2000
Unit
Markus Granziol Chairman and Chief Executive of UBS Warburg 1999
Stephan Haeringer Chief Executive Officer of UBS Switzerland and of 1998
Private and Corporate Clients Business Unit
Pierre de Weck Chief Executive Officer of UBS Capital 1998
Peter A. Wuffli Chief Executive Officer of UBS Asset Management 1998
</TABLE>
The business address of all members of the Group Executive Board is UBS AG,
Bahnhofstrasse 45, Zurich, Switzerland.
Marcel Ospel, the Group Chief Executive Officer, joined Swiss Bank Corporation
in the Central Planning and Marketing Division in 1977. Most recently, he was
the President and Group Chief Executive Officer of SBC, from 1996 to 1998. Prior
to that, he was CEO of SBC Warburg. In 1990, he became a member of the Executive
Board. From 1987 to 1990, he served as Senior Vice President of SBC, in charge
of Securities Trading and Sales. From 1984 through 1987 he was the Managing
Director at Merrill Lynch Capital Markets; and from 1980 to 1984, he worked at
SBCI London and New York, Capital Markets division. Mr. Ospel was born on
February 8, 1950.
Luqman Arnold is the Group Chief Financial Officer and a Member of the Group
Executive Board. He joined SBC Warburg in 1996 as Chairman of the Asia/Pacific
division. As of October 13, 1998, he was the UBS AG, Chief Operating Officer,
Warburg Dillon Read. Prior to that, he served as the UBS AG, Chief Executive
Officer Asia/Pacific, Warburg Dillon Read (as of June 29, 1998). Mr. Arnold was
a Member of the Group Managing Board in 1998 as well. In 1997, he became the
Chief Executive Officer Asia/Pacific at Warburg Dillon Read and a member of the
Group Executive Board, Swiss Bank Corporation. Mr. Arnold was born on April 16,
1950.
Georges Gagnebin is the CEO Private Banking Division, Business Group UBS
Switzerland and a Member of the Group Executive Board. Immediately preceding
this position, he served as UBS AG's Business Area Head International Clients
Europe, Middle East & Africa in the Private Banking Division; a Member of the
Business Committee Private Banking and a Member of the Group Managing Board, UBS
AG. He joined SBC in 1969 at Bern. He was the General Manager, a Member
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<PAGE> 53
UBS
--------------------------------------------------------------------------------
of SBC's Management Board SBC Private Banking and a Member of the Group
Executive Board from 1997 to 1998. In 1994, Mr. Gagnebin became the General
Manager and a Member of the Executive Board Switzerland and of the Group
Executive Board. In 1992, he was the Deputy General Manager and a Member of the
Executive Board. Between 1987 and 1992, he was the Senior Vice President, Head
of Finance & Investment (at SBC Lausanne from 1990-1992, and at SBC Bern from
1987-1990). In 1985, he became a First Vice President, and beginning in 1982, he
served as the Vice President, Head of Finance & Investment, SBC Bern. Mr.
Gagnebin was born on March 3, 1946.
Markus Granziol, the CEO of Business Group UBS Warburg and a Member of the Group
Executive Board, most recently was UBS AG, CEO Warburg Dillon Read (Investment
Banking Division) and a Member of the Group Executive Board. From 1998 to 1999,
he served as UBS AG, Global Head Equities and Rates, Warburg, Dillon Read and a
Member of Group Managing Board, UBS AG. Mr. Granziol served with SBC from 1987
through 1998. From 1996 to 1998, he was the General Manager and Member of the
Group Executive Board. Prior to that, between 1995 and 1996 he served with SBC
Warburg as the Joint Global Head of Equities Business, and as a Member of the
Executive Board and of the Investment Banking Board. In 1994, he was the Global
Head of Equities Business at SBC, Hong Kong. In 1987 he was the Head of the
Securities Department at SBC, Zurich (previously Global Head Risk Control). Mr.
Granziol was born on January 21, 1952.
Stephan Haeringer is the CEO of Business Group UBS Switzerland and Division
Private and Corporate Clients, and has been a Member of the Group Executive
Board of UBS AG since 1998. Between June 29, 1998 and February 15, 2000, he was
UBS AG Division Head Private and Corporate Clients. He has held several
positions with SBC. From 1996 to 1998, he was the Chief Executive Officer Region
Switzerland. He was a Member of SBC's Group Executive Board, Division Head
Private Banking and Institutional Asset Management from 1991 to 1996. Between
1991 and 1994 he was a member of the Executive Board Switzerland, Sector Head
Private Banking and Securities Administration. During the years 1981 to 1988, he
served in several positions: Executive Vice President, Head of Financial
Division; Deputy Executive Vice President, Sector of Investment Counseling,
Specialized Instruments, Portfolio Management, Securities Administration and
Collateral Loans Worldwide; Head of Department of Investment Counseling and
Portfolio Management Worldwide; and Department Head International Investment
Counseling. From 1967 to 1981, he was in the Stock Exchange and Securities
Department, Investment Research, Training at Williams de Broe in London, and was
involved with Investment Counseling. Mr. Haeringer was born December 6, 1946.
Pierre de Weck, the CEO of UBS Capital (Private Equity), Business Group UBS
Warburg and a Member of the Group Executive Board, UBS AG, has held several
positions at SBC. Most recently, he served as UBS AG's Chief Credit Officer and
Head Private Equity. He started in 1985 with SBC as the Head of Project Finance
at Head Office in Zurich. In 1987, he became the Branch Manager of New York. In
1991, he served as the Chief Executive Officer North America and was a Member of
the Enlarged Group Executive Board, on which he served until 1995. From 1992 to
1994, he was the Chief Executive Officer (in Zurich). From 1994 to 1995, Mr. de
Weck was the Executive Vice President, Member of the Group Executive Board, and
Division Head Corporate Finance, Primary Markets, Merchant Banking. From 1995 to
1998, he served as a Member of the Group Executive Board, and Division Head
Corporate and Institutional Finance. Mr. de Weck was born July 15, 1950.
Peter A. Wuffli is the CEO of Business Group UBS Asset Management and a Member
of the Group Executive Board. Most recently, he was UBS AG, Group Chief
Financial Officer and a Member of the Group Executive Board. From 1994 to 1998,
he was the Chief Financial Officer from SBC and a Member of SBC's Group
Executive Committee. Mr. Wuffli was born October 26, 1957.
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<PAGE> 54
UBS
--------------------------------------------------------------------------------
The Audit Committee and the Compensation Committee
The Audit Committee of the Board of Directors monitors the functional adequacy
of the auditing work and the cooperation between internal and external audit. It
is chaired by Peter Bockli with Rolf A. Meyer as Vice-Chairman and Andreas
Reinhart as an additional member. The Audit Committee meets two to three times
per year together with the head of Group Internal Audit and the external
auditors, and -- specifically for the review of the annual accounts -- with the
Chief Financial Officer. All members of the committee are non-executives and
fully independent of UBS.
The Remuneration Committee of the Board of Directors fixes the remuneration of
the Board of Director's full-time members, the members of the Group Executive
Board and of the Group Managing Board, and it proposes to the Board of Directors
the individual remuneration for its part-time members. The three members are
Alex Krauer (Chairman), Alberto Togni, and Markus Kundig. The committee meets as
often as necessary.
Compensation of Directors and Officers
The aggregate compensation paid by UBS to its directors and officers as a group
in 1998 was approximately CHF 102.8 million, including bonus compensation and
approximately CHF 10.3 million in accrued pension benefits. The aggregate
compensation paid by UBS to its directors and officers as a group in 1999 was
approximately CHF 193.1 million, including bonus compensation and approximately
CHF 2.7 million in accrued pension benefits. For the purposes of this analysis,
UBS's executive officers are the members of the UBS Group Managing Board, as
described above under "-- Control of Registrant."
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.
Options to Purchase Securities from UBS
UBS offers employees options on UBS ordinary shares under five plans, as
described below:
Under the UBS Employee Ownership Plan and Senior Management Compensation
Program, key personnel are awarded that portion of their performance-related
compensation in excess of a predetermined amount in UBS ordinary shares,
warrants or options, which are restricted for a specified number of years.
Under the UBS Employee Investment Plan, employees have the option to invest part
or all of their annual bonus in UBS ordinary shares, warrants or other
derivatives on UBS ordinary shares. A certain holding period applies during
which the instruments cannot be sold or exercised.
Under the UBS Long Term Incentive and Key Award plans, long-term stock options
are granted to key employees. UBS considers the key employee's performance,
potential, years of service and the performance of the division in which the
employee works in determining the amount of the award. The options are blocked
for a certain period of time during which they cannot be exercised. For the 1997
options and certain of the 1998 options, one half of each grant is subject to an
acceleration clause after which certain forfeiture provisions lapse. One option
gives the right to purchase one registered share at the option's strike price.
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<PAGE> 55
UBS
--------------------------------------------------------------------------------
Prior to the merger PaineWebber offered employees options under three plans, as
described below:
Under the Equity Plus Program ("EPP") employees are granted two stock options
for each share the employee purchases. The funds for the purchase are collected
through payroll deductions and the stock purchase and option grants are made
quarterly.
As part of the Financial Advisor recruiting effort, new recruits are eligible to
contribute a portion of their employee forgivable loan to receive options in a
manner similar to the EPP.
Senior management as well as key managers may also receive option grants for
their performance and/or potential.
These stock option plans will be continuing for employees under UBS.
The following table provides information concerning options to purchase UBS
ordinary shares at 30 November 2000. The amounts in the table incorporate
options outstanding under the PaineWebber plans.
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE PRICE WEIGHTED-AVERAGE
INSTRUMENT TYPE NUMBER ISSUED (IN CHF) EXPIRATION (IN YEARS)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options.......................... 22,010,506 177.07 4.62
Warrants......................... 6,232,786 228.50 2.08
Total....................... 28,243,292 188.42 4.06
</TABLE>
The total number of UBS ordinary shares subject to issuance under such options
and warrants held by officers and directors of UBS as of 30 November 2000 is
3,021,689.
Interest of Management in Certain Transactions
Mortgages receivable from members of the UBS Board of Directors, the UBS Group
Executive Board, the UBS Group Managing Board, close family members of these
individuals and enterprises controlled by these individuals were as follows:
<TABLE>
<CAPTION>
CHF MILLION 1999
-------------------------------------------------------------------
<S> <C>
Mortgages at 1 January...................................... 27
Additions................................................... 6
Reductions.................................................. 5
Mortgages at 31 December.................................... 28
</TABLE>
Members of the UBS Board of Directors, UBS Group Executive Board and UBS Group
Managing Board are granted mortgages at the same terms and conditions as other
employees. Terms and conditions are based on third party terms, excluding the
credit margin. In addition, fully secured personal loans totalling approximately
CHF 3.6 million have been extended to members of this group, all of which are
due and payable within 24 months.
Names and Addresses of UBS's Auditors
UBS's auditors for the last three years have been Ernst & Young Ltd. (formerly
known as ATAG Ernst & Young). Ernst & Young Ltd. is a member of the Swiss
Chamber of Auditors and is a member firm of Ernst & Young International. Ernst &
Young Ltd.'s address is Aeschengraben 9, CH-4002, Basel, Switzerland.
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<PAGE> 56
UBS
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with UBS's
consolidated financial statements and the related notes included elsewhere in
this prospectus. UBS's consolidated financial statements have been prepared in
accordance with International Accounting Standards, or "IAS," which differ in
certain significant respects from U.S. GAAP. Please refer to Note 42 of UBS's
consolidated financial statements for a description of the significant
differences between IAS and U.S. GAAP and the reconciliation of shareholders'
equity and net profit (loss) to U.S. GAAP. Unless otherwise stated, all of UBS's
financial information presented in this prospectus is presented on a
consolidated basis under IAS.
All references to 1999, 1998 and 1997 refer to UBS's fiscal years ended 31
December 1999, 1998 and 1997, respectively. The financial statements for each of
these periods have been audited by Ernst & Young Ltd., as described in the
"Report of Independent Auditors" on page F-1.
For comparative purposes, 1999 and 1998 figures have been restated to conform to
the 2000 presentation, which gives effect to certain accounting changes,
including:
- the removal from net trading income of profit on UBS ordinary shares held for
trading purposes;
- the treatment of these shares as treasury shares, reducing both the number of
shares and the shareholders' equity used in ratio calculations;
- the reclassification of trading-related interest revenues from net trading
income to net interest income;
- the removal of the credit to net interest income and matching debit to net
trading income for the cost of funding trading positions; and
- the capitalization of costs relating to the in-house development of software.
Note 1(t) of UBS's consolidated financial statements includes a complete
explanation of these accounting changes.
Introduction
UBS is a global, integrated investment services firm and operates through three
business groups, which are divided into eight operating business units, and its
Corporate Center. The business units within each of the three business groups,
share senior management, infrastructure and other resources. The three business
groups are:
- UBS Switzerland, which is made up of two business units: Private and Corporate
Clients and Private Banking;
- UBS Asset Management, which consists of two business units: Institutional
Asset Management and Investment Funds/GAM; and
- UBS Warburg, which is composed of four business units: Corporate &
Institutional Clients, UBS Capital, Private Clients and e-services.
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<PAGE> 57
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--------------------------------------------------------------------------------
The following table sets forth the contributions to operating profit before tax
from each of the three business groups, and the eight business units within
them, and for the Corporate Center.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UBS SWITZERLAND:
Private and Corporate Clients.................... 1,018 621 1,271 908
Private Banking.................................. 1,980 1,537 2,937 4,415
----- ----- ----- ------
UBS Switzerland................................ 2,998 2,158 4,208 5,323
UBS ASSET MANAGEMENT:
Institutional Asset Management................... 138 148 325 437
Investment Funds/GAM............................. 64 24 112 65
----- ----- ----- ------
UBS Asset Management........................... 202 172 437 502
UBS WARBURG:
Corporate and Institutional Clients.............. 2,865 1,430 2,346 (1,102)
UBS Capital...................................... 71 57 157 428
Private Clients.................................. (246) (141) (327) (133)
e-services....................................... (158) 0 (39) 0
----- ----- ----- ------
UBS Warburg.................................... 2,532 1,346 2,137 (807)
CORPORATE CENTER................................. (172) 1,355 1,111 (1,147)
----- ----- ----- ------
Total....................................... 5,560 5,031 7,893 3,871
===== ===== ===== ======
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
The 1998 merger of Swiss Bank Corporation and Union Bank of Switzerland, which
was completed on 29 June 1998, was accounted for under the
"pooling-of-interests" method of accounting. Under the pooling-of-interests
method, a single uniform set of accounting policies was adopted and applied
retrospectively for the restatement of comparative information. After the 1998
merger was effected, UBS began the process of integrating the operations of the
two banks. This process involved streamlining operations, eliminating duplicate
information technology infrastructure, consolidating banking premises and
various other measures to bring the two banks together. At the time of the 1998
merger, UBS established a restructuring provision of CHF 7 billion to cover its
expected restructuring costs associated with the 1998 merger. An additional
pre-tax restructuring charge of CHF 300 million in respect of the 1998 merger,
representing about 4% of the original CHF 7 billion provision, was recognized in
December 1999. The majority of the extra provision was due to revised estimates
of the cost of lease breaks and property disposals. UBS has now largely
completed the integration and restructuring process relating to the 1998 merger
and, at 30 June 2000, has used approximately CHF 6.1 billion of the CHF 7.3
billion restructuring provision.
In addition, during the last three and a half years, a number of other events
occurred that also had a significant effect on UBS's results of operations
during these periods. These events included:
- During 1999, UBS recognized pre-tax gains of CHF 1,490 million on the sale of
its 25% stake in Swiss Life/Rentenanstalt; CHF 110 million on Julius Baer
registered shares; CHF 200 million on the sale of its international Global
Trade Finance business; and CHF 38 million on Long Term Capital Management,
L.P.
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- During the first half of 1998, UBS divested Banca della Svizzera Italiana, or
"BSI," and Adler & Co. Ltd. to satisfy a condition of the Swiss Competition
Commission in connection with the 1998 merger. UBS recognized pre-tax gains
of CHF 1,058 million on these sales.
- During 1998, due to extremely volatile market conditions, UBS incurred losses
of CHF 1,160 million relating to the write-down of its trading and investment
positions in Long Term Capital Management, L.P. and CHF 762 million relating
to its Global Equity Derivatives portfolio.
- As of 31 December 1998, UBS established a provision of CHF 842 million in
connection with the claims relating to the matter known as the Holocaust
affair. UBS recognized additional pre-tax provisions of CHF 154 million
relating to this claim in 1999 and CHF 200 million in 2000.
- In the fourth quarter of 1999, UBS recognized a one-time credit of CHF 456
million in connection with excess pension fund employer prepayments, recorded
in accordance with IAS.
As a global financial services firm, UBS's businesses are affected by the
external environment in the markets in which it operates. In particular, the
results of UBS's business in Switzerland, and notably the results of its
credit-related activities, would be adversely affected by any deterioration in
the state of the Swiss economy because of the impact this would have on UBS's
customers' creditworthiness. More generally, economic and political conditions
in different countries can also impact UBS's results of operations and financial
position by affecting the demand for UBS's products and services and the credit
quality of UBS's borrowers and counterparties. Similarly, any prolonged weakness
in international securities markets would affect UBS's business revenues through
its effect on UBS's clients' investment decisions and the value of portfolios
under management, which would in turn reduce UBS's revenues from its private
banking and asset management businesses.
Competitive Forces. UBS faces intense competition in all aspects of its
business. UBS competes with asset management entities, retail and commercial
banks, investment banking firms, merchant banks, broker-dealers and other
investment services firms. In addition, the trend toward consolidation in the
global financial services industry is enhancing the competitive position of some
of UBS's competitors by broadening the range of their product and service
offerings and increasing their access to capital. These competitive pressures
could result in increased pricing pressure on a number of UBS's products and
services, particularly as competitors seek to win market share.
Fluctuations in Currency Exchange Rates and Interest Rates. Because UBS
prepares its accounts in Swiss francs, changes in currency exchange rates,
particularly between the Swiss franc and the U.S. dollar and the Swiss franc and
the British pound, may have an effect on the earnings that it reports. UBS's
approach to managing the risk is explained below under "--Asset and Liability
Management--Currency Management." In addition, changes in exchange rates can
affect UBS's business earnings. For example, the establishment of the euro
during 1999 has started to have an effect on the foreign exchange markets in
Europe by reducing the extent of foreign exchange dealings among member
countries and generating more harmonized financial products. Movements in
interest rates can also affect UBS's results. As interest rates decline, UBS's
interest rate margins generally come under pressure and mortgage borrowers may
seek to repay their borrowings early, which can affect UBS's net interest
income. Interest rate movements can also affect UBS's fixed income trading
portfolio and the investment performance of its asset management businesses.
Operational Risks. UBS's businesses are dependent on its ability to process a
large number of complex transactions across numerous and diverse markets in
different currencies and subject to many different legal and regulatory regimes.
UBS's systems and processes are designed to ensure that the risks associated
with UBS's activities are appropriately controlled, but UBS recognizes that any
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
weaknesses in these systems could have a negative impact on its results of
operations during the affected period.
As a result of these and other factors beyond its control, UBS's revenues and
operating profit have been and are likely to continue to be subject to a measure
of variability from period to period. Therefore UBS's revenues and operating
profit for any particular fiscal period may not be indicative of sustainable
results, may vary from year to year and may impact UBS's ability to achieve its
strategic objectives. Nevertheless, UBS's risk management and control procedures
have been designed to keep the risk of such variability at an acceptably low
level. For further discussion of UBS's risk management and control see
"--Analysis of Risks--Consequential Risks."
Consolidated Results of Operations
The following table sets forth UBS's consolidated results of operations for the
half years ended 30 June 2000 and 1999 and for the years ended 31 December 1999
and 1998.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME:
Interest income............................. 24,079 16,293 35,604 37,442
Interest expense............................ 19,753 13,540 29,695 32,424
------ ------ ------ ------
Net interest income...................... 4,326 2,753 5,909 5,018
Credit loss expense......................... (83) 635 956 951
------ ------ ------ ------
Net interest income after credit loss
expense................................ 4,409 2,118 4,953 4,067
Net fee and commission income............... 7,835 6,184 12,607 12,626
Net trading income.......................... 5,669 4,460 7,719 3,313
Other income, including income from disposal
of associates and subsidiaries........... 644 2,340 3,146 2,241
------ ------ ------ ------
Total operating income................... 18,557 15,102 28,425 22,247
------ ------ ------ ------
OPERATING EXPENSES:
Personnel................................... 8,876 6,819 12,577 9,816
General and administrative.................. 3,174 2,388 6,098 6,735
Depreciation and amortization............... 947 864 1,857 1,825
------ ------ ------ ------
Total operating expenses................. 12,997 10,071 20,532 18,376
Operating profit before tax and minority
interests................................... 5,560 5,031 7,893 3,871
Tax expense................................. 1,257 1,151 1,686 904
------ ------ ------ ------
Net profit before minority interests..... 4,303 3,880 6,207 2,967
Minority interests.......................... (35) (21) (54) 5
------ ------ ------ ------
Net profit............................. 4,268 3,859 6,153 2,972
====== ====== ====== ======
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Net interest
income increased by CHF 1,573 million, or 57.1%, from CHF 2,753 million in the
first half of 1999 to CHF 4,326 million in the first half of 2000. This was
principally the result of higher coupon income, in line with an increase of
interest bearing instruments in the trading portfolio.
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As a result of the significant recovery of the Swiss economy in the first half
of 2000 and especially its effect on the real estate and real estate
construction markets, UBS was able to write back CHF 237 million of domestic
credit loss provisions in the first half of 2000. These writebacks were offset
by additional provisions on the international portfolio of CHF 154 million,
leading to a net credit of CHF 83 million in the credit loss expense line for
the first half of 2000, compared to an expense of CHF 635 million in the first
half of 1999.
Net fee and commission income increased by CHF 1,651 million, or 26.7%, from CHF
6,184 million in the first half of 1999 to CHF 7,835 million in the first half
of 2000, as the result of increased client activity, driven by strong markets,
especially in the first quarter of 2000. The following table sets forth UBS's
net fee and commission income for the first half of 2000 and 1999.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED 30 JUNE
2000 1999(1)
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
CREDIT-RELATED FEES AND COMMISSIONS......................... 145 215
SECURITY TRADING AND INVESTMENT ACTIVITY FEES:
Underwriting and corporate finance fees................... 1,069 826
Brokerage fees............................................ 2,979 1,882
Fiduciary fees............................................ 175 162
Custodian fees............................................ 726 788
Portfolio and other management and advisory fees.......... 1,913 1,476
Investment fund fees...................................... 1,360 925
Other..................................................... 29 53
----- ---------
Total.................................................. 8,251 6,112
----- ---------
COMMISSION INCOME FROM OTHER SERVICES....................... 391 367
----- ---------
TOTAL FEE AND COMMISSION INCOME...................... 8,787 6,694
----- ---------
FEE AND COMMISSION EXPENSE:
Brokerage fees paid....................................... 582 359
Other..................................................... 370 151
----- ---------
Total.................................................. 952 510
----- ---------
NET FEE AND COMMISSION INCOME............................... 7,835 6,184
===== =========
</TABLE>
------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Credit-related fees and commissions decreased in the first half of 2000 as a
result of the sale of UBS's International Global Trade Finance business in the
second half of 1999. Underwriting and corporate finance fees increased by 29%
over the first half of 1999 with strong results in both equity and fixed income
underwriting, and continuing increases in corporate finance revenues. Brokerage
fees were 58.3% higher in the first half of 2000 than in the first half of 1999
as a result of high levels of client activity in the context of strong market
volumes. The increase in investment fund fees from the first half of 1999 to the
first half of 2000 resulted from higher volumes and the inclusion in the first
half of 2000 of GAM, which was acquired in the fourth quarter of 1999. Portfolio
and other management and advisory fees increased CHF 437 million due to higher
asset-related fees in the first half of 2000.
Net trading income increased CHF 1,209 million, or 27.1%, to CHF 5,669 million
for the first half of 2000, compared to CHF 4,460 million for the first half of
1999, driven by strong growth in equity trading income and through increased
client activity, particularly in the first quarter of 2000. The
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--------------------------------------------------------------------------------
following table sets forth UBS's net trading income by major business area for
the first half of 2000 and 1999.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
30 JUNE
2000 1999(1)
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
Foreign exchange(2)......................................... 680 718
Fixed income................................................ 643 1,303
Equities.................................................... 4,346 2,439
----- ---------
Total............................................. 5,669 4,460
===== =========
</TABLE>
------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
(2) Includes other trading income such as banknotes, precious metals and
commodities.
Net trading income from foreign exchange decreased CHF 38 million, or 5.3%, from
the first half of 1999 to the first half of 2000 in difficult trading
conditions, with lower levels of market activity and narrowing margins on
derivative products.
Net trading income from fixed income decreased CHF 660 million, or 50.7%, from
the first half of 1999 to CHF 643 million in the first half of 2000. The fixed
income component of net trading income does not represent the full revenue
picture of the Fixed Income business area within the Corporate and Institutional
Clients business unit. In particular, coupon income is managed as an integral
part of the trading portfolio. The relative revenue contributions of
mark-to-market gains, coupon income and other factors are somewhat volatile,
because they depend on trading strategies and the instrument composition. In the
first half of 2000, while fixed income trading income fell, coupon income, which
is reported in net interest income, rose substantially. The sum of the two
results suggests significantly more stable revenue development than either
component standing alone. In total, in the first half of 2000, revenues in the
Fixed Income business area of Corporate and Institutional Clients rose 13.6%
over the first half of 1999.
Net trading income from equities increased CHF 1,907 million, or 78.2%, from the
first half of 1999 to the first half of 2000. Positive markets led to an
exceptionally good first quarter of 2000, with record client volumes and strong
performances in European, U.S., U.K. and Japanese equities. Performance in the
second quarter fell slightly in more mixed market conditions, but was still well
ahead of second quarter of 1999.
Other income, including income from disposal of associates and subsidiaries,
decreased CHF 1,696 million, or 72.5%, from CHF 2,340 million in the first half
of 1999 to CHF 644 million in the first half of 2000. Total disposal-related
pre-tax gains were CHF 1,778 million in the first half of 1999 compared to CHF
23 million in the first half of 2000. The first half of 1999 included pre-tax
gains of CHF 1,490 million from the sale of UBS's stake in Swiss
Life/Rentenanstalt, CHF 200 million from the disposal of the Global Trade
Finance business and CHF 110 million from the sale of Julius Baer registered
shares. Excluding income from disposal of associates and subsidiaries, other
income increased CHF 59 million due to increased income from the disposal of
private equity investments and the consolidation of Klinik Hirslanden AG's
results in the first half of 2000 but not in the first half of 1999, offset by a
reduction of income from investments in associates and losses from the
revaluation of properties held for resale.
Personnel expense increased CHF 2,057 million, or 30.2%, from CHF 6,819 million
in the first half of 1999 to CHF 8,876 million in the first half of 2000,
despite an almost unchanged headcount of
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<PAGE> 62
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--------------------------------------------------------------------------------
47,744 at 30 June 2000, compared to 48,066 at 30 June 1999. This is primarily
attributable to higher performance-related compensation based on the very strong
results in the first half of 2000. In addition, CHF 567 million of the increase
is the result of adverse currency movements and CHF 182 million is due to the
consolidation of Klinik Hirslanden AG's results in the first half of 2000 but
not in the first half of 1999 and the inclusion of GAM, acquired in the fourth
quarter of 1999.
General and administrative expenses increased CHF 786 million, or 32.9%, from
CHF 2,388 million in the first half of 1999 to CHF 3,174 million in the first
half of 2000. General and administrative expenses in the first half of 2000
includes a final provision of CHF 200 million related to the U.S. global
settlement of Holocaust-related claims and CHF 110 million from the
consolidation of Klinik Hirslanden AG and the inclusion of GAM. Marketing and
public relations costs increased by CHF 102 million in the first half of 2000,
mainly due to the corporate re-branding program. CHF 146 million of the increase
primarily relates to information technology outsourcing charges for work that
was previously carried out in-house.
Depreciation and amortization increased CHF 83 million, or 9.6%, from CHF 864
million in the first half of 1999 to CHF 947 million in the first half of 2000,
mainly as a result of the acquisition of GAM and Allegis in the fourth quarter
of 1999.
Tax expense increased CHF 106 million, or 9.2%, from CHF 1,151 million in the
first half of 1999 to CHF 1,257 million in the first half of 2000, principally
due to increased operating profit. The effective tax rate of 22.6% in the first
half of 2000 is very slightly lower than the 22.9% rate in the first half of
1999.
Year to 31 December 1999 Compared to Year to 31 December 1998. Net interest
income increased by CHF 891 million, or 17.8%, from CHF 5,018 million in 1998 to
CHF 5,909 million in 1999. Increased trading-related interest income and higher
interest margins in the domestic loan portfolio in 1999 from more consistent
application of UBS's risk-adjusted pricing model were partially offset by the
sale of business activities which had contributed to net interest income in
1998, as well as the impact of lower returns on invested equity and the
reduction of the international loan portfolio.
Credit loss expense had a slight increase of CHF 5 million from CHF 951 million
in 1998 to CHF 956 million in 1999. During 1999, UBS experienced general
improvements in the economy and in the credit performance of its loan portfolio,
and a reduction in impaired loans in the aggregate. Although impaired loans
decreased, additional provisions were required for some of the impaired domestic
loans remaining in the portfolio.
Net fee and commission income decreased by CHF 19 million from CHF 12,626
million in 1998 to CHF 12,607 million in 1999. Excluding the effect of
divestments in 1998, the decrease was roughly 1%.
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The following table sets forth UBS's net fee and commission income for each of
the years ended 31 December 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
31 DECEMBER(1)
1999 1998
(CHF in millions)
-----------------------------------------------------------------------------------
<S> <C> <C>
CREDIT-RELATED FEES AND COMMISSIONS......................... 372 559
SECURITY TRADING AND INVESTMENT ACTIVITY FEES:
Underwriting and corporate finance fees................... 1,831 1,694
Brokerage fees............................................ 3,934 3,670
Fiduciary fees............................................ 317 349
Custodian fees............................................ 1,583 1,386
Portfolio and other management and advisory fees.......... 2,984 3,335
Investment fund fees...................................... 1,915 1,778
Other..................................................... 57 110
------ ------
Total.................................................. 12,621 12,322
------ ------
COMMISSION INCOME FROM OTHER SERVICES....................... 765 776
------ ------
TOTAL FEE AND COMMISSION INCOME........................ 13,758 13,657
------ ------
FEE AND COMMISSION EXPENSE:
Brokerage fees paid....................................... 795 704
Other..................................................... 356 327
------ ------
Total.................................................. 1,151 1,031
------ ------
NET FEE AND COMMISSION INCOME............................... 12,607 12,626
====== ======
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Credit-related fees and commissions decreased in line with reduced emerging
market exposures and the sale of UBS's international Global Trade Finance
operations. As a result of strong results in mergers and acquisitions in 1999,
underwriting and corporate finance fees increased 8% relative to exceptionally
strong performance in 1998. Brokerage fees were higher in 1999 than in 1998
mainly due to strong volumes in the U.K., U.S. and Asia. A CHF 137 million
increase in investment fund fees was attributable to higher volumes and pricing
adjustments from the integration of the two pre-1998 merger product platforms.
Strong increases in custodian fees reflected higher custodian assets and a new
pricing model.
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Net trading income increased CHF 4,406 million, or 133%, from CHF 3,313 million
in 1998 to CHF 7,719 million in 1999. The following table sets forth UBS's net
trading income by major business area for each of the years ended 31 December
1999 and 1998.
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER(1)
1999 1998
(CHF in millions)
----------------------------------------------------------------------------------
<S> <C> <C>
Foreign exchange(2)......................................... 1,108 1,992
Fixed income................................................ 2,603 162
Equities.................................................... 4,008 1,159
----- ------
Total..................................................... 7,719 3,313
===== ======
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
(2) Includes other trading income such as banknotes, precious metals and
commodities.
Net trading income from foreign exchange decreased CHF 884 million, or 44.4%,
from 1998 to 1999 mostly as a result of lower volumes in key markets. The
reduced levels of activity resulted from the introduction of the euro and
narrowing margins from increased competition in global markets.
Net trading income from fixed income increased CHF 2,441 million from 1998 to
1999. During 1998, net trading income from fixed income was negatively impacted
by the pre-tax approximately CHF 790 million write-down of UBS's trading
position in Long Term Capital Management, L.P., or "LTCM," and approximately CHF
690 million in losses in UBS's emerging markets trading portfolios. Excluding
those write downs from the 1998 results, net trading income from fixed income
increased approximately 58% in 1999 over 1998. Fixed income trading revenues
were strong across all major products during 1999, led by swaps and options and
investment grade debt.
Net trading income from equities increased CHF 2,849 million from 1998 to 1999.
During 1998, net trading income was negatively impacted by pre-tax CHF 762
million in losses from the Global Equities Derivatives positions. In 1999, net
trading income benefited from very strong customer volumes in equity products
globally.
Other income, including income from disposal of associates and subsidiaries,
increased CHF 905 million, or 40.4%, from CHF 2,241 million in 1998 to CHF 3,146
million in 1999. Total disposal-related pre-tax gains were CHF 1,821 million in
1999 compared to disposal-related pre-tax gains of CHF 1,119 million in 1998.
The first-time consolidation of Klinik Hirslanden in 1999 resulting in other
income of CHF 395 million was partially offset by less income from investments
in associates as a result of the divestments as well as lower income from other
properties. The approximately CHF 370 million portion of the LTCM write-down
negatively impacted other income in 1998.
Personnel expense increased CHF 2,761 million, or 28.1%, from CHF 9,816 million
in 1998 to CHF 12,577 million in 1999, despite only a minor increase in
headcount from 48,011 at 31 December 1998 to 49,058 at 31 December 1999. At the
end of 1997, UBS foresaw the probability of a shortfall in profit in its
investment banking business as a result of the then-pending 1998 merger. In
order to protect its investment banking franchise, UBS realized it would
probably need to make payments to personnel in excess of amounts determined by
normal compensation methodologies. An amount of approximately CHF 1 billion was
recorded as part of the merger-related restructuring reserve for this purpose.
By the end of 1998, this shortfall had materialized, and CHF 1,007 million of
accrued payments to personnel were charged against the restructuring reserve in
1998 as planned. The shortfall in profits noted above was aggravated by losses
associated with LTCM and the Global Equity Derivatives, or "GED," portfolio.
Adjusting the prior year for the CHF 1,007 million, personnel
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--------------------------------------------------------------------------------
expenses in 1999 increased by 16%, which was primarily attributable to higher
performance-related compensation based on the good investment banking result in
1999. Personnel expense in 1999 was reduced by the recognition of CHF 456
million in pre-paid employer pension contributions.
General and administrative expenses decreased CHF 637 million, or 9.5%, from CHF
6,735 million in 1998 to CHF 6,098 million in 1999. General and administrative
expenses in 1998 includes the provision of CHF 842 million for the settlement
related to the Holocaust litigation. In 1999, the following were included:
- the additional restructuring provision of CHF 300 million;
- an additional provision of CHF 154 million for the U.S. global settlement
of Holocaust-related claims; and
- CHF 130 million from the first-time consolidation of Klinik Hirslanden.
Excluding the impact of these items in 1998 and 1999, general and administrative
expenses decreased 6.4% year-on-year reflecting stringent cost reduction
programs.
Depreciation and amortization increased CHF 32 million, or 1.8%, from CHF 1,825
million 1998 to CHF 1,857 million in 1999. Excluding the impact of the
first-time consolidation of Klinik Hirslanden in 1999, depreciation and
amortization remained flat.
Tax expense increased CHF 782 million, or 86.5%, from CHF 904 million in 1998 to
CHF 1,686 million in 1999, principally due to increased operating profit. The
effective tax rate of 21.4% is lower than 23.4%, the rate in 1998, primarily due
to the utilization of tax loss carry forwards.
Year Ended 31 December 1998 Compared to Year Ended 31 December 1997. The
following figures have not been restated for the changes in accounting policy
and restructuring of the UBS business groups that have been introduced during
2000, as such a restatement of the 1997 data was not practicable. As a result of
the differences in the reporting by the predecessor banks' accounting and
reporting policies, the unavailability of certain data, and the shut down and
modification of significant computer systems as a result of the 1998 merger and
to address Year 2000 issues, there is insufficient information to permit UBS to
restate the 1997 results for the changes in accounting policy.
<TABLE>
<CAPTION>
31 DECEMBER
1998 1997
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME:
Interest income........................................... 22,835 23,669
Interest expense.......................................... 16,173 16,733
------ ------
Net interest income.................................. 6,662 6,936
Credit loss expense....................................... 951 1,278
------ ------
Total................................................ 5,711 5,658
Net fee and commission income............................. 12,626 12,234
Net trading income........................................ 1,750 5,491
Other income, including income from disposal of associates
and subsidiaries....................................... 2,241 1,497
------ ------
Operating income..................................... 22,328 24,880
------ ------
</TABLE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
31 DECEMBER
1998 1997
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
OPERATING EXPENSES:
Personnel................................................. 9,816 11,559
General and administrative................................ 6,617 5,315
Depreciation and amortization............................. 1,825 1,762
------ ------
Operating expenses..................................... 18,258 18,636
------ ------
Operating profit before tax.......................... 4,070 6,244
Restructuring costs....................................... -- 7,000
Tax expense (benefit)..................................... 1,045 (105)
------ ------
Net profit (loss) before minority interests.......... 3,025 (651)
Minority interests........................................ 5 (16)
------ ------
Net profit (loss).................................... 3,030 (667)
====== ======
</TABLE>
Net interest income decreased CHF 274 million, or 4.0%, from CHF 6,936 million
in 1997 to CHF 6,662 million in 1998. The decrease primarily resulted from lower
variable-rate mortgage volumes and the elimination of operations in 1998 that
generated interest income during 1997. Lower variable rate mortgage volumes
during 1998 more than offset an increase in fixed-rate mortgages. In addition,
although lower savings and deposit accounts reduced interest expense in 1998, it
also resulted in lower interest income from deposits during the year.
UBS's credit loss expense decreased CHF 327 million, or 25.6%, from CHF 1,278
million in 1997 to CHF 951 million in 1998. Credit loss expense improved because
of positive developments in the overall Swiss economy. This was offset in part
by the rapid deterioration of emerging market economies, most notably in Latin
America and Southeast Asia. This caused an approximately CHF 275 million net
increase in country provisions from 1997 to 1998 and other increases in
individual counterparty allowances. The largest provisions in the emerging
markets economies were as follows at 31 December 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
Brazil...................................................... 276 55
Indonesia................................................... 168 29
South Korea................................................. 186 19
</TABLE>
Net fee and commission income increased CHF 392 million, or 3.2%, from CHF
12,234 million in 1997 to CHF 12,626 million in 1998. Increases in underwriting
and corporate finance fees, custodian fees, portfolio and other management and
advisory fees, and fees from investment funds resulting from strong markets,
growth in assets under management and the acquisition of Dillon Read & Co., Inc.
in late 1997 all contributed to this net increase. These increases were
partially offset by a decrease in credit-related fees and commissions and
brokerage fees.
Net trading income decreased CHF 3,741 million, or 68.1%, from CHF 5,491 million
in 1997 to CHF 1,750 million in 1998. The decrease primarily resulted from the
CHF 790 million write-down of UBS's trading position in LTCM, the CHF 762
million loss on UBS's Global Equities Derivatives portfolio and approximately
CHF 810 million of losses on UBS's emerging markets trading portfolios. Net
trading income from foreign exchange and bank notes decreased by CHF 541 million
primarily reflecting losses in foreign exchange trading that were partially
offset by unusually strong results in UBS's cash and collateral trading
business. In addition, net trading income from precious metals and
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commodities decreased by CHF 216 million, or 89%, from CHF 244 million in 1997
to CHF 28 million in 1998 due primarily to the wind-down of some of these
businesses and difficult trading conditions.
Other income, including income from disposal of associates and subsidiaries,
increased CHF 744 million, or 49.7%, from CHF 1,497 million in 1997 to CHF 2,241
million in 1998. The increase primarily reflected CHF 1,058 million gains on the
sales of BSI and Adler and gains in UBS's real estate and private equity
activities, partially offset by the CHF 370 million write-down of UBS's
investment in LTCM attributable to other income.
Personnel expense decreased CHF 1,743 million, or 15.1%, from CHF 11,559 million
in 1997 to CHF 9,816 million in 1998, reflecting reduced headcount of 13.0% from
55,176 people as of 31 December 1997 to 48,011 people as of 31 December 1998.
The headcount reduction primarily resulted from efficiencies gained from the
1998 merger and divestments of specific businesses. As discussed above, CHF
1,007 million of accrued payments to personnel were charged against the
restructuring reserve in 1998. Adjusting 1998 for this amount, personnel
expenses decreased 6.4% in 1998 compared to 1997.
General and administrative expenses increased CHF 1,302 million, or 24.5%, from
CHF 5,315 million in 1997 to CHF 6,617 million in 1998. This increase primarily
resulted from a CHF 842 million charge taken in 1998 for the settlement of the
claim relating to the Holocaust litigation and approximately CHF 397 million in
expenses recorded in 1998 associated with preparing for implementation of the
euro and for Year 2000 readiness.
Depreciation and amortization increased CHF 63 million, or 3.6%, from CHF 1,762
million in 1997 to CHF 1,825 million in 1998. Increased amortization of goodwill
and other intangible assets primarily resulting from additional goodwill
recorded in 1998 on Brinson Partners, the acquisition of Dillon Read & Co., Inc.
in September 1997 and the accelerated amortization of goodwill on Russian and
Brazilian subsidiaries due to the worsening markets in these countries in 1998
were the primary reasons for the increase from 1997 to 1998. These increases
were offset by a decrease in depreciation from the disposal of property and
equipment.
Tax expense increased CHF 1,150 million, from a tax benefit in 1997 of CHF 105
million to a tax expense in 1998 of CHF 1,045 million. In 1997, UBS recognized a
total current and deferred tax benefit of approximately CHF 1,600 million
related to the CHF 7,000 million restructuring provision. Excluding the
restructuring reserve, operating profit before tax would have been CHF 6,244
million in 1997 and UBS would have accrued tax expenses of CHF 1,395 million.
Operational Reserves. UBS maintains operational reserves to provide for losses
associated with existing transaction errors in processing and other operational
losses. The reserves cover probable losses that exist in the portfolio as of the
balance sheet date, and are subject to senior management review and approval
within the specific business unit, functional operations and financial control
management and at the Group Executive Board.
UBS experienced an overall increase in the level of these reserves during 1999,
primarily related to UBS's continuing program of integrating the two predecessor
banks' domestic operations. As planned, this integration is taking longer than
the integration of operations outside Switzerland. There has been no significant
change in the level of these reserves in the first half of 2000.
Restructuring Provision. At the announcement of the 1998 merger in 1997, UBS
estimated the costs it believed would result from integrating and restructuring
the operations of the two pre-existing banks and recorded a charge of CHF 7
billion. The charge included estimates for personnel-related costs, costs for
the elimination of duplicate infrastructures and the merging of bank premises,
and other 1998 merger-related restructuring costs. An additional pre-tax
restructuring charge of CHF 300 million in
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respect of the 1998 merger, representing about 4% of the original CHF 7 billion
provision, was recognized in December 1999. The majority of the extra charge was
taken to provide for revised estimates of the cost of lease breaks and property
disposals. UBS has now largely completed the integration and restructuring
process and, at 30 June 2000, has used approximately CHF 6.1 billion of the CHF
7.3 billion restructuring provision.
During 1998, CHF 4,027 million of the restructuring provision was utilized
including:
- CHF 2 billion for personnel-related expenses,
- CHF 797 million for information technology integration projects and
write-offs of equipment that management had committed to dispose of,
- CHF 267 million for merging premises, and
- CHF 939 million for costs associated with the exit of specific
businesses, as well as merger administration costs.
Included in the CHF 2 billion of personnel-related expenses are severance
payments and payments required to maintain stability in the workforce during the
1998 merger-related integration period, as well as some performance-related
compensation as discussed above.
During 1999, CHF 1,844 million of the restructuring provision was utilized,
bringing the total utilization to CHF 5,871 million at 31 December 1999. The
transition to one common technology platform and parallel operation of the
systems in UBS Switzerland's Private and Corporate Clients business unit and the
merger of bank premises, including related moving, outfitting and vacancy costs,
recognized in Corporate Center, were the primary uses of the provision in 1999.
During the first half of 2000, the main use of the restructuring provision
related to premises costs in Corporate Center, including moving, outfitting and
vacancy costs that were charged against the provision, and also to costs
relating to the early retirement plan in Private and Corporate Clients. The
following table analyzes the use of the restructuring provision through the
first half of 2000.
<TABLE>
<CAPTION>
USAGE IN 2000 30 JUNE 31 DECEMBER
PERSONNEL IT PREMISES OTHER 2000 1999 1998
(CHF in millions)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Private and Corporate Clients............ 53 14 1 20 88 794 717
Private Banking.......................... 0 5 0 0 5 122 104
--------- --- -------- ----- ------- ----- -----
UBS Switzerland........................ 53 19 1 20 93 916 821
Institutional Asset Management........... 1 0 0 0 1 9 18
Investment Funds/GAM..................... 0 0 0 0 0 6 4
--------- --- -------- ----- ------- ----- -----
UBS Asset Management................... 1 0 0 0 1 15 22
Corporate and Institutional Clients...... 0 0 0 0 0 316 2,382
UBS Capital.............................. 0 0 0 0 0 3 2
Private Clients.......................... 0 0 0 0 0 29 39
e-Services............................... 0 0 0 0 0 0 0
--------- --- -------- ----- ------- ----- -----
UBS Warburg............................ 0 0 0 0 0 348 2,423
Corporate Center......................... 3 0 91 3 97 565 761
--------- --- -------- ----- ------- ----- -----
Total.......................... 57 19 92 23 191 1,844 4,027
========= === ======== ===== ======= ===== =====
</TABLE>
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The substantial majority of the remaining restructuring reserve balance is also
attributed to employees and real estate located in Switzerland. UBS estimates
that the balance of the reserve will be used in the second half of 2000 and in
2001.
UBS has achieved 1998 merger-related cost savings of CHF 2 billion per year,
including savings related to headcount reductions of CHF 1.6 billion and savings
for other costs estimated to be around CHF 0.4 billion per year, including
approximately CHF 75 million in eliminated depreciation expenses and other costs
related to real estate.
Since the 1998 merger was announced, UBS Warburg has essentially completed its
integration including the reduction of personnel and the integration of
information technology platforms. As expected, most of the cost savings over the
past two years have been attributable to UBS Warburg.
UBS Asset Management has also essentially completed its integration, while in
the Corporate Center UBS expects the write-off or sale of the remaining
redundant real estate to proceed in 2000 and 2001.
Within UBS Switzerland, Private Banking's integration is essentially complete.
Private and Corporate Clients, meanwhile, has been rapidly integrating its
business in line with a detailed timetable and project schedule. For example,
the branch network has been reduced by 36%, or 200 branches. In addition, now
that the integration of the technology platforms has been completed and in line
with employee association agreements made in 1998, redundancy plans will gain
momentum during 2000 and 2001.
As with any merger, cost savings attributable directly to the 1998 merger are
becoming increasingly difficult to track. Across all divisions, normal organic
business growth, new investments and initiatives, and at least three
acquisitions and six divestitures have clouded underlying developments since the
time of the 1998 merger.
For example, UBS Warburg's Private Clients business unit has invested heavily
over the past two years in building up its onshore private banking business
outside Switzerland. Additionally, in 1999, UBS formed the e-services business
area, which will experience further significant investment. More information on
various divisional initiatives can be found in the respective business
descriptions.
UBS is also implementing general cost control initiatives across all divisions,
which extend well beyond merger-related savings. These initiatives are already
well-structured at UBS Warburg's Corporate and Institutional Clients business
unit and UBS Switzerland's Private and Corporate Clients business unit.
Corporate and Institutional Clients is continuing to focus on cost management
with emphasis on improving overall efficiency such that revenue growth exceeds
any growth in non-personnel costs.
In addition, the Corporate and Institutional Clients Investment Committee has
carried out a rigorous review process to ensure that investments in the business
unit's infrastructure are fully aligned with the strategy of the business.
Within the UBS Switzerland Private and Corporate Clients business unit, the
Strategic Projects Portfolio is expected to enhance revenues and reduce costs,
including the ongoing realization of the remaining merger-related cost savings.
This portfolio is well on track and is expected to yield a significant
improvement in net profit by 2002.
In the third quarter of 1998, UBS realized a post-tax loss of CHF 984 million as
a result of a write-down of its investment in Long Term Capital Management,
L.P., or LTCM, and a post-tax loss of CHF 919 million as a result of unrealized
losses in the value of its Global Equity Derivatives, or GED, portfolio.
Long Term Capital Management. In the case of LTCM, the loss arose from a
structured transaction in which UBS sold an option that gave the optionholder
the right to purchase shares in LTCM at a predetermined price over a seven-year
period. In order to hedge the risk of this option, UBS held $800 million of LTCM
shares to create an incrementally risk neutral position. Separate from the
structured
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transaction, UBS also made a further direct equity investment of $266 million in
LTCM. In normal market conditions, the structured transaction would have behaved
in a controlled manner. However, the structured transaction could not be
effectively hedged, particularly in the event of extreme market movements. As a
result of the structured transaction, UBS was exposed to a sudden and severe
downward movement in the value of LTCM equity, and had very limited scope to
hedge this exposure. LTCM's equity was not traded and was valued only
periodically based on the underlying instruments held by LTCM. Moreover, LTCM
did not provide detailed information about its investment results. Consequently,
UBS could not hedge with any precision against adverse moves in the value of
LTCM's equity. In particular, when LTCM was faced by a sharp adverse move in
market prices relating to certain specific investment strategies, UBS was unable
to hedge this risk itself as it had no knowledge of the details of these
strategies.
At the time of the recapitalization of LTCM in 1998, UBS wrote down its initial
investment in LTCM and also agreed to provide a further $300 million (out of
$3.6 billion provided by a group of financial institutions) of "consortium"
equity in order to avoid a forced liquidation of LTCM and to enable LTCM's
portfolio to be managed under the oversight of a management board that would
oversee the orderly winding down of LTCM's portfolio.
On 24 November 1999, at the release of its nine month 1999 results, UBS reported
that its initial investment, which was written down to $106 million, had been
bought back by LTCM, with an immaterial impact on UBS's income statement. That
position is now closed. In addition, as part of UBS's "consortium" investment,
four cash payments totaling $296 million were received by UBS by 31 December
1999. Of these cash repayments, $271 million were treated as a return of its
$300 million investment, to leave a remaining balance of $29 million, and $25
million was recorded as income.
Global Equity Derivatives (GED) Portfolio. The other major contributory factor
to the third-quarter 1998 losses related to the GED portfolio. This portfolio
consists of a number of structured equity derivative transactions. This
portfolio was analyzed at the time of the merger and it was recognized that it
contained a number of positions that possessed the potential for significant
short-term variance. Consequently, when equity market volatilities increased
significantly as a result of the market turmoil in the third quarter of 1998, an
unrealized loss of about CHF 728 million on the value of the portfolio arose.
Over the next 12 months, as volatilities fell and positions were reduced, income
from the portfolio of approximately CHF 306 million was recognized.
UBS continues to manage the exposure associated with this portfolio in order to
minimize the risk of further adverse effects on earnings. The positions have now
been included in UBS's standard equity risk management platform and are subject
to its normal risk control and stress loss processes. UBS has been reducing the
market risk associated with the portfolio and will continue to do so through
specific hedges, close-outs and the passage of time. These positions, including
the associated hedges, are all carried at fair value. However, given that the
average maturity of the transactions in the portfolio is about two years, it
will take some time to wind down this exposure, and during this time the
portfolio will continue to be exposed to adverse moves in equity markets.
Reconciliation of IAS to U.S. GAAP. UBS's consolidated results of operations
are prepared in accordance with IAS, which differs in certain respects from U.S.
GAAP. A reconciliation of the effects on shareholders' equity and net
profit/(loss) to U.S. GAAP for the years ended 31 December 1999 and 1998 is
included in Note 42 of UBS's consolidated financial statements.
Results of Operations by Business Unit
UBS's management reporting system and policies were used to determine the
revenues and expenses directly attributable to each business unit. Internal
charges and transfer pricing adjustments have been
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reflected in the performance of each business unit. The basis of the reporting
reflects UBS's current management structure (UBS Warburg, UBS Asset Management,
UBS Switzerland and Corporate Center), rather than the management structure that
existed during 1999 and during 1998, following the 1998 merger (UBS Asset
Management, UBS Private Banking, UBS Capital, UBS Private and Corporate Clients,
UBS Warburg and Corporate Center).
Inter-business unit revenues and expenses include transfers between business
units and between geographical locations. Inter-business unit expense charges
are recorded as a reduction to expenses in the business unit providing the
service. Corporate Center expenses are allocated to the operating business
units, to the extent possible, whereby the business unit controlling the process
that is driving the expense bears the expense.
The credit loss expense included in the business unit results is a statistically
derived adjusted annual expected loan loss that reflects the inherent
counterparty and country risks in the respective portfolios. The expected loss
is based on assumptions about developments covering a full economic cycle and on
cumulative loss probabilities over the entire life of the loan portfolio. In
determining the inherent counterparty and country risk in the portfolio, UBS
takes into consideration the statistical probability of default by the customer
and the severity of loss.
As each business unit is ultimately responsible for its credit decisions, the
difference between actual credit losses and annual expected loan loss will
eventually be charged or credited back to the business unit in order to ensure
that the risks and rewards of credit decisions are fully reflected in its
results. The difference between the statistically adjusted expected loss that is
charged to the management accounts of the business unit and the credit loss
expense that is recorded in the financial accounts in accordance with IAS is
included in Corporate Center results.
The following table compares the expected credit loss charged to the management
accounts to the credit loss expense calculated in accordance with IAS, broken
down by business unit for the half years to 30 June 2000 and 1999 and for the
years ended 31 December 1999 and 1998.
<TABLE>
<CAPTION>
EXPECTED IAS
CREDIT LOSS CREDIT EXPENSE EXPECTED CREDIT LOSS IAS CREDIT EXPENSE
30 JUNE 30 JUNE 30 JUNE 30 JUNE 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER
2000 1999 2000 1999 1999 1998 1999 1998
(CHF in millions) (CHF in millions)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UBS Switzerland...... 423 560 (237) 617 1,071 1,186 985 445
UBS Asset
Management......... 0 0 0 0
UBS Warburg.......... 115 171 154 14 333 510 (20) 506
Corporate Center..... (621) (96) 4 (448) (745) (9) 0
----- ----- ----- ----- ----- ----- ----- -----
Total................ (83) 635 (83) 635 956 951 956 951
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>
Business unit results are presented according to the current management
structure and current accounting treatment for the following periods:
- Six months ended 30 June 2000 compared to six months ended 30 June 1999; and
- Year ended 31 December 1999 compared to year ended 31 December 1998.
Results for the year ended 31 December 1998 compared to the year ended 31
December 1997 are presented in terms of the business divisions through which UBS
was managed at that time, namely UBS Private Banking, UBS Private and Corporate
Clients, UBS Warburg, UBS Capital, UBS Asset Management and Corporate Center. As
a result of the differences in the reporting by the predecessor banks'
accounting and reporting policies, the unavailability of certain data, and the
shut down and modification of significant computer systems as a result of the
1998 merger and to address Year 2000
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issues, there is insufficient information to permit UBS to restate these results
in terms of the current business group and business unit structure.
The principal differences between the structure in 1997 and the current
structure are that the UBS Asset Management Investment Funds business unit and
the UBS Warburg Private Clients business unit were part of the Private Banking
Division, and their results are included within that Division. In addition, UBS
Warburg's UBS Capital business unit was an autonomous division, and UBS Warburg
itself consisted only of what is now the UBS Warburg Corporate and Institutional
Clients business unit.
In addition the comparison of the year ended 31 December 1998 with the year
ended 31 December 1997 is based on results which are presented without
restatement for new accounting policies introduced in 2000. The principal effect
of this is within UBS Warburg. For further details, see Note 1(t) to UBS's
consolidated financial statements.
In considering these results it is important to bear in mind the following
representations with regard to the factors that may affect the operating income
of each business unit.
Introduction.
UBS Switzerland.
Private and Corporate Clients. Private and Corporate Clients derives its
operating income principally from:
- interest income on its loan portfolio;
- fees for investment and asset management services;
- transaction fees; and
- investment income from deposits.
As a result, Private and Corporate Clients' operating income is affected by
movements in interest rates, fluctuations in assets under management, client
activity, investment performance and changes in market conditions.
Private Banking. Private Banking derives its operating income from:
- fees for financial planning and wealth management services;
- fees for discretionary services; and
- transaction-related fees.
Private Banking's fees are based on the market value of assets under management
and the level of transaction-related activity. As a result, Private Banking's
operating income is affected by such factors as fluctuations in assets under
management, changes in market conditions, investment performance and inflows and
outflows of client funds.
UBS Asset Management. Prior to the reorganization of UBS in February 2000, UBS
Asset Management generated most of its revenue from the asset management
services it provides to institutional clients. In 2000 this has become more
evenly divided between institutional and non-institutional sources due to the
addition of GAM and the Investment Funds business area. Fees charged to
institutional clients and on investment funds are based on the market value of
assets under management. As a result, UBS Asset Management's revenues are
affected by changes in market conditions as well as new and lost business.
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UBS Warburg.
Corporate and Institutional Clients. Corporate and Institutional Clients
generates operating income from:
- commissions on agency transactions and spreads or markups on principal
transactions,
- fees from debt and equity capital markets transactions, leverage finance and
structuring derivatives and complex transactions;
- mergers and acquisitions advisory fees;
- interest income on principal transactions and from the loan portfolio; and
- gains and losses on market making, proprietary and arbitrage positions.
As a result, Corporate and Institutional Clients's operating income is affected
by movements in market conditions, interest rate swings, the level of trading
activity in primary and secondary markets and the extent of merger and
acquisition activity. These and other factors outside the control of Corporate
and Institutional Clients have had and may in the future have a significant
impact on its results of operations from year to year.
UBS Capital. UBS Capital's primary source of operating income is capital gains
from the disposition or sale of its investments, which are recorded at the time
of ultimate divestment. As a result, appreciation in fair market value is
recognized as operating income only at the time of sale. The level of annual
operating income from UBS Capital is directly affected by the level of
investment dispositions that take place during the course of a year. With the
formation of regional funds, UBS Capital has begun to receive management fees
from funds UBS manages and sponsors, which are recorded as operating income.
Private Clients. Private Clients derives its operating income from:
- fees for financial planning and wealth management services;
- fees for discretionary services; and
- transaction-related fees.
Private Clients' fees are based on the market value of assets under management
and the level of transaction-related activity. As a result, Private Clients'
operating income is affected by such factors as fluctuations in assets under
management, changes in market conditions, investment performance and inflows and
outflows of client funds.
e-services. The e-services business unit has not yet generated revenues, but
expects to generate revenues from fees for financial planning and wealth
management services, fees for discretionary services and transaction related
fees. It is expected that these fees will be based on the market value of assets
under management and the level of transaction-related activity. As a result,
e-services' operating income will be affected by such factors as fluctuations in
assets under management, changes in market conditions, investment performance
and inflows and outflows of client funds. In addition, e-services is a new
business with no existing clients and an as yet unproven business model.
e-services' possible future income will be affected by its ability to attract
clients and by the success or failure of its business model.
UBS Switzerland. The business group UBS Switzerland is made up of two business
units:
- Private and Corporate Clients, the leading retail and commercial bank in
Switzerland; and
- Private Banking, which covers all Swiss and international high net worth
clients who bank in Switzerland or offshore centers.
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Private and Corporate Clients. The following table sets forth the results of
Private and Corporate Clients for the half years ended 30 June 2000 and 30 June
1999 and the years ended 31 December 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE(1) 31 DECEMBER(2)
2000 1999(2) 1999 1998
(CHF in millions)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME:
Individual clients........................... 4,553 4,785
Corporate clients............................ 1,855 1,728
Risk transformation and capital management... 330 --
Operations................................... 313 448
Other........................................ 142 64
------- -------
Total operating income before credit loss
expense................................. 3,803 3,599 7,193 7,025
Credit loss expense.......................... 412 554 1,050 1,170
------- ------- ------- -------
Operating income........................... 3,391 3,045 6,143 5,855
------- ------- ------- -------
OPERATING EXPENSES:
Personnel, general and administrative
expenses................................... 2,154 2,224 4,486 4,263
Depreciation and amortization................ 219 200 386 684
------- ------- ------- -------
Operating expenses......................... 2,373 2,424 4,872 4,947
------- ------- ------- -------
Operating profit before tax............. 1,018 621 1,271 908
------- ------- ------- -------
(at period end)
Assets under management (CHF in billions).... 439 443 439 434
------- ------- ------- -------
Total loans............................. 162,752 167,004 164,743 164,840
======= ======= ======= =======
</TABLE>
------------
(1) Income by business area is only reported at year end.
(2) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating
income before credit loss expense increased CHF 204 million, or 5.7%, from CHF
3,599 million in the first half of 1999 to CHF 3,803 million in the first half
of 2000. This improvement was primarily due to increased brokerage revenues in
the strong market conditions, particularly in the first quarter of 2000. Private
and Corporate Clients' results are dependent on interest-related businesses,
which contribute almost 60% of operating income.
Private and Corporate Clients' credit loss expense decreased CHF 142 million, or
26%, from CHF 554 million in the first half of 1999 to CHF 412 million in the
second half of 2000 as a result of improved asset quality and increased
collateral values.
Personnel, general and administrative expenses decreased CHF 70 million, or
3.1%, from CHF 2,224 million in the first half of 1999 to CHF 2,154 million in
the first half of 2000. This decrease was due primarily to continued reduction
in personnel expense, in line with headcount reductions as a result of the 1998
merger. General and administrative expenses increased by 1%, or CHF 6 million,
from CHF 501 million in the first half of 1999 to CHF 507 million in the first
half of 2000, while personnel expenses fell 4% or CHF 76 million to CHF 1,647
million in the first half of 2000.
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Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income
before credit loss expense increased CHF 168 million, or 2.4%, from CHF 7,025
million in 1998 to CHF 7,193 million in 1999. This improvement was primarily due
to higher margins on interest-related business, such as mortgages, as well as
the first full-year impact of the amalgamation and repricing of products from
the two former banks. In conjunction with the creation of the Risk
Transformation and Capital Management business area in October 1999, the
business areas within Private and Corporate Clients were realigned in 1999.
These realignments and the resulting effects on 1999 operating income were as
follows:
- The Business Client segment was transferred from Individual Clients to
Corporate Clients resulting in a decrease in operating income from Individual
Clients from 1998 to 1999.
- Operating income from Corporate Clients increased from 1998 to 1999 primarily
due to the transfer in of the Business Client segment, the transfer in of the
Swiss Global Trade Finance business from UBS Warburg and improving interest
margins. The transfer out of the Recovery portfolio to Risk Transformation and
Capital Management partially offset these increases.
- Operating income from Operations decreased compared to 1998. This was the net
effect of the transfer of emerging market bank activities from UBS Warburg
into UBS Private and Corporate Clients and the transfer of industrialized bank
activities to UBS Warburg during 1999.
UBS's credit loss expense decreased CHF 120 million, or 10.3%, from CHF 1,170
million in 1998 to CHF 1,050 million in 1999 as a result of the accelerated
reduction of impaired positions and the movement to higher quality businesses.
This was partially offset by increased loss expectations primarily resulting
from the transfer of the remainder of the Swiss Global Trade Finance business
from UBS Warburg during 1999.
Personnel, general and administrative expenses increased CHF 223 million, or
5.2%, from CHF 4,263 million in 1998 to CHF 4,486 million in 1999. This increase
was due primarily to merger related IT integration work, work relating to the
Year 2000 transition and the costs associated with the shift of the Swiss Trade
Finance business from UBS Warburg. This business, with approximately 400
professionals, was transferred from UBS Warburg in early 1999. These increases
were partially offset by cost savings resulting from the closure of redundant
branches.
Depreciation and amortization expense decreased CHF 298 million, or 43.6%, from
CHF 684 million in 1998 to CHF 386 million in 1999, primarily due to reduced
assets employed subsequent to the merger.
Private Banking. The following table sets forth the results of Private Banking
for the half years ended 30 June 2000 and 30 June 1999 and the years ended 31
December 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME:
Operating income before credit loss expense..... 3,471 2,728 5,568 6,933
Credit loss expense............................. 11 6 21 16
------ ------ ------ ------
Operating income.............................. 3,460 2,722 5,547 6,917
------ ------ ------ ------
</TABLE>
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<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING EXPENSES:
Personnel, general and administrative
expenses...................................... 1,425 1,147 2,513 2,411
Depreciation and amortization................... 55 38 97 91
------ ------ ------ ------
Operating expenses............................ 1,480 1,185 2,610 2,502
------ ------ ------ ------
Operating profit before tax................ 1,980 1,537 2,937 4,415
====== ====== ====== ======
(at period end)
ASSETS UNDER MANAGEMENT (CHF IN BILLIONS):
Advisory........................................ 533 470 501 437
Discretionary................................... 150 160 170 142
------ ------ ------ ------
Total......................................... 683 630 671 579
====== ====== ====== ======
</TABLE>
------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating
income before credit loss expense increased CHF 743 million, or 27.2%, from CHF
2,728 million in the first half of 1999 to CHF 3,471 million in the first half
of 2000. This increase principally reflected higher transaction-based revenues
due to higher levels of client transaction activity and asset growth since 30
June 1999.
Assets under management increased CHF 53.0 billion, or 8.4%, from 30 June 1999
to 30 June 2000, with most of the increase due to positive performance trends,
partially offset by a net decline of CHF 3 billion in new money.
Operating expenses increased 24.8%, or CHF 295 million, to CHF 1,480 million
from the first half of 1999 to the first half of 2000, mainly due to increased
general and administrative expense.
Personnel, general and administrative expenses increased CHF 278 million, or
24.2%, from CHF 1,147 million in the first half of 1999 to CHF 1,425 million in
the first half of 2000. Personnel costs increased 16.5%, or CHF 109 million, to
CHF 769 million in the first half of 2000, due to increased performance-related
compensation in line with strong first half 2000 results and an increase in
headcount. Headcount went up by 750 from 6,697 at 30 June 1999 to 7,447 at 30
June 2000 as Private Banking expanded its front line staff and strengthened its
logistics. General and administrative expenses increased 34.7%, or CHF 169
million, from the first half of 1999 to the first half of 2000 due to increases
in IT and marketing expenses and higher intra-Group cost recoveries, driven by
higher transaction levels.
Goodwill amortization increased CHF 9 million, or 112.5%, to CHF 17 million in
the first half of 2000 as a result of the acquisition of Bank of America's
international private banking business, which took place in the second quarter
of 1999. Depreciation increased CHF 8 million, or 26.6%, from CHF 30 million in
the first half of 1999 to CHF 38 million in the first half of 2000.
Year to 31 December 1999 Compared to Year to 31 December 1998. In March 1999,
UBS acquired Bank of America's international private banking operations in
Europe and Asia, thereby increasing the assets under management in UBS Private
Banking by approximately CHF 5 billion as of 31 December 1999. The remainder of
the increase was principally performance related.
Operating income before credit loss expense decreased CHF 1,365 million, or
19.7%, from CHF 6,933 million in 1998 to CHF 5,568 million in 1999. This
significant decrease principally reflected lower
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transaction-based revenues due to lower levels of client transaction activity.
CHF 1,058 million gains from the divestitures of BSI and Adler, as well as CHF
268 million of operating income relating to BSI's operations, are included in
operating income for 1998 and did not recur in 1999. Excluding the disposal
related income, operating income from UBS Private Banking increased 2.3% from
1998 to 1999.
Notwithstanding the decrease in operating income, assets under management
increased during 1999 by CHF 92 billion, or 15.9%. Strong markets, especially in
Europe, the United States and in the technology sector, as well as the stronger
U.S. dollar, led to a performance increase of CHF 80 billion for 1999. In
addition, the acquisition of the international private banking operations of
Bank of America accounted for an additional CHF 5 billion while interdivisional
transfers resulted in another CHF 6 billion. This increase was partially offset,
however, by decreased volumes from existing clients during the second half of
1999.
Operating expenses, adjusting for CHF 125 million in divestiture-related
operating expenses, increased 4.3%, or CHF 108 million, to CHF 2,610 million in
1999, to a large extent as a result of UBS's expansion in the front-line staff
as well as infrastructure related investments.
Personnel, general and administrative expenses increased CHF 102 million, or
4.2%, from CHF 2,411 million in 1998 to CHF 2,513 million in 1999. Personnel
costs increased 9.7%, or CHF 118 million, to CHF 1,328 million, in 1999 due to
an increase in headcount of 710 from 6,546 at 31 December 1998 to 7,256 at 31
December 1999. Headcount growth resulted from the acquisition in 1999 of Bank of
America's international private banking operations, enhancement of UBS's
logistics capabilities and support for the introduction of new portfolio
monitoring and advisory capabilities. Operating expenses in 1998 also included
CHF 125 million related to BSI that did not occur in 1999.
As a result of the acquisition of the international private banking operations
of Bank of America, goodwill amortization increased by CHF 21 million in 1999.
Depreciation decreased CHF 15 million, or 16.5%, from CHF 91 million in 1998 to
CHF 76 million in 1999.
UBS Asset Management.
Institutional Asset Management. The following table sets forth the results of
Institutional Asset Management for the half years ended 30 June 2000 and 30 June
1999 and the years ended 31 December 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME........................................ 638 542 1,099 1,163
OPERATING EXPENSES:
Personnel, general and administrative expenses.......... 402 331 636 619
Depreciation and amortization........................... 98 63 138 107
--- --- ----- -----
Operating expenses.................................... 500 394 774 726
--- --- ----- -----
Operating profit before tax........................ 138 148 325 437
=== === ===== =====
(at period end)
Assets under management (CHF in billions):.............. 525 563 574 531
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Assets under
management decreased 6.7% or CHF 38 billion, from CHF 563 billion at 30 June
1999 to CHF 525 billion at 30
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June 2000, with increases in non-institutional assets under management more than
offset by losses in institutional assets under management. Non-institutional
assets under management increased primarily because of market performance, while
institutional assets under management declined mainly due to client losses, as a
result of performance issues in equity related mandates, offset by the effect of
currency movements and the acquisition of Allegis Realty Investors LLC in
December 1999.
Operating income increased CHF 96 million, or 17.5%, from CHF 542 million in the
first half of 1999 to CHF 638 million in the first half of 2000. Despite the
decrease in assets under management, operating income increased as a result of
the acquisition of Allegis, the addition of the O'Connor alternative asset
management business formed in June 2000 and positive currency movements,
partially offset by lost revenue from client losses.
Personnel, general and administrative expenses increased CHF 71 million, or
21.5%, from CHF 331 million in the first half of 1999 to CHF 402 million in the
first half of 2000. Headcount increased 13.6% from 1,507 as of 30 June 1999 to
1,712 as of 30 June 2000, primarily as a result of the acquisition of Allegis in
December 1999 and the creation of the O'Connor business in June 2000. Personnel
expenses increased 18.7% from CHF 252 million in the first half of 1999 to CHF
299 million in the first half of 2000 due to the acquisition of Allegis, the
addition of the O'Connor business and currency movements. General and
administrative expenses increased 30.4% to CHF 103 million in the period as a
result of the acquisition of Allegis and currency movements.
Depreciation and amortization expense increased CHF 35 million, or 56%, from CHF
63 million in the first half of 1999 to CHF 98 million in the first half of
2000, reflecting the acquisition of Allegis.
Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income
decreased CHF 64 million, or 5.5%, from CHF 1,163 million in 1998 to CHF 1,099
million in 1999. Assets under management increased 8.1%, or CHF 43 billion, to
CHF 574 billion at 31 December 1999, with increases in both institutional and
non-institutional categories year-on-year. Despite the 4.4% increase in
institutional assets under management, which primarily resulted from investment
performance, the acquisition of Allegis and growth in private client mandates,
institutional revenues decreased. This decrease from CHF 968 million in 1998 to
CHF 903 million in 1999 reflects a slight decline in average institutional
assets under management from 1998 to 1999, as gains from performance and
currency were offset by loss of clients and performance issues in certain
mandate types. Non-institutional assets increased by 16% during 1999; however,
non-institutional revenues declined slightly to CHF 193 million as a result of
new interdivisional fee arrangements with UBS Private Banking.
Personnel, general and administrative expenses increased CHF 17 million, or
2.7%, from CHF 619 million in 1998 to CHF 636 million in 1999. Headcount
increased from 1,497 as of 31 December 1998 to 1,653 as of 31 December 1999,
primarily as a result of the acquisition of Allegis in December 1999. Personnel
expenses decreased slightly from CHF 465 million in 1998 to CHF 458 million in
1999 reflecting decreased incentive compensation. General and administrative
expenses increased 15.6% to CHF 178 million in 1999 as a result of revisions in
cost-sharing arrangements between Institutional Asset Management and other
divisions of UBS.
Depreciation and amortization expense increased CHF 31 million, or 29%, from CHF
107 million in 1998 to CHF 138 million in 1999, reflecting increased goodwill
amortization related to the buy-out of UBS's joint venture with the Long-Term
Credit Bank of Japan.
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Investment Funds/GAM. The following table sets forth the results of Investment
Funds/GAM for the half years ended 30 June 2000 and 1999 and the years ended 31
December 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME........................................... 334 102 270 195
OPERATING EXPENSES:
Personnel, general and administrative expenses............. 215 75 151 124
Depreciation and amortization.............................. 55 3 7 6
--- --- --- ---
Operating expenses....................................... 270 78 158 130
--- --- --- ---
Operating profit before tax.............................. 64 24 112 65
=== === === ===
(at period end)
Assets under management (CHF in billions).................. 225 190 225 175
</TABLE>
------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Assets under
management increased 18.4%, or CHF 35 billion, from CHF 190 billion at 30 June
1999 to CHF 225 billion at 30 June 2000, as a result of the acquisition of GAM,
which had CHF 24 billion assets under management at 31 December 1999, and
positive market performance.
Operating income increased CHF 232 million, or 227.5%, from CHF 102 million in
the first half of 1999 to CHF 334 million in the first half of 2000. This was a
result of the GAM acquisition and increases in Investment Fund fees from higher
asset levels.
Personnel, general and administrative expenses increased CHF 140 million, or
187%, from CHF 75 million in the first half of 1999 to CHF 215 million in the
first half of 2000. Headcount increased 165% from 392 as of 30 June 1999 to
1,038 as of 30 June 2000, primarily as a result of the acquisition of GAM and an
increase of about 100 people to support increased marketing and distribution
initiatives in Investment Funds. Personnel expenses increased 321% from CHF 29
million in the first half of 1999 to CHF 122 million in the first half of 2000
due to the acquisition of GAM. General and administrative expenses increased
102.2% from 30 June 1999 to CHF 93 million at 30 June 2000 as a result of the
acquisition of GAM and marketing and distribution initiatives in Investment
Funds.
Depreciation and amortization expense increased CHF 52 million, or 1,733% from
CHF 3 million in the first half of 1999 to CHF 55 million in the first half of
2000, reflecting goodwill amortization following the acquisition of GAM.
Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income
increased CHF 75 million, or 38.5%, from CHF 195 million in 1998 to CHF 270
million in 1999. This was principally due to higher Investment Funds assets and
the transfer from Private Banking of some client responsibility and related
income. The acquisition of GAM did not impact income or expenses in 1999.
Assets under management increased 28.1%, or CHF 50 billion, to CHF 225 billion
at 31 December 1999. CHF 24 billion of this increase was due to the acquisition
of GAM in December 1999. The remainder was mainly due to positive investment
performance.
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Personnel, general and administrative expenses increased CHF 27 million, or
21.7%, from CHF 124 million in 1998 to CHF 151 million in 1999. Headcount
increased from 366 as of 31 December 1998 to 923 as of 31 December 1999,
primarily as a result of the acquisition of GAM in December 1999. Excluding GAM,
headcount increased by 69, as a result of efforts to build the Investment Funds
business, including the launching of new funds and expansion of distribution
efforts. Personnel expenses increased 16% from CHF 50 million in 1998 to CHF 58
million in 1999 in line with the increase in headcount. General and
administrative expenses increased 25.7% to CHF 93 million in 1999 reflecting
increased investment in international distribution and the costs of launching
new funds, offset by synergies from the 1998 merger, including reduced fees for
market data systems and the combination of fund valuation and management
systems.
Depreciation and amortization expense increased CHF 1 million, or 16.7%, from
CHF 6 million in 1998 to CHF 7 million in 1999, as a result of changes in the
holding structure of some of the business unit's real estate funds.
UBS Warburg.
Corporate and Institutional Clients. The Corporate Finance business area within
Corporate and Institutional Clients provides both advisory services and
financing services. The financing services include both equity and fixed-income
offerings undertaken in cooperation with the Equity Capital Markets, Debt
Capital Markets and Leveraged Finance groups. Accordingly, a portion of
operating income associated with these equity and fixed-income financing
services is allocated to Corporate Finance and the remaining operating income is
allocated to the Equities business area or Fixed Income business area as
appropriate.
The following table sets forth the results of Corporate and Institutional
Clients for the half years ended 30 June 2000 and 1999 and the years ended 31
December 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1)(2) 1999 1998
(CHF in millions)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME:
Equities......................................... 5,724 3,253
Fixed Income..................................... 2,464 (267)
Corporate Finance................................ 2,054 1,665
Treasury Products................................ 1,805 2,351
Non-Core Business................................ 682 (96)
------ ------
Total operating income before credit loss
expense........................................ 9,909 6,966 12,729 6,906
Credit loss expense.............................. 113 171 330 500
------ ------ ------ ------
Operating income............................... 9,796 6,795 12,399 6,406
------ ------ ------ ------
OPERATING EXPENSES:
Personnel, general and administrative............ 6,601 4,972 9,290 6,816
Depreciation and amortization.................... 330 393 763 692
------ ------ ------ ------
Operating expenses............................. 6,931 5,365 10,053 7,508
------ ------ ------ ------
Operating profit (loss) before tax.......... 2,865 1,430 2,346 (1,102)
====== ====== ====== ======
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
(2) Income by business area is only reported at year end.
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Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating
income increased CHF 3,001 million, or 44.2% from CHF 6,795 million in the first
half of 1999 to CHF 9,796 million in the first half of 2000. Corporate Finance
revenues increased in the first half of 2000 with a strong performance in
mergers and acquisitions, and both Equities and Fixed Income produced record
revenues reflecting active markets and record levels of client commissions,
offset by slightly weaker performances by Treasury Products.
Credit loss expense decreased CHF 58 million, or 33.9%, from CHF 171 million in
the first half of 1999 to CHF 113 million in the first half of 2000. This
reflected a decrease in expected credit losses due primarily to the continued
wind-down of the non-core loan portfolio and the sale of the international
Global Trade Finance business in mid-1999.
Personnel, general and administrative expenses increased CHF 1,629 million, or
32.8%, from CHF 4,972 million in the first half of 1999 to CHF 6,601 million in
the first half of 2000. Despite a slight reduction in headcount of 418 from
13,148 at 30 June 1999 to 12,730 at 30 June 2000, personnel expenses increased
CHF 1,464 million, or 37.6%, to CHF 5,362 million in the first half of 2000, due
primarily to performance-related compensation tied directly to the strong
results for the half. General and administrative expenses increased by CHF 165
million, or 15.4%, from the first half of 1999 to the first half of 2000, mainly
driven by increased investments in e-commerce and technology.
Depreciation and amortization decreased CHF 63 million, or 16%, from CHF 393
million in the first half of 1999 to CHF 330 million in the first half of 2000,
as the depreciation impact of 1998 merger-related IT and premises projects
diminished.
Year to 31 December 1999 Compared to Year to 31 December 1998. In October and
November 1998, UBS's Board of Directors mandated and undertook a review of UBS's
risk profile and risk management as well as UBS's control processes and
procedures. The review placed particular emphasis on the Fixed Income business
area, which had experienced losses on credit exposures in certain emerging
market assets. Each of the business areas selected for review was assessed as to
whether it supported the UBS and UBS Warburg franchises and, if so, whether the
expected return as compared to the estimated risk justified a continuation of
the business. Corporate and Institutional Clients used the review to define its
core and non-core business areas, and decided to wind down over time the
identified non-core businesses.
The businesses identified as non-core in late 1998 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
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--------------------------------------------------------------------------------
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 61.3%, 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.
In 1999, Corporate and Institutional Clients' operating income before credit
loss expense from core businesses amounted to CHF 12,047 million and its
operating income before credit loss expense from non-core businesses was CHF 682
million.
Operating income from Equities increased CHF 2,471 million, or 76%, from CHF
3,253 million in 1998 to CHF 5,724 million in 1999. This increase was primarily
due to continued strong growth throughout 1999 compared to weaker results and
losses in 1998 that did not recur. Equities performed well during the six months
ended 30 June 1998, but experienced a more difficult trading environment in the
second half of 1998 as a result of higher volatility levels in equity markets.
In 1999, Equities performed strongly in all major markets. Continuing strong
secondary cash and derivatives business with institutional and corporate clients
contributed significantly to the positive results.
Operating income from Fixed Income increased CHF 2,731 million from CHF (267)
million in 1998 to CHF 2,464 million in 1999. The improvement in Fixed Income
largely reflected particularly strong performance in swaps and options and
investment grade corporate debt products during 1999. Strong client flows drove
both investor and issuer activities, resulting in increased revenues. Weaker
than expected results in Fixed Income in 1998 were due primarily to significant
losses in the Group's emerging market portfolio, which were largely attributable
to Corporate and Institutional Clients and a write-down of CHF 790 million in
the division's LTCM trading position.
Operating income from Corporate Finance increased CHF 389 million, or 23.4%,
from CHF 1,665 million in 1998 to CHF 2,054 million in 1999. Strong performance
in mergers and acquisitions, resulting in higher advisory fees, and
contributions from UBS's Equity and Debt Capital Markets Groups were the primary
drivers of the increase.
Operating income from Treasury Products decreased CHF 546 million, or 23.2%,
from CHF 2,351 million in 1998 to CHF 1,805 million in 1999. Foreign exchange
trading, while continuing to be profitable, was adversely affected by diminished
volumes in key markets in 1999. The reduced levels of activity resulted from the
introduction of the euro and narrowing margins from increased competition in the
global markets. Corporate and Institutional Clients' precious metals business
was adversely impacted by the dramatic volatility in the gold market in the
fourth quarter of 1999.
Operating income from the non-core business as identified above increased CHF
778 million from CHF (96) million in 1998 to CHF 682 million in 1999. In 1998,
Equities recognized losses of CHF 762 million from the Global Equity Derivatives
portfolio as compared to 1999, during which this portfolio generated CHF 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
addition, during 1999
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the Global Trade Finance business was sold for a CHF 200 gain after generating
approximately CHF 160 million in revenues in 1999.
Credit loss expense decreased CHF 170 million, or 34.0%, from CHF 500 million in
1998 to CHF 330 million in 1999. This reflected a decrease in expected credit
losses due primarily to the continued wind-down of the non-core loan portfolio
and the sale of the international Global Trade Finance business in mid-1999. See
"--UBS Switzerland--Private and Corporate Clients" for a discussion of the
impact of the transfer of UBS's Swiss Global Trade Finance business to Private
and Corporate Clients. The non-core loan portfolio will continue to be
wound-down.
Personnel, general and administrative expenses increased CHF 2,474 million, or
36.3%, from CHF 6,816 million in 1998 to CHF 9,290 million in 1999. Despite a
reduction in headcount of 1,100, or 8%, from 13,794 at 31 December 1998 to
12,694 at 31 December 1999, personnel expenses increased CHF 2,528 million, or
58.3%, to CHF 6,861 million in 1999, due primarily to performance-related
compensation tied directly to the strong divisional results for the year. In
addition, in 1998, CHF 1,007 million of accrued payments to personnel was
charged against the restructuring reserve. At the end of 1997, UBS foresaw the
probability of a shortfall in profit in its investment banking business as a
result of the merger. In order to protect its investment banking franchise, UBS
realized it would probably need to make payments to personnel in excess of
amounts determined by normal compensation methodologies. An amount of
approximately CHF 1 billion was recorded as part of the merger-related
restructuring reserve for this purpose. By the third quarter of 1998, this
shortfall had materialized, and the CHF 1,007 million of accrued payments to
personnel were charged against the restructuring reserve as planned. The
shortfall in profits noted above was aggravated by losses associated with LTCM
and the Global Equity Derivatives portfolio. After adjusting 1998 for the amount
charged to the restructuring reserve, personnel expenses in 1999 increased 28.5%
against the comparative prior period.
General and administrative expenses remained relatively flat from 1998 to 1999.
Depreciation and amortization increased CHF 71 million, or 10.3%, from CHF 692
million in 1998 to CHF 763 million in 1999, primarily reflecting accelerated
amortization of the goodwill on a Latin American subsidiary.
UBS Capital. The following table sets forth the results of UBS Capital for the
half years ended 30 June 2000 and 1999 and the years ended 31 December 1999 and
1998.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME........................................ 151 120 315 585
OPERATING EXPENSES:
Personnel, general and administrative................... 76 60 151 156
Depreciation and amortization........................... 4 3 7 1
--- --- --- ---
Operating expenses...................................... 80 63 158 157
--- --- --- ---
Operating profit before tax............................. 71 57 157 428
=== === === ===
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating
income increased CHF 31 million, or 25.8% from CHF 120 million in the first half
of 1999 to CHF 151 million in the
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--------------------------------------------------------------------------------
first half of 2000. This reflects an increase in realized gains resulting from
an increased number of sales of investments in the first half of 2000 as
compared to 1999, partially offset by write-downs of the value of some
under-performing companies in the portfolio.
Personnel, general and administrative expenses increased by CHF 16 million, or
26.7%, from CHF 60 million in the first half of 1999 to CHF 76 million in the
first half of 2000. This was mainly driven by bonus expenses. Bonuses are
accrued when an investment is successfully exited, so personnel expenses
increase when divestments occur.
UBS Capital made approximately CHF 0.8 billion of new investments and add-ons
between 31 December 1999 and 30 June 2000, compared to CHF 0.6 billion in the
equivalent period in 1999. UBS Capital is gradually increasing its annual
investment rate, as demonstrated by the higher investment rate in the first half
of 2000 as compared to the first half of 1999. UBS Capital has a target
portfolio book value of approximately CHF 5 billion from its own investments and
CHF 5 billion from third-party funds.
Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income
decreased CHF 270 million, or 46.2%, from CHF 585 million in 1998 to CHF 315
million in 1999. This reflects a decrease in realized gains resulting from a
reduced number of sales of investments in 1999 as compared to 1998. In 1999,
operating income included CHF 13 million of management fees paid by funds that
UBS manages and sponsors.
Personnel, general and administrative expenses decreased slightly by CHF 5
million, or 3.2%, from CHF 156 million in 1998 to CHF 151 million in 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
another business unit effective 1 January 1999. This resulted in a lower
headcount during most of 1999 when compared to 1998, and therefore personnel
costs decreased 13.2% from CHF 121 million in 1998 to CHF 105 million in 1999.
General and administrative expenses increased CHF 11 million, or 31.4%, to CHF
46 million in 1999 mainly due to deal-related expenses.
UBS Capital made approximately CHF 1.4 billion of new investments and add-ons
during 1999.
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Private Clients. The following table sets forth the results of Private Clients
for the half years ended 30 June 2000 and 1999 and the years ended 31 December
1999 and 1998.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE
ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME............................................ 133 93 194 190
OPERATING EXPENSES:
Personnel, general and administrative....................... 365 216 481 294
Depreciation and amortization............................... 14 18 40 29
---- ---- ---- ----
Operating expenses........................................ 379 234 521 323
---- ---- ---- ----
Operating loss before tax.............................. (246) (141) (327) (133)
==== ==== ==== ====
(at period end)
Assets under management (CHF in billions)................... 37 29 36 27
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 compared to Half Year to 30 June 1999. Operating
income increased CHF 40 million, or 43%, from CHF 93 million in the first half
of 1999 to CHF 133 million in the first half of 2000. Revenues have increased as
assets under management have grown and a wider range of products and services
has been offered to clients. With the exception of its business activities in
Germany and Australia, UBS Warburg's Private Clients business is in the
relatively early stages of development and its client relationships have not yet
delivered their full revenue potential. Private Clients opened new offices in
Rome, Madrid, Barcelona and Marbella in January 1999 and in Stuttgart and Paris
in June 1999.
Assets under management increased by CHF 8 billion, or 27.6%, from 30 June 1999
to 30 June 2000, driven primarily by market performance.
Operating expenses increased 62%, or CHF 145 million, from CHF 234 million in
the first half of 1999 to CHF 379 million in the first half of 2000, mainly due
to the expansion of Private Clients' offices during the year. This included a
restructuring charge of CHF 93 million taken as a result of scaling back
operations in certain markets, subsequent to integration of Private Clients into
UBS Warburg in February 2000. CHF 60 million of the charge relates to personnel
costs, the remainder to general and administrative expenses.
Personnel, general and administrative expenses increased CHF 149 million, or
69.0%, from CHF 216 million in the first half of 1999 to CHF 365 million in the
first half of 2000. Personnel costs increased 86.6%, or CHF 116 million, to CHF
250 million in the first half of 2000, versus the first half of 1999, including
the restructuring charge of CHF 60 million as explained above. Excluding this
restructuring charge, personnel expenses increased 41.8% in line with increases
in headcount, and bonus accruals increased in line with improved revenue
performance. General and administrative expenses increased CHF 33 million, or
40%, from the first half of 1999 to the first half of 2000, due to the
restructuring provision explained above. Excluding this provision, general and
administrative expenses were unchanged, reflecting continued close management of
non-personnel costs in the context of a growing business.
Year to 31 December 1999 Compared to Year to 31 December 1998. Results for the
year ended 31 December 1998 are driven by a business consisting primarily of the
private banking operations of
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Schroder Munchmeyer Hengst, a German private bank acquired by the former Union
Bank of Switzerland in August 1997, domestic private banking activities in
Australia, and limited onshore private banking activities conducted in the
United States and Italy, established by the former Union Bank of Switzerland.
Operating income increased CHF 4 million, or 2%, from CHF 190 million in 1998 to
CHF 194 million in 1999.
Assets under management increased during 1999 by CHF 9 billion, or 33%.
Operating expenses increased 61%, or CHF 198 million, to CHF 521 million in
1999, as a result of expansion in front-line and support staff, office
locations, and infrastructure related investments.
Personnel, general and administrative expenses increased CHF 187 million, or
64%, from CHF 294 million in 1998 to CHF 481 million in 1999. Personnel costs
increased 57%, or CHF 107 million, to CHF 294 million in 1999 due to an increase
in headcount of 664, or 92%, from 722 at 31 December 1998 to 1,386 at 31
December 1999. General and administrative expenses increased CHF 80 million, or
75%, from 1998 to CHF 187 million in 1999, due to increases in information
technology, property and other infrastructure costs to support the new offices
and increased headcount.
e-services. UBS Group established the e-services project in the third quarter
of 1999.
The following table sets forth the results of e-services for the half year ended
30 June 2000 and the year ended 31 December 1999.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS YEAR ENDED
ENDED 30 JUNE 31 DECEMBER
2000 1999(1)
(CHF in millions)
--------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME............................................ 0 0
OPERATING EXPENSES:
Personnel, general and administrative....................... 144 36
Depreciation and amortization............................... 14 3
------------- -----------
Operating expenses........................................ 158 39
------------- -----------
Operating loss before tax.............................. (158) (39)
============= ===========
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
e-services has yet to be launched to the public. Accordingly, there have been no
revenues.
Operating expenses were CHF 158 million in the first half of 2000, mainly
related to the hiring of front-line staff as well as infrastructure-related
investments in core technologies. Personnel, general and administrative expenses
were CHF 144 million in the first half of 2000 and CHF 36 million in 1999, of
which CHF 84 million and CHF 18 million were personnel costs. These expenses are
primarily related to
- the hiring of the management team across a broad range of functions,
- the establishment of the operations infrastructure, including new call
centers in Maastricht and Edinburgh,
- the installation and testing of systems platforms, and
- the testing of the marketing concept.
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Corporate Center. The following table sets forth the results of Corporate
Center for the half years ended 30 June 2000 and 1999 and the years ended 31
December 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999 1999 1998
(CHF in millions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME:
Operating income before credit loss expense......... 33 1,587 2,010 191
Credit loss expense................................. (621) (96) (448) (745)
---- ----- ----- ------
Operating income.................................. 654 1,683 2,458 936
---- ----- ----- ------
OPERATING EXPENSES:
Personnel general and administrative expenses....... 668 182 931 1,868
Depreciation and amortization....................... 158 146 416 215
---- ----- ----- ------
Operating expenses................................ 826 328 1,347 2,083
---- ----- ----- ------
Operating profit (loss) before tax............. (172) 1,355 1,111 (1,147)
==== ===== ===== ======
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating
income before credit loss expense decreased CHF 1,554 million from CHF 1,587
million in the first half of 1999 to CHF 33 million in the first half of 2000,
primarily due to one-time gains on the divestitures of the stake in Swiss
Life/Rentenanstalt of CHF 1,490 million and of Julius Baer registered shares of
CHF 110 million included in the first half of 1999. Operating income before
credit loss expense included CHF 216 million in the first half of 2000, due to
the consolidation of Klinik Hirslanden AG. Other gains and losses attributable
to Corporate Center arise from funding, capital and balance sheet management,
the management of corporate real estate and the management of foreign currency
earnings activities undertaken by Group Treasury.
Credit loss expense in Corporate Center reconciles the difference between
management accounting and financial accounting, that is between the adjusted
expected losses charged to the divisions and the actual credit loss expense
recognized in the Group financial accounts. The Swiss economy has been strong in
the first half of 2000 and has led to lower than expected credit losses, and a
write back of credit loss provisions of CHF 208 million, resulting in a credit
of CHF 621 million in this line.
Personnel, general and administrative expenses increased CHF 486 million, or
267%, from CHF 182 million in the first half of 1999 to CHF 668 million in the
first half of 2000.
Personnel costs increased CHF 208 million, or 254%, in the first half of 2000
from CHF 82 million in the first half of 1999 to CHF 290 million in the first
half of 2000. This increase is largely attributable to the first-time
consolidation of Klinik Hirslanden AG beginning in the second half of 1999.
General and administrative expenses increased 278%, or CHF 278 million, to CHF
378 million in the first half of 2000 from CHF 100 million in the first half of
1999, primarily as a result of the following items, which were included in
general and administrative expenses for the first half of 2000:
- an additional charge of CHF 200 million for the U.S. global settlement of
Holocaust-related claims; and
- expenses of Klinik Hirslanden AG as a result of the consolidation of this
entity in the first half of 2000, but not in the first half of 1999.
Depreciation and amortization increased CHF 12 million, or 8.2%, from CHF 146
million in the first half of 1999 to CHF 158 million in 1999, principally
reflecting the inclusion of Klinik Hirslanden AG
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in the first half of 2000. The remaining portion of depreciation and
amortization includes depreciation of workstations and information technology
equipment, goodwill and other intangible assets as well as depreciation of other
fixed assets.
Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income
before credit loss expense increased CHF 1,819 million, or 952%, from CHF 191
million in 1998 to CHF 2,010 million in 1999, primarily due to the following:
- gains on the divestments of Swiss Life/Rentenanstalt of CHF 1,490 million and
of UBS's interest in Julius Baer registered shares of CHF 110 million
included in 1999;
- approximately CHF 380 million due to the first time consolidation of Klinik
Hirslanden AG included in 1999; and
- negative impact on 1998 operating income due to the loss of CHF 370 million
from LTCM.
In addition, revenues attributable to Corporate Center arise from the funding,
capital and balance sheet management, and the management of foreign currency
earnings activities undertaken by Group Treasury.
Personnel, general and administrative expenses decreased CHF 937 million, or
50.2%, from CHF 1,868 million in 1998 to CHF 931 million in 1999.
Personnel costs decreased 56.6% to CHF 92 million in 1999 from CHF 212 million
in 1998 primarily as a result of the recognition in 1999 of pre-paid employer
pension contributions of CHF 456 million. This represents the difference between
previously recorded and actuarially determined pension expenses and was
recognized in 1999 after the resolution of certain legal and regulatory issues.
Excluding the recognition of this benefit, personnel expenses increased from
1998 to 1999 despite a slight decrease in headcount from 921 in 1998 to 862 in
1999. This increase year-on-year is largely attributable to the first-time
consolidation of Klinik Hirslanden AG in 1999.
General and administrative expenses decreased CHF 817 million, or 49.3%, to CHF
839 million in 1999 from CHF 1,656 million in 1998, primarily as a result of a
charge for the U.S. global settlement of Holocaust-related claims of CHF 842
million in 1998. In addition, the following items were included in general and
administrative expenses for 1999:
- an additional charge of CHF 154 million related to the settlement of
Holocaust-related claims in the United States;
- an additional pre-tax restructuring charge of CHF 300 million in respect of
the 1998 merger; and
- expenses of Klinik Hirslanden AG as a result of the first-time consolidation
of this entity in 1999.
In addition, total operating expenses in Corporate Center were reduced from 1998
to 1999 mainly due to a further refinement of service level agreements with the
business groups.
Depreciation and amortization increased CHF 201 million, or 93.5%, from CHF 215
million in 1998 to CHF 416 million in 1999, principally as a result of a
reclassification of certain items which appeared in general and administrative
expenses in 1998.
Divisional Results for Year Ended 31 December 1998 Compared to Year Ended 31
December 1997
Results for the year ended 31 December 1998 compared to year ended 31 December
1997 are shown in terms of the old divisional structure which existed at that
time, and without taking account of the accounting changes implemented during
2000.
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The principal differences from the current structure were that the UBS Asset
Management Investment Funds business unit and the UBS Warburg Private Clients
business unit were part of the Private Banking Division, and their results are
included within that division. In addition, UBS Warburg's UBS Capital business
unit was an autonomous division, and UBS Warburg itself consisted only of what
is now the UBS Warburg Corporate and Institutional Clients business unit. The
e-services business did not exist in 1998 or 1997.
Private and Corporate Clients. The following table sets forth the results of
Private and Corporate Clients for the years ended 31 December 1998 and 1997.
<TABLE>
<CAPTION>
AS OF YEAR ENDED
31 DECEMBER
1998 1997(1)
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME:
Individual clients........................................ 4,785
Corporate clients......................................... 1,728
Operations................................................ 448
Other..................................................... 64
-------
Total operating income............................ 7,025 7,005
Credit loss expense....................................... 1,170 1,092
------- -------
Operating income.................................. 5,855 5,913
------- -------
OPERATING EXPENSES:
Personnel, general and administrative expenses............ 4,263 4,497
Depreciation and amortization............................. 684 660
------- -------
Operating expenses..................................... 4,947 5,157
------- -------
Operating profit before tax....................... 908 756
======= =======
(at year end)
Assets under management (CHF in billions)................... 434 398
Total loans................................................. 164,840 N/A(2)
------- -------
</TABLE>
---------------
(1) Prior to the 1998 merger, the businesses were reported under different
management reporting structures. A breakdown of 1997 operating income in
accordance with UBS's current management reporting structure is, therefore,
not possible.
(2) Total loans are not available for dates prior to the 1998 merger.
Total operating income before credit loss expense increased slightly from CHF
7,005 million in 1997 to CHF 7,025 million in 1998. Included in operating income
in 1997 was a CHF 97 million pre-tax gain on the sale of Bank Aufina AG.
Included in operating income in 1998 were total gains from the sale of Bank
Prokredit AG, a leasing and consumer credit company, of CHF 50 million. The
small increase in operating income before credit loss expense from 1997 to 1998
excluding the gains from the divestitures was primarily attributable to improved
margins resulting from risk-adjusted pricing.
Private and Corporate Clients' credit loss expenses increased CHF 78 million, or
7.1%, from CHF 1,092 million in 1997 to CHF 1,170 million in 1998, reflecting
increased loss expectations.
Personnel, general and administrative expense decreased CHF 234 million, or
5.2%, from CHF 4,497 million in 1997 to CHF 4,263 million in 1998. This decrease
primarily reflected reduced costs due to a reduction in headcount from 25,641 in
1997 to 24,043 in 1998 resulting from the sales of Boss Lab SA and Bank
Prokredit AG and additional reductions from the closing of redundant branches.
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Private Banking. The following table sets forth the results of Private Banking
for the years ended 31 December 1998 and 1997.
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER
1998 1997
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME:
Operating income before credit loss expense............... 7,223 6,215
Credit loss expense....................................... 26 59
----- -----
Operating income.................................. 7,197 6,156
===== =====
OPERATING EXPENSES:
Personnel, general and administrative expenses............ 2,735 2,869
Depreciation and amortization............................. 126 122
----- -----
Operating expenses................................ 2,861 2,991
===== =====
Operating profit before tax (at period end)................. 4,336 3,165
===== =====
ASSETS UNDER MANAGEMENT (CHF IN BILLIONS):
Advisory.................................................. 458 470
Discretionary............................................. 149 140
----- -----
Total............................................. 607 610
===== =====
</TABLE>
Operating income increased CHF 1,041 million, or 16.9%, from CHF 6,156 million
in 1997 to CHF 7,197 million in 1998. This increase primarily reflected
non-recurring gains of CHF 1,058 million realized on the sales of BSI and Adler.
Excluding these gains from 1998 operating income, operating income decreased
marginally from 1997 to 1998. The decrease primarily reflected adverse market
conditions in the second half of 1998. Despite this difficult environment and
the occurrence of the 1998 merger on 29 June 1998, Private Banking was able to
maintain relatively stable performance, with assets under management decreasing
only slightly from CHF 610 billion at 31 December 1997 to CHF 607 billion at 31
December 1998.
Personnel, general and administrative expenses decreased CHF 134 million, or
4.7%, from CHF 2,869 million in 1997 to CHF 2,735 million in 1998. Headcount
decreased 2.9% from 7,862 at 31 December 1997 to 7,634 at 31 December 1998.
Headcount in Switzerland, along with related personnel costs, decreased
primarily from the sales of BSI and Adler. This decrease was partially offset by
an increase in headcount outside of Switzerland due to the development of UBS's
private banking business outside of Switzerland.
Depreciation and amortization increased slightly, from CHF 122 million in 1997
to CHF 126 million in 1998.
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UBS Asset Management. The following table sets forth the results of UBS Asset
Management for the years ended 31 December 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
31 DECEMBER
1998 1997
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME............................................ 1,163 1,040
OPERATING EXPENSES:
Personnel, general and administrative expense............. 608 542
Depreciation and amortization............................. 107 95
----- -----
Operating expenses..................................... 715 637
----- -----
Operating profit before tax....................... 448 403
===== =====
(at period end):
ASSETS UNDER MANAGEMENT (CHF IN BILLIONS):
Institutional............................................. 360 373
Non-institutional......................................... 171 131
----- -----
Total............................................. 531 504
===== =====
</TABLE>
Operating income increased CHF 123 million, or 11.8%, from CHF 1,040 million in
1997 to CHF 1,163 million in 1998, reflecting growth in assets under management
from UBS Asset Management's acquisition in Japan and positive market
performance. Non-institutional assets under management, including assets from
Private Banking, increased CHF 40 billion, or 30.5%, from 1997 to 1998. These
positive developments were partially offset by a decline in the U.K. business's
operating income and assets under management due to short-term performance
issues and a very competitive U.K. marketplace.
Personnel, general and administrative expenses increased CHF 66 million, or
12.2%, from CHF 542 million in 1997 to CHF 608 million in 1998. This increase
reflects the expansion in Europe and the acquisition of Long-Term Credit Bank of
Japan's asset management business during 1998. Principally as a result of these
expansions, headcount increased 9.8% from 1,364 at 31 December 1997 to 1,497 at
31 December 1998.
Depreciation and amortization increased CHF 12 million, or 12.6%, from CHF 95
million in 1997 to CHF 107 million in 1998. This increase reflects an increase
in goodwill amortization due to additional goodwill recorded in 1998 upon the
payment of the remaining obligation to the previous owners of Brinson Partners.
UBS Warburg. The following table sets forth the results of UBS Warburg for the
years ended 31 December 1998 and 1997:
<TABLE>
<CAPTION>
31 DECEMBER
1998 1997(1)
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME:
Equities.................................................. 3,334
Fixed income.............................................. (267)
Corporate Finance......................................... 1,665
</TABLE>
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<TABLE>
<CAPTION>
31 DECEMBER
1998 1997(1)
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
Treasury Products......................................... 2,351
Non-core Business......................................... (96)
------
Total operating income before credit loss
expense......................................... 6,987 10,888
Credit loss expense....................................... 500 300
------ ------
Operating income.................................. 6,487 10,588
------ ------
OPERATING EXPENSES:
Personnel, general and administrative..................... 6,816 8,641
Depreciation and amortization............................. 692 668
------ ------
Operating expenses................................ 7,508 9,309
------ ------
Operating profit (loss) before restructuring
costs and tax................................ (1,021) 1,279
====== ======
</TABLE>
------------
(1) Prior to the 1998 merger, these businesses were reported under different
management reporting structures. A breakdown of 1997 operating income in
accordance with UBS's current management reporting structure in effect for
1998 was, therefore, not possible.
Total operating income before credit loss expense decreased CHF 3,901 million,
or 35.8%, from CHF 10,888 million in 1997 to CHF 6,987 million in 1998, with
decreases recognized across all business areas. Equities experienced a difficult
trading environment in the second half of 1998 in addition to recognizing net
losses on the Global Equity Derivatives portfolio of CHF 762 million, although
this was offset somewhat by high commission levels and income from new issues.
Fixed Income's operating income decreased from 1997 to 1998 due to the writedown
in 1998 of UBS's holdings in LTCM by CHF 790 million and CHF 725 million in
emerging markets. This emerging markets loss consisted of CHF 455 million in
losses in Russia, CHF 215 million in Latin America and CHF 55 million in Asia
and other Eastern European countries. These losses were somewhat offset by
strong primary and secondary bond activity.
Corporate Finance exceeded expectations in 1998 resulting from strong mergers
and acquisitions activity and improved results from equity and equity-linked
issues. In 1997 and 1998, Treasury Products performed well in cash and
collateral trading, as well as in foreign exchange.
Credit loss expense increased CHF 200 million, or 66.7%, from CHF 300 million in
1997 to CHF 500 million in 1998. This increase resulted from increased exposures
from the start-up of the leveraged finance business in early 1998 and an
increase in over-the-counter derivatives exposures due primarily to counterparty
and country rating downgrades resulting from the Asian and Russian crises.
Personnel, general and administrative expenses decreased CHF 1,825 million, or
21.1%, from CHF 8,641 million in 1997 to CHF 6,816 million in 1998. This
primarily reflected a reduction in personnel related costs resulting from a
reduction in headcount by 25.9% from 18,620 at 31 December 1997 to 13,794 at 31
December 1998 as a result of the merger. Merger integration for UBS Warburg in
connection with the 1998 merger was substantially completed during 1998. As
discussed above, CHF 1,007 million of accrued payments to personnel were charged
against the restructuring reserve in 1998. Adjusting 1998 for this amount,
personnel expenses decreased from 1997 by 9.5%.
Depreciation and amortization increased CHF 24 million, or 3.6%, from CHF 668
million in 1997 to CHF 692 million in 1998. This reflected increased goodwill
amortization in 1998 due to the acquisition of Dillon Read & Co., Inc. in
September 1997 and the accelerated amortization of
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goodwill on Russian and Brazilian subsidiaries of CHF 35 million due to weak
market conditions in these countries in 1998.
UBS Capital. The following table sets forth the results of UBS Capital for the
years ended 31 December 1998 and 1997:
<TABLE>
<CAPTION>
31 DECEMBER
1998 1997
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME............................................ 585 492
----- -----
OPERATING EXPENSES:
Personnel, general and administrative expense............. 156 110
Depreciation and amortization............................. 1 1
----- -----
Operating expenses..................................... 157 111
----- -----
Operating profit before tax.......................... 428 381
===== =====
(at period end)
Investments (at book value)................................. 1,748 1,080
</TABLE>
Operating income increased CHF 93 million, or 18.9%, from CHF 492 million in
1997 to CHF 585 million in 1998, reflecting generally favorable conditions in
Western markets allowing for the disposals of investments in Switzerland, the
United States, and the Benelux and Nordic region. UBS Capital's portfolio in
1998 was, and it continued to be during 1999, primarily focused on the United
States and Western Europe with minor exposure to Latin America and Asia.
Therefore, the emerging markets crises which took place during 1998 had little
impact on the division's performance.
Personnel, general and administrative expenses increased CHF 46 million, or
41.8%, from CHF 110 million in 1997 to CHF 156 million in 1998. Higher
performance-related compensation in 1998 than in 1997 primarily resulted from
the stronger performance in 1998. Staff losses due to the merger were minimal.
UBS Capital made investments totaling approximately CHF 800 million during 1998
compared to approximately CHF 600 million during 1997, further demonstrating
steady growth in its investment rate.
Corporate Center. The following table sets forth the results of Corporate
Center for the years ended 31 December 1998 and 1997.
<TABLE>
<CAPTION>
31 DECEMBER
1998 1997
(CHF in millions)
---------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME:
Operating income before credit loss expense............... 296 518
------ ----
Credit loss expense....................................... (745) (173)
------ ----
Operating income....................................... 1,041 691
------ ----
OPERATING EXPENSES:
Personnel, general and administrative expenses............ 1,855 215
Depreciation and amortization............................. 215 216
------ ----
Operating expenses..................................... 2,070 431
------ ----
Operating profit (loss) before restructuring costs
and tax............................................. (1,029) 260
====== ====
</TABLE>
Operating income before credit loss expense from Corporate Center activities
decreased CHF 222 million, or 42.9%, from CHF 518 million in 1997 to CHF 296
million in 1998, reflecting a CHF 370
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million charge resulting from the write-down in 1998 of UBS's investment in
LTCM. In addition, revenues attributable to Corporate Center arise from the
funding, capital and balance sheet management, and the management of foreign
currency earnings activities undertaken by Group Treasury.
Personnel, general and administrative expenses increased CHF 1,640 million, or
763%, from CHF 215 million in 1997 to CHF 1,855 million in 1998, primarily
resulting from a CHF 842 million provision taken in 1998, for the settlement in
the United States of the Holocaust-related litigation, additional provisions for
litigation and adjustments to the pricing of interdivisional allocations on the
basis of service level agreements.
Depreciation and amortization decreased CHF 1 million, or 0.5%, from CHF 216
million in 1997 to CHF 215 million in 1998. This represented the charge for
depreciation on goodwill and intangibles, information technology infrastructure,
real estate and other fixed assets.
UBS Financial Targets
UBS focuses on four key financial targets. These targets are to achieve:
- A pre-goodwill return on equity, or "RoE," averaging between 15% and 20%,
across periods of varying market conditions.
- Double-digit average annual growth in pre-goodwill earnings per share, across
periods of varying market conditions.
- Focus and downward pressure on UBS's cost/income ratio.
- Strong growth in net new money in UBS's private client businesses.
Adjusted for the final provision of CHF 200 million relating to the U.S. global
settlement, UBS's annualized pre-goodwill return on equity for the first six
months of 2000 was 31.9%. Pre-goodwill earnings per share grew 92% over the
first six months of 1999, adjusted for divestments and one-off provisions,
reaching UBS's target of double-digit growth. UBS's cost/income ratio is well
below that of the first half of 1999. After a positive start to the year, net
new money in the private client businesses was slightly negative in the second
quarter of 2000, against a more muted market background for asset growth than
the first quarter.
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UBS's performance against its performance targets for the six months ended 30
June 2000 and the year ended 31 December 1999 are as follows:
UBS PERFORMANCE AGAINST TARGETS
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 2000 31 DECEMBER 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
ROE (%, ANNUALIZED)
As reported.............................................. 29.5 22.4
Before goodwill amortization and adjusted for significant
financial events (1, 2)................................ 31.9 18.2
BASIC EPS (CHF) (3)
As reported.............................................. 10.91 15.20
Before goodwill amortization and adjusted for significant
financial events (1,2)................................. 12.01 12.37
COST/INCOME RATIO (%)
As reported.............................................. 70.4 69.9
Before goodwill amortization and adjusted for significant
financial events (1,2)................................. 67.8 73.3
NET NEW MONEY FOR PRIVATE CLIENT BUSINESSES (4).......... 4 5
</TABLE>
------------
(1) The amortization of goodwill and other purchased intangible assets are
excluded from the calculation.
(2) Significant financial events are excluded from the calculation. In 1999,
these events included the disposal of the registered shares of Julius Baer,
the sale of UBS's 25% stake in Swiss Life/Rentenanstalt, the sale of UBS's
international Global Trade Finance business, and the pre-tax gains on Long
Term Capital Management, L.P., the one-time credit recognized during the
fourth quarter of 1999 in connection with excess pension fund employer
prepayments, the additional provisions recognized in 1999 in connection with
the U.S. global settlement and the utilization of the restructuring
provision relating to the 1998 merger. In the first six months of 2000,
these events included the further provision recognized in relation to the
U.S. global settlement.
(3) The 1999 figures are restated for the two-for-one stock split relating to
the UBS ordinary shares, which became effective on 8 May 2000.
(4) For this purpose, Private Client Businesses consist of the UBS Warburg
Private Clients business unit and the UBS Switzerland Private Banking
business unit. Excludes interest and dividend income.
THERE CAN BE NO ASSURANCE THAT UBS WILL BE ABLE TO ACHIEVE ITS FINANCIAL
TARGETS, AND THESE TARGETS ARE SUBJECT TO CHANGE AT THE DISCRETION OF UBS'S
MANAGEMENT. A VARIETY OF FACTORS COULD PREVENT UBS FROM ACHIEVING THESE TARGETS,
INCLUDING THE FACTORS REFERRED TO UNDER "CAUTIONARY NOTE REGARDING FORWARD-
LOOKING INFORMATION."
Liquidity and Capital Resources
Group liquidity and capital management is undertaken at UBS by Group Treasury as
an integral asset and liability management function. For a detailed discussion
of UBS's asset and liability management, see "--Asset and Liability Management"
and for a detailed discussion of UBS's liquidity risk management, see "--Asset
and Liability Management--Liquidity and Funding Management."
Consolidated Cash Flows. In the half year to 30 June 2000, cash equivalents
decreased CHF 13,788 million, principally as a result of operating activities.
UBS's net profit of CHF 4,268 million was more than offset by a high net cash
outflow for repurchase and reverse repurchase agreements, cash collateral on
securities borrowed and lent and for investments in trading positions. Negative
cash flow of CHF 2,293 million from investing activities was principally due to
the purchase of financial investments. Net cash inflow from financing activities
of CHF 14,507 million was principally generated
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--------------------------------------------------------------------------------
by the issuance of CHF 20,754 million in money market paper and CHF 7,452
million in long-term debt, offset by the repayment of CHF 10,794 million of
long-term debt, dividend payments of CHF 2,164 million and treasury share
transactions.
UBS generated significant positive cash flow during the year ended 31 December
1999 resulting in a net increase in cash equivalents of CHF 18,599 million.
Operating activities provided a net cash flow of CHF 3,338 million during the
year ended 31 December 1999. The strong positive results and reduction in UBS's
customers' loan exposures at UBS Warburg during the year, offset in part by a
net cash outflow from trading-related balances, generated the net positive cash
flow from operating activities. Net cash from investing activities included cash
outflows due to the purchase of property and equipment and investments in
subsidiaries and associates, which were more than offset by positive cash flows
generated from the sale of subsidiaries and associates, property and equipment
and financial investments. The net cash inflow from financing activities was
principally due to the issuance of CHF 13,128 million in money market paper and
CHF 12,661 million in long-term debt which was partially offset by the payment
of dividends, treasury share transactions, the repayment of CHF 7,801 million in
long-term debt and minority interests.
During the year ended 31 December 1998, UBS's net cash outflows from operating
and financing activities more than offset its net cash inflow from investing
activities resulting in a decrease in UBS's cash equivalents of CHF 8,675
million. The main contributor to the net decrease in cash equivalents was the
negative cash flow from financing activities of CHF 12,335 million. This
negative cash flow was primarily due to the repayment of long-term debt, the
reduction in money market paper outstanding, the payment of dividends and
treasury share transactions, partially offset by the issuance of long-term debt.
Positive net cash flow from investing activities resulted primarily from the
sale and maturity of financial investments.
During the year ended 31 December 1997, UBS's net cash outflows of CHF 35,895
million from operating and investing activities more than offset UBS's net cash
inflow from financing activities of CHF 29,015 million resulting in a decrease
in cash equivalents of CHF 7,451 million. UBS's operating activities generated
negative net cash flow principally due to a net increase in its trading related
balances which was only partially offset by strong operating results before the
restructuring reserve. Investing activities generated a net cash outflow of CHF
1,671 million during the period primarily due to the purchase of property and
equipment and financial investments. Net cash inflow from financing activities
resulted principally from the issuance of long-term debt and money market paper.
Capital Resources. Capital management is undertaken at UBS by Group Treasury as
an integral asset and liability management function. UBS does not have any
material commitments for capital expenditures as of 30 June 2000. UBS's overall
capital needs are continually reviewed to ensure that its capital base can
appropriately support the anticipated needs of the divisions as well as the
regulatory capital requirements. See "--Asset and Liability Management."
The Bank for International Settlements, or "BIS," is an international
organization fostering the cooperation of central banks and international
financial institutions. Among other activities, it provides guideline formulas
for evaluating capital adequacy.
As the following table shows, UBS's BIS Tier 1 Ratio increased from 9.3% at 31
December 1998 to 10.6% at 31 December 1999 primarily resulting from a
significant increase in retained earnings coupled with a reduction in risk
weighted assets. The decrease in risk weighted assets is principally a result of
reduced positive replacement values, off balance sheet contingent liabilities
and the reduction in the size of the international loan book.
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UBS's BIS Tier 1 Ratio has continued to increase, from 10.6% at 31 December 1999
to 12.1% at 30 June 2000. The effect of UBS's share buy back program was more
than offset by a significant increase in UBS's retained earnings as well as a
further reduction in risk weighted assets.
<TABLE>
<CAPTION>
PRO
FORMA(1)
30 JUNE 30 JUNE 31 DECEMBER
2000 2000 1999 1998
(CHF in millions except ratios)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BIS Tier 1 Capital.......................... 24,982 31,904 28,952 28,220
BIS Tier 1 and Tier 2 Capital............... 35,921 42,173 39,682 40,306
BIS Tier 1 Capital Ratio.................... 8.51% 12.1% 10.6% 9.3%
BIS Tier 1 and Tier 2 Capital Ratio......... 12.24% 15.9% 14.5% 13.2%
Balance sheet risk-weighted assets.......... 239,359 210,538 214,011 237,042
Off balance sheet and other positions....... 41,718 41,718 48,282 50,659
Market risk positions....................... 12,450 12,450 10,813 16,018
------- ------- ------- -------
Total BIS risk-weighted assets.............. 293,527 264,706 273,106 303,719
======= ======= ======= =======
</TABLE>
------------
(1) Gives effect to the combined pro forma financial position of UBS and
PaineWebber.
The ratios measure capital adequacy by comparing UBS's eligible capital with the
risk-weighted asset positions, which include balance sheet assets, the net
positions in securities not held in the trading portfolio, off-balance sheet
transactions converted into their credit equivalents and market risk positions
at a weighted amount to reflect their relative risk. See Note 33c in UBS's
consolidated financial statements for additional information on capital
adequacy.
The calculation of capital requirements applicable to UBS under the Swiss
Federal Banking Commission's regulations differs in certain respects from the
calculation under the BIS guidelines. Most importantly:
- where the BIS currently does not apply risk weightings above 100% to any asset
category, the Swiss Federal Banking Commission applies risk weightings of
greater than 100% to certain kinds of assets (for example, real estate, bank
premises, other fixed assets, equity securities and unconsolidated
participations); and
- where the BIS guidelines apply a 20% risk weighting to obligations of OECD
banks, the Swiss Federal Banking Commission's regulations apply risk
weightings of 25% to 75% (depending upon maturities) to obligations of OECD
banks.
As a result of these differences, UBS's risk-adjusted assets are higher, and its
ratios of total capital and Tier 1 capital are lower, when calculated pursuant
to the Swiss Federal Banking Commission's regulations as compared to the BIS
guidelines. However, since the BIS and Swiss Federal Banking Commission first
implemented their risk-based capital guidelines and regulations in 1987, UBS and
its predecessor banks have always had total capital and Tier 1 capital in excess
of the minimum requirements of both the BIS and the Swiss Federal Banking
Commission. For the years ended 31 December 1998 and 31 December 1999 and the
six-months ended 30 June 2000, UBS has maintained significant levels of total
capital and Tier 1 capital in excess of the minimum requirements of both the BIS
and the Swiss Federal Banking Commission. Although no assurance can be given
that UBS will continue to have total capital and Tier 1 capital in excess of the
minimum requirements of both the BIS and the Swiss Federal Banking Commission,
UBS does not expect that credit losses, risk-weighted asset growth and similar
events will eliminate UBS's excess total capital or Tier 1 capital.
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UBS is committed to maintaining a strong capitalization and rating as a
distinguishing characteristic of UBS for both clients and shareholders. On 12
March 1999, UBS introduced a treasury stock buy-back program, which was intended
to run for a period of two years. At 31 December 1998, UBS held 8,300,300
shares, as adjusted for the two-for-one stock split that became effective on 8
May 2000, or 2% of its outstanding shares, as treasury stock. As of 31 December
1999, a total of 15,660,220 shares, as adjusted for the two-for-one stock split,
or 3.6%, had been acquired as treasury stock. This amount includes 1,053,082
shares that are at the disposal of UBS's Board of Directors. The objective of
the buy-back program was to utilize the shares for acquisitions and the employee
stock ownership program. UBS has subsequently concluded that this program was
too limited for its purposes because of the continuous increase in capital that
was projected to arise from on-going retained earnings, the selective reduction
in the risk profile and increasing capital efficiency.
For this reason, UBS announced in December 1999 that it would replace the
treasury stock buy-back program with a Swiss-specific program targeted at Swiss
institutional shareholders, which is the only tax-efficient means that has been
identified to achieve cancellation. This is called a "second trading line"
program. At UBS's annual shareholders' meeting on 18 April 2000, shareholders
approved the repurchase of shares up to a maximum amount of CHF 4 billion,
through the second trading line program. The second trading line program was
implemented in January 2000 and concluded on 28 June 2000. During this time UBS
repurchased 18,421,783 shares, representing 4.3% of its share capital, at an
average price of CHF 217.00. The final cancellation of the shares bought back
through the second trading line requires shareholders' approval which the board
of directors will seek at the annual general meeting scheduled for April 2001.
In the opinion of UBS, its working capital is sufficient for its present
requirements.
Balance Sheet. UBS maintains a significant percentage of liquid assets,
including collateralized receivables and trading portfolios that can be
converted into cash on relatively short notice and with a limited impact on
UBS's results in order to meet short-term funding needs. Collateralized
receivables include reverse repurchase agreements and cash collateral on
securities borrowed which are secured by U.S. government and agency securities,
and marketable corporate debt and equity securities and a portion of UBS's loans
and due from banks which are secured primarily by real estate. The value of
UBS's collateralized receivables and trading portfolio will fluctuate depending
on market conditions and client business. The individual components of UBS's
total assets may vary significantly from period to period due to changing client
needs, economic and market conditions and trading strategies.
Total assets increased CHF 47,419 million, or 5.3%, at 30 June 2000 compared to
total assets at 31 December 1999. This was principally a result of an increase
in cash collateral on securities borrowed, reverse repurchase and trading
portfolio assets, which was partially offset by significant decreases in cash
and balances with central banks and money market paper as liquidity levels were
adjusted following Y2K, a reduction in positive replacement values resulting
from decreases in derivative products, and decreases in amounts due from banks.
Total liabilities increased CHF 46,151 million, or 5.3%, at 30 June 2000,
compared to total liabilities at 31 December 1999, principally due to a
significant increase in amounts due under repurchase agreements, cash collateral
on securities lent and trading portfolio liabilities and an increase in money
market paper issued, offset in part by a decrease in negative replacement values
resulting from decreases in derivative products.
In the course of the first half of 2000, UBS's long-term debt portfolio
decreased from CHF 56.3 billion at 31 December 1999 to CHF 53.0 billion at 30
June 2000. During this half year CHF 7,452 million of long-term securities were
issued while CHF 10,794 million matured. UBS believes the maturity profile of
the long-term debt portfolio is well balanced with slight bias towards
shorter-term maturities to match the maturity profile of UBS's assets.
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The following table sets forth information regarding total shareholders' equity
at 30 June 2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 31 DECEMBER
2000 1999 1998
(CHF in millions, except ratios)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total shareholders' equity................................. 31,876 30,608 28,794
Total shareholders' equity to total assets................. 3.4% 3.4% 3.3%
</TABLE>
Shareholders' equity increased CHF 1,268 million, or 4.1%, from 31 December 1999
to 30 June 2000. The increase in treasury shares was more than offset by the
increase in net income, resulting in a steady increase in total shareholders'
equity.
Credit Ratings. UBS uses the debt capital markets to fund a significant portion
of its operations. The cost and availability of debt financing is influenced by
UBS's credit ratings. Credit ratings are also important in certain markets and
in entering into certain transactions, such as derivative transactions. A
reduction in UBS's credit ratings could increase its borrowing costs and limit
its access to the capital markets. UBS has been able to maintain strong credit
ratings over the past few years, even during periods of a difficult trading
environment.
The following table sets forth UBS's credit ratings on its long-term debt as of
30 June 2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 31 DECEMBER
2000 1999 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Moody's, New York........................................... Aa1 Aa1 Aa1
Fitch/IBCA, London.......................................... AAA AAA AAA
Standard & Poor's, New York................................. AA+ AA+ AA+
Thomson BankWatch, New York................................. AA AA AA
</TABLE>
Each of these ratings reflects only the view of the applicable rating agency at
the time the rating was issued, and any explanation of the significance of such
rating may be obtained only from such rating agency. There is no assurance that
any such credit rating will remain in effect for any given period of time or
that such rating will not be lowered, suspended or withdrawn entirely by the
applicable rating agency, if in such rating agency's judgment, circumstances so
warrant.
Recent Accounting Developments
For a discussion of recent accounting developments, including those that have
not yet been adopted, see Note 1 to UBS's consolidated financial statements,
which are included elsewhere in this prospectus.
Risk Management
The risk management process is an integral part of UBS's commitment to providing
consistent high quality returns for its shareholders. UBS believes that the
delivery of superior shareholder returns depends on achieving an appropriate
balance between risk and return. This requires a management process that gives
appropriate focus to risk as well as returns and which integrates this approach
with the management of UBS's balance sheet and capital. For this reason, UBS
restructured the Corporate Center in the course of 1999 to establish an
integrated group-wide function under the Chief Financial Officer, or "CFO," to
address all aspects of finance, strategic planning, risk control and balance
sheet and capital management.
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--------------------------------------------------------------------------------
The approach to risk management and control at UBS recognizes that risk is
integral to its business. UBS's risk processes, which have evolved over a number
of years, seek to limit the scope for adverse variations in UBS's earnings and
in particular to protect UBS from the risk of loss in the event of unlikely, but
possible, stress scenarios arising from any of the material risks which it
faces. UBS's Risk Policy Framework focuses on the procedures for managing and
controlling the risks that can affect the volatility of earnings from period to
period, and distinguishes between the following three types of risk:
- Primary risks: risks inherent in the businesses that UBS undertakes. The
principal primary risks are credit risk and market risk.
- Group risks: risks that UBS faces at the Group level in managing its business
and balance sheet. Principal group risks are tax risk, liquidity and funding
risk and residual balance sheet related interest rate risk.
- Consequential risks: risks that UBS faces as a consequence of the operational
activities it undertakes to provide services to customers. This is sometimes
referred to as "operational risk." Principal consequential risks are
transaction processing risk, legal risk, compliance risk, liability risk and
security risk.
UBS's risk framework recognizes that an effective risk management and control
process depends on sound processes to identify risks, and to establish and
maintain limits and procedures to control these risks. UBS's Chief Risk Officer,
or "CRO," has overall responsibility for ensuring that the limits and procedures
are appropriate and are adhered to for risks other than credit risk. The Chief
Credit Officer, or "CCO," has overall responsibility for ensuring that the
limits and procedures are appropriate and are adhered to for credit risk. Credit
risk remains the single largest risk that UBS faces. The limits and procedures
are designed to keep UBS's risk exposures within the parameters determined by
the UBS Board of Directors. These limits and procedures take into account not
only the external environment that UBS faces, but also UBS's internal
capabilities to manage the risk, including issues such as the availability of
appropriate information processing systems and the availability of suitably
qualified staff to manage and control the risk.
The Board of Directors establishes the risk parameters within which UBS operates
and reviews a report on UBS's risk profile from the CCO and the CRO on at least
a quarterly basis. The Board of Directors establishes two limits: normal
earnings volatility and potential losses under a stress scenario. UBS's risk
appetite defines the amount of earnings volatility that the Board of Directors
deems to be acceptable in normal market conditions in order to achieve
divisional growth targets. This potential volatility is measured by the risk
control organization using measures that estimate statistically possible losses.
Value at risk, or "VaR," methodology is the principal quantitative measure UBS
uses for evaluating risk.
UBS's risk bearing capacity seeks to establish a limit to the potential scale of
the loss that UBS might face in unlikely but possible stress situations. Stress
loss limits are set by the Board of Directors taking into account UBS's overall
earnings capacity. They are set in order to protect UBS from unacceptable damage
to annual earnings, dividend paying capability, business viability and
reputation. UBS currently adopts this approach to risk limits in the context of
its trading activities and its country risk credit exposure. In addition, the
Board of Directors approves UBS's key risk policies and the Chairman's office
maintains an ongoing oversight of the integrity of the risk management and
control processes through UBS's internal audit function.
The responsibility for implementing the risk framework on a day to day basis is
delegated by the Board of Directors to the Group Executive Board, which
allocates risk limits to the divisions and monitors UBS's aggregate risk profile
on an ongoing basis. The Group Executive Board, together with
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
the CRO and CCO, constitutes itself as UBS's Risk Council and usually meets
twice a month to review outstanding risk issues, large exposures and significant
transactions. In addition, the Group Executive Board has established a Group
Risk Committee and a Group Governance Committee. These committees, which meet
quarterly, consist of representatives of the risk control organization at the
Corporate Center and from the business groups and consider issues relating to
the implementation and development of the risk framework.
Each business group also has a risk management and control structure in place
which is appropriate to its particular business profile. The CRO and CCO have
risk control staff who are located in each business group and who are
responsible for ensuring that the business group implements the Group-wide risk
policies and procedures appropriately. They ensure that all risks are adequately
taken into account in assessing the risk profile of the business groups'
business activities. The focus is on identifying those infrequent events with a
potentially severe impact. In addition, each business group has its own
structure of risk management and governance committees. This is designed to
ensure that there is an ongoing review of the risk profile that the business
group faces in new business initiatives and in large and complex transactions
and that any requirement for amendments to risk policies or limits is identified
and, where appropriate, is escalated in a timely manner to the Group Executive
Board.
Analysis of Risks
Within UBS's risk framework, UBS has identified a number of risk factors as
being of particular importance to its business. The following section summarizes
the main trends and developments in the key risks that UBS faces.
Credit Risk. Credit risk is the risk of loss resulting from the default of an
obligor or counterparty. UBS's definition of credit risk includes counterparty
and country transfer risk, as well as settlement risk. Credit risk is inherent
in traditional banking products, such as loans and commitments to lend money in
the future or contracts to support clients' obligations to third parties, such
as letters of credit. Credit risk is also inherent in derivative contracts and
other traded products, such as bonds and equity investments. In view of the
significance of credit risk for UBS, the approval and monitoring of new
transactions giving rise to credit risk plays a central part in UBS's risk
control process. Credit approval authorities are exercised independently from
the business units. Credit authority is dependent on the amount involved,
quality, security and tenor of the transaction as well as on the experience and
competence of the credit professionals entrusted with this function.
In order to manage UBS's exposure to credit risk effectively, and in particular
to encourage appropriate pricing of transactions involving credit, UBS measures
its exposure to credit risk using a forward looking statistical estimate of the
expected loss based on the estimated probability of default of UBS's
counterparties. Such estimates are based on the volume and type of exposure, the
value of potential collateral or support, and the quality of each counterparty.
The quality of the counterparty is expressed in a rating with a specific default
probability. For this purpose, UBS classifies all counterparties into a 14 point
rating scale and the transfer risk into a 15 point country rating scale.
Composition of Credit Risk. Credit risk is assumed, as an integral part of
their business, by UBS Warburg and UBS Switzerland.
The composition of UBS's credit exposure differs appreciably between these two
business groups. At 30 June 2000, a substantial majority of UBS Warburg's
counterparties fell into the internal counterparty rating categories C1-C5 both
with respect to banking products (83%) and the traded products portfolio (97%).
UBS's internal rating classes C1-C5 compare to Moody's Investor Services ratings
Aaa to Baa3 and are considered investment grade. UBS Warburg's counterparties
are primarily sovereigns, insurance companies, financial institutions,
multi-national corporate clients and investment
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
funds. UBS Warburg's exposure to lower rated customers is generally
collateralized or otherwise structurally supported. UBS's aggregate, unsecured
exposure to hedge funds measured in terms of net replacement value amounted to
USD 5 million at 30 June 2000 compared to USD 55 million at 31 December 1999 and
USD 81 million at 31 December 1998.
By contrast, the largest single component of the loan portfolio within UBS
Switzerland consists of residential mortgage lending in Switzerland, over half
of which is classified within UBS's lowest internal investment grade rating
class of C5. The rating of the remainder of the Swiss portfolio, excluding
mortgages, is fairly widely spread with the largest concentration being in
rating classes C3-C5 comparable to Moody's rating of A2 to Baa3. Credits to
Private Clients are predominately extended against the pledge of marketable
securities and against single-family real estate property.
The continued improvement in the Swiss economy and property markets has aided in
the overall improvement in the quality of this portfolio. UBS Switzerland's
largest exposure at 30 June 2000 was to private households in Switzerland.
Loan Portfolio. The UBS Warburg loan portfolio remained unchanged during the
first half of 2000. In 1999 this portfolio had been significantly reduced. This
was a continuation of the strategy that began immediately after the 1998 merger
with the objective of improving the risk/reward profile of the international
lending business. This initiative included the shift in focus away from Emerging
Markets and into high quality credits in the major OECD (Organization for
Economic Cooperation and Development) countries and the sale of the non-Swiss
portion of the Global Trade Finance business.
The overall impact of this shift has been a reduction in UBS Warburg's
international banking portfolio (consisting of loans and unfunded commitments to
corporates and institutional clients, excluding banks) from over CHF 250 billion
at June 1998 to CHF 96 billion by 30 June 2000 (CHF 99 billion by 31 December
1999).
The following table shows UBS's loan portfolio and related allowances and
provisions by business groups at 30 June 2000 and 31 December 1999.
<TABLE>
<CAPTION>
UBS ASSET CORPORATE
UBS SWITZERLAND MANAGEMENT UBS WARBURG CENTER TOTAL
---------------- --------------- --------------- --------------- ----------------
ALL AMOUNTS IN CHF MILLIONS JUNE 00 DEC 99 JUNE 00 DEC 99 JUNE 00 DEC 99 JUNE 00 DEC 99 JUNE 00 DEC 99
------------------------------------------ ------- ------- ------- ------ ------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans to Banks (Gross).................... 11,673 8,780 352 181 14,442 21,481 93 343 26,560 30,785
Loans to Customers (Gross)................ 188,579 191,180 59 32 54,758 55,670 1,022 347 244,418 247,229
------- ------- ------- ------ ------- ------ ------- ------ ------- -------
Loans, Gross............................. 200,252 199,960 411 213 69,200 77,151 1,115 690 270,978 278,014
------- ------- ------- ------ ------- ------ ------- ------ ------- -------
Counterparty Allowance.................... 9,267 10,447 -- -- 1,764 1,550 6 6 11,037 12,003
Country Allowance......................... -- -- -- -- 1,166 1,246 -- -- 1,166 1,246
------- ------- ------- ------ ------- ------ ------- ------ ------- -------
Allowances for Loan Losses(1)............ 9,267 10,447 -- -- 2,930 2,796 6 6 12,203 13,249
------- ------- ------- ------ ------- ------ ------- ------ ------- -------
Loans, Net of Allowances............... 190,985 189,513 411 213 66,270 74,355 1,109 684 258,775 264,765
------- ------- ------- ------ ------- ------ ------- ------ ------- -------
Counterparty Provision for Contingent
Claims................................... 12 -- -- -- 24 19 -- -- 36 19
Country Provision for Contingent Claims... -- -- -- -- 151 130 -- -- 151 130
------- ------- ------- ------ ------- ------ ------- ------ ------- -------
Total Provisions(2)...................... 12 -- -- -- 175 149 -- -- 187 149
======= ======= ======= ====== ======= ====== ======= ====== ======= =======
Summary:
Allowances & Provisions for Counterparty
Risk..................................... 9,279 10,447 -- -- 1,788 1,569 6 6 11,073 12,022
Allowances & Provisions for Country
Risk..................................... -- -- -- -- 1,317 1,376 -- -- 1,317 1,376
------- ------- ------- ------ ------- ------ ------- ------ ------- -------
Total Allowances & Provisions............ 9,279 10,447 -- -- 3,105 2,945 6 6 12,390 13,398
------- ------- ------- ------ ------- ------ ------- ------ ------- -------
</TABLE>
---------------
(1) Deducted from assets.
(2) Booked as liabilities.
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See "--Selected Statistical Information--Loans" for a breakdown of the loan
exposure by type of borrower.
Over-the-Counter Derivative Contracts. A significant proportion of UBS
Warburg's credit risk arises from its trading activities, including its trading
of derivative products. The provision of risk management solutions that involve
the use of derivative products is a core service that UBS offers to its clients.
Derivative products by their nature are particularly sensitive to changes in
market prices and consequently UBS pays close attention to the management and
control of these risks. UBS's credit standards for entering into unsecured
derivative contracts are very high and particular emphasis is placed on the
maturity profile. Ninety-seven percent of UBS Warburg's credit risk on
derivative products falls within UBS's internal rating classes C1-C5.
Transactions with counterparties of lower quality are generally conducted only
on a secured basis. A new system has been introduced in February 2000 to monitor
credit risk exposure to derivative contracts on the basis of a statistically
calculated potential exposure, or Potential Credit Exposure or "PCE," which will
allow an even more precise valuation of the credit equivalents.
Settlement Risk. Due to UBS's international business, UBS is also exposed to
settlement risk. Settlement risk arises in transactions involving the exchange
of values where a counterparty fails to honor its obligation to deliver cash or
securities. This risk is particularly significant in relation to foreign
exchange and precious metals transactions. UBS limits its exposure to settlement
risk by tolerance levels assigned to each counterparty in relation to its
rating. In addition, UBS monitors this risk on a permanent basis and seeks to
shorten, as much as practicable, the period during which UBS is exposed. UBS has
also been an active participant in an industry initiative to establish a new
organization, called CLS Bank, which is being established in order to
substantially reduce settlement risk between major international financial
institutions. Participation in regulated payment and securities clearing systems
also reduces settlement exposure.
Country Risk Exposure. UBS's definition of country risk comprises all
cross-border exposures from loans, derivative products and trading products.
This definition includes its own intracompany cross-border positions, which
amounted to CHF 419 billion at 30 June 2000, about 49% of the total non-
emerging market country risk exposure of CHF 851 billion. At 30 June 2000, 98.0%
of UBS's country risk exposure was included in its three highest internal
ratings classes. This portion of UBS's country risk exposure was with OECD
countries where the risk of default is judged to be negligible. The following
table summarizes UBS's country transfer risk exposure grouped by rating classes
as of 30 June 2000 compared to 31 December 1999 and 31 December 1999 compared to
31 December 1998.
<TABLE>
<CAPTION>
BANKING TRADED TRADABLE
PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL
COUNTRY CATEGORIES (CHF IN MILLIONS)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrialized Countries
COUNTRIES RATED S0 - S2......................... 496,212 183,839 170,784 850,835
Change from December 1999..................... -8,512 27,738 -48,711 -29,485
Change December 1999/December 1998............ 28,270 -23,380 26,207 31,097
</TABLE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BANKING TRADED TRADABLE
PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL
COUNTRY CATEGORIES (CHF IN MILLIONS)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Emerging Markets
COUNTRIES RATED S3 - S14........................ 11,020 3,478 2,941 17,439
Change from December 1999..................... -5,610 -1,967 414 -7,163
Change December 1999/December 1998............ -7,533 -1,794 1,500 -7,827
TOTAL........................................... 507,232 187,317 173,725 868,274
Change from December 1999..................... -14,122 25,771 -48,297 -36,648
Change December 1999/December 1998............ 20,737 -25,174 27,707 23,270
</TABLE>
------------
(1) Traded products consists of derivative instruments and repurchase
agreements.
(2) Tradeable assets consist of equity and fixed income financial instruments
held for trading purposes, which are marked to market on a daily basis.
The remaining 2.0%, or CHF 17.4 billion, of UBS's country risk exposure is to
emerging markets that are classified in rating classes S3 to S14. This exposure
has decreased as a result of the restructuring of the international loan
portfolio and the exit from the non-Swiss Global Trade Finance business in 1999.
Total exposure to the emerging markets group of countries fell by CHF 7.2
billion between 31 December 1999 and 30 June 2000 -- a reduction of 29% -- and
by CHF 15.0 billion between 31 December 1998 and 30 June 2000 -- a reduction of
46%. In view of the higher risk associated with emerging markets, UBS closely
monitors this exposure on an ongoing basis within the country limits approved by
the Board of Directors. All significant new transactions in emerging and
distressed markets require approval from the respective country risk manager in
addition to the standard counterparty credit approval. The country risk limit
operates as the primary limit for such transactions and extension of credit may
be denied on the basis of a country risk limit even though adequate counterparty
limits may be available for the customer concerned.
The following table analyzes the emerging markets exposures by the major
geographical areas as of 30 June 2000 compared to 31 December 1999 and 31
December 1999 compared to December 1998.
<TABLE>
<CAPTION>
BANKING TRADED TRADABLE
PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL
REGION (CHF IN MILLIONS)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EMERGING EUROPE.................................... 711 210 351 1,272
Change from December 1999........................ -208 -38 -68 -314
Change from December 1999/December 1998.......... -402 -6 239 -169
EMERGING ASIA...................................... 5,152 1,657 1,257 8,066
Change from December 1999........................ 149 -2,216 78 -1,989
Change from December 1999/December 1998.......... -4,230 -971 850 -4,351
LATIN AMERICA...................................... 3,168 998 1,267 5,433
Change from December 1999........................ -5,001 333 454 -4,214
Change from December 1999/December 1998.......... -1,649 -603 371 -1,881
AFRICA/MIDDLE EAST................................. 1,989 613 66 2,668
Change from December 1999........................ -550 -46 -50 -646
Change from December 1999/December 1998.......... -1,252 -214 40 -1,426
</TABLE>
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<TABLE>
<CAPTION>
BANKING TRADED TRADABLE
PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL
REGION (CHF IN MILLIONS)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL.............................................. 11,020 3,478 2,941 17,439
Change from December 1999........................ -5,610 -1,967 414 -7,163
Change from December 1999/December 1998.......... -7,533 -1,794 1,500 -7,827
</TABLE>
------------
(1) Traded products consists of derivative instruments and repurchase
agreements.
(2) Tradeable assets consist of equity and fixed income financial instruments
held for trading purposes, which are marked to market on a daily basis.
Impaired loans were reduced from 31 December 1998 to 31 December 1999 by
approximately CHF 1.4 billion and non-performing loans by about CHF 1 billion.
See "--Selected Statistical Information--Cross-Border Outstandings" for
additional details on UBS's country risk exposures.
Impaired and Non-Performing Loans. UBS classifies a loan as impaired when it
determines that there is a high probability that UBS will suffer a partial or
full loss. A provision is then made with respect to the probable loss to be
incurred for the loan in question. Within this category, non-performing loans
are defined as loans where payment of interest, principal or fees is overdue for
90 days.
The following table provides a breakdown by business groups of the impaired and
non-performing loans as of 30 June 2000 and 31 December 1999. UBS Asset
Management did not have any impaired loans or non-performing loans in any of the
periods presented.
<TABLE>
<CAPTION>
UBS SWITZERLAND UBS WARBURG CORPORATE CENTER UBS GROUP
--------------------- --------------------- --------------------- ---------------------
30 JUNE 31 DECEMBER 30 JUNE 31 DECEMBER 30 JUNE 31 DECEMBER 30 JUNE 31 DECEMBER
2000 1999 2000 1999 2000 1999 2000 1999
(CHF in millions)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IMPAIRED LOANS:
Total impaired loans............. 16,658 19,166 4,310 3,226 43 64 21,011 22,456
Allocated allowances............. 9,267 10,447 2,279 2,018 6 6 11,552 12,471
------- ----------- ------- ----------- ------- ----------- ------- -----------
Impaired loans, net of
allowances..................... 7,391 8,719 2,031 1,208 37 58 9,459 9,985
------- ----------- ------- ----------- ------- ----------- ------- -----------
NON-PERFORMING LOANS:
Total non-performing loans....... 10,270 11,416 1,772 1,594 43 63 12,085 13,073
Allocated allowances............. 6,486 7,315 1,383 1,341 5 5 7,874 8,661
------- ----------- ------- ----------- ------- ----------- ------- -----------
Non-performing loans, net of
allowances..................... 3,784 4,101 389 253 38 58 4,211 4,412
------- ----------- ------- ----------- ------- ----------- ------- -----------
</TABLE>
Non-performing loans have decreased to CHF 12,085 million at 30 June 2000 from
CHF 13,073 million at 31 December 1999. This positive result was principally due
to the unexpectedly strong performance of the economy in Switzerland, especially
in the second quarter. Previous provisions were established against a background
of several years of relatively low growth in the Swiss economy and relatively
high credit losses. Since the beginning of this year, the Swiss economy started
improving, and accelerated further during the last quarter, with the Swiss
National Bank recently raising its 2000 growth forecast from 1.8% to 3.0%. In
particular, this turnaround has affected real estate values and the real estate
construction market, which has led to recoveries of provisions against loans in
these portfolios. UBS expects to recognize additional recoveries if current
economic trends continue. Non-performing loans decreased to CHF 13,073 million
at 31 December 1999 from CHF 16,113 million at 31 December 1998. The reduction
reflects an accelerated writedown in the Swiss domestic portfolio, a substantial
reduction in UBS's emerging markets exposure, a significant improvement in the
macroeconomic situation in Switzerland and a faster than expected recovery in
key Asian economies.
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The following table provides a breakdown of impaired loans by type at 30 June
2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans (Gross)............................... 270,978 278,014 330,964
============ ================ ================
Impaired Loans:
Counterparties:
Non-performing loans...................... 11,625 12,649 15,717
Other impaired loans...................... 8,677 9,096 9,884
------------ ---------------- ----------------
Sub-total.............................. 20,302 21,745 25,601
Country:
Non-performing loans...................... 460 424 397
Other impaired loans...................... 249 287 449
------------ ---------------- ----------------
Sub-total.............................. 709 711 846
------------ ---------------- ----------------
Total impaired loans...................... 21,011 22,456 26,447
============ ================ ================
Ratios:
Impaired loans as a percentage of gross
loans..................................... 7.8% 8.1% 8.0%
Non-performing loans as a percentage of
gross loans............................... 4.5% 4.7% 4.9%
</TABLE>
See "--Selected Statistical Information--Impaired, Non-Performing and
Restructured Loans" for further information on impaired and non-performing
loans.
Allowances and Provisions. The adequacy of the allowances and provisions that
UBS makes for impaired loans is assessed by the Credit Risk Management and
Control function which is independent from the business units. Allowances and
provisions are determined based upon an individual assessment of counterparties
and countries and their creditworthiness as well as the amount of collateral
available to UBS to offset against the probable loss. UBS believes that the
probable losses in its portfolio are adequately covered by its allowances and
provisions.
The following table provides a breakdown of allowances and provisions by type at
30 June 2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Counterparties:
Allowances for non-performing loans....... 7,435 8,243 9,609
Allowances for other impaired loans....... 3,602 3,760 3,484
------------ ---------------- ----------------
Subtotal allowances and provisions for
counterparty risk.................... 11,037 12,003 13,093
Country:
Allowances for non-performing loans....... 439 418 397
Allowances for other impaired loans....... 76 50 92
------------ ---------------- ----------------
Subtotal allowances and provisions for
country risk......................... 515 468 489
Allowances and provisions for country
risk...................................... 802 908 961
Allowances for contingent liabilities....... 36 19 435
------------ ---------------- ----------------
Total allowances and provisions for credit
losses.................................... 12,390 13,398 14,978
============ ================ ================
</TABLE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in millions)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowances and provisions for credit losses
as a percentage of gross loans............ 4.6% 4.8% 4.5%
Allowances and provisions for credit losses
as a percentage of impaired loans......... 58.9% 59.7% 56.6%
</TABLE>
The following analysis provides an overview of UBS's credit loss experience for
30 June 2000 and 31 December 1999 and 1998:
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR FOR THE YEAR
MONTHS ENDED ENDED 30 DECEMBER ENDED 30 DECEMBER
30 JUNE 2000 1999 1998
(CHF in millions)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period.......... 13,398 14,978 16,213
Net write-offs........................ (1,142) (3,210) (2,265)
Increase (Decrease) in credit loss
allowances......................... (83) 956 951
Other Adjustments (primarily net
foreign exchange and provisions for
doubtful interest)................. 217 674 79
------------ ----------------- -----------------
Balance at end of period................ 12,390 13,398 14,978
============ ================= =================
</TABLE>
The allowances and provisions for credit losses decreased CHF 1,008 million, or
7.5%, from CHF 13,398 million at 31 December 1999 to CHF 12,390 million at 30
June 2000. During the first half of 2000, UBS realized a decrease in credit loss
allowances of CHF 83 million compared to an increase of CHF 956 million for
1999. This positive result was essentially due to the continuous strong economy
in Switzerland, where recoveries and write-backs of previously established
provisions by far exceeded new provisioning requirements. The Swiss economy is
expanding at the fastest rate in a decade and accelerated further during the
quarter. The growth is broadly supported, especially in the domestic sector, and
was markedly higher than what could have been expected in 1999.
The development of the total credit loss expense in 1998 and 1999 includes the
effect of allocations from the special reserve pools that had been established
in 1996, prior to the 1998 merger, by both Union Bank of Switzerland and Swiss
Bank Corporation totaling some CHF 5.5 billion. These reserves were established
in recognition of the fact that there might be a further deterioration in the
quality of their loan portfolios as a result of adverse economic conditions
particularly in Switzerland. These reserves totaled CHF 3.6 billion at the
beginning of 1998. CHF 3.3 billion was applied against specific loan exposures
during 1998 and the balance of CHF 300 million was used or reversed in 1999.
Following these allocations, the credit loss expense incurred in 1998 amounted
to CHF 951 million and in 1999 to CHF 956 million. UBS does not believe there is
a current need for such allowances. See "--Selected Statistical
Information--Summary of Movements in Allowances and Provisions for Credit
Losses" for a further analysis of credit losses.
The allowance and provisions for credit losses include a component for country
risk. UBS's approach to country risk provisioning follows the guidelines of the
Swiss Bankers' Association, which allows banks to establish provisions based on
their own portfolio scenarios. UBS establishes country-specific scenarios, which
are reviewed and used on an ongoing basis to evaluate the current and future
probability of default due to country risk incidents or country-specific
systemic risks. The appropriate allowances and provisions are then determined by
evaluating the type of credit exposure and the loss severities that have been
attributed to each exposure type. Total provisions and allowances for emerging
market-related exposures stood at CHF 1,317 million at 30 June 2000, CHF 1,376
million at 31 December 1999 and CHF 1,450 million at 31 December 1998,
reflecting both the reduction in the
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
overall size of UBS's emerging market exposure and reallocation of provisions
from Asia to Latin America during 1999.
See "--Selected Statistical Information--Summary of Movements in Allowances and
Provisions for Credit Losses" and "--Selected Statistical
Information--Allocation of the Allowances and Provisions for Credit Losses" for
further analyses of the allowances and provisions for credit risk and related
credit losses.
Market Risk. Market risk is the risk UBS faces as a result of adverse movements
in the value of foreign exchange, commodities, equity market and interest rates
positions. UBS incurs market risk mainly through its trading activities, which
are centered in UBS Warburg, although market risk also arises--to a
substantially lesser extent--in relation to other activities, notably in the
context of balance sheet management activities. UBS Warburg's primary market
risk exposure relates to its business activities in equities, fixed income
products and foreign exchange. The risk that UBS Warburg assumes is primarily
related to the need to facilitate its customers' activities in the major OECD
markets.
UBS measures its exposure to market risk using the framework of expected loss,
statistical loss and stress loss, as follows:
- In the context of market risk, expected losses are the value adjustments made
to the portfolio to adjust for price uncertainties resulting from a lack of
market liquidity or the absence of a reliable market price for a particular
instrument.
- One-day loss is measured based on a value at risk, or "VaR," methodology. VaR
is a forward-looking estimate of potential loss. One-day VaR looks forward one
trading day, while 10-day VaR looks forward ten days. UBS calculates VaR using
a 99% confidence level. In other words, under normal market conditions, UBS
would expect over the course of a day a loss of more than its 1-day VaR to
occur 1 in 100 times.
- Stress scenario loss is defined as the risk of an extreme market move
affecting particular predefined market variables.
In order to keep its exposure to market risk within acceptable boundaries, the
UBS Board of Directors has set limits on UBS's exposure to both statistical loss
by reference to the VaR exposures as well as to stress scenario loss by placing
limits in relation to particular stress scenarios.
UBS calculates the VaR associated with its exposure to market risk and
consequently also its regulatory market risk capital requirement using the
historical simulation technique, based on five years of data. VaR is calculated
both on a 1-day 99% confidence interval and a 10-day 99% confidence interval,
and the latter is used both for internal limits setting and for calculating
regulatory market risk capital. The calculation incorporates both the risk from
general market moves, such as moves in foreign exchange rates, equity indices
and market interest rates, as well as the risk from price movements that are
specific to an individual issuer. During 1999 and in the first six months of
2000, UBS Warburg operated within a CHF 450 million 10-day VaR limit.
The Swiss Federal Banking Commission, or "FBC," approved the use of UBS's VaR
model to compute regulatory capital requirements for market risks in 1999.
While a VaR measure is the principal measure of UBS's exposure to day-to-day
movements in market prices, UBS's risk control process is specifically focused
on tail risks (or the risk of a loss on UBS's portfolios significantly larger
than the VaR number as a result of large movements in the risk factors, such as
equity indices, foreign exchange rates and interest rates). UBS has a consistent
set of predefined large price movements, or shocks, and risk limits, which apply
to all the major risk factors to which UBS is exposed as a basis to prevent risk
concentration. This is the primary protection against any extreme event. In
addition to this first level protection, a stress loss limit has been introduced
as a
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
portfolio control for all the trading activities that are concentrated within
UBS Warburg. The potential stress loss is calculated with respect to eight base
scenarios which are supplemented by ad hoc analyses depending on external
developments or specific portfolio concentrations such as Year 2000, which UBS
added to its stress test analysis in the third quarter of 1999. This ensures
that both historical crises as well as forward-looking extreme scenarios are
incorporated in the analysis. Implementing this stress loss limit is a way of
protecting UBS's earnings during periods of extreme market stress.
UBS Warburg Market Risk Developments. Market risk exposure as measured by the
10-day 99% confidence VaR was generally higher over 1999 and the first half of
2000. However, utilization remained well within the limits. The main market risk
drivers continued to be Equity and Interest Rate risk.
SUMMARY OF 10-DAY 99% CONFIDENCE VaR UTILIZATION FOR UBS WARBURG
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
30 JUNE 31 DECEMBER
MIN. MAX. AVERAGE 2000 MIN. MAX. AVERAGE 1999
(CHF in millions)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RISK TYPE
Equities.............. 169.5 245.9 210.2 189.6 121.8 207.6 162.5 172.8
Interest Rates........ 127.0 181.2 152.5 133.7 87.7 187.6 140.2 140.1
Foreign Exchange...... 8.7 97.5 41.0 9.5 9.5 144.7 57.5 76.1
Precious Metals....... 4.3 27.4 12.2 12.1 5.3 35.8 21.0 27.8
Diversification
Effect.............. -- -- (159.8) (113.6) -- -- (168.2) (193.2)
----- ------ ------- ---------- ----- ------ ------- -----------
UBS Warburg........... 214.6 296.1 256.1 231.3 176.6 275.7 213.1 223.6
----- ------ ------- ---------- ----- ------ ------- -----------
</TABLE>
All VaR models, while forward-looking, are based on past events and are
dependent upon the quality of available market data. In order to evaluate the
VaR model, actual revenues are compared with the 1-day VaR on a daily basis, a
process known as "backtesting," with losses greater than the VaR estimate being
known as "exceptions." As the chart below shows, UBS Warburg's backtesting
results showed no exceptions over the last 12 months. In addition, there were no
exceptions during 1999.
[UBS Warburg Backtesting Results Graph]
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--------------------------------------------------------------------------------
Market Risk in the Other Business Groups. Although UBS assumes almost all of
its active market risk in UBS Warburg, the Group-wide VaR utilization includes
all sources of market risk. This includes a small amount of risk that is assumed
in order to facilitate customer business by UBS Private Banking in Switzerland
as well as the risk associated with the structural foreign exchange and interest
rate hedge positions managed by Corporate Center, which are discussed below
under "--Asset and Liability Management." However, market risk exposure at the
UBS group level continues to be dominated by the UBS Warburg positions.
SUMMARY OF 10-DAY 99% CONFIDENCE VaR UTILIZATION FOR UBS GROUP
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER
2000 1999 1998
(CHF in millions)
------------------------------------------------------------------------------------
<S> <C> <C> <C>
DIVISION:
UBS Warburg................................................ 231.3 223.6 259.9
UBS Switzerland............................................ 3.8 4.3 5.4
Corporate Center........................................... 62.8 59.8 79.2
Diversification Effect..................................... (69.2) (55.5) (62.0)
----- ----- -----
UBS Group.................................................. 228.7 232.2 282.5
===== ===== =====
</TABLE>
Consequential Risks. In addition to credit and market risks that UBS assumes as
an integral part of its business activities, UBS also assumes a number of
consequential risks--often referred to as "operational risk"--which arise as a
consequence of its business activities. These risks include:
- operations or transactions processing risk;
- legal risk;
- compliance risk;
- liability risk; and
- security risk.
UBS is addressing the measurement of its consequential risks through the
introduction of a generic operational risk-modeling framework. This framework
groups risks into predetermined risk categories and identifies the factors
behind the risk exposure. Operational risk scenarios are developed to stress
UBS's processes and procedures underlying the exposure. This helps UBS to
measure the risk of loss from the identified exposure in a similar manner to the
statistical loss measurements of its credit and/or market risk exposures. This
framework is relatively new and is periodically reviewed and enhanced so that
risks are accurately assessed and are in accordance with UBS's risk appetite and
risk-bearing capacity.
Year 2000 Issue. An important element of UBS's operational risks over the past
two years has been the need to address the Year 2000 issue. UBS recognized early
the potential problems that could arise from computer systems failing to
properly recognize the change of date from 1999 to 2000. To combat this problem,
starting in 1996, UBS and each of its operating divisions established and
implemented a program responsible for addressing the Year 2000 issue.
UBS has not experienced any material problems related to the Year 2000 date
change. The total cost to UBS of the Year 2000 program was CHF 493 million in
1998 and CHF 279 million in 1999.
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--------------------------------------------------------------------------------
Asset and Liability Management
UBS's asset and liability management processes are designed to manage all
balance sheet related risks on a coordinated Group-wide basis. The procedures
and policies cover Group liquidity, Group funding and capital management, and
the management of non-trading foreign exchange and interest rate risk.
UBS recognizes that the market and credit risk framework that is set out above
cannot be fully applied to its asset and liability management activities.
Consequently, specific processes and policies have been established for managing
these risks. UBS's asset and liability management function is undertaken at the
Corporate Center by the Group Treasury department, which reports directly to the
CFO. Group Treasury is responsible for establishing and effectively managing the
processes in relation to these risks in accordance with policies that have been
approved by the Board of Directors.
The overriding goals of all processes within the asset and liability management
activities are:
- efficient management of the bank's non-trading interest rate and foreign
exchange exposures;
- sustainable and cost-efficient funding of the bank's balance sheet;
- optimal liquidity management in order to generate cash when required; and
- compliance with legal and regulatory requirements.
Interest Rate Management. Interest rate risk is inherent to most of UBS's
businesses. Interest rate risks arise from a variety of factors, including
differences in the timing between the contractual maturity or repricing of
assets, liabilities and derivative instruments. Net interest income is affected
by changes in market interest rates, given that the repricing characteristics of
loans and other interest earning assets do not necessarily match those of
deposits, other borrowings and capital. In the case of floating rate assets and
liabilities, UBS is also exposed to basis risk, which is the difference in
repricing characteristics of two floating rate indices, such as the savings rate
and six-month LIBOR. In addition, certain products have embedded options that
affect their pricing and principal.
UBS adopts a comprehensive Group-wide approach to managing interest rate risk,
and allocates the responsibility for managing this risk to a limited number of
business areas. Under this approach, interest rate risk is clearly segregated
into trading and non-trading risk. All interest rate risks arising from
non-trading business activities are captured at the point of business
origination and transferred either to UBS Warburg's Cash and Collateral Trading
book--or "CCT"--or to the Corporate Center's Bank Book through a Group-wide
transfer pricing mechanism. The risk is then managed centrally in accordance
with the relevant risk policy.
In the case of transactions with a fixed maturity, the interest rate risk is
transferred from the relevant business area to CCT on a transaction by
transaction basis. This means that products with fixed maturities immediately
become part of the trading book in UBS Warburg and the business locks in an
interest-rate-risk-free margin on such products, thereby relieving them of any
residual interest rate risk. As a result of this process, UBS benefits fully
from the netting potential between its balance sheet and trading products.
In the case of client business, such as savings accounts or current accounts,
which have no contractual maturity date or directly market-linked customer rate,
the interest rate risk is transferred from the business areas by pooled
transactions to the Bank Book. Since these products effectively contain various
embedded options in respect of withdrawal/prepayment and rate-setting, they
cannot be hedged by single back-to-back transactions. Consequently, Group
Treasury manages the inherent interest rate risk in these products in the Bank
Book through the establishment of replicating portfolios of revolving fixed-rate
transactions of predefined maturities, which approximate the average cash flow
behavior of these positions. Group Treasury then hedges the overall risk in the
Bank Book by means of internal
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
transactions with CCT. As a result of this process, all interest rate risks
arising from client business are transferred either directly or indirectly via
the Bank Book to CCT.
In addition to the interest rate risk associated with client business, a
significant amount of interest rate risk arises in relation to non-business
balance sheet items, such as in the refinancing of the bank's real estate
portfolio, equity investments in associated companies and the investment of
UBS's own equity. The refinancing of real estate and equity investments and the
investment of equity are all strategic decisions that implicitly create
non-trading interest rate exposures. The interest rate risks inherent in these
balance sheet items are managed in the Bank Book by representing them as
replicating portfolios, on the basis of decisions taken by the Group Executive
Board as to the appropriate effective maturities. Here, too, the risk is hedged
by means of internal transactions with CCT.
All the replicating portfolios that are contained in the Bank Book are updated
monthly by replacing maturing tranches with new aggregate tranches that reflect
the changes in the balance sheet over the period. By their nature, the staggered
tranches that constitute each replicating portfolio reduce the volume that must
be hedged by the Bank Book at each monthly rollover. However, due to the extent
of the underlying portfolio volumes, the new aggregate tranches are nevertheless
of such a size that they cannot be hedged instantly. The Bank Book therefore
assumes intramonth interest rate exposure until it can execute all the necessary
offsetting hedges with CCT. The exposure of the Bank Book, which thus tends to
fluctuate between monthly rollovers and the profits or losses arising out of the
Bank Book, are reported on an accrual basis in the financial statements and
constitute an integral part of the Group's net interest income.
The Board of Directors has approved risk management policies, risk limits and
the control framework for the entire interest rate risk management process
including the establishment of a VaR limit for the interest rate exposure of the
Bank Book. Market Risk Control monitors the risk in both CCT and in the Bank
Book on a daily basis as part of the Group's overall market risk in order to
ensure the integrity of the interest rate risk management process and UBS's
compliance with the defined risk limits.
UBS's approach to managing the interest rate risks inherent in the Bank Book
complies with the regulatory framework recently introduced by the FBC. In the
course of the year 2000, it will become mandatory for all Swiss banks to report
to the Swiss National Bank the interest rate sensitivity of the Bank Book on a
quarterly basis. Additionally, the specific composition of the underlying
replicating portfolios used to manage individual balance sheet items must also
be disclosed in order to assist the regulators to identify 'outliers' in terms
of their interest rate risk profiles.
The following table shows the interest rate sensitivity of the Bank Book as at
30 June 2000 measured in terms of the potential impact of a one basis point
(0.01%) parallel rise in interest rates on the market value of each balance
sheet item.
<TABLE>
<CAPTION>
WITHIN 1 1 TO 3 3 TO 12 1 TO 5 OVER 5
MONTH MONTHS MONTHS YEARS YEARS TOTAL
(CHF thousand per basis point)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHF.................................. 6 (5) 55 212 (627) (359)
USD.................................. 8 (34) (29) (119) 505 331
EUR.................................. 0 (3) 3 106 192 298
GBP.................................. 0 0 (47) 288 531 772
JPY.................................. 0 0 0 1 (6) (5)
Others............................... 0 0 0 0 0 0
----- --- ---- -- -- --
TOTAL................................ 14 (42) (18) 488 595 1,037
</TABLE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WITHIN 1 1 TO 3 3 TO 12 1 TO 5 OVER 5
MONTH MONTHS MONTHS YEARS YEARS TOTAL
(CHF thousand per basis point)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Of which Replicated Equity:
CHF.................................. 16 23 237 6,990 1,710 8,976
Bank Book without Replicated Equity:
TOTAL................................ (2) (65) (255) (6,502) (1,115) (7,939)
</TABLE>
The most significant component of the Bank Book sensitivity stems from the
investment of UBS's equity. At 30 June 2000, this was invested in a portfolio of
fixed-rate CHF deposits with an average duration of 2.5 years and a sensitivity
of CHF (9.0) million per basis point, in line with the strategic investment
targets set by the Group Executive Board. In order to ensure that these Group
Executive Board targets are met, UBS's equity is represented as a liability
position by a replication portfolio reflecting this target benchmark. UBS's
equity becomes then automatically invested according to the Group Executive
Board's strategic targets so as to offset the interest rate risk associated with
this equity replication portfolio. The interest rate sensitivity of these
investments indicates the extent to which their marked-to-market value would be
affected by an upward move in interest rates. This in turn is directly related
to the investment duration chosen by the Group Executive Board. However, when
measured against the equity replication portfolio itself, the residual interest
rate risk is negligible. Moreover, any reduction in this measure of the interest
rate sensitivity relating to the investment of UBS's equity would inevitably
require investing at significantly shorter maturities, which would lead to a
higher volatility of UBS's interest earnings.
In addition to the above standard sensitivity to a one basis point rise in
rates, UBS uses the following two measures to help to monitor the risk inherent
in the Bank Book:
- Net interest income at risk, which is defined as the exposure of the net
interest income arising in the Bank Book to an adverse movement in interest
rates over the next twelve months. Given the fact that all client business
with fixed maturities is "match funded" with UBS Warburg, these transactions
are not affected by changes in interest rates. Therefore only net interest
income positions resulting from replicating portfolios may be exposed to
market changes. This measure estimates the impact of different changes in the
level of interest rates using shock scenarios as well as gradual changes in
interest rates over a period of time. All of the scenarios are compared with
a scenario in which current market rates are held constant for the next
twelve months.
- The economic value sensitivity, which is defined as the potential change in
market value of the Bank Book resulting from changes in interest rates. This
estimates the effect of an immediate interest rate shock on the net position
in the Bank Book.
The net interest income at risk measure on the Bank Book considers such
variables as:
- repricing characteristics of assets and liabilities;
- rate barrier effects, such as caps and floors, on assets and liabilities;
- maturity effects of replicating portfolios; and
- behavior of competitors.
Both measures are based on the Bank Book's interest rate position excluding the
liability position relating to the "equity replication portfolio." The
methodology is designed to highlight the effects of market changes in interest
rates on existing balance sheet positions; it ignores future changes in the
asset and liability mix and therefore it is not by itself a measure of future
net interest income.
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The two methodologies provide different measures of the level of interest rate
risk. The economic value sensitivity measure provides a longer term view, since
this considers the present value of all future cash flows generated from the
existing balance sheet positions. The net interest income at risk measure
provides a shorter term view, as it considers the repricing effect of all
maturing positions over the next twelve months. The table below shows the change
in risk under both measures at 30 June 2000, 31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 31 DECEMBER
2000 1999 1998
(CHF in millions)
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income at risk................................. (188) (355) (265)
Economic value sensitivity.................................. (787) (555) (493)
</TABLE>
Among various scenarios that have been analyzed the net interest income at risk
figure shown is the worst case and relates to an interest rate shock (parallel
shift) of -200 basis points. At 31 December 1998, the difference to the constant
market rate scenario represents -4.07% of UBS's 1998 total net interest income,
-5.6% at 31 December 1999 and -3.0% at 30 June 2000. In this extreme scenario
the largest part of the decrease would occur due to lower margins on deposit
accounts and lower returns on the investment of UBS's equity.
The economic value sensitivity shows the effect of a 100 basis point adverse
interest rate shock, implying that the bank had an exposure of CHF (493) million
to rising interest rates at 31 December 1998, CHF (555) million at 31 December
1999 and CHF (787) million at 30 June 2000.
Liquidity and Funding Management. UBS's approach to liquidity management seeks
to ensure that UBS will always have sufficient liquidity to meet its liabilities
in a timely manner while preserving the option of exploiting potential strategic
market opportunities. UBS's centralized approach to liquidity management
encompasses the entire network of branches and all subsidiaries and ensures that
the liquidity position is more than adequate to cover short-term liabilities at
all times. UBS's liquidity management is based on an integrated framework that
incorporates an assessment of all known cash flows within UBS as well as the
availability of high grade collateral that could be used to secure additional
funding if required. The liquidity position is prudently managed under different
potential scenarios taking stress factors into due consideration.
UBS's Board of Directors has approved a policy that establishes the core
principles for liquidity management and has defined an appropriate contingency
plan. A first set of principles relates to the establishment of liquidity risk
limits, such as a net overnight funding limit. The risk limits are set by the
Group Executive Board and monitored by the Group Treasury Committee, or "GTC,"
which is chaired by the Group Treasurer and meets on a monthly basis in order to
assess the bank's liquidity exposure. A second set of principles concentrates on
liquidity crisis management for which detailed contingency plans have been
worked out. Regional committees constantly monitor the markets in which UBS
operates for potential threats and regularly report their findings to the GTC.
If a liquidity crisis occurs, regional crisis task forces will perform all
necessary contingency actions under the command of senior management.
The liquidity management process is undertaken jointly by Group Treasury and
CCT. Group Treasury's function is to establish a comprehensive framework of
directives and risk limits, while CCT undertakes the operational cash and
collateral management transactions within the established parameters. UBS's
centralized cash and collateral business management structure facilitates a
tight control on both the global cash position and the stock of highly liquid
and rediscountable securities.
UBS's funding strategy seeks to ensure that business activities are funded at
the lowest possible costs. With a broad diversification (by market, product and
currency) of funding sources UBS maintains a
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well balanced portfolio of liabilities which generate a stable flow of financing
and additionally provides protection in the event of market disruptions. In this
context UBS's strong domestic retail business is a very valuable, cost efficient
and reliable source of funding. Through the establishment of short-, medium- and
long-term funding programs in Europe, in the US and in Asia, UBS can raise funds
globally in a very efficient manner and minimize its dependence on any
particular source of funding.
See "--Liquidity and Capital Resources" for additional information.
Currency Management. UBS's corporate currency management activities are
designed to protect UBS's equity and the expected future foreign currency
cash-flows from adverse currency movements against the Swiss franc while
preserving the option of exploiting any market opportunities which may arise.
The following principles guide the approach to managing this risk:
- UBS's equity must be invested in Swiss francs (translation risk management);
and
- Recognized foreign currency exposures must be hedged proactively for the
whole financial year, which represents the cycle of financial accounting
(transaction risk management).
Translation (Balance Sheet) Currency Risk. UBS aims to maintain the flexibility
to allow foreign assets (a business unit or a non-financial asset) to be
divested at any time without adverse currency impacts. To limit these undesired
foreign exchange impacts on investments and divestments of these assets, foreign
currency assets are match funded in the relevant currency. The match-funding
principle is also applied to the financing of foreign investments, including
foreign equity investments. This strategy, together with the repatriation into
Swiss francs of foreign currency dividends and capital, ensures that UBS's
equity is always fully invested in Swiss francs.
Transaction (Revenues/Costs) Currency Risk. UBS's transaction risk currency
management process is designed to protect the budgeted annual foreign currency
net profits against adverse currency movements during the relevant reporting
period. Foreign currency net profits are actively managed by Group Treasury on
behalf of UBS in accordance with the instructions of the Group Executive Board
and subject to the VaR limit that has been established for this risk. The
budgeted net profits are treated as long forward foreign exchange exposures in
the local reporting currency against the Swiss franc.
The non-trading foreign currency exposures are hedged mainly with foreign
exchange forward contracts, although foreign exchange options are also used
particularly where there is a measure of uncertainty about the magnitude of the
underlying income. The net position of the budgeted net profits and the
corresponding hedges is the basis for the VaR calculation on Group Treasury's
non-trading currency position. During the year, actual results are continuously
monitored. Major budget deviations must be communicated to Group Treasury for
potential additional hedge transactions. The VaR analysis, which is performed
daily, is based on the same 10-day 99% confidence level as applies in UBS
Warburg. The validity of the VaR measurement is evaluated by conducting
backtests, which compare the estimated VaR amount with the actual shift of the
positions' profit or loss due to exchange rate movements.
The following table summarizes the VaR usage during the second half of 1998,
1999 and the first half of 2000.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM AVERAGE LAST VALUE OF PERIOD
VaR (CHF in millions)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 JULY -- 31 DECEMBER 1998............... 37.2 133.7 77.5 79.2
1999..................................... 1.4 77.8 37.1 59.7
1 JANUARY -- 30 JUNE 2000................ 11.7 113.4 52.2 12.2
</TABLE>
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--------------------------------------------------------------------------------
The principal contributors to UBS's non-trading currency exposure are the
operations in the UK and the US. In general, the VaR position is highest at the
beginning of the year when the budgeted net profits are transferred to Group
Treasury and is gradually reduced during the year depending on the exact hedge
strategy being used. The underlying policy is to keep the VaR of the non-trading
currency position as low as practicable.
Capital Management. Capital management is undertaken at UBS by Group Treasury
as an integral asset and liability management function. UBS's overall capital
needs are continually reviewed to ensure that its capital base can appropriately
support the anticipated needs of the divisions as well as regulatory capital
requirements. See "--Liquidity and Capital Resources--Capital Resources" for
further details.
Performance Measurement. UBS is in the process of implementing a comprehensive
value based management approach intended to support management in key tasks like
planning, investments, capital allocation, performance appraisal and
compensation, strategic risk management and communication to investors and
analysts.
Divisional business plans, planned acquisitions, investments and divestments are
evaluated and approved on the basis of their expected contribution to
shareholder value. Actual performance is appraised using division specific
hurdle rates and according to the contribution to value creation. The implicit
costs of risk tolerance as well as the consumption of regulatory equity and risk
control efforts are therefore considered in an appropriate way.
Selected Statistical Information
The tables below set forth selected statistical information regarding UBS's
banking operations. Unless otherwise indicated, average balances for the year
ended 31 December 1999 are calculated from monthly data and averages for the
years ended 31 December 1998 and 1997 are calculated from quarterly data. The
distinction between domestic and foreign generally is based on the domicile of
the booking location. For loans, this method is not significantly different from
an analysis based on domicile of the borrower. Disclosures for the years ended
31 December 1996 and 1995, where applicable, are presented for Union Bank of
Switzerland and Swiss Bank Corporation individually. Combined data is not
presented for these periods because differences between accounting policies of
the predecessor banks were significant or could not be quantified, or because
significant inter-company balances could not be identified and eliminated. For
purposes of this selected statistical information, "UBS" refers to Union Bank of
Switzerland and "SBC" refers to Swiss Bank Corporation.
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Average Balances and Interest Rates. The following table sets forth average
interest-earning assets and average interest-bearing liabilities, along with the
average rates, for the years ended 31 December 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%)
(CHF in millions, except percentages)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Money market paper
Domestic........... 2,798 27 1.0% 4,002 70 1.7% 6,768 181 2.7%
Foreign............ 48,179 1,144 2.4% 20,679 763 3.7% 27,416 1,133 4.1%
Due from banks
Domestic........... 19,451 705 3.6% 22,703 916 4.0% 22,823 926 4.1%
Foreign............ 28,999 1,269 4.4% 43,705 2,852 6.5% 33,003 2,278 6.9%
Securities borrowed
and reverse
repurchase
agreements
Domestic........... 3,265 117 3.6% 7,751 89 1.2% -- -- --
Foreign............ 223,962 11,305 5.0% 275,549 10,290 3.7% 257,090 11,328 4.4%
Trading portfolio
Domestic........... 36,269 72 0.2% 78,211 78 0.1% 19,915 139 0.7%
Foreign............ 124,564 4,460 3.6% 119,629 3,802 3.2% 153,211 4,059 2.6%
Loans
Domestic........... 200,111 7,733 3.9% 207,937 8,839 4.3% 216,114 10,646 4.9%
Foreign............ 58,634 3,326 5.7% 72,445 5,440 7.5% 61,110 5,400 8.8%
Financial investments
Domestic........... 2,066 74 3.6% 3,481 104 3.0% 3,819 119 3.1%
Foreign............ 3,737 85 2.3% 7,105 268 3.8% 9,491 379 4.0%
Net interest on
swaps.............. -- 2,132 -- -- 1,701 -- -- 725 --
------- ------ --------- ------ ------- ------
Total
interest-earning
assets............. 752,035 32,449 4.3% 863,197 35,212 4.1% 810,760 37,313 4.6%
Non-interest-earning
assets
Positive
replacement
values........... 146,036 164,708 124,224
Fixed assets....... 8,824 11,316 12,628
Other.............. 34,957 33,897 32,846
------- --------- -------
TOTAL AVERAGE
ASSETS............. 941,852 1,073,118 980,458
======= ========= =======
LIABILITIES AND
EQUITY
Money market paper
issued
Domestic........... 146 1 0.7% 255 2 0.8% 625 12 1.9%
Foreign............ 57,956 2,394 4.1% 51,435 2,557 5.0% 42,565 1,920 4.5%
Due to banks
Domestic........... 37,581 1,303 3.5% 69,140 2,772 4.0% 76,269 1,749 2.3%
Foreign............ 41,583 1,704 4.1% 51,209 3,205 6.3% 63,498 4,155 6.5%
</TABLE>
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<TABLE>
<CAPTION>
1999 1998 1997
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%) BALANCE INTEREST RATE (%)
(CHF in millions, except percentages)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities loaned and
repurchase
agreements
Domestic........... 12,830 106 0.8% 12,261 71 0.6% -- -- --
Foreign............ 144,837 8,340 5.8% 186,819 7,472 4.0% 177,128 9,660 5.5%
Trading portfolio
Domestic........... -- -- -- -- -- -- -- -- --
Foreign............ 48,560 2,070 4.3% 65,677 1,741 2.7% 40,541 1,492 3.7%
Due to customers
Domestic........... 155,887 1,920 1.2% 161,688 2,613 1.6% 169,514 3,030 1.8%
Foreign............ 122,411 5,593 4.6% 132,338 7,275 5.5% 121,305 6,505 5.4%
Long-term debt
Domestic........... 16,241 979 6.0% 21,267 1,138 5.4% 29,010 1,481 5.1%
Foreign............ 37,963 2,130 5.6% 31,024 1,348 4.3% 23,788 1,055 4.4%
------- ------ --------- ------ ------- ------
Total
interest-bearing
liabilities........ 675,995 26,540 3.9% 783,113 30,194 3.9% 744,243 31,059 4.2%
Non-interest-bearing
liabilities
Negative
replacement
values........... 171,800 187,934 136,151
Other.............. 60,946 69,184 66,755
------- --------- -------
Total liabilities.... 908,741 1,040,231 947,149
Shareholders'
equity............. 33,111 32,887 33,309
------- --------- -------
TOTAL AVERAGE
LIABILITIES AND
SHAREHOLDERS'
EQUITY............. 941,852 1,073,118 980,458
======= ========= =======
NET INTEREST INCOME.. 5,909 5,018 6,254
NET YIELD ON
INTEREST-EARNING
ASSETS............. 0.8% 0.6% 0.8%
</TABLE>
All assets and liabilities are translated into Swiss francs at uniform month-end
rates. Income and expenses are translated at monthly average rates.
Average rates earned and paid on assets and liabilities can change from period
to period based on the changes in interest rates in general, but also are
affected by changes in the currency mix included in the assets and liabilities.
This is especially true for foreign assets and liabilities. Tax exempt income is
not recorded on a tax-equivalent basis. For all three years presented, it is
considered to be insignificant and therefore the impact from such income is
negligible.
Interest income and expense on certain accounts are reported as trading income
in UBS's 1997 consolidated financial statements, but are reported against those
accounts in the table. These accounts include: money market paper, securities
borrowed and lent, reverse repurchase and repurchase agreements, and trading
assets and liabilities. Also, the interest expense in UBS's 1997 consolidated
financial statements is reduced by an amount for funding costs for trading
positions, which is not
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--------------------------------------------------------------------------------
reflected in the preceding table. The following table reconciles net interest on
interest-earnings assets as shown in the table above to net interest income in
UBS's 1997 consolidated financial statements.
<TABLE>
<CAPTION>
1997
(CHF in
millions)
-----------------------------------------------------------------------
<S> <C>
Net interest on interest-earning assets..................... 6,254
Money market paper........................................ --
Securities borrowed and reverse repurchase agreements..... (11,328)
Trading portfolio assets.................................. (4,198)
Securities loaned and repurchase agreements............... 9,660
Trading portfolio liabilities............................. 1,492
Funding costs for trading positions....................... 5,056
-------
NET INTEREST PER FINANCIAL STATEMENTS....................... 6,936
=======
</TABLE>
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--------------------------------------------------------------------------------
Analysis of Changes in Interest Income and Expense. The following tables
allocate, by categories of interest-earning assets and interest-bearing
liabilities, the changes in interest income and expense due to changes in volume
and interest rates for the year ended 31 December 1999 compared to the year
ended 31 December 1998, and for the year ended 31 December 1998 compared to the
year ended 31 December 1997. Volume and rate variances have been calculated on
movements in average balances and changes in interest rates. Changes due to a
combination of volume and rate have been allocated proportionally.
<TABLE>
<CAPTION>
1999 OVER 1998 1998 OVER 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
CHANGES IN CHANGES IN
AVERAGE AVERAGE
VOLUME AVERAGE RATE NET CHANGE VOLUME AVERAGE RATE NET CHANGE
(CHF in millions)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Money market paper
Domestic................... (21) (22) (43) (74) (37) (111)
Foreign.................... 1,014 (633) 381 (278) (92) (370)
Due from banks
Domestic................... (131) (80) (211) (5) (4) (9)
Foreign.................... (960) (623) (1,583) 739 (165) 574
Securities borrowed and
reverse repurchase
agreements
Domestic................... (52) 79 27 89 -- 89
Foreign.................... (1,926) 2,941 1,015 813 (1,851) (1,038)
Trading portfolio
Domestic................... (42) 36 (6) 407 (468) (61)
Foreign.................... 157 501 658 (890) 633 (257)
Loans
Domestic................... (333) (773) (1,106) (403) (1,404) (1,807)
Foreign.................... (1,037) (1,077) (2,114) 1,002 (962) 40
Financial investments
Domestic................... (13) (17) (30) (11) (4) (15)
Foreign.................... (126) (57) (183) (95) (16) (111)
------- ------- ------- ------- ------- -------
Interest income
Domestic................... (592) (777) (1,369) 3 (1,917) (1,914)
Foreign.................... (2,878) 1,053 (1,825) 1,291 (2,453) (1,162)
------- ------- ------- ------- ------- -------
Total interest-earning
assets..................... (3,470) 276 (3,194) 1,294 (4,370) (3,076)
------- ------- ------- ------- ------- -------
Net interest on swaps........ 431 976
------- -------
Total interest income........ (2,763) (2,100)
------- -------
------- -------
</TABLE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 OVER 1998 1998 OVER 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
CHANGES IN CHANGES IN
AVERAGE AVERAGE
VOLUME AVERAGE RATE NET CHANGE VOLUME AVERAGE RATE NET CHANGE
(CHF in millions)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-BEARING LIABILITIES
Money market paper issued
Domestic................... (1) (0) (1) (7) (3) (10)
Foreign.................... 324 (487) (163) 400 237 637
Due to banks
Domestic................... (1,265) (204) (1,469) (164) 1,187 1,023
Foreign.................... (602) (899) (1,501) (804) (146) (950)
Securities loaned and
repurchase agreements
Domestic................... 3 32 35 71 -- 71
Foreign.................... (1,679) 2,547 868 529 (2,717) (2,188)
Trading portfolio
Domestic................... -- -- -- -- -- --
Foreign.................... (454) 783 329 926 (677) 249
Due to customers
Domestic................... (94) (599) (693) (140) (277) (417)
Foreign.................... (546) (1,136) (1,682) 592 178 770
Long-term debt
Domestic................... (269) 110 (159) (395) 52 (343)
Foreign.................... 302 480 782 321 (28) 293
------- ------------ ---------- ------- ------------ ----------
Interest expense
Domestic................... (1,626) (661) (2,287) (635) 959 324
Foreign.................... (2,655) 1,288 (1,367) 1,964 (3,153) (1,189)
------- ------------ ---------- ------- ------------ ----------
Total interest-bearing
liabilities................ (4,281) 627 (3,654) 1,329 (2,194) (865)
======= ============ ========== ======= ============ ==========
</TABLE>
--------------------------------------------------------------------------------
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Deposits. The following table analyzes average deposits and the average rates
on each deposit category listed below at and for the years ended 31 December
1999, 1998 and 1997. The geographic allocation is based on the location of the
office or branch where the deposit is made.
<TABLE>
<CAPTION>
1999 1998 1997
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
DEPOSIT RATE (%) DEPOSIT RATE (%) DEPOSIT RATE (%)
(CHF in millions except percentages)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BANKS
Domestic offices:
Demand deposits........... 12,736 0.9% 11,890 0.6% 9,856 0.8%
Time deposits............. 6,715 4.8% 10,813 4.7% 12,967 2.5%
------- ------- -------
Total domestic offices.... 19,451 2.2% 22,703 2.6% 22,823 1.8%
------- ------- -------
Foreign offices:
Interest-bearing
deposits(1)............. 28,999 4.1% 43,705 6.3% 33,003 6.5%
------- ------- -------
TOTAL DUE TO BANKS............. 48,450 3.4% 66,408 5.0% 55,826 4.6%
======= ======= =======
CUSTOMER ACCOUNTS
Domestic offices:
Demand deposits........... 49,261 0.6% 44,569 0.7% 41,411 0.8%
Savings deposits.......... 80,543 1.1% 82,561 1.6% 85,027 1.8%
Time deposits............. 26,083 2.8% 34,558 2.9% 43,076 2.7%
------- ------- -------
Total domestic offices.... 155,887 1.2% 161,688 1.6% 169,514 1.8%
------- ------- -------
Foreign offices:
Demand deposits........... 122,411 4.6% 132,338 5.5% 121,305 5.4%
------- ------- -------
TOTAL DUE TO CUSTOMERS......... 278,298 2.7% 294,026 3.4% 290,819 3.3%
======= ======= =======
</TABLE>
------------
(1) Includes mostly time deposits.
At 31 December 1999, the maturity of time deposits exceeding CHF 150,000, or an
equivalent amount in other currencies, was as follows.
<TABLE>
<CAPTION>
AT 31 DECEMBER 1999
DOMESTIC FOREIGN
(CHF in millions)
---------------------------------------------------------------------------------
<S> <C> <C>
Within 3 months............................................. 32,466 117,260
3 to 12 months.............................................. 4,620 7,784
1 to 5 years................................................ 1,027 978
Over 5 years................................................ 429 2,333
------ -------
TOTAL TIME DEPOSITS......................................... 38,542 128,355
====== =======
</TABLE>
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Short-Term Borrowings. The following table presents UBS's period-end, average
and maximum month-end outstanding amounts for short-term borrowings, along with
the average rates and period-end rates at and for the years ended 31 December
1999, 1998 and 1997.
<TABLE>
<CAPTION>
MONEY MARKET PAPER ISSUED DUE TO BANKS REPURCHASE AGREEMENTS
1999 1998 1997 1999 1998 1997 1999 1998 1997
(CHF in millions)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period-end balance...... 64,655 51,527 55,600 40,580 10,361 84,952 217,736 137,617 191,792
Average balance......... 58,103 51,690 43,190 30,714 53,941 83,941 149,071 177,298 153,028
Maximum month-end
balance............... 76,368 53,710 55,600 64,562 89,072 105,332 217,736 202,062 191,792
Average interest rate
during the period..... 4.1% 5.0% 4.5% 4.5% 4.9% 4.0% 4.8% 3.6% 5.3%
Average interest rate at
period-end............ 4.6% 4.6% 4.5% 4.8% 4.4% 4.2% 3.9% 4.9% 4.5%
</TABLE>
Loans. UBS's loans are widely dispersed over customer categories both within
and outside of Switzerland. No one concentration of loans, with the exceptions
of private households in Switzerland and foreign commercial and manufacturing,
accounted for more than 10% of the total loan portfolio. For further discussion
of UBS's loan portfolio, see "--Analysis of Risks--Credit Risk." The following
table illustrates the diversification of the loan portfolio among customer
categories at 31 December 1999, 1998, 1997, 1996 and 1995. The industry
categories presented are consistent with the classification of loans for
reporting to the Swiss Federal Banking Commission and Swiss National Bank.
<TABLE>
<CAPTION>
1996 1995
1999 1998 1997 UBS SBC UBS SBC
(CHF in millions)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Banks.................. 5,802 4,543 17,751 15,039 2,532 2,700 2,467
Financial
institutions......... 9,387 10,240 11,371 14,465 6,752 12,865 6,673
Construction........... 6,577 7,897 9,627 6,022 4,556 3,737 4,644
Services (1)........... 14,862 11,582 13,083 7,841 6,383 6,011 6,401
Retail and wholesale... 10,904 8,912 10,512 7,220 6,602 6,772 6,323
Hotels and
restaurants.......... 4,259 4,129 4,668 4,815 2,200 4,311 2,219
Real estate and rentals
(2).................. 19,835 21,231 22,915 N/A N/A N/A N/A
Manufacturing.......... 11,377 13,505 16,440 9,650 9,019 10,113 9,788
Public authorities..... 5,277 5,858 6,354 3,271 4,972 2,727 4,484
Private households..... 93,846 97,664 109,044 55,088 59,098 48,935 56,732
Other.................. 1,818 1,662 1,862 1,156 694 1,629 747
------- ------- ------- ------- ------- ------- -------
Total domestic........... 183,944 187,223 223,627 124,567 102,808 99,800 100,478
Foreign:
Banks.................. 24,983 65,000 49,559 25,048 70,758 88,586 42,689
Other loans (3)........ 69,087 78,741 80,054 33,412 34,758 55,188 29,814
------- ------- ------- ------- ------- ------- -------
Total foreign............ 94,070 143,741 129,613 58,460 105,516 143,774 72,503
------- ------- ------- ------- ------- ------- -------
TOTAL GROSS LOANS........ 278,014 330,964 353,240 183,027 208,324 243,574 172,981
======= ======= ======= ======= ======= ======= =======
</TABLE>
---------------
(1) Includes transportation, communication, health and social work, education
and other social and personal service activities.
(2) Includes real estate development, buying, selling and leasing of real
estate, agency activities and real estate management. The Swiss National
Bank introduced this category in 1997; prior years' balances cannot be
restated.
(3) Includes commercial and manufacturing (52%), financial institutions (25%),
commodities (8%) and other (15%) at 31 December 1999.
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The following table analyzes UBS's mortgage portfolio by geographic origin of
the customer and type of mortgage at 31 December 1999, 1998, 1997, 1996 and
1995. Mortgages are included in the aforementioned industry categories.
<TABLE>
<CAPTION>
1996 1995
1999 1998 1997 UBS SBC UBS SBC
(CHF in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------
Mortgages:
Domestic................................ 126,677 138,306 142,919 68,534 70,966 67,200 67,098
Foreign................................. 1,310 2,479 3,883 1,657 2,266 1,306 2,372
------- ------- ------- ------ ------ ------ ------
Total gross mortgages..................... 127,987 140,785 146,802 70,191 73,232 68,506 69,470
======= ======= ======= ====== ====== ====== ======
Mortgages:
Residential............................. 91,408 106,093 105,926 48,508 49,794 48,711 46,083
Commercial.............................. 36,579 34,692 40,876 21,683 23,438 19,795 23,387
------- ------- ------- ------ ------ ------ ------
Total gross mortgages..................... 127,987 140,785 146,802 70,191 73,232 68,506 69,470
======= ======= ======= ====== ====== ====== ======
</TABLE>
Loan Maturities. The following table discloses loans by maturity at 31 December
1999. The determination of maturities is based on contract terms. Information on
interest rate sensitivities can be found in Note 33 of UBS's consolidated
financial statements.
<TABLE>
<CAPTION>
WITHIN 1 YEAR 1 TO 5 YEARS OVER 5 YEARS TOTAL
(CHF in millions)
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------
Domestic:
Banks.................................. 5,756 21 25 5,802
Mortgages.............................. 66,787 57,582 2,308 126,677
Other loans............................ 39,665 9,304 2,496 51,465
------------- ------------ ------------ -------
Total domestic........................... 112,208 66,907 4,829 183,944
------------- ------------ ------------ -------
Foreign:
Banks.................................. 24,286 453 244 24,983
Mortgages.............................. 802 287 221 1,310
Other loans............................ 62,140 4,124 1,513 67,777
------------- ------------ ------------ -------
Total foreign............................ 87,228 4,864 1,978 94,070
------------- ------------ ------------ -------
Total gross loans........................ 199,436 71,771 6,807 278,014
============= ============ ============ =======
</TABLE>
--------------------------------------------------------------------------------
121
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UBS
--------------------------------------------------------------------------------
Impaired, Non-Performing and Restructured Loans. UBS classifies a loan as
impaired when it is determined that there is a high probability that the bank
will suffer a partial or full loss. A provision is then made with respect to the
probable loss to be incurred for the loan in question. Within the category are
non-performing loans, for which the contractual payments of principal and/or
interest are in arrears for 90 days or more. After the 90-day period, UBS no
longer recognizes interest income on the loan and takes a charge for the unpaid
and accrued interest receivable. Unrecognized interest related to non-performing
loans amounted to CHF 409 million, CHF 423 million and CHF 450 million for the
years ended 31 December 1999, 1998 and 1997, respectively. The table below
provides an analysis of the Group's non-performing and restructured loans at 31
December 1999, 1998, 1997, 1996 and 1995. For further discussion of impaired and
non-performing loans, see "--Analysis of Risks--Credit Risk."
<TABLE>
<CAPTION>
1996 1995
1999 1998 1997 UBS SBC UBS SBC
(CHF in millions)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-performing loans:
Domestic......................... 11,435 14,023 15,238 7,171 9,587 7,787 10,582
Foreign.......................... 1,638 2,091 1,426 414 1,446 424 1,703
------ ------ ------ ----- ------ ----- ------
TOTAL NON-PERFORMING LOANS......... 13,073 16,114 16,664 7,585 11,033 8,211 12,285
====== ====== ====== ===== ====== ===== ======
FOREIGN RESTRUCTURED LOANS(1)...... 287 449 638 473 289 439 301
====== ====== ====== ===== ====== ===== ======
</TABLE>
---------------
(1) Amounts presented for 1999 and 1998 include only performing foreign
restructured loans. Amounts presented for prior years include both
performing and non-performing foreign restructured loans. UBS does not, as a
matter of policy, typically restructure loans to accrue interest at rates
different from the original contractual terms or reduce the principal amount
of loans. Instead, specific loan allowances are established as necessary.
Unrecognized interest related to the foreign restructured loans was not
material to the results of operations during these periods.
In addition to the data above analyzing non-performing loans, at 31 December
1999 UBS had CHF 9,383 million in "other impaired loans." These are loans that
are current, or less than 90 days in arrears, with respect to payment of
principal or interest; however, UBS's credit officers have expressed doubts as
to the ability of the borrowers to repay the loans, and specific allowances of
CHF 3,810 million have been established against them. These loans are primarily
domestic.
Cross-Border Outstandings. Cross-border outstandings consist of general banking
products such as loans and deposits with third parties, credit equivalents of
over-the-counter derivatives and repurchase agreements, and the market value of
the inventory of securities. The outstandings are monitored and reported on an
ongoing basis by the credit risk management organization with a dedicated
country risk information system. With the exception of the 27 most developed
economies, the exposures are rigorously limited.
Claims that are secured by third-party guarantees are recorded against the
guarantor's country of domicile. Outstandings that are secured by collateral are
recorded against the country where the asset could be liquidated. This follows
the "Guidelines for the Management of Country Risk," which are applicable to all
banks that report to the Swiss Federal Banking Commission as their supervisory
body.
The following tables list those countries for which UBS's cross-border
outstandings exceeded 0.75% of total assets at 31 December 1999, 1998 and 1997.
At 31 December 1999, there were no outstandings that exceeded 0.75% of total
assets in any country currently facing liquidity problems that the bank expects
would materially affect the country's ability to service its obligations.
For more information on cross-border outstandings, see "--Analysis of
Risks--Credit Risk--Country Risk Exposure."
--------------------------------------------------------------------------------
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<PAGE> 126
UBS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT 31 DECEMBER 1999
BANKING PRODUCTS TRADED TRADEABLE % OF TOTAL
BANKS NON-BANKS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
(CHF in millions)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States.............. 3,202 2,508 41,970 48,012 95,692 9.7%
Japan...................... 1,117 965 7,153 69,194 78,429 8.0%
United Kingdom............. 3,417 3,193 11,273 58,300 76,183 7.8%
Germany.................... 4,455 3,174 41,422 8,181 57,232 5.8%
Italy...................... 2,462 762 6,803 8,708 18,735 1.9%
Netherlands................ 1,932 1,149 6,648 4,993 14,722 1.5%
France..................... 1,200 1,395 7,324 4,379 14,298 1.5%
Australia.................. 2,688 409 6,342 3,735 13,174 1.3%
Canada..................... 866 492 5,233 807 7,398 0.8%
</TABLE>
<TABLE>
<CAPTION>
AT 31 DECEMBER 1998
BANKING PRODUCTS TRADED TRADEABLE % OF TOTAL
BANKS NON-BANKS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
(CHF in millions)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States............ 13,882 2,292 27,922 65,543 109,639 11.6%
United Kingdom........... 4,006 2,583 10,912 32,348 49,849 5.3%
Japan.................... 1,633 768 7,879 38,133 48,413 5.1%
Germany.................. 7,850 2,500 20,666 15,903 46,919 5.0%
France................... 2,490 1,420 10,037 8,521 22,468 2.4%
Italy.................... 2,174 1,201 8,236 9,394 21,005 2.2%
Australia................ 6,749 543 3,097 4,760 15,149 1.6%
Netherlands.............. 1,221 1,086 6,134 6,363 14,804 1.6%
Sweden................... 449 812 3,710 8,091 13,062 1.4%
Canada................... 755 549 5,162 3,479 9,945 1.1%
Austria.................. 769 82 1,513 5,436 7,800 0.8%
Spain.................... 913 350 2,495 3,701 7,459 0.8%
Belgium.................. 1,248 162 2,393 3,599 7,402 0.8%
Luxembourg............... 1,212 2,130 1,723 2,195 7,260 0.8%
</TABLE>
<TABLE>
<CAPTION>
UBS AT 31 DECEMBER 1997
BANKING TRADED TRADEABLE % OF TOTAL
PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
(CHF in millions)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States........................ 8,306 10,063 -- 18,369 3.2%
France............................... 7,338 3,450 -- 10,788 1.9%
Germany.............................. 5,074 4,704 -- 9,778 1.7%
United Kingdom....................... 2,741 6,963 -- 9,704 1.7%
Italy................................ 6,088 1,748 -- 7,836 1.4%
Singapore............................ 5,930 739 -- 6,669 1.2%
Luxembourg........................... 4,832 1,123 -- 5,955 1.0%
Japan................................ 1,641 4,101 -- 5,742 1.0%
Netherlands.......................... 3,524 1,114 -- 4,638 0.8%
</TABLE>
--------------------------------------------------------------------------------
123
<PAGE> 127
UBS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SBC AT 31 DECEMBER 1997
BANKING TRADED TRADEABLE % OF TOTAL
PRODUCTS PRODUCTS(1) ASSETS(2) TOTAL ASSETS
(CHF in millions)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States........................ 23,084 11,432 26,170 60,686 13.8%
Germany.............................. 4,790 10,404 8,768 23,962 5.5%
Japan................................ 2,022 6,555 11,870 20,447 4.7%
France............................... 1,271 5,150 2,900 9,321 2.1%
Netherlands.......................... 2,621 4,009 2,379 9,009 2.1%
Italy................................ 2,419 2,541 3,988 8,948 2.0%
Sweden............................... 1,144 2,096 1,254 4,494 1.0%
Belgium.............................. 365 1,664 2,035 4,064 0.9%
Canada............................... 655 2,531 818 4,004 0.9%
Australia............................ 73 1,982 1,671 3,726 0.8%
Cayman Islands....................... 771 1,443 1,328 3,542 0.8%
</TABLE>
---------------
(1) Traded products consist of derivative instruments and repurchase
agreements.
(2) Tradeable assets consist of equity and fixed income financial instruments
held for trading purposes, which are marked to market on a daily basis.
Summary of Movements in Allowances and Provisions for Credit Losses. The
following table provides an analysis of movements in allowances and provisions
for credit losses for the years ended 31 December 1999, 1998, 1997, 1996 and
1995.
As a result of Swiss bankruptcy laws, banks write off loans against allowances
only upon final settlement of bankruptcy proceedings, the sale of the underlying
asset and/or in case of the forgiveness of debt. Under Swiss law, a creditor can
continue to collect from a debtor who has emerged from bankruptcy, unless the
debt has been forgiven through a formal agreement.
--------------------------------------------------------------------------------
124
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UBS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
1999 1998 1997 UBS SBC UBS SBC
(CHF in millions)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of year................... 14,978 16,213 18,135 6,413 6,700 6,412 7,403
Writeoffs:
Domestic:
Banks...................................... (4) (2) (5) -- -- (3) --
Financial institutions..................... (92) (66) (226) (32) (284) (57) (88)
Construction............................... (296) (228) (408) (103) (140) (447) (166)
Services(1)................................ (315) (116) (229) (220) (54) (283) (100)
Retail and wholesale....................... (210) (178) (227) (108) (46) (192) (68)
Hotels and restaurants..................... (137) (98) (138) (28) (37) (46) (35)
Real estate and rentals(2)................. (823) (610) (871) (561) (263) (386) (278)
Manufacturing.............................. (242) (214) (514) (179) (111) (197) (171)
Public authorities......................... -- (2) (19) -- (3) -- (2)
Private households......................... (598) (534) (1,214) (306) (389) (220) (867)
Other...................................... (41) (15) (29) (85) (35) (155) (28)
------ ------ ------ ------ ------ ------ ------
Total domestic............................... (2,758) (2,063) (3,880) (1,622) (1,362) (1,986) (1,803)
Foreign...................................... (517) (261) (240) (49) (350) (73) (339)
------ ------ ------ ------ ------ ------ ------
Total writeoffs................................ (3,275) (2,324) (4,120) (1,671) (1,712) (2,059) (2,142)
Recoveries:
Domestic..................................... 54 59 406 438 71 354 78
Foreign...................................... 11 -- 36 25 20 8 --
------ ------ ------ ------ ------ ------ ------
Total recoveries............................... 65 59 442 463 91 362 78
------ ------ ------ ------ ------ ------ ------
Net writeoffs.................................. (3,210) (2,265) (3,678) (1,208) (1,621) (1,697) (2,064)
Increase in credit loss allowances............. 956 951 1,432 1,272 1,018 1,084 874
Special provisions(3).......................... -- -- -- 2,289 2,480 711 --
Other adjustments(4)........................... 674 79 324 140 652 (97) 487
------ ------ ------ ------ ------ ------ ------
Balance at end of year......................... 13,398 14,978 16,213 8,906 9,229 6,413 6,700
====== ====== ====== ====== ====== ====== ======
</TABLE>
---------------
(1) Includes transportation, communication, health and social work, education
and other social and personal service activities.
(2) Includes real estate development, buying, selling and leasing of real
estate, agency activities and real estate management.
(3) The 1996 UBS amount includes a special provision of CHF 3,000 million for
credit risks and the release of a CHF 711 million provision for general
banking risks from the prior year.
(4) Includes the following for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
(CHF in millions)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Doubtful interest..................................... 409 423 450
Net foreign exchange.................................. 351 (98) 91
Subsidiaries sold and other........................... (86) (246) (217)
--- ---- ----
Total adjustments..................................... 674 79 324
=== ==== ====
</TABLE>
--------------------------------------------------------------------------------
125
<PAGE> 129
UBS
--------------------------------------------------------------------------------
Allocation of the Allowances and Provisions for Credit Losses. The following
tables provide an analysis of the allocation of the allowances and provisions
for credit losses by customer categories and geographic location at 31 December
1999, 1998, 1997, 1996 and 1995. For a description of the bank's procedures with
respect to allowances and provisions for credit losses, see "--Analysis of
Risks--Credit Risk."
<TABLE>
<CAPTION>
1996 1995
------------- -------------
1999 1998 1997 UBS SBC UBS SBC
(CHF in millions)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Banks.......................................... 41 49 34 9 39 43 32
Financial institutions......................... 342 668 510 152 403 132 370
Construction................................... 1,247 1,671 1,449 716 539 602 471
Services(1).................................... 934 766 661 429 160 440 157
Retail and wholesale........................... 779 825 723 371 263 318 212
Hotels and restaurants......................... 690 657 512 172 135 113 112
Real estate and rentals(2)..................... 2,696 3,333 2,591 1,286 1,335 1,314 1,163
Manufacturing.................................. 1,223 1,331 1,036 603 438 547 385
Public authorities............................. 40 107 59 1 66 1 47
Private households............................. 2,350 2,741 2,264 970 1,459 976 1,396
Other.......................................... 141 71 52 40 19 19 34
------ ------ ------ ----- ----- ----- -----
Total domestic................................... 10,483 12,219 9,891 4,749 4,856 4,505 4,379
------ ------ ------ ----- ----- ----- -----
Foreign........................................ 1,539 1,309 1,399 353 1,286 340 1,539
Country provisions............................. 1,376 1,450 1,175 804 404 857 559
------ ------ ------ ----- ----- ----- -----
Total foreign(3)................................. 2,915 2,759 2,574 1,157 1,690 1,197 2,098
------ ------ ------ ----- ----- ----- -----
Unallocated allowances(4)...................... -- -- 3,748 3,000 2,683 711 223
------ ------ ------ ----- ----- ----- -----
TOTAL ALLOWANCES AND PROVISIONS FOR CREDIT
LOSSES......................................... 13,398 14,978 16,213 8,906 9,229 6,413 6,700
====== ====== ====== ===== ===== ===== =====
</TABLE>
---------------
(1) Includes transportation, communication, health and social work, education
and other social and personal service activities.
(2) Includes real estate development, buying, selling and leasing of real
estate, agency activities and real estate management.
(3) The 1999 and 1998 amounts include CHF 149 million and CHF 435 million of
provisions and commitments for contingent liabilities, respectively.
(4) The 1997 amount includes a provision for commitments and contingent
liabilities of CHF 472 million. In addition, the 1996 SBC amount includes
CHF 603 million of provisions for commitments and contingent liabilities.
The 1995 UBS and SBC amounts represent provisions for general banking risks
and commitments and contingent liabilities, respectively.
The following table presents the percentage of loans in each category to total
loans at 31 December 1999, 1998, 1997, 1996 and 1995. This table can be read in
conjunction with the preceding table showing the breakdown of the allowances and
provisions for credit losses by loan categories to evaluate the credit risks in
each of the categories.
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
1999 1998 1997 UBS SBC UBS SBC
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Banks.................................. 2.1% 1.4% 5.0% 8.2% 1.2% 1.1% 1.4%
Financial institutions................. 3.4% 3.1% 3.2% 7.9% 3.2% 5.3% 3.9%
Construction........................... 2.4% 2.4% 2.7% 3.3% 2.2% 1.5% 2.7%
Services............................... 5.3% 3.5% 3.7% 4.3% 3.1% 2.5% 3.7%
Retail and wholesale................... 3.9% 2.7% 3.0% 3.9% 3.2% 2.8% 3.6%
Hotels and restaurants................. 1.5% 1.2% 1.3% 2.6% 1.0% 1.8% 1.3%
Real estate and rentals................ 7.1% 6.4% 6.5% 0.0% 0.0% 0.0% 0.0%
</TABLE>
--------------------------------------------------------------------------------
126
<PAGE> 130
UBS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
1999 1998 1997 UBS SBC UBS SBC
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Manufacturing.......................... 4.1% 4.1% 4.7% 5.3% 4.3% 4.1% 5.7%
Public authorities..................... 1.9% 1.8% 1.8% 1.8% 2.4% 1.1% 2.6%
Private households..................... 33.8% 29.5% 30.9% 30.1% 28.4% 20.1% 32.8%
Other.................................. 0.7% 0.5% 0.5% 0.6% 0.3% 0.7% 0.4%
----- ----- ----- ----- ----- ----- -----
Total domestic........................... 66.2% 56.6% 63.3% 68.0% 49.3% 41.0% 58.1%
----- ----- ----- ----- ----- ----- -----
Foreign:
Banks.................................. 9.0% 19.6% 14.0% 13.7% 34.0% 36.4% 24.7%
Other loans............................ 24.8% 23.8% 22.7% 18.3% 16.7% 22.6% 17.2%
----- ----- ----- ----- ----- ----- -----
Total foreign............................ 33.8% 43.4% 36.7% 32.0% 50.7% 59.0% 41.9%
----- ----- ----- ----- ----- ----- -----
TOTAL GROSS LOANS........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Loss History Statistics. The following is a summary of UBS's loan loss history
at 30 June 2000 and 31 December 1999, 1998, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
30 JUNE 2000 1999 1998 1997 UBS SBC UBS SBC
(CHF in millions except percentages)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross loans.............. 270,978 278,014 330,964 353,240 183,027 208,324 243,574 172,981
Impaired loans........... 21,011 22,456 26,447 N/A N/A N/A N/A N/A
Non-performing loans..... 11,552 13,073 16,114 16,664 7,585 11,033 8,211 12,285
Allowances and provisions
for credit losses...... 12,390 13,398 14,978 16,213 8,906 9,229 6,413 6,700
Net writeoffs............ 1,142 3,210 2,265 3,678 1,208 1,621 1,697 2,064
Credit loss expense...... (83) 956 951 1,432 1,272 1,018 1,084 874
RATIOS:
Impaired loans/Gross
loans.................. 7.8% 8.1% 8.0% N/A N/A N/A N/A N/A
Non-performing loans/
Gross loans............ 4.3% 4.7% 4.9% 4.7% 4.1% 5.3% 3.4% 7.1%
Allowance and provisions
for credit losses as a
percentage of:
Gross loans............ 4.6% 4.8% 4.5% 4.6% 4.9% 4.4% 2.6% 3.9%
Impaired loans......... 58.9% 59.7% 56.6% N/A N/A N/A N/A N/A
Non-performing loans... 107.3% 102.5% 93.0% 97.3% 117.4% 83.6% 78.1% 54.5%
Net writeoffs as a
percentage of:
Gross loans............ 0.4% 1.2% 0.7% 1.0% 0.7% 0.8% 0.7% 1.2%
Allowance and
provisions for credit
losses............... 9.2% 24.0% 15.1% 22.7% 13.6% 17.6% 26.5% 30.8%
Allowance and provisions
for credit losses as a
multiple of net
writeoffs.............. 10.85% 4.17 6.61 4.41 7.37 5.69 3.78 3.25
</TABLE>
---------------
N/A = Not Available
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See "--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Analysis of Risks--Market Risk."
--------------------------------------------------------------------------------
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<PAGE> 131
UBS AMERICAS
--------------------------------------------------------------------------------
UBS Americas
UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine
Webber Group Inc. was the holding company for the PaineWebber group of
companies. UBS Americas is a direct, wholly owned subsidiary of UBS AG. See "UBS
AG -- Description of Business -- Merger with PaineWebber."
--------------------------------------------------------------------------------
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<PAGE> 132
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
Unaudited Pro Forma Condensed Consolidated
Financial Information
The accompanying unaudited pro forma financial statements on pages 129 to 154
present the condensed consolidated balance sheet of UBS and PaineWebber as of 30
June 2000 and the related condensed consolidated income statements for the
six-month period ended 30 June 2000 and the year ended 31 December 1999, as if
the merger had occurred on 1 January 1999. The presentation is made both on the
basis of IAS and U.S. GAAP. In order to present this information and show the
reader the source of the information, several schedules are required.
The first set of schedules included present the unaudited pro forma financial
statements on the basis of IAS, in Swiss francs (CHF). This is achieved by
presenting in the first two columns the financial statements of PaineWebber in
accordance with IAS in U.S. Dollars (USD), and then showing the translation into
CHF. The third column presents the IAS financial statements of UBS in CHF. We
then present accounting entries to reflect the results of the merger, each of
which is explained in a footnote, and the final resulting column presents the
unaudited pro forma condensed consolidated financial statements. Since IAS will
be the primary accounting framework of the consolidated company, we present this
information first.
PaineWebber presents its financial statements on the basis of U.S. GAAP rather
than IAS. The second set of schedules shows the restatement of the U.S. GAAP
financial statements of PaineWebber into IAS. The first column presents the U.S.
GAAP financial statements of PaineWebber, after reflecting certain
reclassification entries required to conform to the UBS presentation. These
reclassification entries do not affect net income or shareholders' equity, and
are therefore not presented separately in this prospectus. The next column
presents the accounting entries required to restate the financial statements on
the basis of IAS, and each entry is explained in a footnote. The final resulting
column presents the PaineWebber financial statements in accordance with IAS, and
is the same as the first column in the first set of schedules described in the
preceding paragraph.
The third set of schedules presents the unaudited pro forma condensed
consolidated financial statements in accordance with U.S. GAAP. In much the same
way that UBS is required to present a reconciliation of its primary financial
statements from IAS to U.S. GAAP, we have also presented this reconciliation.
The first column presents the IAS unaudited pro forma condensed consolidated
financial statements and is the same as the next to last column in the first set
of schedules described two paragraphs above. The next two columns present the
accounting entries required to restate the unaudited pro forma financial
statements for UBS and PaineWebber, respectively, in accordance with U.S. GAAP.
Each of the entries is described in a footnote. The final column presents the
unaudited pro forma condensed consolidated financial statements in accordance
with U.S. GAAP.
THE UNAUDITED PRO FORMA FINANCIAL STATEMENTS WERE PREPARED DURING AUGUST 2000,
SHORTLY AFTER THE MERGER WAS ANNOUNCED, AND THEY HAVE NOT BEEN UPDATED SINCE
THEN. As of the date of this prospectus, the analyses necessary to complete the
purchase accounting entries required to reflect the merger have not been
finalized. However, several of the assumptions and data inputs used in preparing
the pro forma financial statements have changed. The more significant changes
include:
- Price of UBS Stock. UBS stock was assumed to be valued at $148.75 (CHF 245.70)
per share for purposes of computing the fair value of the stock consideration
given in the merger. The actual closing price on 3 November 2000 (the date the
merger was consummated) was $143.30 (CHF 252.5) per share.
- Employee stock options. The pro forma financial statements assume that all
outstanding PaineWebber employee stock options would have been exercised prior
to consummation of the
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
merger. In fact, a significant number of options were exchanged for options on
UBS stock rather than being exercised.
- UBS partial dividend. The partial dividend authorized by UBS shareholders in
their Extraordinary General Meeting has not been reflected in the pro forma
financial statements.
- Fair value of PaineWebber debt. At the time the merger was announced,
PaineWebber debt instruments were being traded generally at a discount to face
value. Since that time, the market for these instruments has changed
reflecting the prospective guarantee announced by UBS and they are now valued
at a premium to face value.
- Final identification of all acquisitions related liabilities has not been
completed.
- Analyses necessary to conform PaineWebber accounting policies to those of UBS
and to adjust other PaineWebber assets and liabilities to fair value in
accordance with purchase accounting have not yet been completed.
All of these matters will result in changes to the estimates included in the
accompanying pro forma financial information, which will, in the aggregate be
significant. While we do not expect the changes to result in any material change
to operating income as presented in the pro formas, these changes will increase
the recorded balance of goodwill significantly, as well as the related annual
amortization.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AND INCOME STATEMENT
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000
The following unaudited pro forma condensed consolidated balance sheet and
income statement as of and for the six months ended 30 June 2000 is derived from
the unaudited consolidated financial statements of UBS as of and for the six
month period then ended and PaineWebber's unaudited condensed consolidated
financial statements as of and for the same period, as adjusted to IAS and
translated into Swiss francs, after giving effect to the pro forma adjustments
described in the notes to the UBS and PaineWebber unaudited pro forma condensed
consolidated balance sheet and income statement below. These adjustments have
been made as if the merger took place on 1 January 1999, the first day of the
earliest period presented in the UBS and PaineWebber unaudited pro forma
condensed consolidated financial information. This information has been prepared
from, and should be read together with, the respective unaudited consolidated
financial statements and related notes of UBS and the unaudited condensed
consolidated financial statements of PaineWebber, which are included in this
prospectus. These statements have been prepared in accordance with IAS.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
UBS AND UBS AND
UBS AND PAINEWEBBER PAINEWEBBER
PAINEWEBBER PRO FORMA CONSOLIDATED CONSOLIDATED
PAINEWEBBER UBS COMBINED ADJUSTMENT(2) PRO FORMA PRO FORMA
(IN MILLIONS) US$ CHF(1) CHF CHF CHF REFERENCE(2) CHF US$(3)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
Interest income....... 2,056 3,410 24,079 27,489 27,489 16,820
Interest expense...... 1,729 2,868 19,753 22,621 299 e,g 22,920 14,024
----- ----- ------- ----------- ------------- ----------- -----------
Net interest income... 327 542 4,326 4,868 (299) 4,569 2,796
Credit loss expense... -- -- (83) (83) (83) (51)
----- ----- ------- ----------- ------------- ----------- -----------
Net interest income
after credit loss
expense............. 327 542 4,409 4,951 (299) 4,652 2,847
Net fee and commission
income.............. 2,025 3,359 7,835 11,194 11,194 6,850
Net trading income.... 473 784 5,669 6,453 6,453 3,948
Other income,
including income
from disposal of
associates and
subsidiaries........ 81 134 644 778 778 475
----- ----- ------- ----------- ------------- ----------- -----------
Total operating
income.............. 2,906 4,819 18,557 23,376 (299) 23,077 14,120
----- ----- ------- ----------- ------------- ----------- -----------
OPERATING EXPENSES
Personnel............. 1,781 2,955 8,876 11,831 166 h 11,997 7,340
General and
administrative...... 605 1,003 3,174 4,177 4,177 2,556
Depreciation and
amortization........ 63 104 947 1,051 372 d,k 1,423 871
----- ----- ------- ----------- ------------- ----------- -----------
Total operating
expense............. 2,449 4,062 12,997 17,059 538 17,597 10,767
----- ----- ------- ----------- ------------- ----------- -----------
OPERATING PROFIT
BEFORE TAX AND
MINORITY
INTERESTS........... 457 757 5,560 6,317 (837) 5,480 3,353
----- ----- ------- ----------- ------------- ----------- -----------
Tax expense........... 166 274 1,257 1,531 (169) l 1,362 834
----- ----- ------- ----------- ------------- ----------- -----------
NET PROFIT BEFORE
MINORITY
INTERESTS........... 291 483 4,303 4,786 (668) 4,118 2,519
----- ----- ------- ----------- ------------- ----------- -----------
Minority interests.... 0 0 35 35 111 f 146 89
----- ----- ------- ----------- ------------- ----------- -----------
NET PROFIT............ 291 483 4,268 4,751 (779) 3,972 2,430
----- ----- ------- ----------- ------------- ----------- -----------
Basic earnings per
share............... 3.32 10.91 9.15 5.60
----- ------- ----------- -----------
Diluted earnings per
share............... 3.15 10.79 9.03 5.52
----- ------- ----------- -----------
</TABLE>
The notes to the UBS and PaineWebber unaudited pro forma condensed consolidated
balance sheet and income statement are an integral part of this pro forma
information.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
AS OF 30 JUNE 2000
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
UBS AND UBS AND
UBS AND PAINEWEBBER PAINEWEBBER
PAINEWEBBER PRO FORMA CONSOLIDATED CONSOLIDATED
PAINEWEBBER UBS COMBINED ADJUSTMENT(2) PRO FORMA PRO FORMA
(IN MILLIONS) US$ CHF(1) CHF CHF CHF REFERENCE(2) CHF US$(3)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and balances with
central banks.......... -- -- 3,457 3,457 3,457 2,115
Money market paper....... 4,284 7,002 61,504 68,506 68,506 41,918
Due from banks........... 1,682 2,749 25,761 28,510 28,510 17,445
Cash collateral on
securities borrowed.... 10,517 17,188 146,199 163,387 163,387 99,974
Reverse repurchase
agreements............. 17,622 28,800 164,866 193,666 193,666 118,501
Trading portfolio
assets................. 15,939 26,048 215,649 241,697 241,697 147,891
Positive replacement
values................. 190 310 57,758 58,068 58,068 35,531
Loans, net of allowance
for credit losses...... 11,108 18,152 233,015 251,167 251,167 153,685
Financial investments.... 862 1,408 9,504 10,912 50 b 10,962 6,708
Accrued income and
prepaid expenses....... 575 940 5,817 6,757 776 h 7,533 4,610
Investments in
associates............. -- -- 818 818 818 501
Property and equipment... 723 1,182 8,216 9,398 9,398 5,750
Intangible assets and
goodwill............... 676 1,105 3,545 4,650 12,669 b,c,d,k 17,319 10,597
Other assets............. 1,408 2,301 10,198 12,499 1,601 b,l 14,100 8,628
------ ------- ------- ----------- ------------- ----------- -----------
TOTAL ASSETS............. 65,586 107,185 946,307 1,053,492 15,096 1,068,588 653,854
------ ------- ------- ----------- ------------- ----------- -----------
LIABILITIES
Money market paper
issued................. 1,157 1,890 85,409 87,299 87,299 53,417
Due to banks............. 1,496 2,445 75,172 77,617 7,724 a 85,341 52,219
Cash collateral on
securities lent........ 7,249 11,847 15,334 27,181 27,181 16,632
Repurchase agreements.... 28,825 47,109 230,565 277,674 277,674 169,904
Trading portfolio
liabilities............ 4,239 6,928 60,279 67,207 67,207 41,123
Negative replacement
values................. 320 523 77,926 78,449 78,449 48,002
Due to customers......... 10,228 16,716 279,915 296,631 296,631 181,503
Accrued expenses and
deferred income........ 2,197 3,591 14,492 18,083 802 e 18,885 11,555
Long-term debt........... 5,603 9,157 52,990 62,147 (307) b,g 61,840 37,839
Other liabilities........ 1,121 1,829 21,950 23,779 303 b,f,l 24,082 14,736
------ ------- ------- ----------- ------------- ----------- -----------
TOTAL LIABILITIES........ 62,435 102,045 914,032 1,016,067 8,522 1,024,589 626,930
------ ------- ------- ----------- ------------- ----------- -----------
MINORITY INTERESTS....... -- -- 399 399 2,478 a 2,877 1,761
------ ------- ------- ----------- ------------- ----------- -----------
TOTAL SHAREHOLDERS'
EQUITY................. 3,151 5,150 31,876 37,026 4,096 a,b,c,f,h,j 41,122 25,163
------ ------- ------- ----------- ------------- ----------- -----------
TOTAL LIABILITIES,
MINORITY INTERESTS AND
SHAREHOLDERS' EQUITY... 65,586 107,185 946,307 1,053,492 15,096 1,068,588 653,854
====== ======= ======= =========== ============= =========== ===========
</TABLE>
The notes to the UBS AG and PaineWebber unaudited pro forma condensed
consolidated balance sheet and income statement are an integral part of this pro
forma information.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 1999
The following unaudited pro forma condensed consolidated income statement for
the year ended 31 December 1999 is derived from the audited consolidated
financial statements of UBS for the year then ended and from the audited
consolidated financial statements of PaineWebber for the year then ended as
adjusted to IAS and translated into Swiss francs, after giving effect to the pro
forma adjustments described in the notes to the UBS and PaineWebber unaudited
pro forma condensed consolidated balance sheet and income statement. These
adjustments have been determined as if the merger took place on 1 January 1999,
the first day of the earliest financial period presented in the UBS and
PaineWebber unaudited pro forma condensed consolidated financial information.
This information has been prepared from, and should be read together with, the
respective historical consolidated financial statements of UBS and PaineWebber,
which are included in this prospectus. These statements have been prepared in
accordance with IAS.
FOR THE YEAR ENDED 31 DECEMBER 1999
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
UBS AND UBS AND
UBS AND PAINEWEBBER PAINEWEBBER
PAINEWEBBER PRO FORMA CONSOLIDATED CONSOLIDATED
PAINEWEBBER UBS AG COMBINED ADJUSTMENT(2) PRO FORMA PRO FORMA
(IN MILLIONS) US$ CHF(1) CHF CHF CHF REF(2) CHF US$(3)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
Interest income............... 3,123 4,694 35,604 40,298 40,298 24,658
Interest expense.............. 2,647 3,979 29,695 33,674 545 e,g 34,219 20,938
----- ----- ------ ----------- ------------- ----------- -----------
Net interest income........... 476 715 5,909 6,624 (545) 6,079 3,720
Credit loss expense........... -- -- 956 956 956 585
----- ----- ------ ----------- ------------- ----------- -----------
Net interest income after
credit loss expense......... 476 715 4,953 5,668 (545) 5,123 3,135
Net fee and commission
income...................... 3,343 5,024 12,607 17,631 17,631 10,788
Net trading income............ 1,090 1,638 7,719 9,357 9,357 5,726
Other income, including income
from disposal of associates
and subsidiaries............ 171 257 3,146 3,403 3,403 2,082
----- ----- ------ ----------- ------------- ----------- -----------
Total operating income........ 5,080 7,634 28,425 36,059 (545) 35,514 21,731
----- ----- ------ ----------- ------------- ----------- -----------
OPERATING EXPENSES
Personnel..................... 3,069 4,613 12,577 17,190 331 h 17,521 10,721
General and administrative.... 1,016 1,526 6,098 7,624 7,624 4,665
Depreciation and
amortization................ 98 147 1,857 2,004 746 d,k 2,750 1,683
----- ----- ------ ----------- ------------- ----------- -----------
Total operating expenses...... 4,183 6,286 20,532 26,818 1,077 27,895 17,069
----- ----- ------ ----------- ------------- ----------- -----------
OPERATING PROFIT BEFORE TAX
AND MINORITY INTERESTS...... 897 1,348 7,893 9,241 (1,622) 7,619 4,662
----- ----- ------ ----------- ------------- ----------- -----------
Tax expense................... 366 550 1,686 2,236 (306) l 1,930 1,181
----- ----- ------ ----------- ------------- ----------- -----------
NET PROFIT BEFORE MINORITY
INTERESTS................... 531 798 6,207 7,005 (1,316) 5,689 3,481
----- ----- ------ ----------- ------------- ----------- -----------
Minority interests............ -- -- 54 54 223 f 277 169
----- ----- ------ ----------- ------------- ----------- -----------
NET PROFIT.................... 531 798 6,153 6,951 (1,539) 5,412 3,312
----- ----- ------ ----------- ------------- ----------- -----------
Basic earnings per share...... 5.51 15.20 12.10 7.40
----- ------ ----------- -----------
Diluted earnings per share.... 5.21 15.07 11.97 7.32
----- ------ ----------- -----------
</TABLE>
The notes to the UBS and PaineWebber unaudited pro forma condensed consolidated
balance sheet and income statement are an integral part of this information.
--------------------------------------------------------------------------------
133
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000 AND FOR THE YEAR ENDED 31
DECEMBER 1999
1. TRANSLATION OF PAINEWEBBER FINANCIAL STATEMENTS
PaineWebber presents its financial statements on a U.S. GAAP basis and in U.S.
dollars. These financial statements have been restated into IAS. The restated
income statement of PaineWebber has been translated into Swiss francs at the
average rate of CHF 1.66 per U.S. $1.00 for the six months ended 30 June 2000
and CHF 1.50 per U.S. $1.00 for the year ended 31 December 1999.
The restated PaineWebber balance sheet has been translated into Swiss francs at
the spot rate of CHF 1.63 per U.S. $1.00 at 30 June 2000 and CHF 1.59 per U.S.
$1.00 at 31 December 1999.
These translations should not be taken as assurances that the CHF amounts
currently represent U.S. dollar amounts or could be converted into U.S. dollars
at the rate indicated or at any other rate, at any time.
2. PRO FORMA ACQUISITION ADJUSTMENTS
The unaudited pro forma condensed consolidated financial information records the
merger as being accounted for as an acquisition with the excess of the fair
value of the consideration over the fair value of net assets acquired being
allocated to goodwill. See the discussion below for information related to
recording the issuance of UBS ordinary shares, trust preferred securities and
debt to effect the purchase, the related retirement of shares of PaineWebber
common stock, the adjustment of PaineWebber's assets and liabilities to fair
value, and the recording of the resulting goodwill.
Issuance of UBS Securities and the Retirement of PaineWebber Securities
The unaudited pro forma condensed consolidated financial information assumes a
total purchase price of $12,696 million (CHF 20,970 million). Pursuant to the
terms of the merger agreement, UBS will issue approximately 42.7 million UBS
ordinary shares, equivalent to $6,348 million (CHF 10,485 million), and pay
$6,348 million (CHF 10,485 million) in cash in exchange for 172.8 million shares
of PaineWebber common stock at an exchange ratio of 0.4954. The total purchase
price assumed is based on the closing price of UBS ordinary shares on the New
York Stock Exchange on 11 July 2000, which was $148.75 (CHF 245.70). Additional
costs relevant to the merger include estimated professional fees of $90 million
(CHF 149 million) (primarily legal, investment bankers' and accountants' fees)
to be accounted for as acquisition costs.
For purposes of determining the number of PaineWebber shares to be canceled, it
is assumed that, in addition to the 146.8 million shares outstanding as of 11
July 2000, PaineWebber employee stock options and convertible debt representing
approximately 33.6 million shares will be exercised or converted at an aggregate
strike price of $908 million (CHF 1,500 million), at a range of $6.69 to $48.56,
or CHF 11.05 to CHF 80.21, per share, and reduced by approximately 7.6 million
shares of PaineWebber common stock that may be repurchased from employees at
$73.50 (CHF 121.42) per share for a total price of $562 million (CHF 928
million) to satisfy their individual tax withholding requirements.
a. This entry records the cash consideration of $6,348 million (CHF 10,485
million) to be paid in the merger, on the basis of the assumptions noted in this
footnote. We have assumed, for purposes of these pro forma financial statements,
that UBS will issue, directly or indirectly through subsidiaries, $1,500 million
(CHF 2,478 million) in trust preferred securities during the third and fourth
quarters of 2000. Although it has not yet been determined how the proceeds of
these trust preferred securities will be applied by UBS, we have assumed, solely
for the purposes of these pro forma financial statements, that the cash
consideration in the merger will be financed from the proceeds of those trust
preferred securities and through the issuance of short-term debt instruments.
UBS will also enter into certain interest rate swap transactions in order to
produce the effect of issuing medium- to long-term debt.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
The pro forma net cash requirement relating to the merger, including additional
cost considerations and sources of funding, are shown below.
<TABLE>
<CAPTION>
US$ CHF
(in millions) (in millions)
--------------------------------------------------------------------------------------------
<S> <C> <C>
Cash consideration.......................................... 6,348 10,485
Professional fees........................................... 90 149
----- ------
Purchase price net cash requirement......................... 6,438 10,634
Additional funding:
1. Purchase of PaineWebber shares for tax withholding (see
b)..................................................... 562 928
2. Employee retention program (see h)..................... 19 31
3. Proceeds from PaineWebber employee stock options (see
i)..................................................... (908) (1,500)
4. Swiss assessment for issuance of UBS ordinary shares
(see j)................................................ 66 109
----- ------
Total cash required to fund the merger...................... 6,177 10,202
===== ======
Sources of funding:
Short-term debt........................................... 4,677 7,724
Issuance of trust preferred securities.................... 1,500 2,478
----- ------
6,177 10,202
===== ======
</TABLE>
Fair Value and Book Value Adjustments
b. This entry records the adjustments to state the net assets of PaineWebber at
their fair market values and additional book value adjustments as of 30 June
2000. A preliminary allocation of the purchase price has been performed for
purposes of the unaudited pro forma condensed consolidated financial information
based on initial appraisal estimates and other valuation studies which are in
process and on certain assumptions that UBS believes are reasonable. The final
allocation is subject to completion of these studies, which is expected to be
within the next twelve months. However, UBS does not expect the differences
between the preliminary and final allocations to have a material impact on
shareholders' equity or net profit for the periods. A summary, in accordance
with IAS, is shown on the following page.
Certain financial and non-financial assets, long-term debt and corresponding
hedging derivatives, and pension obligations have been adjusted to reflect their
estimated fair values. All remaining assets and liabilities are reported in the
historical accounts at approximately their respective fair values. The fair
value adjustments have been shown pre-tax, with an aggregate tax effect, based
on a 35% effective tax rate, disclosed.
PaineWebber vested and non-vested options and convertible debt outstanding as of
11 July 2000 are assumed to be fully exercised or converted prior to the merger.
The resulting proceeds, related tax benefit and redemption of shares of
PaineWebber common stock in satisfaction of employees' tax withholding
requirements have been reflected in the adjustments.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
<TABLE>
<CAPTION>
US$ CHF
(in millions) (in millions)
--------------------------------------------------------------------------------------------
<S> <C> <C>
Book value of PaineWebber net assets in accordance with
IAS....................................................... 3,151 5,205
Proceeds upon exercise of existing PaineWebber stock
options................................................... 908 1,500
Tax benefit upon exercise/conversion of existing PaineWebber
stock options/convertible debt and net tax benefit upon
vesting of (restricted) shares............................ 714 1,179
Redemption of shares in satisfaction of employees'
individual tax withholding requirements................... (562) (928)
Fair value adjustments:
1. Elimination of existing goodwill....................... (660) (1,090)
2. Revaluation of financial assets........................ 30 50
3. Revaluation of non-financial assets.................... 39 64
4. Recognition of fair value of lease obligations......... 145 240
5. Revaluation of long-term debt and associated hedging
derivatives............................................ 85 141
6. Revaluation of pension obligations..................... (21) (35)
Tax effect of fair value adjustments........................ 134 221
===== ======
Fair value of net assets acquired........................... 3,962 6,545
===== ======
</TABLE>
Determination of Goodwill
c. This entry records payment of the total purchase consideration, the
elimination of PaineWebber's equity accounts, and the recognition of the
resulting goodwill.
<TABLE>
<CAPTION>
US$ CHF
(in millions) (in millions)
--------------------------------------------------------------------------------------------
<S> <C> <C>
Share consideration
Share capital............................................. 635 1,049
Share premium............................................. 5,713 9,436
------ ------
Total share consideration................................... 6,348 10,485
Cash consideration.......................................... 6,348 10,485
Acquisition costs........................................... 90 149
------ ------
Total purchase consideration................................ 12,786 21,119
Less: Fair value of net assets acquired (see above)......... 3,962 6,545
------ ------
Goodwill.................................................... 8,824 14,574
====== ======
</TABLE>
The purchase consideration and pro forma adjustments shown above are based in
part on the assumption that all of the 33.6 million PaineWebber employee stock
options and convertible debt are exercised/converted and the resulting shares
(net of shares repurchased by PaineWebber) are tendered as part of the share
exchange. UBS stock options will be issued to replace PaineWebber options and
convertible debt that are not exercised/converted. If none of the PaineWebber
stock options/convertible debt were exercised/converted, 16.7 million UBS
options would be issued, with a fair value of $1,845
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
million. (CHF 3,048 million). This would change the pro forma information
presented in this prospectus as follows:
<TABLE>
<CAPTION>
US$ CHF
(IN MILLIONS (IN MILLIONS
EXCEPT FOR EXCEPT FOR
EARNINGS PER EARNINGS PER %
SHARE) SHARE) CHANGE
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease in purchase price............................... (184) (305) (1.5%)
Decrease in cash consideration........................... (1,014) (1,675) (16.0%)
Decrease in net assets acquired.......................... (1,096) (1,810) (27.7%)
Increase in goodwill..................................... 911 1,505 10.3%
Change in pro forma net profit and EPS:
Six months ended 30 June 2000
Net profit.......................................... (9.56) (15.67) (0.4%)
Basic EPS........................................... 0.07 0.11 1.2%
Diluted EPS......................................... (0.08) (0.14) (1.5%)
Year ended 31 December 1999
Net profit.......................................... (19.12) (35.48) (0.7%)
Basic EPS........................................... 0.08 0.11 0.9%
Diluted EPS......................................... (0.21) (0.33) (2.8%)
</TABLE>
d. This entry records the amortization of goodwill of $221 million (CHF 364
million) in the six months ended 30 June 2000, and $441 million (CHF 729
million) in the year ended 31 December 1999.
Other Merger-Related Adjustments
e. This entry records interest expense accrued on $4,677 million (CHF 7,724
million) of merger-related short-term debt. The interest expense assumes a
weighted average rate of 6.85% on the short-term debt and a 0.50% rate on swaps
used to hedge the short-term debt, for a total interest rate of 7.35%. The
resulting adjustment to interest expense is $172 million (CHF 285 million) for
the six months ended 30 June 2000, and $344 million (CHF 517 million) for the
year ended 31 December 1999. The effect of a 1/8% increase in interest rates
would be to increase interest expense by $3 million (CHF 5 million) for the six
months ended 30 June 2000 and by $6 million (CHF 9 million) for the year ended
31 December 1999.
f. This entry records the distributions accrued on $1,500 million (CHF 2,478
million) of trust preferred securities issued, assuming a distribution rate of
9%. The distributions accrued are $68 million (CHF 111 million) for the six
months ended 30 June 2000, and $135 million (CHF 223 million) for the year ended
31 December 1999. The effect of a 1/8% increase in rates would be to increase
distributions by $1 million (CHF 2 million) for the six months ended 30 June
2000 and by $2 million (CHF 3 million) for the year ended 31 December 1999.
g. This entry records amortization of net discount resulting from fair market
valuation of PaineWebber long-term debt and associated hedging swaps. The
amortization period is a straight line period of 5 years (the average maturity
of the long-term debt). The amounts amortized are $9 million (CHF 14 million)
for the six months ended 30 June 2000 and $17 million (CHF 28 million) for the
year ended 31 December 1999.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
h. This entry records the establishment of an employee retention bonus program.
For purposes of this pro forma presentation, it is assumed that approximately 5
million restricted UBS ordinary shares, 2 million UBS stock options and $37.5
million (CHF 62 million) cash, with an aggregate value of $875 million (CHF
1,446 million), subject to vesting restrictions of 2 to 4 years, will be awarded
to certain employees of PaineWebber. It is further assumed that the options will
be issued with strike prices equivalent to the current market value of UBS
ordinary shares. No compensation expense is recorded for the options. The
assumed issuance of restricted UBS ordinary shares results in incremental
compensation expense of $94 million (CHF 156 million) for the six months ended
30 June 2000 and $188 million (CHF 310 million) for the year ended 31 December
1999. The related deferred compensation expense at the end of such periods is
$470 million (CHF 776 million) and $564 million (CHF 931 million), respectively.
The cash component of the award results in compensation expense of $6 million
(CHF 10 million) for the six months ended 30 June 2000 and $13 million (CHF 21
million) for the year ended 31 December 1999. For purposes of computing the cash
requirements in a. above, initial funding of the cash awards includes the total
amount expensed through the periods ending 30 June 2000, $19 million (CHF 31
million).
i. This entry records PaineWebber's recognition of $908 million (CHF 1,500
million) in proceeds from the exercise of existing PaineWebber employee stock
options as a reduction in short term borrowings used to fund the merger.
j. This entry records the payment of $66 million (CHF 109 million) in Swiss
assessments required upon the issuance of new UBS ordinary shares in the merger.
For purposes of this entry, we have assumed the entire stock component of the
purchase consideration will be newly issued shares. The actual amount of newly
issued shares may differ if UBS issues shares from treasury stock or enters into
stock borrow transactions as a funding source.
k. This entry records the amortization of the fair market valuation of lease
obligations. The amortization period is a straight line period of 14 years (the
average economic life of existing lease obligations, to be fair valued). The
amortization expense is $5 million (CHF 8 million) for the six months ended 30
June 2000 and $10 million (CHF 17 million) for 31 December 1999.
l. This entry records the tax effects of the relevant pro forma adjustments
arising from the acquisition at the assumed effective rate of 35%, for both
balance sheet and income statement purposes, resulting in a net tax benefit of
$102 million (CHF 169 million) for the six months ended 30 June 2000 and $203
million (CHF 306 million) for the year ended 31 December 1999.
3. CONVENIENCE TRANSLATION
30 June 2000 and 31 December 1999 CHF amounts have been translated into U.S.
dollars at the exchange rate of one US$=CHF 1.63, the exchange rate on 30 June
2000.
4. PAINEWEBBER EARNINGS PER SHARE
The EPS amounts presented for PaineWebber reflect pro forma IAS adjustments to
income and effects of currency translation and will thus differ from those
presented in PaineWebber's historical audited and unaudited consolidated
financial statements.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
5. PROPOSED DIVIDEND
At the extraordinary general meeting of UBS AG, held on 7 September 2000, the
UBS shareholders approved the UBS Board of Directors proposal that a partial
dividend be paid to UBS shareholders on record as of 2 October 2000. The
payment, which was made on 5 October 2000, relates to the first nine months of
the year 2000. The payment of $2.75 (CHF 4.50) per share amounted to
approximately $1.1 billion (CHF 1.8 billion). This dividend has not been
reflected in the assumptions made for purposes of presenting pro forma financial
information.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
PAINEWEBBER UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000
The following unaudited condensed consolidated statement of financial condition
and income statement as of and for the six months ended 30 June 2000 is derived
from the historical unaudited condensed consolidated statement of financial
condition and income statement of PaineWebber as of and for the six months then
ended, after giving effect to the unaudited IAS adjustments described in the
notes to the PaineWebber unaudited pro forma condensed consolidated statement of
financial condition and income statement: conversion from U.S. GAAP to IAS. This
information has been prepared from, and should be read together with, the
unaudited condensed consolidated financial statements and related notes of
PaineWebber for the six months ended 30 June 2000, which are included in this
prospectus.
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
PAINE WEBBER
(IN US$ MILLIONS) U.S. GAAP(1) IAS ADJUSTMENT(2) REFERENCE(2) IAS
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME
Interest income........................ 2,056 2,056
Interest expense....................... 1,713 16 i 1,729
------ ---- ------
Net interest income.................... 343 (16) 327
Credit loss expense.................... -- --
------ ---- ------
Net interest income after credit
loss expense.................... 343 (16) 327
Net fee and commission income.......... 2,093 (68) j,k 2,025
Net trading income..................... 491 (18) f,j 473
Other income, including income from
disposal of associates and
subsidiaries......................... 81 81
------ ---- ------
Total operating income................. 3,008 (102) 2,906
------ ---- ------
OPERATING EXPENSES
Personnel.............................. 1,789 (8) f 1,781
General and administrative............. 653 (48) j 605
Depreciation and amortization.......... 64 (1) a,d 63
------ ---- ------
Total operating expenses............... 2,506 (57) 2,449
------ ---- ------
OPERATING PROFIT BEFORE TAX AND
MINORITY INTERESTS................... 502 (45) 457
------ ---- ------
Tax expense............................ 182 (16) g 166
------ ---- ------
NET PROFIT BEFORE MINORITY INTERESTS... 320 (29) 291
------ ---- ------
Minority interests..................... 16 (16) i 0
------ ---- ------
NET PROFIT............................. 304 (13) 291
------ ---- ------
Basic earnings per share............... 2.09 2.00
------ ------
Diluted earnings per share............. 1.98 1.90
------ ------
</TABLE>
The notes to the PaineWebber unaudited pro forma condensed consolidated
statement of financial condition and income statement: conversion from U.S. GAAP
to IAS are an integral part of this pro forma information.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION
AS OF 30 JUNE 2000
<TABLE>
<CAPTION>
(IN USD MILLIONS) US GAAP(1) IAS ADJ(2) REF(2) IAS
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and balances with central banks............... -- --
Money market paper................................. 4,302 (18) f 4,284
Due from banks..................................... 1,682 1,682
Securities received as collateral.................. 907 (907) c --
Cash collateral on securities borrowed............. 10,517 10,517
Reverse repurchase agreements...................... 15,313 2,309 c 17,622
Trading portfolio assets........................... 18,194 (2,255) c,e,f 15,939
Positive replacement values........................ 190 190
Loans, net of allowance for credit losses.......... 11,108 11,108
Financial investments.............................. 892 (30) k 862
Accrued income and prepaid expenses................ 575 575
Investments in associates.......................... -- --
Property and equipment............................. 748 (25) a 723
Intangible assets and goodwill..................... 693 (17) d 676
Other assets....................................... 1,282 126 b 1,408
---------- ------ ------
TOTAL ASSETS....................................... 66,403 (817) 65,586
---------- ------ ------
LIABILITIES
Money market paper issued.......................... 1,157 1,157
Due to banks....................................... 2,393 (897) e 1,496
Cash collateral on securities lent................. 7,249 7,249
Obligation to return securities received as
collateral....................................... 907 (907) c --
Repurchase agreements.............................. 27,918 907 c 28,825
Trading portfolio liabilities...................... 4,081 158 c,e 4,239
Negative replacement values........................ 194 126 b 320
Due to customers................................... 10,228 10,228
Accrued expenses and deferred income............... 2,197 2,197
Long-term debt..................................... 5,209 394 i 5,603
Other liabilities.................................. 1,285 (164) f,g 1,121
---------- ------ ------
TOTAL LIABILITIES.................................. 62,818 (383) 62,435
---------- ------ ------
MINORITY INTERESTS................................. 394 (394) i --
---------- ------ ------
TOTAL SHAREHOLDERS' EQUITY......................... 3,191 (40) a,d,g 3,151
---------- ------ ------
TOTAL LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS' EQUITY............................. 66,403 (817) 65,586
---------- ------ ------
</TABLE>
The notes to the PaineWebber unaudited pro forma condensed consolidated
statement of financial condition and income statement: conversion from US GAAP
to IAS are an integral part of this pro forma information.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
PAINEWEBBER UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS
FOR THE YEAR ENDED 31 DECEMBER 1999
The following unaudited condensed consolidated income statement for the year
ended 31 December 1999 is derived from the historical audited consolidated
income statement of PaineWebber for the year then ended, after giving effect to
the unaudited IAS adjustments described in the notes to the PaineWebber
unaudited pro forma condensed consolidated statement of financial condition and
income statement: conversion from U.S. GAAP to IAS. This information has been
prepared from, and should be read together with, the historical consolidated
financial statements and related notes of PaineWebber, which are included in
this prospectus.
FOR THE YEAR ENDED 31 DECEMBER 1999
<TABLE>
<CAPTION>
IAS
(IN US$ MILLIONS) U.S. GAAP(1) ADJUSTMENT(2) REFERENCE(2) IAS
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME
Interest income................................ 3,123 3,123
Interest expense............................... 2,532 115 h,i 2,647
------------ ----------------- -----
Net interest income............................ 591 (115) 476
Credit loss expense............................ -- --
------------ ----------------- -----
Net interest income after credit loss
expense...................................... 591 (115) 476
Net fee and commission income.................. 3,418 (75) j 3,343
Net trading income............................. 1,110 (20) j 1,090
Other income, including income from disposal of
associates and subsidiaries.................. 171 171
------------ ----------------- -----
Total operating income......................... 5,290 (210) 5,080
------------ ----------------- -----
OPERATING EXPENSES
Personnel...................................... 3,050 19 a 3,069
General and administrative..................... 1,105 (89) a,j 1,016
Depreciation and amortization.................. 100 (2) a,d 98
------------ ----------------- -----
Total operating expense........................ 4,255 (72) 4,183
------------ ----------------- -----
OPERATING PROFIT BEFORE TAX AND MINORITY
INTERESTS.................................... 1,035 (138) 897
------------ ----------------- -----
Tax expense.................................... 374 (8) g 366
------------ ----------------- -----
NET PROFIT BEFORE MINORITY INTERESTS........... 661 (130) 531
------------ ----------------- -----
Minority interests............................. 32 (32) i --
------------ ----------------- -----
NET PROFIT..................................... 629 (98) 531
------------ ----------------- -----
Dividends and amortization of discount on
preferred stock.............................. 83 (83) h --
------------ ----------------- -----
NET PROFIT APPLICABLE TO COMMON SHARES......... 546 (15) 531
------------ ----------------- -----
Basic earnings per share....................... 3.77 3.67
------------ -----
Diluted earnings per share..................... 3.56 3.47
------------ -----
</TABLE>
The notes to the PaineWebber unaudited pro forma condensed consolidated
statement of financial condition and income statement: conversion from U.S. GAAP
to IAS are an integral part of this pro forma information.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000 AND
THE YEAR ENDED 31 DECEMBER 1999
1. RECLASSIFICATION TO CONFORM PAINEWEBBER ACCOUNTS WITH UBS FINANCIAL
PRESENTATION
Reclassifications have been made to the PaineWebber historical financial
information presented under U.S. GAAP to conform to UBS's presentation under
IAS.
The principal income statement reclassifications relate to:
1. Commission revenue, Asset management revenue, and Investment banking revenue
have been reclassified as Net fees and commission revenue.
2. Compensation and benefits expense has been reclassified into the Personnel
balance.
3. Office and equipment expense, Communication expense, Business development
expense, Professional services expense, and Other expenses have been
reclassified into the General and administrative and Depreciation and
Amortization expense balances.
The principal balance sheet reclassifications relate to:
1. Cash and cash equivalents, Cash and securities segregated and on deposit for
federal and other regulations, and Receivables from broker dealers have been
reclassified into Due from banks.
2. Treasury bills and money market securities have been removed from Financial
instruments owned and moved into Money market paper.
3. Positive and negative replacement values on derivatives have been separated
from Financial instruments owned or sold, not yet purchased into their own
respective line items.
4. Receivables from clients have been reclassified to Loans, net of allowances
for credit losses.
5. Dividend and interest receivables and Fees and other receivables have been
reclassified into Accrued income and prepaid expenses.
6. Intangible assets and goodwill have been removed from Other assets and
classified into their own line item.
7. Commercial and money market paper issued by PaineWebber have been removed
from Short term borrowings and reclassified into Money market paper issued.
8. Short term borrowings, excluding those removed above, and Payables to broker
dealers have been reclassified into Due to banks.
9. Dividends and interest payable and Other liabilities and accrued expenses
have been reclassified into Accrued expenses and deferred income.
10. Accrued compensation and benefits have been reclassified into Other
liabilities.
11. Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts have been reclassified into Minority interest.
12. Certain investments were reclassified from Financial instruments owned to
Financial investments and all other Financial instruments owned have been
reclassified into Trading portfolio assets.
None of these reclassification adjustments has an impact on net income or
shareholders' equity.
2. U.S. GAAP TO IAS ADJUSTMENTS
Accounting principles generally accepted in the United States differ in material
respects from IAS. The differences that are material to restating the historical
consolidated financial statements of PaineWebber to comply with IAS are
described below.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS -- (CONTINUED)
Adjustments to Historical PaineWebber Financial Statements:
a. Software Capitalization
IAS 38, Intangible Assets, became effective 1 January 2000 for entities
reporting on a calendar year basis. This standard requires that companies
capitalize certain costs of acquiring or developing internal use software. Prior
to 1 January 2000, these costs were expensed. Under U.S. GAAP, PaineWebber early
adopted SOP 98-1, Accounting for the Costs of Software Developed or Obtained for
Internal Use, and capitalized such costs beginning in 1998. For purposes of the
pro forma presentation, the effects of capitalization and related amortization
prior to 1 January 2000 are reversed and costs are instead recognized in expense
as incurred.
b. Hedge Accounting
Under U.S. GAAP, unrealized gains and losses on derivatives that qualify for
hedge accounting are not recognized on the face of the balance sheet. Under IAS,
the replacement value of all derivative products, including those qualifying for
hedge accounting, are recognized on the balance sheet. For purposes of the pro
forma presentation, positive and negative replacement values for derivatives
qualifying for hedge accounting are reported on the face of the balance sheet,
with the net offset reported as other assets.
c. Repurchase, Resale, and Securities Lending Transactions
Under IAS, repurchase agreements and securities borrowed are accounted for as
collateralized borrowings. Reverse repurchase agreements and securities lending
are accounted for as collateralized lending transactions. Cash collateral is
reported on the balance sheet at amounts equal to the collateral advanced or
received.
Under U.S. GAAP, securities lending and repurchase transactions are also
generally accounted for as collateralized borrowing and lending transactions.
However, certain such transactions may be deemed sale or purchase transactions
under specific circumstances. The accounting for these transactions has been
reversed for purposes of the IAS presentation.
Additionally, under U.S. GAAP, when specific control conditions exist,
securities collateral controlled is recognized as an asset with an offsetting
obligation to return such securities collateral. For purposes of IAS
presentation, such controlled securities collateral has been de-recognized.
d. Goodwill and Other Intangibles
Under IAS, amortization of goodwill and other intangible assets is generally
limited to a maximum period of 20 years. U.S. GAAP provides that goodwill and
other intangibles are amortizable over their useful economic life with a maximum
life of 40 years. For purposes of the pro forma presentation, the amortization
of PaineWebber's goodwill and other intangibles has been restated using the
maximum 20 year period.
e. Trade Date v. Settlement Date
UBS follows a settlement date convention of accounting for inventory in its
trading portfolio, for balance sheet presentation purposes. PaineWebber
recognizes purchases and sales of inventory on its statement of financial
condition at their trade date. For purpose of pro forma presentation
PaineWebber's statement of financial condition has been restated as if it
followed settlement date accounting.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS -- (CONTINUED)
f. Rabbi Trusts
PaineWebber has transferred certain compensation related assets into "Rabbi
Trusts." U.S. GAAP requires consolidation of the assets and liabilities of a
Rabbi Trust. IAS, however, applies a "controls" approach in determining whether
an entity should be consolidated. Under this approach the Rabbi Trusts would not
be consolidated and therefore, for purposes of the pro forma presentation, such
assets and liabilities and their related income and expenses have been
eliminated from the statement of financial condition and income statement,
respectively.
g. Income Taxes
Records the tax effect pertaining to the conversion from U.S. GAAP to IAS on the
unaudited consolidated statement of financial condition and income statement of
PaineWebber, assuming an effective tax rate of 37.3%.
h. Redemption of Mandatorily Redeemable Preferred Stock
Under IAS, preferred shares having mandatory redemption features are classified
as debt with associated dividends recognized in interest expense. For purposes
of pro forma presentation, the Unamortized discount charged to equity on
redemption of preferred stock and Dividends and amortization of discount on
preferred stock, thereon, have been reclassified as Interest expense.
i. Trust Preferred Securities
Under IAS, trust preferred securities having mandatory redemption features are
classified as debt with associated dividends recognized in interest expense. For
purposes of pro forma presentation, Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts have been reclassified to Long-term
debt and the related Minority interest expense to Interest expense.
j. Brokerage, Clearing and Exchange Fees
PaineWebber records certain brokerage, clearing and exchange fees as separate
components of expense for purposes of its U.S. GAAP financial statements. Under
IAS, expenses directly connected with a transaction are charged against
revenues.
k. Private Equity Investments
PaineWebber carries private equity related investments for which there exist
trading restrictions at estimated net realizable value under U.S. GAAP. UBS
records similar investments at cost, less writedowns for impairments in value.
This adjustment reverses unrealized gains on such investments reflected in the
PaineWebber accounts.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000
The following unaudited pro forma condensed consolidated balance sheet and
income statement as of and for the six months ended 30 June 2000 is derived from
the unaudited consolidated balance sheet and income statements of UBS and
PaineWebber as of and for the six months then ended, after giving effect to the
U.S. GAAP adjustments described in the notes to the UBS and PaineWebber
unaudited pro forma condensed consolidated balance sheet and income statement:
conversion from IAS to U.S. GAAP and the pro forma adjustments presented in the
notes to the UBS and PaineWebber unaudited pro forma condensed consolidated
balance sheet and income statement. This information has been prepared from, and
should be read together with, the respective unaudited consolidated financial
statements and related notes of UBS and of PaineWebber, which are included in
this prospectus.
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
UBS AND UBS AND
PAINEWEBBER UBS AND PAINEWEBBER
CONSOLIDATED UBS PAINEWEBBER PAINEWEBBER CONSOLIDATED
PRO FORMA U.S. GAAP U.S. GAAP CONSOLIDATED PRO FORMA
IAS ADJUSTMENT(1) REFERENCE(1) ADJUSTMENT U.S. GAAP U.S. GAAP
(IN MILLIONS) CHF CHF CHF CHF US$(2)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
Interest income................ 27,489 (91) a 27,398 16,764
Interest expense............... 22,920 (15) a (27) 22,878 13,999
------- ------ --- ------ -------
Net interest income............ 4,569 (76) 27 4,520 2,765
Credit loss expense............ (83) (83) (51)
------- ------ --- ------ -------
Net interest income after
credit loss expense.......... 4,652 (76) 27 4,603 2,816
Net fee and commission
income....................... 11,194 112 11,306 6,918
Net trading income............. 6,453 (1,270) c 30 5,213 3,190
Other income, including income
from disposal of associates
and subsidiaries............. 778 25 d 803 493
------- ------ --- ------ -------
Total operating income......... 23,077 (1,321) 169 21,925 13,417
------- ------ --- ------ -------
OPERATING EXPENSES
Personnel...................... 11,997 (7) e,f,g 13 12,003 7,344
General and administrative..... 4,177 27 b 79 4,283 2,621
Depreciation and
amortization................. 1,423 839 a,h 3 2,265 1,386
------- ------ --- ------ -------
Restructuring costs............ -- 130 b 130 80
Total operating expenses....... 17,597 989 95 18,681 11,431
=========== ============= ============ =========== ============ ===========
OPERATING PROFIT BEFORE TAX AND
MINORITY INTERESTS........... 5,480 (2,310) 74 3,244 1,986
------- ------ --- ------ -------
Tax expense.................... 1,362 (71) a 26 1,317 807
------- ------ --- ------ -------
NET PROFIT BEFORE MINORITY
INTERESTS.................... 4,118 (2,239) 48 1,927 1,179
------- ------ --- ------ -------
Minority interests............. 146 27 173 106
------- ------ --- ------ -------
NET PROFIT..................... 3,972 (2,239) 21 1,754 1,073
------- ------ --- ------ -------
Other comprehensive income..... -- 34 o 34 21
------- ------ --- ------ -------
COMPREHENSIVE INCOME........... 3,972 (2,205) 21 1,788 1,094
------- ------ --- ------ -------
Basic earnings per share....... 9.15 4.04
------- ------ --- ------ -------
Diluted earnings per share..... 9.03 3.99
------- ------ --- ------ -------
</TABLE>
The notes to the UBS and PaineWebber unaudited pro forma condensed consolidated
balance sheet and income statement: conversion from IAS to U.S. GAAP are an
integral part of this pro forma information.
--------------------------------------------------------------------------------
146
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
BALANCE SHEET
AS OF 30 JUNE 2000
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
UBS AND UBS AND
PAINEWEBBER UBS AND PAINEWEBBER
CONSOLIDATED UBS PAINEWEBBER PAINEWEBBER CONSOLIDATED
PRO FORMA U.S. GAAP U.S. GAAP CONSOLIDATED PRO FORMA
IAS ADJUSTMENT(1) ADJUSTMENT U.S. GAAP U.S. GAAP
(IN MILLIONS) CHF CHF REFERENCE(1) CHF CHF US$(2)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and balances with central
banks........................... 3,457 3,457 2,115
Money market paper................ 68,506 30 68,536 41,936
Due from banks.................... 28,510 18,866 a,j 741 48,117 9,442
Cash collateral on securities
borrowed........................ 163,387 163,387 99,974
Reverse repurchase agreements..... 193,666 (3,773) 189,893 116,192
Trading portfolio assets.......... 241,697 (10,307) g,i,j 3,685 235,075 143,839
Positive replacement values....... 58,068 (380) i 57,688 35,298
Loans, net of allowance for credit
losses.......................... 251,167 8,787 a,j 741 60,695 159,515
Financial investments............. 10,962 (5,880) d (1,458) 3,624 2,217
Accrued income and prepaid
expenses........................ 7,533 7,533 4,609
Investments in associates......... 818 818 501
Property and equipment............ 9,398 878 a,h 41 10,317 6,313
Intangible assets and goodwill.... 17,319 16,965 a,h 59 34,343 21,014
Other assets...................... 14,100 15,025 c,d,e,f 1,253 30,378 18,588
----------- ------- ------ ----------- ---------
TOTAL ASSETS...................... 1,068,588 43,954 1,319 1,113,861 681,553
----------- ------- ------ ----------- ---------
LIABILITIES
Money market paper issued......... 87,299 87,299 53,417
Due to banks...................... 85,341 18,104 j 2,206 105,651 64,649
Cash collateral on securities
lent............................ 27,181 27,181 16,632
Repurchase agreements............. 277,674 (15,703) j (1,482) 260,489 159,389
Trading portfolio liabilities..... 67,207 (259) 66,948 40,964
Negative replacement values....... 78,449 (378) i (205) 77,866 47,645
Due to customers.................. 296,631 18,519 a,j 741 315,891 193,288
Accrued expenses and deferred
income.......................... 18,885 18,885 11,555
Long-term debt.................... 61,840 130 a,g (644) 61,326 37,524
Other liabilities................. 24,082 4,212 a,b,c,d,g,i,j 250 28,544 17,466
----------- ------- ------ ----------- ---------
TOTAL LIABILITIES................. 1,024,589 24,884 607 1,050,080 642,526
----------- ------- ------ ----------- ---------
MINORITY INTERESTS................ 2,877 644 3,521 2,154
----------- ------- ------ ----------- ---------
TOTAL SHAREHOLDERS' EQUITY........ 1,122 19,070 68 60,260 36,873
----------- ------- ------ ----------- ---------
TOTAL LIABILITIES, MINORITY
INTERESTS AND SHAREHOLDERS'
EQUITY.......................... 1,068,588 43,954 1,319 1,113,861 681,553
----------- ------- ------ ----------- ---------
</TABLE>
The notes to the UBS and PaineWebber unaudited pro forma condensed consolidated
balance sheet and income statement: conversion from IAS to U.S. GAAP are an
integral part of this pro forma information.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP
FOR THE YEAR ENDED 31 DECEMBER 1999
The following unaudited pro forma condensed consolidated income statement for
the year ended 31 December 1999 is derived from the audited consolidated income
statement of UBS for the year then ended and from the unaudited pro forma
condensed consolidated income statement of PaineWebber for the year then ended,
after giving effect to the U.S. GAAP adjustments described in the notes to the
UBS and PaineWebber unaudited pro forma condensed consolidated balance sheet and
income statement: conversion from IAS to U.S. GAAP and the pro forma adjustments
presented in the notes to the UBS and PaineWebber unaudited pro forma condensed
consolidated income statement. This information has been prepared from, and
should be read together with, the respective consolidated financial statements
and related notes of UBS and PaineWebber, which are included in this prospectus.
FOR THE YEAR ENDED 31 DECEMBER 1999
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
UBS AND UBS AND
PAINEWEBBER UBS AND PAINEWEBBER
CONSOLIDATED UBS PAINEWEBBER PAINEWEBBER CONSOLIDATED
PRO FORMA U.S. GAAP U.S. GAAP CONSOLIDATED PRO FORMA
IAS ADJUSTMENT(1) ADJUSTMENT U.S. GAAP U.S. GAAP
(IN MILLIONS) CHF CHF REFERENCE CHF CHF US$(2)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
Interest income....................... 40,298 (200) a 40,098 24,536
Interest expense...................... 34,219 (35) a (173) 34,011 20,811
------- ------ ---- ------- -------
Net interest income................... 6,079 (165) 173 6,087 3,725
Credit loss expense................... 956 956 585
------- ------ ---- ------- -------
Net interest income after credit loss
expense............................. 5,123 (165) 173 5,131 3,140
Net fee and commission income......... 17,631 113 17,744 10,857
Net trading income.................... 9,357 (545) a,b,c 30 8,842 5,411
Other income, including income from
disposal of associates and
subsidiaries........................ 3,403 36 a,d 3,439 2,104
------- ------ ---- ------- -------
Total operating income................ 35,514 (674) 316 35,156 21,512
------- ------ ---- ------- -------
OPERATING EXPENSES
Personnel............................. 17,521 (94) a,b,e,f,g,h (29) 17,398 10,646
General and administrative............ 7,624 566 a,b,h 134 8,324 5,093
Depreciation and amortization......... 2,750 1,597 a,h 3 4,350 2,662
------- ------ ---- ------- -------
Restructuring costs................... -- 750 b 750 459
Total operating expenses.............. 27,895 2,819 108 30,822 18,860
------- ------ ---- ------- -------
OPERATING PROFIT BEFORE TAX AND
MINORITY INTERESTS.................. 7,619 (3,493) 208 4,334 2,652
------- ------ ---- ------- -------
Tax expense........................... 1,930 (177) a 12 1,765 1,080
------- ------ ---- ------- -------
NET PROFIT BEFORE MINORITY
INTERESTS........................... 5,689 (3,316) 196 2,569 1,572
------- ------ ---- ------- -------
Minority interests.................... 277 48 325 199
------- ------ ---- ------- -------
NET PROFIT............................ 5,412 (3,316) 148 2,244 1,373
------- ------ ---- ------- -------
Dividends and amortization of discount
on preferred stock.................. -- 125 125 76
------- ------ ---- ------- -------
NET PROFIT/(LOSS) APPLICABLE TO COMMON
SHARES.............................. 5,412 (3,316) 23 2,119 1,297
------- ------ ---- ------- -------
Basic earnings per share.............. 12.10 4.74
------- ------ ---- ------- -------
Diluted earnings per share............ 11.97 4.69
------- ------ ---- ------- -------
</TABLE>
The notes to the UBS and PaineWebber unaudited pro forma condensed consolidated
balance sheet and income statement: conversion from IAS to U.S. GAAP are an
integral part of this pro forma information.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000
AND FOR THE YEAR ENDED 31 DECEMBER 1999
1. IAS TO U.S. GAAP ADJUSTMENTS
IAS accounting principles differ in material respects from accounting principles
generally accepted in the U.S. The differences which are material to restating
the historical consolidated financial statements of UBS and PaineWebber to
comply with U.S. GAAP, are described below.
ADJUSTMENTS TO UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEETS AND INCOME STATEMENTS
The differences which are material to restating the UBS unaudited pro forma
consolidated balance sheets and income statements to U.S. GAAP relate to
purchase accounting, restructuring provisions, derivatives held for non-trading
purposes, financial investments, retirement and benefit plans, other employee
benefits, equity participation plans, software capitalization, settlement date
vs. trade date accounting and repurchase, resale and securities lending
transactions as described in notes (a), (b), (c), (d), (e), (f), (g), (h), (i)
and (j), respectively. PaineWebber's IAS to U.S. GAAP adjustments have been
documented in the notes to the PaineWebber unaudited pro forma condensed
consolidated statement of financial condition and income statement: conversion
from U.S. GAAP to IAS, note #2: U.S. GAAP to IAS adjustments. In addition, for
purposes of conforming PaineWebber's accounts to UBS's presentation under U.S.
GAAP, certain investments have been reclassified from financial investments to
Other Assets.
a. Purchase Accounting
General
Under IAS, UBS accounted for the 1998 merger of Union Bank of Switzerland and
Swiss Bank Corporation under the pooling of interests method. The balance sheets
and income statements of the banks were combined and no adjustments to the
carrying values of the assets and liabilities were made.
Under U.S. GAAP, the business combination creating UBS is accounted for under
the purchase method with Union Bank of Switzerland being considered the
accounting acquirer. Under the purchase method, the cost of acquisition is
measured at fair value and the acquirer's interests in identifiable tangible
assets and liabilities of the acquiree are restated to fair values at the date
of acquisition. Any excess consideration paid over the fair value of net
tangible assets acquired is allocated, first to identifiable intangible assets
based on their fair values, if determinable, with the remainder allocated to
goodwill.
Goodwill
Under U.S. GAAP, goodwill and other intangible assets acquired are capitalized
and amortized over the expected periods to be benefited with adjustments, if
any, for impairment.
For purposes of the U.S. GAAP reconciliation, the excess of the consideration
paid for Swiss Bank Corporation over the fair value of the net tangible assets
received has been recorded as Goodwill and is being amortized on a straight line
basis over a weighted average life of 13 years beginning 29 June 1998.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
Other Purchase Accounting Adjustments
For purposes of the U.S. GAAP reconciliation, the restatement of Swiss Bank
Corporation's net assets to fair value resulted in decreasing net tangible
assets by CHF 1,077 million. This amount will be amortized over a period ranging
from 2 years to 20 years depending upon the nature of the restatement.
b. Restructuring Provision
Under IAS, restructuring provisions are recognized when a legal or constructive
obligation has been incurred. In 1997, UBS recognized a CHF 7,000 million
restructuring provision to cover personnel, information technology ("IT"),
premises and other costs associated with combining and restructuring the merged
Group. An additional CHF 300 million provision was recognized in the fourth
quarter of 1999, reflecting the impact of increased precision in the estimation
of certain leased and owned property costs.
Under U.S. GAAP, restructuring provisions for business combinations are not
recognized prior to the consummation date of the business combination. Also, the
criteria for establishing liabilities of this nature are more stringent than
under IAS. Established restructuring provisions are required to be periodically
reviewed for appropriateness and revised if necessary.
For purposes of the U.S. GAAP reconciliation, the aggregate CHF 7,300 million
restructuring provision was reversed. As a result of the business combination
with Swiss Bank Corporation, the decision to combine and streamline certain
activities of the banks for the purpose of reducing costs and improving
efficiencies, Union Bank of Switzerland recognized a restructuring provision of
CHF 1,575 million during 1998 for purposes of the U.S. GAAP reconciliation. CHF
759 million of this provision related to estimated costs for restructuring the
operations and activities of Swiss Bank Corporation and such amount was recorded
as a liability of the acquired business. The remaining CHF 816 million of
estimated costs were charged to restructuring expense during 1998. Adjustments
of CHF 130 million and 600 million to the restructuring provision were
recognized in the six months ended 30 June 2000 and in the year ended 31
December 1999, respectively, for purposes of the U.S. GAAP reconciliation. The
reserve is expected to be substantially exhausted by the end of 2001.
The restructuring provision initially included CHF 756 million for employee
termination benefits, CHF 332 million for the closure and write downs of owned
and leased premises, and CHF 487 million for professional fees, IT costs,
miscellaneous transfer taxes and statutory fees.
The usage of the U.S. GAAP restructuring provision was as follows:
<TABLE>
<CAPTION>
BALANCE BALANCE JAN-JUN JAN-JUN
1 JANUARY 1999 1999 31 DECEMBER 2000 2000 BALANCE
(CHF MILLIONS) 1999 USAGE REVISION 1999 USAGE REVISION 30 JUNE 2000
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Personnel............ 382 (254) 553 681 57 70 694
Premises............. 305 (244) 179 240 98 45 187
IT................... 25 (5) 7 27 3 -- 24
Other................ 313 (45) (139) 129 6 15 138
------ ----- ----- ------ ---- ---- ------
Total........... 1,025 (548) 600 1,077 164 130 1,043
========= ===== ======== =========== ======= ======== ============
</TABLE>
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
Additionally, for purposes of the U.S. GAAP reconciliation, nil and CHF 150
million of restructuring costs were expensed as incurred in the six months ended
30 June 2000 and the year ended 31 December 1999, respectively.
c. Derivatives Instruments Held or Issued for Non-Trading Purposes
Under IAS, UBS recognizes transactions in derivative instruments hedging
non-trading positions in the income statement using the accrual or deferral
method, which is generally the same accounting as the underlying item being
hedged.
U.S. GAAP requires that derivatives be reported at fair value with changes in
fair value recorded in income unless specified criteria are met to obtain hedge
accounting treatment (accrual or deferral method).
UBS is not required to comply with all of the criteria necessary to obtain hedge
accounting treatment under U.S. GAAP. Accordingly, for purposes of the U.S. GAAP
reconciliation, derivative instruments held or issued for non-trading purposes
that did not meet U.S. GAAP hedging criteria have been carried at fair value
with changes in fair value recognized as adjustments to net trading income.
d. Financial Investments
Under IAS, financial investments are classified as either current investments or
long-term investments. UBS considers current financial investments to be held
for sale and carried at lower of cost or market value. UBS accounts for
long-term financial investments at cost, less any permanent impairment.
Under U.S. GAAP, investments are classified as either held to maturity
(essentially debt securities), which are carried at amortized cost, or available
for sale (debt and marketable equity securities), which are carried at fair
value with changes in fair value recorded as a separate component of
shareholders' equity. Realized gains and losses are recognized in net profit in
the period sold.
For purposes of the U.S. GAAP reconciliation, amounts reflected in Other income
for the changes in market values of held for sale investments are reclassified
as a component of Shareholders' equity. Held to maturity investments that do not
meet U.S. GAAP criteria are reclassified to the available for sale category.
Unrealized gains or unrealized losses relating to these investments are recorded
as a component of Shareholders' equity.
e. Retirement Benefit Plans
Under IAS, UBS has recorded pension expense based on a specific method of
actuarial valuation of projected plan liabilities for accrued service including
future expected salary increases and expected return on plan assets. Plan assets
are held in a separate trust to satisfy plan liabilities. Plan assets are
recorded at fair value. The recognition of a prepaid asset on the books of UBS
is subject to certain limitations. These limitations generally cause amounts
recognized as expense to equal amounts funded in the same period. Any amount not
recognized as a prepaid asset and the corresponding impact on pension expense
has been disclosed in the financial statements.
Under U.S. GAAP, pension expense, generally, is based on the same method of
valuation of liabilities and assets as under IAS. Differences in the levels of
expense and liabilities (or prepaid assets) exist due to the different
transition date rules and the stricter provisions of IAS as well as industry
practice under IAS for recognition of a prepaid asset.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
As a result of the merger of the retirement benefit plans of Union Bank of
Switzerland and Swiss Bank Corporation after the 1998 merger, there was a one
time increase of the vested plan benefits for the beneficiaries of such plans.
This had the effect of increasing the defined benefit obligation at this date by
CHF 3,020 million. Under IAS this resulted in a one-time charge to income which
was offset by the recognition of assets (previously unrecognized due to certain
limitations under IAS).
Under U.S. GAAP, in a business combination that is accounted for under the
purchase method, the assignment of the purchase price to individual assets
acquired and liabilities assumed must include a liability for the projected plan
liabilities in excess of plan assets or an asset for plan assets in excess of
the projected plan liabilities, thereby recognizing any previously existing
unrecognized net gains or losses, unrecognized prior service cost, or
unrecognized net liabilities or assets.
For purposes of the U.S. GAAP reconciliation, UBS recorded a prepaid asset for
the Union Bank of Switzerland plans as of 1 January 1998. Swiss Bank Corporation
recorded a purchase price adjustment to recognize its prepaid asset at 29 June
1998. The recognition of these assets impacts the pension expense recorded under
U.S. GAAP versus IAS. The pension expense for the year ended 31 December 1999 is
also impacted by the different treatment of the merger of the plans under IAS
versus U.S. GAAP. The assets recognized under IAS (which had been previously
unrecognized due to certain limitations under IAS) were already recognized under
U.S. GAAP due to the absence of such limitations under U.S. GAAP.
f. Other Employee Benefits
Under IAS, UBS has recorded expenses and liabilities for post-retirement
benefits determined under a methodology similar to that described above under
retirement benefit plans.
Under U.S. GAAP, expenses and liabilities for post-retirement benefits would be
determined under a similar methodology as under IAS. Differences in the levels
of expenses and liabilities have occurred due to different transition date rules
and the treatment of the merger of Union Bank of Switzerland and Swiss Bank
Corporation under the purchase method.
g. Equity participation plans
IAS does not specifically address the recognition and measurement requirements
for equity participation plans.
U.S. GAAP permits the recognition of compensation cost on the grant date for the
estimated fair value of equity instruments issued (Statement of Financial
Accounting Standards No. 123) or based on the intrinsic value of equity
instruments issued (Accounting Principles Board Opinion No. 25), with the
disclosure of the pro forma effects of equity participation plans on net profit
and earnings per share, as if the fair value had been recorded on the grant
date. UBS recognized only intrinsic values at the grant date with subsequent
changes in value not recognized.
For purposes of the U.S. GAAP reconciliation, certain of UBS's option awards
have been determined to be variable, primarily because they may be settled in
cash or UBS has offered to hedge their value. Additional compensation expense
from these options awards for the six months ended 30 June and the year ended 31
December 1999, is CHF 44 million and CHF 41 million, respectively. In addition,
certain of UBS's equity participation plans provide for deferral of the awards,
and the instruments are held in trusts for the participants. Certain of these
trusts are recorded on UBS's balance sheet for U.S.
--------------------------------------------------------------------------------
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
GAAP presentation, the effect of which is to increase assets by CHF 1,070
million and CHF 655 million, liabilities by CHF 1,162 million and CHF 717
million, and decrease shareholders' equity by CHF 92 million and CHF 62 million
(for UBS shares held by the trusts, which are treated as treasury shares) at 30
June 2000 and 31 December 1999, respectively.
h. Software capitalization
Under IAS, effective 1 January 2000, certain costs associated with the
acquisition or development of internal use software are required to be
capitalized. Once the software is ready for its intended use, the costs
capitalized are amortized to the income statement over estimated lives. Under
U.S. GAAP, the same principal applies; however this standard was effective
beginning 1 January 1999. For purposes of the U.S. GAAP reconciliation, the
costs associated with the acquisition or development of internal use software
that met the U.S. GAAP software capitalization criteria in 1999 have been
reversed from Operating expenses and amortized over a life of 2 years. From 1
January 2000, the only remaining reconciliation item is the amortization of
software capitalized in 1999 for U.S. GAAP purposes.
i. Settlement Date vs. Trade Date Accounting
UBS's transactions from securities activities are recorded on the settlement
date for balance sheet and on the trade date for income statement purposes. This
results in recording an off-balance sheet forward transaction during the period
between the trade date and the settlement date. Forward positions relating to
trading activities are revalued to fair value and any unrealized profits and
losses are recognized in Net profit.
Under U.S. GAAP, trade date accounting is required for purchases and sales of
securities. For purposes of U.S. GAAP presentation, all purchases and sales of
securities previously recorded on settlement date have been recorded as of trade
date for balance sheet purposes. Trade date accounting has resulted in
receivables and payables to broker-dealers and clearing organizations recorded
in Other assets and Other liabilities.
j. Repurchase, Resale and Securities Lending Transactions
Under IAS, UBS's repurchase agreements and securities borrowed are accounted for
as collateralized borrowings. Reverse repurchase agreements and securities
lending are accounted for as collateralized lending transactions. Cash
collateral is reported on the balance sheet at amounts equal to the collateral
advanced or received.
Under U.S. GAAP, securities lending and repurchase transactions are also
generally accounted for as collateralized borrowing and lending transactions.
However, certain such transactions may be deemed sale or purchase transactions
under specific circumstances. Additionally, under U.S. GAAP, UBS is required to
recognize securities collateral controlled and an offsetting obligation to
return such securities collateral on certain financing transactions, when
specific control conditions exist.
For purposes of U.S. GAAP presentation, securities collateral recognized under
financing transactions is reflected in Due from banks or loans, net of allowance
for credit losses, depending on the counterparty. The related obligation to
return the securities collateral is reflected in the balance sheet in Due to
banks or Due to customers, as appropriate.
--------------------------------------------------------------------------------
153
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
2. CONVENIENCE TRANSACTION
30 June 2000 and 31 December 1999 CHF amounts have been translated into U.S.
dollars at the exchange rate of one US$ = CHF 1.63, the exchange rate on 30 June
2000.
3. PROPOSED DIVIDEND
At the extraordinary general meeting of UBS AG, held on 7 September 2000, the
UBS shareholders approved the UBS Board of Directors proposal that a partial
dividend be paid to UBS shareholders on record as of 2 October 2000. The
payment, which was made on 5 October 2000, relates to the first nine months of
the year 2000. The payment of $2.75 (CHF 4.50) per share amounted to
approximately $1.1 billion (CHF 1.8 billion).
--------------------------------------------------------------------------------
154
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--------------------------------------------------------------------------------
Description of Debt Securities
Please note that in this section entitled "Description of Debt Securities,"
references to UBS Americas refer only to UBS Americas Inc. and not to its
consolidated subsidiaries. Similarly, references to UBS refer only to UBS AG and
not to its consolidated subsidiaries. Also, in this section, references to
Holders mean those who own debt securities registered in their own names on the
books that we or the trustee maintain for this purpose, and not those who own
beneficial interests in debt securities registered in street name or in debt
securities issued in book-entry form through one or more depositaries. Because
all of the debt securities are currently held by the Depository Trust Company in
the form of global debt securities, DTC is currently the only Holder of any of
the debt securities. Owners of beneficial interests in the debt securities
should read the subsection entitled "-- Global Debt Securities."
THIS SECTION IS ONLY A SUMMARY
The applicable indenture and its associated documents, including your note,
contain the full legal text governing the matters described in this section.
This section summarizes all the material terms of the applicable indenture and
your note. It does not, however, describe every aspect of the indenture and your
note. For example, in this section, we use terms that have been given special
meaning in the indenture, but we describe the meaning of only the more important
of those terms.
All of the debt securities were issued in various issuances by Paine Webber
Group Inc. before Paine Webber Group Inc. merged with UBS Americas Inc. Some of
the debt securities were issued as separate series of securities, and these are
listed in the first table under "--Fixed Rate Securities" below. Other debt
securities were issued as medium-term notes, either as part of Paine Webber
Group Inc.'s Medium-Term Senior Notes, Series C, or as part of Paine Webber
Group Inc.'s Medium-Term Subordinated Notes, Series D. These are listed in the
other tables under "--Fixed Rate Securities" and "--Floating Rate Securities"
below.
THE INDENTURES
Each of the debt securities was issued under one of two Indentures, each of
which is between UBS Americas and The Chase Manhattan Bank, as Trustee.
The senior debt securities were issued under the Senior Indenture, dated as of
15 March 1988, as amended by a supplemental indenture dated as of 22 September
1989, by a supplemental indenture dated as of 22 March 1991, and by a
supplemental indenture dated as of 3 November 2000, between UBS Americas (as
successor by merger to PaineWebber) and The Chase Manhattan Bank (formerly known
as Chemical Bank), as Trustee, as well as by a supplemental indenture dated as
of 22 December 2000 among UBS Americas, the Trustee and UBS AG, as guarantor.
When we refer to The Chase Manhattan Bank, acting as Trustee under the Senior
Indenture, we will call it the "Senior Trustee." The debt securities issued
under the Senior Indenture constitute Superior Indebtedness and rank pari passu
with all other unsecured debt of UBS Americas except subordinated debt. The
Chase Manhattan Bank's address is 270 Park Avenue, New York, NY 10017.
The subordinated debt securities were issued under the Subordinated Indenture,
dated as of 15 March 1988, as amended by a supplemental indenture dated as of 22
September 1989, by a supplemental indenture dated as of 22 March 1991, by a
supplemental indenture dated as of 30 November 1993, and by a supplemental
indenture dated as of 3 November 2000, between UBS Americas (as successor by
merger to PaineWebber) and Chase Manhattan Bank USA, National Association
(formerly known
--------------------------------------------------------------------------------
155
<PAGE> 159
DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
as Chemical Bank (Delaware)), as Trustee, as well as by a supplemental indenture
dated as of 22 December 2000 among UBS Americas, the Trustee and UBS AG, as
guarantor. When we refer to Chase Manhattan Bank USA, acting as Trustee under
the Subordinated Indenture, we will call it the "Subordinated Trustee." The debt
securities issued under the Subordinated Indenture are subordinated in right of
payment, to the extent and in the manner listed in the Subordinated Indenture,
to the prior payment in full of all Superior Indebtedness, as described below
under "--Subordination." Chase Manhattan Bank USA's address is 1201 Market
Street, Wilmington, DE 19801.
In this prospectus, we sometimes refer to the Senior Indenture and the
Subordinated Indenture together as the "Indentures." Similarly, we sometimes
refer to the Senior Trustee and the Subordinated Trustee together as the
"Trustees." Both Indentures are filed as exhibits to the registration statement
that includes this prospectus. See "Where You Can Find More Information" below
for information on how to obtain a copy.
The Indentures do not restrict (i) a consolidation, merger or sale of assets or
other similar transactions that may adversely affect the creditworthiness of the
Company or a successor or combined entity, (ii) a change of control of the
Company or (iii) leveraged transactions involving the Company, whether or not
involving a change of control. In addition, under the terms of the Indentures
the Company is entitled to defease the Offered Securities. As a result, the
Indentures do not protect Holders against a substantial decline in the value of
the Offered Securities which may result from the aforementioned transactions.
FORM
All of the debt securities were issued in fully registered form without coupons.
All of the debt securities that are denominated in U.S. dollars were issued in
denominations of $1,000 and integral multiples of $1,000. All of the debt
securities that are denominated in Japanese yen were issued in denominations of
Y250,000,000 and integral multiples of Y250,000,000 or Y100,000,000 and integral
multiples of Y100,000,000.
PRINCIPAL
All of the debt securities are denominated in U.S. dollars, with the exception
of three series of fixed rate Medium-Term Notes, Series C, which are payable in
Japanese yen, as indicated below. The principal of, and interest on, the
yen-denominated debt securities is payable in Japanese yen, except under the
circumstances described under "--Payment Currency" below. For each debt
security, the aggregate principal amount outstanding is equal to the initial
aggregate principal amount for that debt security. The full principal amount of
each series of debt securities will be due and payable on the maturity date
specified for that series below.
INTEREST RATE
All of the debt securities bear interest, either at a fixed rate or at a
floating rate. Each debt security will bear interest from its date of issuance
until its principal is paid or made available for payment. The interest will be
payable on each interest payment date and at maturity as described below under
"--Payment of Principal and Interest."
FIXED RATE DEBT SECURITIES
Each fixed rate debt security will bear interest at a fixed rate, payable
semi-annually on the dates specified in the table below. The description below
designates the fixed rate of interest per annum payable on each of the fixed
rate debt securities.
--------------------------------------------------------------------------------
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
The following tables list the fixed rate debt securities, as well as their
primary terms:
<TABLE>
<CAPTION>
INITIAL
AGGREGATE INTEREST HELD
PRINCIPAL MATURITY PAYMENT REGULAR THROUGH
TITLE AMOUNT DATE DATES RECORD DATES DTC
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7 5/8% Notes Due 2009 $275 million 1 December 1 June and 15 May and 15 Yes
2009 1 December November
6 3/8% Notes Due 2004 $525 million 15 May 2004 15 May and 15 30 April and Yes
November 31 October
6.45% Notes Due 2003 $340 million 1 December 1 June and 1 15 May and 15 Yes
2003 December November
6.55% Notes Due 2008 $250 million 15 April 15 April and 15 1 April and 1 No
2008 October October
7 5/8% Notes Due 2008 $150 million 15 October 15 April and 15 1 April and 1 No
2008 October October
8 1/4% Notes Due 2002 $125 million 1 May 2002 1 May and 1 15 April and No
November 15 October
8 7/8% Notes Due 2005 $125 million 15 March 15 March and 15 1 March and 1 No
2005 September September
7 5/8% Notes Due 2014 $200 million 15 February 15 February and 1 February and No
2014 15 August 1 August
6 3/4% Notes Due 2006 $100 million 1 February 1 February and 15 January and No
2006 1 August 15 July
6 1/2% Notes Due 2005 $200 million 1 November 1 May and 1 15 April and No
2005 November 15 October
7 7/8% Notes Due 2003 $100 million 15 February 15 February and 1 February and No
2003 15 August 1 August
9 1/4% Notes Due 2001 $150 million 15 December 15 June and 15 1 June and 1 No
2001 December December
7 3/4% Subordinated Notes
Due 2002 $175 million 1 September 1 March and 1 15 February No
2002 September and 15 August
</TABLE>
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MEDIUM-TERM SENIOR NOTES, SERIES C*
-------------------------------------------------------------------------------
INITIAL
AGGREGATE INTEREST
PRINCIPAL MATURITY PAYMENT REGULAR INTEREST
AMOUNT DATE DATES RECORD DATES RATE
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Y 900 million** 1 July 2002 1 January and 1 15 December 1.0100
July and 15 June
Y 9 billion** 13 March 2003 13 March and 13 1 March and 1 1.2700
September September
Y 900 million** 1 July 2003 1 January and 1 15 December 1.3400
July and 15 June
$ 20 million 25 January 2001 1 March and 1 15 February 5.8300
September and 15 August
$ 25 million 21 May 2001 1 March and 1 15 February 6.1850
September and 15 August
$ 10 million 08 June 2001 1 March and 1 1 March and 1 5.8100
September September
$ 1 million 13 June 2001 1 March and 1 15 February 7.6400
September and 15 August
$ 25 million 23 July 2001 1 March and 1 15 February 6.5850
September and 15 August
$ 5 million 24 July 2001 1 March and 1 15 February 7.2800
September and 15 August
$ 5 million 11 September 1 March and 1 15 February 7.5200
2001 September and 15 August
$ 22 million 26 September 1 March and 1 15 February 6.5200
2001 September and 15 August
$ 22 million 28 September 1 March and 1 15 February 6.4400
2001 September and 15 August
$ 10 million 14 December 2001 1 March and 1 15 February 6.5800
September and 15 August
$ 20 million 28 March 2002 1 March and 1 15 February 6.0150
September and 15 August
$ 45 million 22 April 2002 1 March and 1 15 February 6.0200
September and 15 August
$ 25 million 15 October 2002 1 March and 1 15 February 6.6500
September and 15 August
$ 25 million 4 February 2003 1 March and 1 15 February 6.2500
September and 15 August
$ 12 million 14 February 2003 1 March and 1 15 February 7.0200
September and 15 August
$ 45 million 18 March 2003 1 March and 1 15 February 6.3200
September and 15 August
$ 25 million 20 May 2003 1 March and 1 15 February 6.3310
September and 15 August
$ 30 million 1 July 2003 1 March and 1 15 February 6.7850
September and 15 August
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
------------
* All of the Medium-Term Senior Notes, Series C, are held through DTC.
**Redeemable under the limited circumstances described under "--Payment of
Additional Amounts" below.
</TABLE>
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MEDIUM-TERM SENIOR NOTES, SERIES C*
-------------------------------------------------------------------------------
INITIAL
AGGREGATE INTEREST
PRINCIPAL MATURITY PAYMENT REGULAR INTEREST
AMOUNT DATE DATES RECORD DATES RATE
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 20 million 15 October 2003 1 March and 1 15 February 7.3000
September and 15 August
$ 5 million 21 October 2003 1 March and 1 15 days prior 6.3100
September to each
interest
payment date
$ 1 million 17 November 2003 1 March and 1 15 days prior 6.6800
September to each
interest
payment date
$ 1 million 24 November 2003 1 March and 1 15 days prior 6.7700
September to each
interest
payment date
$ 20 million 20 January 2004 1 March and 1 15 days prior 6.7300
September to each
interest
payment date
$ 20 million 26 January 2004 1 March and 1 15 days prior 6.7300
September to each
interest
payment date
$ 5 million 27 January 2004 1 March and 1 15 February 7.1150
September and 15 August
$ 5 million 28 January 2004 1 March and 1 15 February 7.1400
September and 15 August
$ 2.2 million 3 February 2004 1 March and 1 15 days prior 6.6700
September to each
interest
payment date
$ 20 million 10 February 2004 1 March and 1 15 days prior 6.6800
September to each
interest
payment date
$ 13.5 million 10 February 2004 1 March and 1 15 February 7.0150
September and 15 August
$ 5 million 13 September 1 March and 1 15 February 7.0700
2004 September and 15 August
$ 25 million 4 October 2004 1 March and 1 15 February 7.5500
September and 15 August
$ 13 million 4 October 2004 1 March and 1 15 February 6.7900
September and 15 August
$ 11.5 million 15 October 2004 1 March and 1 15 February 7.4900
September and 15 August
$ 30 million 6 April 2005 1 March and 1 15 February 6.5200
September and 15 August
$ 5 million 25 May 2005 1 March and 1 15 days prior 8.0000
September to each
interest
payment date
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
------------
* All of the Medium-Term Senior Notes, Series C, are held through DTC.
</TABLE>
--------------------------------------------------------------------------------
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MEDIUM-TERM SENIOR NOTES, SERIES C*
-------------------------------------------------------------------------------
INITIAL
AGGREGATE INTEREST
PRINCIPAL MATURITY PAYMENT REGULAR INTEREST
AMOUNT DATE DATES RECORD DATES RATE
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 5 million 11 August 2005 1 March and 1 15 days prior 7.7650
September to each
interest
payment date
$ 1 million 14 November 2005 1 March and 1 15 days prior 6.9500
September to each
interest
payment date
$ 2 million 4 October 2006 1 March and 1 15 February 7.7500
September and 15 August
$ 1 million 10 October 2006 1 March and 1 15 February 7.5200
September and 15 August
$ 10 million 20 February 2007 1 March and 1 15 February 7.2200
September and 15 August
$ 35 million 1 April 2008 1 March and 1 15 February 6.7200
September and 15 August
$ 42.5 million 3 April 2008 1 March and 1 15 February 6.7300
September and 15 August
$ 10 million 21 April 2008 1 March and 1 15 February 6.5200
September and 15 August
$ 25 million 5 February 2009 1 March and 1 15 February 6.6400
September and 15 August
$ 2 million 9 February 2009 1 March and 1 15 days prior 7.0100
September to each
interest
payment date
$ 25 million 13 April 2010 1 March and 1 15 February 6.6500
September and 15 August
$ 30 million 14 April 2010 1 March and 1 15 February 6.6400
September and 15 August
$ 10 million 16 May 2011 1 March and 1 15 February 6.7600
September and 15 August
$ 5 million 30 January 2012 1 March and 1 15 February 7.7400
September and 15 August
$ 10 million 30 January 2012 1 March and 1 15 February 7.7400
September and 15 August
$ 5 million 30 January 2012 1 March and 1 15 February 7.7400
September and 15 August
$ 5 million 4 October 2016 1 March and 1 15 February 8.2700
September and 15 August
$ 25 million 17 January 2017 1 March and 1 15 February 8.0600
September and 15 August
$ 2 million 27 January 2017 1 March and 1 15 February 7.9400
September and 15 August
$ 10 million 6 February 2017 1 March and 1 15 February 7.9300
September and 15 August
$ 1 million 13 February 2017 1 March and 1 15 February 7.8100
September and 15 August
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
------------
* All of the Medium-Term Senior Notes, Series C, are held through DTC.
</TABLE>
--------------------------------------------------------------------------------
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MEDIUM-TERM SENIOR NOTES, SERIES C*
-------------------------------------------------------------------------------
INITIAL
AGGREGATE INTEREST
PRINCIPAL MATURITY PAYMENT REGULAR INTEREST
AMOUNT DATE DATES RECORD DATES RATE
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 15 million 13 February 2017 1 March and 1 15 February 7.8100
September and 15 August
$ 20 million 17 March 2017 1 March and 1 15 February 7.9100
September and 15 August
$ 5 million 5 June 2017 1 March and 1 15 February 8.0400
September and 15 August
$ 10 million 9 June 2017 1 March and 1 15 February 7.9900
September and 15 August
$19.31 million 17 July 2017 1 March and 1 15 February 7.6050
September and 15 August
$ 10 million 11 September 1 March and 1 15 February 7.6330
2017 September and 15 August
$ 25 million 16 October 2017 1 March and 1 15 February 7.3900
September and 15 August
</TABLE>
------------
* All of the Medium-Term Senior Notes, Series C, are held through DTC.
<TABLE>
<CAPTION>
MEDIUM-TERM SUBORDINATED NOTES, SERIES D
-----------------------------------------------------------------------------
INITIAL
AGGREGATE INTEREST
PRINCIPAL MATURITY PAYMENT REGULAR INTEREST
AMOUNT DATE DATES RECORD DATES RATE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1 million 22 August 2001 1 March and 1 15 days prior 9.7500
September to each
interest
payment date
$ 1 million 10 September 1 March and 1 15 days prior 9.7500
2001 September to each
interest
payment date
$ 1 million 26 November 2001 1 March and 1 15 days prior 9.3750
September to each
interest
payment date
$ 200,000 19 February 2002 1 March and 1 15 days prior 9.2500
September to each
interest
payment date
$ 5.5 million 22 May 2002 1 March and 1 15 days prior 8.9500
September to each
interest
payment date
$ 6 million 24 July 2002 1 March and 1 15 days prior 8.3900
September to each
interest
payment date
$ 2 million 7 August 2002 1 March and 1 15 days prior 8.2000
September to each
interest
payment date
</TABLE>
--------------------------------------------------------------------------------
161
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MEDIUM-TERM SUBORDINATED NOTES, SERIES D
-----------------------------------------------------------------------------
INITIAL
AGGREGATE INTEREST
PRINCIPAL MATURITY PAYMENT REGULAR INTEREST
AMOUNT DATE DATES RECORD DATES RATE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1 million 13 August 2002 1 March and 1 15 days prior 8.0700
September to each
interest
payment date
$ 2 million 24 January 2003 1 March and 1 15 days prior 8.3000
September to each
interest
payment date
$ 2.5 million 5 February 2003 1 March and 1 15 days prior 8.0400
September to each
interest
payment date
$ 7 million 1 July 2003 1 March and 1 15 days prior 7.1300
September to each
interest
payment date
$ 28 million 15 August 2003 1 March and 1 15 days prior 6.9300
September to each
interest
payment date
$ 9 million 15 August 2003 1 March and 1 15 days prior 6.9000
September to each
interest
payment date
$ 15 million 9 February 2004 1 March and 1 15 days prior 6.9000
September to each
interest
payment date
$ 1 million 19 August 2004 1 March and 1 15 days prior 8.0200
September to each
interest
payment date
$ 1 million 31 August 2004 1 March and 1 15 days prior 8.0600
September to each
interest
payment date
$ 1 million 8 September 2004 1 March and 1 15 days prior 8.0000
September to each
interest
payment date
</TABLE>
FLOATING RATE DEBT SECURITIES
Each floating rate debt security bears interest at a variable rate determined by
reference to LIBOR of the specified "index maturity", adjusted by adding a
"spread." The "spread" for a floating rate debt security is the number of basis
points (one basis point equals one-hundredth of a percentage point) specified
below as being applicable to the interest rate for that debt security. "Index
maturity" means, with respect to a floating rate debt security, the period to
maturity of the LIBOR rate on which the interest rate formula is based, as
specified in the tables below. The Chase Manhattan Bank is the calculation agent
with respect to each floating rate debt security.
"LIBOR" is indexed to the offered rate for U.S. dollar deposits and is
determined by the calculation agent in accordance with the following provisions:
-With respect to any interest determination date, LIBOR is determined on the
basis of the rate for deposits in U.S. dollars having the index maturity
specified in the table below, beginning on the second London banking day
immediately following the interest determination date, that appears on Telerate
Screen Page 3750 as of 11:00 A.M., London time, on that interest determination
date, if the relevant rate appears on Telerate Screen Page 3750.
--------------------------------------------------------------------------------
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
"Telerate Screen Page 3750" means the display designated as page 3750 on the
Dow Jones Market Service (or the other page or pages that may replace page
3750 on that service for the purpose of displaying London interbank offered
rates of major banks).
-If no rate appears on Telerate Screen Page 3750, LIBOR for the interest
determination date will be determined on the basis of the rates at
approximately 11:00 A.M., London time, on such interest determination date at
which deposits in U.S. dollars having the index maturity specified in the table
below, beginning on the second London banking day immediately following that
interest determination date and in a principal amount equal to an amount of not
less than $1,000,000 that in the calculation agent's judgment is representative
for a single transaction in that market at that time, are offered to prime
banks in the London interbank market by four major banks in the London
interbank market selected by the calculation agent. The calculation agent will
request the principal London office of each of these banks to provide a
quotation of its rate. If at least two such quotations are provided, LIBOR for
the interest determination date will be the arithmetic mean of the provided
quotations. If fewer than two quotations are provided, LIBOR for the interest
determination date will be the arithmetic mean of the rates quoted at
approximately 11:00 A.M., New York City time, on that interest determination
date by three major banks in New York City, selected by the calculation agent,
for loans in U.S. dollars to leading European banks having the index maturity
specified in the table below beginning on the second London banking day
immediately following that interest determination date and in a principal
amount equal to an amount of not less than $1,000,000 that in the calculation
agent's judgment is representative for a single transaction in the relevant
market at that time. However, if the banks selected by the calculation agent
are not quoting as described above, LIBOR with respect to the interest
determination date will be LIBOR in effect on that interest determination date.
If the determination of any interest rate requires the calculation agent to
obtain quotes of rates from banks or other sources, those quotes may be given by
the calculation agent or an affiliate of the calculation agent, so long as the
calculation agent or affiliate satisfies all of the applicable criteria for such
a bank or other source listed below. Unless there is a manifest error, any
calculation made by the calculation agent will be conclusive and binding on UBS
Americas, the applicable Trustee and the Holders and owners of the applicable
debt securities.
The tables below specify the index maturity, the spread, and the interest reset
dates with respect to each floating rate debt security. We describe below how
these terms are used.
The rate of interest on each floating rate debt security is reset monthly,
quarterly or semi-annually, as specified in the tables below. We refer to the
dates on which the interest rate is reset as the "interest reset dates." The
interest reset dates are the dates specified in the tables below. Each interest
reset date with respect to a debt security is also an interest payment date for
that debt security. The regular record date for each interest payment date is
the fifteenth day prior to that interest payment date.
If any interest reset date for any floating rate debt security would otherwise
be a day that is not a business day, the interest reset date will be postponed
to the next day that is a business day, except that if that business day is in
the next succeeding calendar month, the interest reset date will be the
immediately preceding business day.
The "interest determination date" pertaining to each interest reset date will be
the second London banking day preceding the interest reset date.
The "calculation date" pertaining to any interest determination date will be the
earlier of:
- The tenth day after the interest determination date or, if that day is not a
New York business day, the next succeeding New York business day.
--------------------------------------------------------------------------------
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
- The New York business day next preceding the relevant interest payment date or
maturity of the debt security, as the case may be.
All percentages resulting from any calculations will be rounded, if necessary,
to the nearest one hundred-thousandth of a percentage point (with five
one-millionths of a percentage point being rounded upward) and all currency or
composite currency amounts used in or resulting from the calculation will be
rounded, if necessary, to the nearest one-hundredth of a unit (with .005 of a
unit being rounded upward).
The interest rate on the debt securities will never be higher than the maximum
rate permitted by New York law, as modified by United States federal law of
general application. Under current New York law, the maximum rate of interest is
25% per annum on a simple interest basis. This limit does not apply to debt
securities in which $2,500,000 or more has been invested.
Upon the request of the holder of any floating rate debt security, the
calculation agent will provide the interest rate then in effect, and, if
determined, the interest rate that will become effective on the next interest
reset date with respect to that floating rate debt security.
The following tables list the floating rate debt securities, as well as their
primary terms:
<TABLE>
<CAPTION>
MEDIUM-TERM SENIOR NOTES, SERIES C*
-------------------------------------------------------------------------------------------------------
INITIAL
AGGREGATE INTEREST
PRINCIPAL MATURITY INDEX RESET
AMOUNT DATE SPREAD MATURITY DATES
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 15 million 11 January 2001 80 basis points 3 months Third Wednesday of
March, June, September
and December
$ 5 million 15 May 2001 35 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 8 million 16 May 2001 40 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 48 million 17 May 2001 16 basis points 1 month Monthly on the third
Wednesday
$ 49 million 18 June 2001 14 basis points 1 month Monthly on the third
Wednesday
$ 7.5 million 20 June 2001 40 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 7 million 26 June 2001 21 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 12 million 19 November 2001 43 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 5 million 26 November 2001 43.5 basis points 1 month Monthly on the third
Wednesday
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
------------
* All of the Medium-Term Senior Notes, Series C, are held through DTC.
</TABLE>
--------------------------------------------------------------------------------
164
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MEDIUM-TERM SENIOR NOTES, SERIES C*
-------------------------------------------------------------------------------------------------------
INITIAL
AGGREGATE INTEREST
PRINCIPAL MATURITY INDEX RESET
AMOUNT DATE SPREAD MATURITY DATES
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 20 million 18 February 2002 25 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 10 million 18 March 2002 37 basis points 1 month Monthly on the third
Wednesday
$ 5 million 26 March 2002 37.5 basis points 1 month Monthly on the third
Wednesday
$ 25 million 14 May 2002 40 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 25 million 2 May 2002 47 basis points 1 month Monthly on the third
Wednesday
$ 12 million 20 May 2002 37 basis points 3 months Third Wednesday of
March, June,
September, and
December
$100 million 15 July 2002 56 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 25 million 14 August 2002 37.5 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 15 million 27 August 2002 35 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 25 million 19 September 35 basis points 3 months Third Wednesday of
2002 March, June,
September, and
December
$ 10 million 03 October 2002 55 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 40 million 18 November 2002 50 basis points 3 months The 18th Day of
February, May, August
and November
$ 11 million 18 December 2002 50 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 12 million 03 February 2003 48 basis points 3 Third Wednesday of
months, March, June,
with September, and
last December
coupon 2
months
$ 10 million 13 March 2003 45 basis points 3 months Third Wednesday of
March, June,
September, and
December
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
------------
* All of the Medium-Term Senior Notes, Series C, are held through DTC.
</TABLE>
--------------------------------------------------------------------------------
165
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MEDIUM-TERM SENIOR NOTES, SERIES C*
-------------------------------------------------------------------------------------------------------
INITIAL
AGGREGATE INTEREST
PRINCIPAL MATURITY INDEX RESET
AMOUNT DATE SPREAD MATURITY DATES
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 10 million 23 June 2003 32 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 5 million 23 July 2003 63 basis points 1 month Monthly on the third
Wednesday
$ 2 million 23 July 2003 63 basis points 1 month Monthly on the third
Wednesday
$ 350,000 24 July 2003 62.5 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 15 million 01 December 2003 135 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 10 million 28 January 2004 92 basis points 3 months Third Wednesday of
March, June, September
and December
$ 5 million 09 February 2004 45 basis points 3 months Third Wednesday of
March, June, September
and December
$ 12 million 10 February 2004 85 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 10 million 12 February 2004 90 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 45 million 11 May 2004 60 basis points 3 months The 11th Day of
February, May, August
and November
$ 12 million 27 May 2004 62 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 25 million 18 August 2004 40 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 30 million 13 October 2004 68 basis points 3 The 13th Day of March,
months, June, September and
with December
last
coupon 1
month
$ 20 million 25 October 2004 35 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 25 million 27 January 2005 65 basis points 3 months The 27th Day of
January, April, July
and October
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
------------
* All of the Medium-Term Senior Notes, Series C, are held through DTC.
</TABLE>
--------------------------------------------------------------------------------
166
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MEDIUM-TERM SENIOR NOTES, SERIES C*
-------------------------------------------------------------------------------------------------------
INITIAL
AGGREGATE INTEREST
PRINCIPAL MATURITY INDEX RESET
AMOUNT DATE SPREAD MATURITY DATES
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 12 million 11 February 2005 65 basis points 3 months The 11th Day of
February, May, August
and November
$ 45 million 15 March 2005 80 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 25 million 15 July 2005 88 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 29 million 14 November 2005 70 basis points 3 months The 14th Day of
February, May, August
and November
$ 10 million 01 May 2006 67 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 10 million 01 May 2006 67 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 4.1 million 07 August 2006 75 basis points 6 months March 1 and September
1
$ 25 million 22 October 2007 45 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 10 million 31 July 2008 52 basis points 3 months Third Wednesday of
March, June,
September, and
December
$ 13 million 07 May 2018 65 basis points 3 Third Wednesday of
months, March, June,
with September, and
last December
coupon 2
months
</TABLE>
EXCHANGE, REGISTRATION AND TRANSFER
Debt securities of any series are exchangeable for other debt securities of the
same series and of the same aggregate principal amount and tenor of any
authorized denominations.
No service charge will be made for any transfer or exchange of the debt
securities, but UBS Americas may require payment of a sum sufficient to cover
any tax or other governmental charge in connection with the transfer or
exchange.
Debt securities may be presented for exchange as provided above, and debt
securities may be presented for registration of transfer (duly endorsed, or
accompanied by a satisfactory instrument of transfer), at the office of the
security registrar or at the office of any transfer agent designated by UBS
Americas for such purpose with respect to any series of debt securities, without
service charge and upon payment of any taxes and other governmental charges as
described in the applicable Indenture. UBS Americas has appointed The Chase
Manhattan Bank as security registrar for each Indenture. If UBS Americas
<TABLE>
<S> <C> <C> <C> <C>
------------
* All of the Medium-Term Senior Notes, Series C, are held through DTC.
</TABLE>
--------------------------------------------------------------------------------
167
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
designates any transfer agents in addition to the security registrar with
respect to any series of debt securities, UBS Americas may at any time rescind
the designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, except that UBS Americas will be
required to maintain a transfer agent for each series in each place of payment
for that series. UBS Americas may at any time designate additional transfer
agents with respect to any series of debt securities.
UBS Americas is not required to: (i) issue, register the transfer of or exchange
debt securities of any series during a period beginning at the opening of
business 15 days before any selection of debt securities of that series to be
redeemed and ending at the close of business on the day of mailing of the
relevant notice of redemption; or (ii) register the transfer of or exchange any
debt security, or portion thereof, called for redemption, except the unredeemed
portion of any debt security being redeemed in part.
For a discussion of restrictions on the exchange, registration and transfer of
global debt securities, see "-- Global Debt Securities" below.
PAYMENT AND PAYING AGENTS
GENERAL PROVISIONS
The corporate trust office of The Chase Manhattan Bank in the Borough of
Manhattan, New York City, has been designated as UBS Americas' paying agent in
the Borough of Manhattan, New York City, for payments with respect to the debt
securities. UBS Americas may at any time designate additional paying agents or
rescind the designation of any paying agent or approve a change in the office
through which any paying agent acts, except that UBS Americas is required to
maintain a paying agent in each place of payment for such series. Chase
Manhattan Bank's address is 270 Park Avenue, New York, NY 10017.
All money paid by UBS Americas to a paying agent for the payment of principal of
or premium, if any, or any interest on any debt security that remains unclaimed
at the end of two years after such principal, premium or interest is due and
payable will be repaid to UBS Americas, and the Holder of such debt security
must look only to UBS Americas for payment of those amounts.
Interest will be payable to the person in whose name a debt security is
registered at the close of business on the regular record date preceding each
interest payment date. However, interest payable at maturity will be payable to
the person to whom principal is payable. Unless otherwise indicated in the
tables above, the "regular record date" with respect to any debt security will
be the fifteenth calendar day prior to each interest payment date, whether or
not such date is a business day.
Payments of interest on any debt security with respect to any interest payment
date or at maturity will include interest accrued from and including the later
of the date of issuance of such debt security and the most recent interest
payment date for such debt security to which interest has been paid or provided
for to but excluding such current interest payment date or maturity.
With respect to a floating rate debt security, accrued interest from the date of
issuance or from the last date to which interest has been paid or provided for
is calculated by multiplying the face amount of such floating rate debt security
by an accrued interest factor. The accrued interest factor is computed by adding
the interest factor calculated for each day from the date of issuance, or from
the last date to which interest has been paid or provided for, to the date for
which accrued interest is being calculated. The interest factor (expressed as a
decimal) for each such day is computed by dividing the interest rate (expressed
as a decimal) applicable to such date by 360. Interest on fixed rate debt
securities will be computed on the basis of a 360-day year of twelve 30-day
months.
--------------------------------------------------------------------------------
168
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
Any payment of principal, premium, if any, or interest required to be made on a
debt security on a day that is not a business day need not be made on such day,
but may be made on the next day that is a business day with the same force and
effect as if made on such day, and no interest will accrue as a result of such
delayed payment, except that in connection with any floating rate debt security,
if the next succeeding business day is in the next succeeding calendar month,
the payment will be made on the immediately preceding business day. The term
"business day" means each day, other than a Saturday or Sunday, that is (i) not
a day on which banking institutions in the business day centers with respect to
such debt security are authorized or obligated by law or executive order to
close and (ii) if the debt security is a floating rate debt security, a London
banking day. "Business day centers" with respect to any debt security means New
York City and, in the case of the yen-denominated debt securities, Tokyo, Japan.
"London banking day" means any day on which dealings in deposits in U.S. dollars
are transacted in the London interbank market.
PAYMENTS ON U.S. DOLLAR-DENOMINATED SECURITIES
Payment of principal of and premium, if any, and any interest on U.S. dollar
denomination debt securities other than medium-term notes will be made at the
office of such paying agent or paying agents as UBS Americas may designate from
time to time, except that at the option of UBS Americas payment of any interest
may be made by check mailed to the address of the person entitled to the
payment, as the address appears in the security register.
Payments in U.S. dollars of interest on medium-term notes (other than interest
payable at maturity) will be made by mailing a check to the Holders of the
medium-term notes entitled to the payment at their addresses appearing on the
security register for the debt securities. However, at the option of UBS
Americas, such payments may be made by wire transfer to an account with a bank
located in the continental United States (or other jurisdiction acceptable to
UBS Americas and the Senior Trustee, in the case of senior debt securities, or
the paying agent, in the case of subordinated debt securities), but only if
appropriate payment instructions from the registered Holder of a certificated
debt security have been received in writing by the Senior Trustee or the paying
agent, as the case may be, not less than five business days prior to the
applicable interest payment date. Payments of principal of and premium, if any,
and interest on the medium-term notes will be made, if at stated maturity or
upon earlier redemption, on the stated maturity or the date fixed for
redemption, as applicable, upon surrender of the medium-term notes at the
Trustee's corporate trust office. Payment of principal of and premium, if any,
and interest upon a repayment prior to stated maturity will be made on the
applicable date for repayment, provided the Holder has complied with the
requirements for repayment listed in this prospectus and in the debt securities.
See "--Optional Redemption, Repayment and Repurchase" below. These payments will
be made in immediately available funds, provided that the medium-term notes to
be paid are presented to the Trustee's corporate trust office in time for the
Senior Trustee or the paying agent, as the case may be, to make the payments in
such funds in accordance with its normal procedures. Beneficial owners of
book-entry debt securities will be paid in accordance with DTC's and its
participants' procedures in effect at the relevant time as described below under
"--Global Debt Securities."
PAYMENTS ON YEN-DENOMINATED DEBT SECURITIES
Payments of principal of and premium, if any, and interest on the
yen-denominated debt securities will be made on the date due by wire transfer to
such account with a bank located in Japan or another jurisdiction acceptable to
UBS Americas and the Senior Trustee, for any Senior Notes, or the paying agent,
for any Subordinated Notes, as are designated at least 15 days prior to the
applicable interest payment date or maturity, as the case may be, by the Holder
of the debt security. However, in the case of payment of principal, premium, if
any, and interest due at maturity, the debt security must be
--------------------------------------------------------------------------------
169
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DESCRIPTION OF DEBT SECURITIES
--------------------------------------------------------------------------------
presented to the relevant Trustee or paying agent, as the case may be, in time
for the Trustee or the paying agent, as the case may be, to make the payments in
the appropriate funds in accordance with its normal procedures. This designation
must be made by filing the appropriate information with the relevant Trustee or
the paying agent, as the case may be, at the debt securities office and, unless
an appropriate revocation is received by the Trustee or the paying agent, as the
case may be, any such designation made with respect to any debt security by a
Holder will remain in effect with respect to any further payments with respect
to such debt security payable to such Holder. If a payment with respect to any
such debt security cannot be made by wire transfer because the required
designation has not been received by the relevant Trustee or paying agent, as
the case may be, on or before the requisite date or for any other reason, a
notice will be mailed to the registered Holder of the relevant debt security at
its registered address requesting a designation pursuant to which the relevant
wire transfer can be made and, upon receipt by the Trustee or the paying agent,
as the case may be, of such a designation, the payment will be made within 15
days of receipt of the designation.
UBS Americas will pay any administrative costs imposed by banks in connection
with making payments by wire transfer, but any tax, assessment or governmental
charge imposed upon payments will be borne by the registered Holders of the debt
securities in respect of which payments are made.
At the option of UBS Americas, payments on a debt security may be made for value
on any date on which a payment of principal, premium, if any, or interest is due
in a place other than the United States, even though, as a result of time zone
differences, it may at the time the payment is made to the Holder of the debt
security be the preceding day in the United States or it may be necessary to
make a payment on the preceding day in the United States in order that the
payment be available to be credited for value on the due date in the place the
payment is made.
If the Japanese yen is not available (as determined by UBS Americas) on any
payment date to make a payment on the yen-denominated debt securities due to the
imposition of exchange controls or other circumstances beyond UBS Americas'
control, or is no longer used by the government of Japan or for the settlement
of transactions by public institutions of or within the international banking
community, then all payments due on the relevant payment date will be made in
U.S. dollars. The amount payable on any such payment date in Japanese yen will
be converted into U.S. dollars at a rate determined by the exchange rate agent
as of the second business day prior to the date on which the payment is due on
the basis of the most recently available exchange rate for Japanese yen. Any
payment made under such circumstances in U.S. dollars where the required payment
is in other than U.S. dollars will not constitute an event of default under the
applicable Indenture. Any such determination by UBS Americas made in good faith
will be binding on the relevant Trustee or the paying agent, as the case may be,
and such Holder.
All determinations referred to above made by the exchange rate agent will be at
its sole discretion and, in the absence of manifest error, will be conclusive
for all purposes and binding on Holders of the debt securities and UBS Americas,
and the exchange rate agent will have no liability for the determination.
The yen-denominated debt securities provide that, in the event of an official
redenomination of the Japanese yen, the obligations of UBS Americas with respect
to payments on those debt securities will, in all cases, be deemed immediately
following such redenomination to provide for payment of that amount of the
redenominated Japanese yen representing the amount of such obligations
immediately before such redenomination.
GLOBAL DEBT SECURITIES
If the tables above indicate that the debt securities of a series are held
through DTC, then those debt securities were issued in the form of one or more
global debt securities that were deposited with, or on behalf of, The Depository
Trust Company. Each global debt security was issued in registered form.
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Each global debt security is registered in the name of DTC or its nominee. Upon
the issuance of a global debt security, DTC credited, on its book-entry
registration and transfer system, the respective principal amounts of the debt
securities represented by such global debt security to the accounts of
institutions that have accounts with DTC or its nominee ("participants").
Ownership of beneficial interests in a global debt security are limited to
participants or persons that may hold interests through participants. Ownership
of a beneficial interest in such global debt security is shown on, and the
transfer of that ownership is effected only through, records maintained by DTC
or its nominee (with respect to participants' interests) or by participants or
persons that hold through participants. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a global debt security.
So long as DTC, or its nominee, is the owner of a global debt security, DTC or
such nominee, as the case may be, will be considered the sole owner or holder of
the debt securities represented by that global debt security for all purposes
under the Indenture governing those debt securities. Except as described below,
owners of beneficial interests in a global debt security will not be entitled to
have debt securities represented by that global debt security registered in
their names, will not receive or be entitled to receive physical delivery of
debt securities in definitive form and will not be considered the owners or
Holders of the debt securities under the applicable Indenture. Accordingly, each
person owning a beneficial interest in a global debt security must rely on the
procedures of DTC and, if such person is not a participant, on the procedures of
the participant and, if applicable, the indirect participant, through which the
person owns its interest, to exercise any rights of a Holder under the
applicable Indenture.
Payment of principal of and premium, if any, and any interest on debt securities
registered in the name of or held by DTC or its nominee will be made to DTC or
its nominee, as the case may be, as the Holder of the global debt security
representing the relevant debt securities. None of UBS Americas, UBS AG, the
trustee for such debt securities, any paying agent, any authenticating agent or
the security registrar for any debt securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in any global debt security or for
maintaining, supervising or reviewing any records relating to any beneficial
ownership interests.
UBS Americas expects that DTC, upon receipt of any payment of principal of or
premium, if any, or any interest on a global debt security, will credit
immediately participants' accounts with payments in amounts proportionate to
their respective holdings in principal amount of beneficial interest in that
global debt security as shown on the records of DTC. UBS Americas also expects
that payments by participants to owners of beneficial interests in the global
debt security held through those participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name."
Those payments will be the responsibility of the participants.
Unless and until it is exchanged in whole for debt securities in definitive
form, a global debt security may not be transferred except as a whole by DTC to
a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by
DTC or any nominee to a successor of DTC or a nominee of such a successor. If
DTC is at any time unwilling or unable to continue as depositary and a successor
depositary is not appointed by UBS Americas within ninety days, UBS Americas
will issue debt securities of that series in like tenor and terms in definitive
registered form in exchange for the global debt security or global debt
securities representing all of the relevant debt securities. In addition, UBS
Americas may at any time and in its sole discretion determine not to have any
debt securities of a series represented by global debt securities and, in that
event, will issue debt securities of that series in like tenor and terms in
definitive registered form in exchange for the global debt security or global
debt securities representing all of the relevant debt securities. In any such
instance, an owner of a
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beneficial interest in a global debt security will be entitled to physical
delivery in definitive form of debt securities of the series represented by that
global debt security equal in aggregate principal amount to that beneficial
interest and to have those debt securities registered in the name of the owner
of the beneficial interest.
DTC has advised UBS Americas and the paying agent as follows: 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, as
amended. DTC holds securities that its participants ("Participants") deposit
with DTC. DTC also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. DTC is owned by a number
of its Direct Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to DTC's system 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 Direct Participant, either directly or
indirectly ("Indirect Participants"). The Rules applicable to DTC and its
Participants are on file with the Securities and Exchange Commission.
OPTIONAL REDEMPTION, REPAYMENT AND REPURCHASE
None of the debt securities can be redeemed prior to its stated maturity except
under the limited circumstances described under "--Payment of Additional
Amounts" below. The debt securities are not subject to any sinking fund. If less
than all of the debt securities having the same terms (except as to principal
amount and date of issuance) are to be redeemed, the debt securities to be
redeemed will be selected by the applicable Trustee by a method the Trustee
deems fair and appropriate and otherwise as provided under the applicable
Indenture.
None of the debt securities can be repaid at the Holder's option prior to its
stated maturity.
UBS Americas and its affiliates may at any time repurchase debt securities at
any price in the open market or otherwise. Debt securities so purchased by UBS
Americas may, at the discretion of UBS Americas, be held or resold or
surrendered to the applicable Trustee for cancellation.
PAYMENT OF ADDITIONAL AMOUNTS
Subject to the limitations and exceptions listed below, UBS Americas will pay to
the Holder of any yen-denominated debt security who is a United States alien (as
defined below) additional amounts that are necessary in order to ensure that
every net payment of principal of, premium, if any, and interest on the debt
security, is not less than the amount provided for in the debt security to be
then due and payable. These amounts will be decreased by any deduction or
withholding by UBS Americas, any Trustee, the paying agent or any of UBS
Americas' other paying agents for or on account of any present or future tax,
assessment or other governmental charge imposed upon the Holder with respect to
or as a result of such payment by the United States or any political subdivision
or taxing authority of the United States. However, this obligation to pay
additional amounts does not apply to any of the following:
(a) any tax, assessment or other governmental charge that would not have been
imposed but for (i) the existence of any present or former connection
between the Holder (or between a fiduciary, settlor or beneficiary of, or
person holding a power over, the Holder, if the Holder is an estate or a
trust,
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or between a member or shareholder of the Holder, if the Holder is a
partnership or corporation) and the United States, including, without
limitation, the Holder (or such fiduciary, settlor, beneficiary, person
holding a power, member or shareholder) being or having been a citizen or
resident or treated as a resident thereof or being or having been engaged in
a trade or business therein or being or having been present therein or
having or having had a permanent establishment therein, or (ii) the Holder's
present or former status as a domestic or foreign personal holding company,
a passive foreign investment company or a controlled foreign corporation, a
private foundation or other tax-exempt organization for United States
Federal income tax purposes or a corporation that accumulates earnings to
avoid United States Federal income tax;
(b) any tax, assessment or other governmental charge that would not have been
imposed but for the presentation by the Holder of the debt security for
payment on a date more than 15 days after the date on which the payment
became due and payable or the date on which payment was duly provided for,
whichever occurs later;
(c) any estate, inheritance, gift, sales, transfer, excise or personal property
tax or any similar tax, assessment or other governmental charge;
(d) any tax, assessment or other governmental charge that would not have been
imposed but for the failure to comply with certification, information,
documentation or other reporting requirements concerning the nationality,
residence, identity or connection with the United States of the Holder or
beneficial owner of the debt security, if compliance is required by statute
or by regulation of the United States or any U.S. taxing authority as a
precondition to relief or exemption from the tax, assessment or other
governmental charge;
(e) any tax, assessment or other governmental charge that is (i) payable
otherwise than by deduction or withholding from payments of principal of or
premium, if any, or interest on the debt security or (ii) required to be
deducted or withheld by any paying agent from any payment, if (and only if)
the payment can be made without a deduction or withholding by any other
paying agent;
(f) any tax, assessment or other governmental charge imposed on interest
received by a person holding, actually or constructively, 10 percent or more
of the total combined voting power of all classes of stock of UBS Americas
entitled to vote (taking into account the applicable attribution of
ownership rules under Section 871(h)(3) of the Internal Revenue Code of
1986, as amended) or that is a controlled foreign corporation related to UBS
Americas (directly or indirectly) through stock ownership; or
(g) any combination of items (a), (b), (c), (d), (e) and (f).
Furthermore, additional amounts will not be paid with respect to payment of the
principal of or premium, if any, or interest on the debt security to any United
States alien that is a fiduciary or partnership or to a person other than the
sole beneficial owner of the debt security to the extent that a beneficiary or
settlor with respect to such fiduciary or a member of the partnership or a
beneficial owner would not have been entitled to the additional amounts had the
beneficiary, settlor, member or beneficial owner been the Holder of the relevant
debt security.
Any debt security registered in the name of a United States alien may be
redeemed at the option of UBS Americas in whole, but not in part, at any time,
on giving not less than 30 nor more than 45 days' notice in accordance with the
provisions described in "--Notices" below (which notice will be irrevocable).
This redemption would be a redemption price equal to the principal amount of the
debt security together with accrued interest to the redemption date, if UBS
Americas determines that UBS Americas has or will become obligated to pay
additional amounts with respect to the debt security on the next succeeding
interest payment date as a result of any change in, or amendment to, the laws
(or any regulations or rulings under the laws) of the United States or any
political subdivision
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or taxing authority, or any change in the application or official interpretation
of such laws, regulations or rulings by a taxing authority, court or regulatory
agency, or any action taken by any taxing authority, court or regulatory agency
(including any change in administrative policy or enforcement practice of such
taxing authority), which change or amendment becomes effective, or action is
taken, on or after the original issuance date of the debt security, and the
obligation cannot be avoided by UBS Americas taking reasonable measures
available to it. Before giving a notice of redemption, UBS Americas will deliver
to the applicable Trustee a certificate stating that UBS Americas is entitled to
make the redemption and showing that the conditions precedent to this right of
have occurred. UBS Americas will also deliver an opinion of independent legal
counsel addressed to UBS Americas and the Trustee to the effect that UBS
Americas has or will become obligated to pay additional amounts as a result of a
change or amendment. Notice of UBS Americas' intention to redeem any debt
security pursuant to this paragraph will not be given earlier than 90 days prior
to the earliest date that the obligation to pay additional amounts would arise
were a payment in respect of the debt security due on such date.
As used in this prospectus, "United States alien" means any person who, for
United States Federal income tax purposes, is a foreign corporation, a
nonresident alien individual, a nonresident alien fiduciary of a foreign estate
or trust, or a foreign partnership, one or more of the members of which is, for
United States Federal income tax purposes, a foreign corporation, a nonresident
alien individual or a nonresident alien fiduciary of a foreign estate or trust.
These provisions apply only to the yen-denominated fixed-rate securities, and
not to any other securities.
SUBORDINATION
The payment of the principal of and premium, if any, and any interest on the
subordinated debt securities, including sinking fund payments, is subordinated
in right of payment, to the extent and in the manner provided in the
Subordinated Indenture, to the prior payment in full of all "superior
indebtedness" of UBS Americas.
Superior indebtedness is defined as:
- the principal of, premium, if any, and accrued and unpaid interest on (a)
indebtedness of UBS Americas for money borrowed, whether outstanding on the
date of execution of the Subordinated Indenture or later created, incurred or
assumed, (b) guarantees by UBS Americas of indebtedness for money borrowed by
any other person, whether outstanding on the date of execution of the
Subordinated Indenture or later created, incurred or assumed, (c) indebtedness
evidenced by notes, debentures, bonds or other instruments of indebtedness for
the payment of which UBS Americas is responsible or liable, by guarantees or
otherwise, whether outstanding on the date of execution of the Subordinated
Indenture or later created, incurred or assumed, and (d) obligations of UBS
Americas under any agreement to lease, or any lease of, any real or personal
property, whether outstanding on the date of execution of the Subordinated
Indenture or later created, incurred or assumed,
- any other indebtedness, liability or obligation, contingent or otherwise, of
UBS Americas and any guarantee, endorsement or other contingent obligation of
UBS Americas in respect of any indebtedness, liability or obligation, whether
outstanding on the date of execution of the Subordinated Indenture or later
created, incurred or assumed, and
- modifications, renewals, extensions and refundings of any such indebtedness,
liabilities, obligations or guarantees, unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is
provided that such indebtedness, liabilities, obligations or guarantees, or
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such modification, renewal, extension or refunding, are not superior in right
of payment to the subordinated debt securities.
However, superior indebtedness will not be deemed to include, and all the
subordinated debt securities will rank equal in right of payment to, any other
subordinated debt securities. The Subordinated Indenture and the subordinated
debt securities do not contain any covenants or other provisions that would
limit the issuance of additional superior indebtedness.
No payment by UBS Americas on account of principal of or premium, if any, or any
interest on the subordinated debt securities may be made if any default or event
of default with respect to any superior indebtedness has occurred and is
continuing and written notice of that default an as event of default has been
given to the Subordinated Trustee by UBS Americas or to UBS Americas and the
Trustee by the Holders of at least 10% in principal amount of any kind or
category of any superior indebtedness (or a representative or trustee on their
behalf). Upon any acceleration of the principal due on the subordinated debt
securities or any payment or distribution of assets of UBS Americas to creditors
upon any dissolution, winding up, liquidation or reorganization, whether
voluntary or involuntary or in bankruptcy, insolvency, receivership or other
proceedings, all principal of and premium, if any, and interest due or to become
due on all superior indebtedness must be paid in full before the Holders of
subordinated debt securities are entitled to receive or retain any payment
(other than shares of stock or subordinated indebtedness provided by a plan of
reorganization or adjustment that does not alter the rights of Holders of
superior indebtedness).
Subject to the payment in full of all superior indebtedness, the Holders of the
subordinated debt securities are to be subrogated to the rights of the Holders
of superior indebtedness to receive payments or distributions of assets of UBS
Americas applicable to superior indebtedness until the subordinated debt
securities are paid in full.
By reason of such subordination, in the event of insolvency, creditors of UBS
Americas who are Holders of superior indebtedness, as well as certain general
creditors of UBS Americas, may recover more, ratably, than the Holders of the
subordinated debt securities.
In addition, because UBS Americas is a holding company, UBS Americas' right, and
therefore the right of its creditors (including holders of debt securities) to
participate in any distribution of assets of any subsidiary of UBS Americas upon
its liquidation or reorganization or otherwise is necessarily subject to the
prior claims of creditors of the subsidiary, except to the extent that claims of
UBS Americas itself as a creditor of the subsidiary may be recognized. Also,
dividend payments and advances to UBS Americas by PaineWebber Incorporated, its
largest subsidiary, are restricted by the provisions of the net capital rules of
the SEC and the NYSE and covenants in various loan agreements. The operations of
UBS Americas are conducted through its subsidiaries and, therefore, UBS Americas
is dependent upon the earnings and cash flow of its subsidiaries to meet its
obligations, including obligations under the senior debt securities and
subordinated debt securities. The senior debt securities and subordinated debt
securities will be effectively subordinated to all indebtedness of UBS Americas'
subsidiaries.
CERTAIN RESTRICTIVE PROVISIONS
The Senior Indenture provides that, with certain limited exceptions, UBS
Americas will not, nor will it permit any restricted subsidiary (as defined in
the Senior Indenture) to, pledge as security for any loan the capital stock or
indebtedness of any restricted subsidiary or create, incur, assume or permit to
exist any lien on any property or asset of UBS Americas. This provision applies
to all the senior debt securities.
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MODIFICATION OF THE INDENTURES
Each Indenture provides that UBS Americas and the applicable Trustee may,
without the consent of any Holders of debt securities, enter into supplemental
indentures for the purpose, among other things, of adding to UBS Americas'
covenants, adding additional events of default, establishing the form or terms
of debt securities or, so long as the relevant action will not adversely affect
the interests of the Holders of any series of debt securities in any material
respect, curing ambiguities or inconsistencies in the applicable Indenture or
making other provisions.
Each Indenture contains provisions permitting UBS Americas, with the consent of
the Holders of not less than 66 2/3% in principal amount of the outstanding debt
securities of each affected series, to execute supplemental indentures adding
any provisions to or changing or eliminating any of the provisions of the
relevant Indenture or modifying the rights of the Holders of the debt securities
of the series.
However, no such supplemental indenture may, without the consent of the Holders
of all the affected outstanding debt securities, among other things:
- change the maturity of the principal of, or any installment of principal of or
interest on, any of the debt securities;
- reduce the principal amount of those debt securities, any premium on those
debt securities or the rate of interest on those debt securities;
- change the currency or currencies, in which any of the debt securities or any
premium or interest on these debt securities is payable;
- change any obligation of UBS Americas to maintain an office or agency in the
places and for the purposes required by the relevant Indenture;
- impair the right to institute suit for the enforcement of any payment due on
any debt securities on or after their applicable maturity date;
- reduce the percentage in principal amount of the outstanding debt securities
of any series, the consent of the Holders of which is required for any
supplemental indenture or for any waiver of compliance with certain provisions
of, or of certain defaults under, the applicable Indenture; or
- with certain exceptions, modify the provisions for the waiver of certain
covenants and defaults and any of the foregoing provisions.
WAIVER OF CERTAIN COVENANTS
The Senior Indenture provides that UBS Americas will not be required to comply
with certain restrictive covenants (including those described above under
"--Certain Restrictive Provisions") if the Holders of at least 66 2/3% in
principal amount of each affected series of outstanding debt securities waive
compliance with those restrictive covenants.
EVENTS OF DEFAULT, NOTICE AND WAIVER
An event of default in respect of any series of debt securities is:
- a default for 30 days in the payment of any installment of interest upon any
of the debt securities of that series when due;
- a default in the payment of principal of or premium, if any, on any of the
debt securities of that series when due;
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- a default in the performance, or breach, of any other covenants or warranties
of UBS Americas in the applicable Indenture which has not been remedied for a
period of 60 days after notice from the Trustee under the applicable Indenture
or the Holders of not less than 25% in principal amount of the outstanding
debt securities of that series; and
- certain events of bankruptcy, insolvency or reorganization of UBS Americas.
If an event of default in respect of any series of outstanding debt securities
has occurred and is continuing, either the relevant Trustee or the Holders of
not less than 25% in principal amount of the outstanding debt securities of the
relevant series may declare the principal of all of the outstanding debt
securities of that series to be immediately due and payable.
The Holders of not less than a majority in principal amount of the outstanding
debt securities of any series may direct the time, method and place of
conducting any proceeding for any remedy available to the relevant Trustee, or
exercising any trust or power conferred on that Trustee, with respect to the
debt securities of that series. However, the Trustee may act in any way that is
not inconsistent with those directions and may decline to act if any direction
is contrary to law or to the Indenture or would involve that Trustee in personal
liability.
The Holders of not less than a majority in principal amount of the outstanding
debt securities of any series may on behalf of the Holders of all of the
outstanding debt securities of such series waive any past default under the
applicable Indenture with respect to that series and its consequences, except a
default (i) in the payment of the principal of or premium, if any, or any
interest on any of the debt securities of the series or (ii) in respect of a
covenant or provision of the applicable Indenture which, under the terms of that
Indenture, cannot be modified or amended without the consent of the Holders of
all of the affected outstanding debt securities of the series.
Each Indenture contains provisions entitling the relevant Trustee, subject to
the duty of that Trustee during an event of default in respect of any series of
debt securities to act with the required standard of care, to be indemnified by
the Holders of the debt securities of that series before proceeding to exercise
any right or power under the applicable Indenture at the request of the Holders
of the debt securities of the relevant series.
The Trustee thereunder will, within 90 days after the occurrence of a default in
respect of any series of debt securities, give to the Holders of the debt
securities of that series notice of all uncured and unwaived defaults known to
it. However, except in the case of a default in the payment of the principal of
or premium, if any, or any interest on any of the debt securities of that
series, the Trustee will be protected in withholding notice if it in good faith
determines that the withholding of notice is in the interest of the Holders of
the debt securities of that series. Furthermore, the notice will not be given
until at least 30 days after the occurrence of an event of default regarding the
performance, or breach, of any covenant or warranty of UBS Americas under the
applicable Indenture other than for the payment of the principal of or premium,
if any, or any interest on any of the debt securities of the series. The term
"default" for the purpose of this provision only means any event that is, or
after notice or lapse of time, or both, would become, an event of default with
respect to the debt securities of the relevant series.
Each Indenture requires UBS Americas to file annually with the relevant Trustee
a certificate, executed by an officer of UBS Americas, indicating whether UBS
Americas is in default under that Indenture.
MEETINGS
Each Indenture contains provisions for convening meetings of the Holders of debt
securities of a series to make, give or take any request, demand, authorization,
direction, notice, consent, waiver or other action that may be made, given or
taken by the Holders pursuant to the applicable Indenture. A
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meeting may be called at any time by the Trustee under the applicable Indenture,
and also, upon request, by UBS Americas or the Holders of at least 10% in
principal amount of the outstanding debt securities of the relevant series, upon
notice given as described under "--Notices" below. Persons entitled to vote a
majority in principal amount of the outstanding debt securities of a series will
constitute a quorum at a meeting of Holders of debt securities of that series.
However, if any action is to be taken at the meeting with respect to a consent
or waiver that is required to be given by the Holders of not less than 66 2/3%
in principal amount of the outstanding debt securities of a series, the persons
entitled to vote 66 2/3% in principal amount of the outstanding debt securities
of that series will constitute a quorum. In the absence of a quorum, (i) a
meeting called by UBS Americas or the Trustee will be adjourned for a period of
not less than 10 days, and in the absence of a quorum at any such adjourned
meeting, the meeting will be further adjourned for a period of not less than 10
days, and (ii) a meeting called by the Holders will be dissolved.
Any resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
Holders of a specified percentage in principal amount of outstanding debt
securities of a series may be adopted at a meeting or adjourned meeting duly
reconvened at which a quorum is present by the affirmative vote of the Holders
of the specified percentage in principal amount of the outstanding debt
securities of that series. Any resolution passed or decision taken at any
meeting of Holders of debt securities of any series duly held in accordance with
the applicable Indenture will be binding on all Holders of debt securities of
that series, whether or not present or represented at the meeting. With respect
to any consent, waiver or other action that the applicable Indenture expressly
provides may be given by the Holders of a specified percentage of the affected
outstanding debt securities of all series (acting as one class), only the
principal amount of outstanding debt securities of any series represented at a
meeting or adjourned meeting duly reconvened at which a quorum is present as
aforesaid and voting in favor of such action will be counted for purposes of
calculating the aggregate principal amount of affected outstanding debt
securities of all series favoring such action.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Without the consent of any Holders of debt securities, UBS Americas may
consolidate with or merge into any other corporation or transfer or lease its
assets substantially as an entirety to any person or may acquire or lease the
assets of any person substantially as an entirety or may permit any corporation
to merge into UBS Americas, so long as:
- The successor is a corporation organized under the laws of any domestic
jurisdiction.
- The successor corporation, if other than UBS Americas, assumes UBS Americas'
obligations under the applicable Indenture and all the debt securities issued
under it.
- Immediately after giving effect to the transaction, no event of default and no
event that, after notice or lapse of time, or both, would become an event of
default, has occurred and is continuing.
- Certain other conditions are also met.
NOTICES
Notices to Holders of debt securities will be given by mail to the addresses of
such Holders as they appear in the security register, within the time prescribed
for the giving of such notice.
TITLE
UBS Americas, UBS AG, the appropriate Trustee and any agent of UBS Americas, UBS
AG or such Trustee may treat the registered owner of any debt security as the
absolute owner of that security
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DESCRIPTION OF DEBT SECURITIES
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(whether or not the debt security is overdue and notwithstanding any notice to
the contrary) for the purpose of making payment, delivering notices and all
other purposes.
REPLACEMENT OF DEBT SECURITIES
Any mutilated debt security will be replaced by UBS Americas at the expense of
the Holder upon surrender of the mutilated debt security to the applicable
Trustee. Debt securities that become destroyed, stolen or lost will be replaced
by UBS Americas at the expense of the Holder upon delivery to the applicable
Trustee of evidence of the destruction, loss or theft of the debt security
satisfactory to UBS Americas and the applicable Trustee. In the case of a
destroyed, lost or stolen debt security, an indemnity satisfactory to the
applicable Trustee and UBS Americas may be required at the expense of the Holder
of the debt security before a replacement debt security will be issued.
DEFEASANCE
UBS Americas at its option (i) will be discharged (as this term is defined in
the applicable Indenture) from any and all obligations in respect of the debt
securities (except for certain obligations to register the transfer or exchange
of debt securities, replace stolen, lost or mutilated debt securities, maintain
paying agencies and hold moneys for payment in trust) or (ii) need not comply
with certain restrictive covenants of the applicable Indenture (including those
described above under "--Certain Restrictive Provisions"), if there is deposited
with the Trustee money and/or (a) in the case of debt securities denominated in
U.S. dollars, U.S. government obligations (as defined in the applicable
Indenture), or (b) in the case of the yen-denominated debt securities, foreign
government securities (as defined in the applicable Indenture), that in each
case through the payment of interest and principal in accordance with their
terms will provide money in an amount sufficient to pay all the principal of,
and interest on, the debt securities on the dates such payments are due in
accordance with the terms of the debt securities. Among the conditions to UBS
Americas's exercising any such option, UBS Americas is required to deliver to
the applicable Trustee an opinion of counsel to the effect that the deposit and
related defeasance would not cause the Holders of the relevant debt securities
to recognize income, gain or loss for United States Federal income tax purposes
and that the Holders will be subject to United States Federal income tax in the
same amounts, in the same manner and at the same times as would have been the
case if such deposit and related defeasance had not occurred.
GOVERNING LAW
The debt securities and the Indentures are governed by and will be construed in
accordance with the laws of the State of New York.
JUDGEMENTS UNDER YEN-DENOMINATED DEBT SECURITIES
Courts in the United States customarily have not rendered judgments for money
damages denominated in any currency other than the U.S. dollar. The Judiciary
Law of the State of New York provides, however, that, in an action based upon an
obligation denominated in a currency other than U.S. dollars, a court will
render or enter a judgment or decree in the currency of the underlying
obligation and the judgment or decree will be converted into U.S. dollars at the
rate of exchange prevailing on the date of entry of the judgment or decree. It
is not known whether the foregoing provision would be applied (a) in any action
based on an obligation denominated in a composite currency or (b) by a Federal
court sitting in the State of New York.
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THE TRUSTEES UNDER THE INDENTURES
The Chase Manhattan Bank is the Trustee under the Senior Indenture. Chase
Manhattan Bank USA, National Association is the Trustee under the Subordinated
Indenture. The Chase Manhattan Bank is a depositary for funds and performs other
services for, and transacts other banking business with, UBS Americas in the
normal course of business.
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The Guarantees
SENIOR DEBT SECURITIES GUARANTEE
UBS AG has unconditionally and irrevocably guaranteed the senior debt securities
of UBS Americas Inc. issued under the Senior Indenture. UBS AG has guaranteed
all the obligations of UBS Americas under the senior debt securities, including
the payment of the principal of and premium, if any, and interest on the senior
debt securities (including any additional interest or other amounts payable in
accordance with the terms of the senior debt securities).
If UBS Americas fails to make any timely payment under the senior debt
securities, the Holders of the senior debt securities or the Senior Trustee may
institute legal proceedings directly against UBS without first proceeding
against UBS Americas.
UBS has agreed that the senior debt securities guarantee is an absolute, present
and continuing guarantee of payment and not of collectability. UBS has also
agreed that its obligations under the guarantee are unconditional, irrespective
of:
- the validity, legality or enforceability of the senior debt securities or the
Senior Indenture,
- the absence of any action to enforce the senior debt securities or to collect
from UBS Americas,
- any waiver or consent by the Holder of the senior debt securities with respect
to the provisions of the senior debt securities, and
- the recovery of any judgment against UBS Americas or any action to enforce a
judgment or any other circumstance that might otherwise result in a legal or
equitable discharge or defense of a guarantor.
The senior debt securities guarantee is a direct, unconditional and unsecured
obligation of UBS.
SUBORDINATED DEBT SECURITIES GUARANTEE
UBS AG has unconditionally and irrevocably guaranteed the subordinated debt
securities of UBS Americas Inc. issued under the Subordinated Indenture. UBS AG
has guaranteed all the obligations of UBS Americas under the subordinated debt
securities, including the payment of the principal of and premium, if any, and
interest on the subordinated debt securities (including any additional interest
or other amounts payable in accordance with the terms of the subordinated debt
securities).
If UBS Americas fails to make any timely payment under the subordinated debt
securities, the Holders of the subordinated debt securities or the Subordinated
Trustee may institute legal proceedings directly against UBS without first
proceeding against UBS Americas.
UBS has agreed that the subordinated debt securities guarantee is an absolute,
present and continuing guarantee of payment and not of collectability and that
its obligations under the guarantee are unconditional, irrespective of:
- the validity, legality or enforceability of the subordinated debt securities
or the Subordinated Indenture,
- the absence of any action to enforce the subordinated debt securities or to
collect from UBS Americas,
- any waiver or consent by the Holder of the subordinated debt securities with
respect to the provisions of the subordinated debt securities, and
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THE GUARANTEES
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- the recovery of any judgment against UBS Americas or any action to enforce the
same or any other circumstance that might otherwise result in a legal or
equitable discharge or defense of a guarantor.
The subordinated debt securities guarantee is a direct, unconditional and
unsecured obligation of UBS. The obligations of UBS under this guarantee are
subordinated in right of payment to the prior payment in full of the deposit
liabilities of UBS and all other liabilities of UBS (including all deposit
liabilities and other liabilities of the head office and all offices of UBS
wherever located), except
(i) any liabilities that by their terms rank pari passu with or are
subordinated to the obligations of UBS under this guarantee;
(ii) any existing pari passu obligations;
(iii) any liabilities that by their terms rank pari passu with or are
subordinated to liabilities which by their terms rank pari passu with or
are subordinated to the obligations of UBS under this guarantee or any
existing pari passu obligations; and
(iv) any existing junior subordinated obligations.
UBS's obligations under this guarantee rank pari passu with any existing pari
passu obligations and any liabilities that by their terms rank pari passu with
this guarantee or any existing pari passu obligations. UBS's obligations under
this guarantee are senior to any existing junior subordinated obligations and
any liabilities that by their terms are subordinated to the obligations of UBS
under this guarantee or under any existing pari passu obligations.
As of 30 November 2000, the amount of senior liabilities of UBS AG to which the
Holders of the subordinated debt securities would be subordinated under the UBS
guarantee would be approximately CHF 580 billion. The Holders would also be
structurally subordinated to all liabilities of UBS AG's subsidiaries.
For purposes of this guarantee, the term "existing pari passu obligations" means
the obligations of UBS under the 7 3/4% Subordinated Debentures due 2026, the 7%
Subordinated Debentures due 15 October 2015, the 6 3/4% Subordinated Notes due
15 July 2005, the 7 3/8% Subordinated Debentures due 15 July 2015 and the 7 1/2%
Subordinated Debentures due 15 July 2025, and any other indebtedness or
liability that, in accordance with its terms, ranks pari passu with any of the
foregoing obligations.
For purposes of this guarantee, the term "existing junior subordinated
obligations" means
(i) the obligations of UBS under (x) the Amended and Restated Limited Liability
Company Agreement of UBS Preferred Funding Company LLC I dated as of 3
October 2000, (y) the Subordinated Guarantee Agreement dated as of 3
October 2000 by UBS, Wilmington Trust Company, as trustee, and Wilmington
Trust Company, as trustee, for the benefit of holders from time to time of
Company Preferred Securities (as defined therein) of UBS Preferred Funding
Company LLC I, and (z) the 8.622% Perpetual Subordinated Notes issued by
UBS; and
(ii) the obligations of UBS pursuant to the guarantees of the obligations of UBS
Americas under (A) the outstanding unsecured debentures issued under the
Indenture dated as of 9 December 1996 between UBS Americas and The Chase
Manhattan Bank, a New York banking corporation, as trustee, as supplemented
by the First Supplemental Indenture dated as of 9 December 1996, the Second
Supplemental Indenture dated as of 14 March 1997, the Third Supplemental
Indenture dated as of 3 November 2000 and the Fourth Supplemental Indenture
dated as of 22 December 2000, (B) the Guarantee Agreement of PWG Capital
Trust I dated as of 9 December 1996 between UBS Americas, as guarantor, and
The Chase Manhattan Bank, a New York banking corporation, as guarantee
trustee, (C) the Amended and Restated Declaration of Trust of PWG Capital
Trust I
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THE GUARANTEES
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dated and effective as of 9 December 1996 (the "Trust I Declaration") by
the trustees named therein, UBS Americas and the holders from time to time
of undivided beneficial interests in the assets of PWG Capital Trust I
issued pursuant to the Trust I Declaration, (D) the Guarantee Agreement of
PWG Capital Trust II dated as of 14 March 1997 between UBS Americas, as
guarantor, and The Chase Manhattan Bank, a New York banking corporation, as
guarantee trustee, and (E) the Amended and Restated Declaration of Trust of
PWG Capital Trust II (the "Trust II Declaration"), dated and effective as
of 14 March 1997, by the trustees named therein, UBS Americas and the
holders from time to time of undivided beneficial interests in the assets
of PWG Capital Trust II issued pursuant to the Trust II Declaration.
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Foreign Currency Risks
PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN FINANCIAL AND LEGAL ADVISERS AS
TO THE RISKS ENTAILED BY AN INVESTMENT IN NOTES DENOMINATED OR PAYABLE IN A
CURRENCY OTHER THAN U.S. DOLLARS. SUCH NOTES ARE NOT AN APPROPRIATE INVESTMENT
FOR PERSONS WHO ARE UNSOPHISTICATED WITH RESPECT TO FOREIGN CURRENCY
TRANSACTIONS.
EXCHANGE RATES AND EXCHANGE CONTROLS
An investment in debt securities that are denominated or payable in a specified
currency other than U.S. dollars, like the Japanese yen-denominated Medium-Term
Senior Notes, Series C, entails significant risks that are not associated with a
similar investment in a security denominated and payable in U.S. dollars. Such
risks include, without limitation, the possibility of significant changes in
rates of exchange between the U.S. dollar and such specified currency and the
possibility of the imposition or modification of foreign exchange controls by
either the U.S. or foreign governments. Such risks generally depend on factors
over which UBS Americas has no control, such as economic and political events
and the supply of and demand for the relevant currencies.
In recent years, rates of exchange between the U.S. dollar and the Japanese yen
have been highly volatile and such volatility may be expected in the future.
Fluctuations in any particular exchange rate that have occurred in the past are
not necessarily indicative, however, of fluctuations in the rate that may occur
during the term of any debt security. Depreciation of the Japanese yen against
the U.S. dollar would result in a decrease in the effective yield of the debt
security below its coupon rate and, in certain circumstances, could result in a
loss to the investor on a U.S. dollar basis.
The following table sets forth the noon buying rate for cable transfers in New
York City payable in Japanese yen, expressed in Japanese yen per U.S. dollar as
reported by the Federal Reserve Bank of New York on the last New York business
day of the months indicated. These rates are provided solely for your
convenience and should not be construed as a representation that Japanese yen
amounts actually represent such U.S. dollar amounts or that such Japanese yen
amounts could have been, or could be, converted into U.S. dollars that rate or
any other rate.
<TABLE>
<CAPTION>
JAPANESE YEN/
U.S. DOLLAR
MONTH-END EXCHANGE DATE
---------------------------------------------------------------------------
<S> <C>
1995
March..................................................... 86.85
June...................................................... 84.78
September................................................. 99.10
December.................................................. 103.28
1996
March..................................................... 107.00
June...................................................... 109.48
September................................................. 111.65
December.................................................. 115.88
</TABLE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JAPANESE YEN/
U.S. DOLLAR
MONTH-END EXCHANGE DATE
---------------------------------------------------------------------------
<S> <C>
1997
March..................................................... 123.72
June...................................................... 114.61
September................................................. 120.71
December.................................................. 130.45
1998
March..................................................... 133.29
June...................................................... 138.29
September................................................. 136.59
December.................................................. 113.08
1999
March..................................................... 118.43
June...................................................... 120.94
September................................................. 106.82
December.................................................. 102.16
2000
March..................................................... 105.46
June...................................................... 106.14
September................................................. 107.90
</TABLE>
The debt securities have not been and will not be registered under the
Securities and Exchange Law of Japan and UBS Americas has agreed that it will
not, directly or indirectly, solicit offers to purchase or, directly or
indirectly, offer, sell or deliver any debt securities in Japan or to any
resident in Japan except as permitted by the Securities and Exchange Law of
Japan and any other applicable laws of Japan.
Governments have imposed from time to time, and may in the future impose,
exchange controls which could affect exchange rates as well as the availability
of the Japanese yen for making payments with respect to a debt security. There
can be no assurances that exchange controls will not restrict or prohibit
payments of principal or any premium or interest in the Japanese yen. Even if
there are no actual exchange controls, it is possible that, on a payment date
with respect to any particular debt security, the Japanese yen would not be
available to UBS Americas. In that event, UBS Americas will make any required
payment in the manner listed above under "Description of Debt Securities --
Payment Currency."
Foreign exchange rates can either be fixed by sovereign governments or float.
Exchange rates of most economically developed nations are permitted to fluctuate
in value relative to the U.S. dollar. Sovereign governments, however, rarely
voluntarily allow their currencies to float freely in response to economic
forces. Sovereign governments in fact use a variety of techniques, such as
intervention by a country's central bank or imposition of regulatory controls or
taxes, to affect the exchange rate of their currencies. Governments may also
issue a new currency to replace an existing currency or alter the exchange rate
or relative exchange characteristics by devaluation or revaluation of a
currency. Thus, a special risk in purchasing a debt security that is denominated
or payable in a foreign currency or composite currency is that its U.S. dollar
equivalent yield could be affected by governmental actions which could change or
interfere with theretofore freely determined currency valuation, fluctuations in
response to other market forces and the movement of currencies across borders.
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Currently, there are limited facilities in the United States for conversion of
U.S. dollars into foreign currencies and vice versa, and few banks offer
non-U.S. dollar-denominated checking or savings account facilities in the United
States. Accordingly, payment of principal of and premium, if any, and interest
on debt securities made in Japanese yen will be made from an account with a bank
located in Japan.
The information listed in this prospectus is directed to prospective purchasers
of debt securities who are United States residents, and UBS Americas disclaims
any responsibility to advise prospective purchasers who are residents of
countries other than the United States with respect to any matters that may
affect the purchase or holding of, or receipt of payments of principal of and
premium, if any, and interest on, debt securities. Such persons should consult
their own legal and financial advisors with regard to such matters.
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Certain United States Federal Income Tax Considerations
This section describes the material United States federal income tax
consequences of owning the debt securities we are offering. It is the opinion of
Sullivan & Cromwell, counsel to UBS Americas. It applies to you only if you
acquire debt securities in a sale governed by this prospectus and you hold your
debt securities as capital assets for tax purposes. This section does not apply
to you if you are a member of a class of holders subject to special rules, such
as:
- a dealer in securities or currencies,
- a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings,
- a bank,
- a life insurance company,
- a tax-exempt organization,
- a person that owns debt securities that are a hedge or that are hedged
against interest rate or currency risks,
- a person that owns debt securities as part of a straddle or conversion
transaction for tax purposes, or
- a person whose functional currency for tax purposes is not the U.S.
dollar.
This section is based on the Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed regulations under the Internal
Revenue Code, published rulings and court decisions, all as currently in effect.
These laws are subject to change, possibly on a retroactive basis.
Please consult your own tax advisor concerning the consequences of owning
these debt securities in your particular circumstances under the Code and
the laws of any other taxing jurisdiction.
UNITED STATES HOLDERS
This subsection describes the tax consequences to a United States holder. You
are a United States holder if you are a beneficial owner of a debt security and
you are:
- a citizen or resident of the United States,
- a domestic corporation,
- an estate whose income is subject to United States federal income tax
regardless of its source, or
- a trust if a United States court can exercise primary supervision over
the trust's administration and one or more United States persons are
authorized to control all substantial decisions of the trust.
If you are not a United States holder, this section does not apply to you and
you should refer to "-United States Alien Holders" below.
PAYMENTS OF INTEREST
You will be taxed on any interest on your debt security, whether payable in U.S.
dollars or a foreign currency, as ordinary income at the time you receive the
interest or when it accrues, depending on your method of accounting for tax
purposes.
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Cash Basis Taxpayers. If you are a taxpayer that uses the cash receipts and
disbursements method of accounting for tax purposes and you receive an interest
payment that is denominated in, or determined by reference to, a foreign
currency, you must recognize income equal to the U.S. dollar value of the
interest payment, based on the exchange rate in effect on the date of receipt,
regardless of whether you actually convert the payment into U.S. dollars.
Accrual Basis Taxpayers. If you are a taxpayer that uses an accrual method of
accounting for tax purposes, you may determine the amount of income that you
recognize with respect to an interest payment denominated in, or determined by
reference to, a foreign currency by using one of two methods. Under the first
method, you will determine the amount of income accrued based on the average
exchange rate in effect during the interest accrual period or, with respect to
an accrual period that spans two taxable years, that part of the period within
the taxable year.
If you elect the second method, you would determine the amount of income accrued
on the basis of the exchange rate in effect on the last day of the accrual
period, or, in the case of an accrual period that spans two taxable years, the
exchange rate in effect on the last day of the part of the period within the
taxable year. Additionally, under this second method, if you receive a payment
of interest within five business days of the last day of your accrual period or
taxable year, you may instead translate the interest accrued into U.S. dollars
at the exchange rate in effect on the day that you actually receive the interest
payment. If you elect the second method it will apply to all debt instruments
that you hold at the beginning of the first taxable year to which the election
applies and to all debt instruments that you subsequently acquire. You may not
revoke this election without the consent of the Internal Revenue Service.
When you actually receive an interest payment, including a payment attributable
to accrued but unpaid interest upon the sale or retirement of your debt
security, denominated in, or determined by reference to, a foreign currency for
which you accrued an amount of income, you will recognize ordinary income or
loss measured by the difference, if any, between the exchange rate that you used
to accrue interest income and the exchange rate in effect on the date of
receipt, regardless of whether you actually convert the payment into U.S.
dollars.
MARKET DISCOUNT
You will be treated as if you purchased your debt security at a market discount,
and your debt security will be a market discount debt security if:
- the difference between the debt security's stated redemption price at
maturity and the price you paid for your debt security is equal to or
greater than 1/4 of 1 percent of your debt security's stated redemption
price at maturity multiplied by the number of complete years to the debt
security's maturity.
If your debt security's stated redemption price at maturity does not exceed the
price you paid for the debt security by 1/4 of 1 percent multiplied by the
number of complete years to the debt security's maturity, the excess constitutes
de minimis market discount, and the rules discussed below are not applicable to
you.
You must treat any gain you recognize on the maturity or disposition of your
market discount debt security as ordinary income to the extent of the accrued
market discount on your debt security. Alternatively, you may elect to include
market discount in income currently over the life of your debt security. If you
make this election, it will apply to all debt instruments with market discount
that you acquire on or after the first day of the first taxable year to which
the election applies. You may not revoke this election without the consent of
the Internal Revenue Service. If you own a market discount debt security and do
not make this election, you will generally be required to defer
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deductions for interest on borrowings allocable to your debt security in an
amount not exceeding the accrued market discount on your debt security until the
maturity or disposition of your debt security.
You will accrue market discount on your market discount debt security on a
straight-line basis unless you elect to accrue market discount using a
constant-yield method. If you make this election, it will apply only to the debt
security with respect to which it is made and you may not revoke it.
DEBT SECURITIES PURCHASED AT A PREMIUM
If you purchase your debt security for an amount in excess of its principal
amount, you may elect to treat the excess as amortizable bond premium. If you
make this election, you will reduce the amount required to be included in your
income each year with respect to interest on your debt security by the amount of
amortizable bond premium allocable to that year, based on your debt security's
yield to maturity. If your debt security is denominated in, or determined by
reference to, a foreign currency, you will compute your amortizable bond premium
in units of the foreign currency and your amortizable bond premium will reduce
your interest income in units of the foreign currency. Gain or loss recognized
that is attributable to changes in exchange rates between the time your
amortized bond premium offsets interest income and the time of the acquisition
of your debt security is generally taxable as ordinary income or loss. If you
make an election to amortize bond premium, it will apply to all debt
instruments, other than debt instruments the interest on which is excludible
from gross income, that you hold at the beginning of the first taxable year to
which the election applies or that you thereafter acquire, and you may not
revoke it without the consent of the Internal Revenue Service.
PURCHASE, SALE AND RETIREMENT OF THE DEBT SECURITIES
Your tax basis in your debt security will generally be the U.S. dollar cost, as
defined below, of your debt security, adjusted by:
- adding any market discount previously included in income with respect to
your debt security, and then
- subtracting any amortizable bond premium applied to reduce interest on
your debt security.
If you purchase your debt security with foreign currency, the U.S. dollar cost
of your debt security will generally be the U.S. dollar value of the purchase
price on the date of purchase. However, if you are a cash basis taxpayer, or an
accrual basis taxpayer if you so elect, and your debt security is traded on an
established securities market, as defined in the applicable Treasury
regulations, the U.S. dollar cost of your debt security will be the U.S. dollar
value of the purchase price on the settlement date of your purchase.
You will generally recognize gain or loss on the sale or retirement of your debt
security equal to the difference between the amount you realize on the sale or
retirement and your tax basis in your debt security. If your debt security is
sold or retired for an amount in foreign currency, the amount you realize will
be the U.S. dollar value of such amount on:
- the date payment is received, if you are a cash basis taxpayer and the
debt securities are not traded on an established securities market, as
defined in the applicable Treasury regulations,
- the date of disposition, if you are an accrual basis taxpayer, or
- the settlement date for the sale, if you are a cash basis taxpayer, or an
accrual basis taxpayer that so elects, and the debt securities are traded
on an established securities market, as defined in the applicable Treasury
regulations.
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You will recognize capital gain or loss when you sell or retire your debt
security, except to the extent:
- described above under "-- Market Discount",
- attributable to accrued but unpaid interest, or
- attributable to changes in exchange rates as described below.
Capital gain of a noncorporate United States holder is generally taxed at a
maximum rate of 20% where the property is held more than one year.
You must treat any portion of the gain or loss that you recognize on the sale or
retirement of a debt security as ordinary income or loss to the extent
attributable to changes in exchange rates. However, you take exchange gain or
loss into account only to the extent of the total gain or loss you realize on
the transaction.
EXCHANGE OF AMOUNTS IN OTHER THAN U.S. DOLLARS
If you receive foreign currency as interest on your debt security or on the sale
or retirement of your debt security, your tax basis in the foreign currency will
equal its U.S. dollar value when the interest is received or at the time of the
sale or retirement. If you purchase foreign currency, you generally will have a
tax basis equal to the U.S. dollar value of the foreign currency on the date of
your purchase. If you sell or dispose of a foreign currency, including if you
use it to purchase debt securities or exchange it for U.S. dollars, any gain or
loss recognized generally will be ordinary income or loss.
UNITED STATES ALIEN HOLDERS
This subsection describes the tax consequences to a United States alien holder.
You are a United States alien holder if you are the beneficial owner of a debt
security and are, for United States federal income tax purposes:
- a nonresident alien individual,
- a foreign corporation,
- a foreign partnership, or
- an estate or trust that in either case is not subject to United States
federal income tax on a net income basis on income or gain from a debt
security.
If you are a United States holder, this section does not apply to you.
Under present United States federal income and estate tax law, and subject to
the discussion of backup withholding below, if you are a United States alien
holder of a debt security:
- we and other payors will not be required to deduct United States
withholding tax from payments of principal, premium, if any, and interest
to you if, in the case of interest;
1. you do not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of UBS Americas entitled to vote,
2. you are not a controlled foreign corporation that is related to UBS
Americas through stock ownership, and
a. you certify to us or a U.S. payor, under penalties of perjury,
that you are not a United States holder and provide your name and address, or
b. a non-U.S. securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business and holds the debt security
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certifies to us or a U.S. payor under penalties of perjury that a similar
statement has been received from you by it or by a similar financial institution
between it and you and furnishes the payor with a copy thereof, and
- no deduction for any United States federal withholding tax will be made
from any gain that you realize on the sale or exchange of your debt
security.
Further, a debt security held by an individual who at death is not a citizen or
resident of the United States will not be includible in the individual's gross
estate for United States federal estate tax purposes if:
- the decedent did not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of UBS Americas
entitled to vote at the time of death and
- the income on the debt security would not have been effectively connected
with a United States trade or business of the decedent at the same time.
If you receive a payment after 31 December 2000, recently finalized Treasury
regulations will apply. Under these final withholding regulations, after 31
December 2000, you may use an alternative method to satisfy the certification
requirement described above. Additionally, if you are a partner in a foreign
partnership, after 31 December 2000, you, in addition to the foreign
partnership, must provide the certification described above and the partnership
must provide certain information. The Internal Revenue Service will apply a
look-through rule in the case of tiered partnerships.
BACKUP WITHHOLDING AND INFORMATION REPORTING
UNITED STATES HOLDERS
In general, if you are a noncorporate United States holder, we and other payors
are required to report to the Internal Revenue Service all payments of
principal, any premium and interest on your debt security. In addition, the
proceeds of the sale of your debt security before maturity within the United
States will be reported to the Internal Revenue Service. Additionally, backup
withholding at a rate of 31% will apply to any payments if you fail to provide
an accurate taxpayer identification number, or you 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.
UNITED STATES ALIEN HOLDERS
You are generally exempt from backup withholding and information reporting with
respect to any payments of principal, premium or interest made by us and other
payors provided that you provide the certification described under "-- United
States Alien Holders," and provided further that the payor does not have actual
knowledge that you are a United States person. See "-- United States Alien
Holders" above for a discussion of the rules under the final withholding
regulations. We and other payors, however, may report payments of interest on
your debt securities on Internal Revenue Service Form 1042-S.
In general, payment of the proceeds from the sale of debt securities to or
through a United States office of a broker is subject to both United States
backup withholding and information reporting. If, however, you are a United
States alien holder, you will not be subject to information reporting and backup
withholding if you certify as to your non-United States status, under penalties
of perjury, or otherwise establish an exemption. Payments of the proceeds from
the sale by a United States alien holder of a debt security made to or through a
foreign office of a broker will not be subject to information reporting or
backup withholding. However, information reporting, but not backup
--------------------------------------------------------------------------------
191
<PAGE> 195
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
--------------------------------------------------------------------------------
withholding, may apply to a payment made outside the United States of the
proceeds of a sale of a debt security through an office outside the United
States if the broker is:
- a United States person,
- a controlled foreign corporation for United States tax purposes,
- a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified
three-year period, or
- with respect to payments made after 31 December 2000, a foreign
partnership, if at any time during its tax year:
- one or more of its partners are "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 a United States trade or
business unless the broker has documentary evidence in its records that
you are a non-U.S. person and does not have actual knowledge that you
are a U.S. person, or you otherwise establish an exemption.
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<PAGE> 196
--------------------------------------------------------------------------------
Tax Considerations Under The Laws of Switzerland
The tax information set forth below is based on the opinion of Ernst & Young AG,
dated 21 December 2000, and has been approved by them for its accuracy. In this
section, we summarize the principal tax consequences under the laws of
Switzerland of owning debt securities fully and unconditionally guaranteed by
UBS AG, Switzerland.
Under the scope of Swiss withholding tax legislation, debt securities issued by
an entity domiciled outside of Switzerland (the issuer) are not subject to the
Swiss withholding tax of 35% on any interest payments on those securities. If
the issuer is a permanent establishment outside of Switzerland or a subsidiary
that is not a resident of Switzerland, and that entity is vested with a
guarantee by the parent company that is a resident of Switzerland, Swiss
withholding tax does not apply if the proceeds of such securities are not used
in Switzerland. If the proceeds from the sale of debt instruments by these
issuers are not used in Switzerland, both (1) interest payments by the issuer
and (2) any guarantee payment or comparable payment by the Swiss parent company
in connection with such debt securities are free from Swiss withholding tax.
The guarantees relate to debt securities, which were issued by Paine Webber Inc.
before the merger with UBS Americas Inc. UBS AG and UBS Americas Inc. will
ensure that the proceeds from the sale of these debt securities are not used in
Switzerland. Consequently, current and future interest payments on the debt
securities should not be subject to Swiss withholding tax.
Neither the present Swiss withholding tax law nor the current practice of the
Federal Tax Administration of Switzerland indicate that a guarantee payment
related to interest could be re-characterized as an interest payment itself,
which would be subject to withholding tax. For this reason, we believe that a
possible guarantee payment will not be subject to Swiss withholding tax,
irrespective of whether it is made for the principal, interest or other amounts
payable in accordance with the terms of the debt securities.
--------------------------------------------------------------------------------
193
<PAGE> 197
--------------------------------------------------------------------------------
ERISA Matters
A fiduciary of a pension, profit-sharing or other employee benefit plan subject
to the Employment Retirement Income Security Act of 1974, as amended ("ERISA"),
should consider the fiduciary standards of ERISA in the context of the plan's
particular circumstances before authorizing an investment in debt securities.
Among other factors, the fiduciary should consider whether the investment would
satisfy the prudence and diversification requirements of ERISA and would be
consistent with the documents and instruments governing the plan.
Section 406 of ERISA and Section 4975 of the Code prohibit an employee benefit
plan, as well as individual retirement accounts and Keogh plans subject to
Section 4975 of the Code, from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the plan. A violation of these
"prohibited transaction" rules may result in excise tax or other liabilities
under ERISA and Section 4975 of the Code for such persons, unless exemptive
relief is available under an applicable statutory or administrative exemption.
Therefore, a fiduciary of an employee benefit plan should also consider whether
an investment in debt securities might constitute or give rise to a prohibited
transaction under ERISA and the Internal Revenue Code. Employee benefit plans
which are governmental plans (as defined in Section 3(32) of ERISA), certain
church plans (as defined in Section 3(33) of ERISA), and foreign plans (as
described in Section 4(b)(4) of ERISA) generally are not subject to the
requirements of ERISA or Section 4975 of the Code.
UBS AG, UBS Americas, Paine Webber Group Inc., PaineWebber International and
other affiliates of UBS Americas may each be considered a party in interest or
disqualified person with respect to many employee benefit plans. This could be
the case, for example, if one of these companies is a service provider to a
plan. Special caution should be exercised, therefore, before debt securities are
purchased by an employee benefit plan. In particular, the fiduciary of the plan
should consider whether exemptive relief is available under an applicable
administrative exemption. The Department of Labor has issued five prohibited
transaction class exemptions that could apply to exempt the purchase, sale and
holding of debt securities from the prohibited transaction provisions of ERISA
and the Code. Those class exemptions are Prohibited Transaction Exemption 96-23
(for transactions determined by in-house asset managers), Prohibited Transaction
Exemption 95-60 (for certain transactions involving insurance company general
accounts), Prohibited Transaction Exemption 91-38 (for certain transactions
involving bank investment funds), Prohibited Transaction Exemption 90-1 (for
certain transactions involving insurance company separate accounts), and
Prohibited Transaction Exemption 84-14 (for certain transactions determined by
independent qualified asset managers).
Due to the complexity of these rules and the penalties that may be imposed upon
persons involved in non-exempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing debt
securities on behalf of or with "plan assets" of any employee benefit plan
consult with their counsel regarding the consequences under ERISA and the Code
of the acquisition of debt securities and the availability of exemptive relief
under Prohibited Transaction Exemption 96-23, 95-60, 91-38, 90-1 or 84-14.
--------------------------------------------------------------------------------
194
<PAGE> 198
--------------------------------------------------------------------------------
Plan of Distribution
This prospectus is to be used by USB AG, UBS Warburg LLC, PaineWebber
Incorporated and other affiliates of UBS AG in connection with offers and sales
related to market-making transactions in the debt securities by and through UBS
AG, UBS Warburg LLC, PaineWebber Incorporated and such other affiliates. These
transactions may be executed at negotiated prices that are related to prevailing
market prices at the time of sale, or at other prices. UBS AG, UBS Warburg LLC,
PaineWebber Incorporated and such other affiliates may act as principal or agent
in these transactions. No new securities are offered. These market-making
transactions will settle in accordance with customary market practices, or as
otherwise agreed by the parties. None of these affiliates will receive any
compensation from UBS Americas or UBS AG for engaging in these transactions.
UBS Warburg LLC and PaineWebber Incorporated currently make a market in the debt
securities. However, they are not required to do so, and they can stop doing so
at any time without notice. As a result, there is no assurance as to the
liquidity of any market for the debt securities.
--------------------------------------------------------------------------------
195
<PAGE> 199
--------------------------------------------------------------------------------
Validity of the Securities
The validity of the debt securities was passed on, at the time of their initial
issuance, by Theodore A. Levine, then PaineWebber's general counsel.
The validity of the guarantees was passed upon for UBS by Sullivan & Cromwell,
New York, New York, in reliance upon the opinion of internal counsel for UBS AG
as to certain matters under Swiss law. Sullivan & Cromwell has in the past
represented and continues to represent UBS on a regular basis and in a variety
of matters.
Experts
The consolidated financial statements of UBS AG 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 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.
Limitation on Enforcement of U.S. Laws Against UBS,
Its Management and Others
UBS is a Swiss bank. Many of its directors and executive officers, including
some 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 UBS's 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 or its management or
have any of them appear in a U.S. court. We have been advised by UBS internal
counsel 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.
--------------------------------------------------------------------------------
196
<PAGE> 200
--------------------------------------------------------------------------------
Where You Can Find More Information
UBS files periodic reports and other information with the Securities and
Exchange Commission. You may read and copy any document that UBS files with the
SEC at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of its public reference room. You may also inspect UBS's SEC reports
and other information at the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005.
We have filed an amendment on Form F-1 to PaineWebber's registration statements
on Form S-3 under the Securities Act with the SEC covering the debt securities
and UBS's guarantees. For further information on the debt securities, the
guarantees, UBS Americas and UBS, you should review our registration statement
and its exhibits. This prospectus summarizes material provisions of the
contracts and other documents that we refer you to. Since this prospectus may
not contain all the information that you may find important, you should review
the full text of these documents. We have included copies of these documents as
exhibits to our registration statement.
Presentation of Financial Information
UBS's financial statements have been prepared in accordance with International
Accounting Standards and are denominated in Swiss francs, or "CHF," the legal
tender of Switzerland. For convenience, 31 December 1999 CHF amounts have been
translated into United States dollars, or "$," at the rate of CHF 1=$0.6277,
which was the noon buying rate on 31 December 1999, and 30 June 2000 CHF amounts
have been translated into United States dollars at the rate of CHF 1=$0.6129,
which was the noon buying rate on 30 June 2000. This translation should not be
construed as a representation that the Swiss franc amounts actually denote such
United States dollar amounts or have been, could have been or could be,
converted into United States dollars at the rate indicated.
The tables below sets forth, for the periods and dates indicated, information
concerning the noon buying rate for the Swiss franc, expressed in United States
dollars per one Swiss franc. The "noon buying rate" is the rate in New York City
for cable transfers in foreign currencies as certified for customs purposes by
the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
HIGH LOW AVERAGE RATE(1)
YEAR ENDED 31 DECEMBER ($ per 1 CHF) AT PERIOD END
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995....................................... 0.8951 0.7616 0.8466 0.8666
1996....................................... 0.8641 0.7399 0.8090 0.7468
1997....................................... 0.7446 0.6510 0.6890 0.6845
1998....................................... 0.7731 0.6485 0.6894 0.7281
1999....................................... 0.7361 0.6244 0.6605 0.6277
2000 (through 30 September)................ 0.6441 0.5596 0.5941 0.5792
</TABLE>
------------
(1) The average of the noon buying rates on the last business day of each full
month during the relevant period.
--------------------------------------------------------------------------------
197
<PAGE> 201
PRESENTATION OF FINANCIAL INFORMATION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONTH HIGH LOW
---------------------------------------------------------------------------
<S> <C> <C>
June 2000................................................ 0.6181 0.5925
July 2000................................................ 0.6165 0.5959
August 2000.............................................. 0.5967 0.5739
September 2000........................................... 0.5804 0.5596
October 2000............................................. 0.5773 0.5479
November 2000............................................ 0.5759 0.5529
</TABLE>
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198
<PAGE> 202
--------------------------------------------------------------------------------
Financial Statements of UBS
TABLE OF CONTENTS
FINANCIAL STATEMENTS OF UBS
<TABLE>
<S> <C>
AUDITED YEAR-END FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-1
UBS Group Income Statement.................................. F-3
UBS Group Balance Sheet..................................... F-4
UBS Group Statement of Changes in Equity.................... F-5
UBS Group Statement of Cash Flows........................... F-6
UBS Group Notes to the Financial Statements................. F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
UBS Group Income Statement.................................. F-86
UBS Group Balance Sheet..................................... F-87
UBS Group Statement of Changes in Equity.................... F-88
UBS Group Statement of Cash Flows........................... F-89
UBS Group Notes to the Financial Statements................. F-90
FINANCIAL STATEMENTS OF PAINEWEBBER
AUDITED YEAR-END FINANCIAL STATEMENTS
Consolidated Statements of Income........................... F-107
Consolidated Statements of Financial Condition.............. F-108
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-109
Consolidated Statements of Cash Flows....................... F-112
Notes to Consolidated Financial Statements.................. F-113
Report of Independent Auditors.............................. F-134
Financial Highlights........................................ F-135
Common Stock and Quarterly Information...................... F-136
Five Year Financial Summary................................. F-138
UNAUDITED INTERIM FINANCIAL STATEMENTS
First Quarter 2000.......................................... F-139
Condensed Consolidated Statements of Income................. F-140
Condensed Consolidated Statements of Financial Condition.... F-141
Condensed Consolidated Statements of Cash Flows............. F-142
Notes to Condensed Consolidated Financial Statements........ F-143
Second Quarter 2000......................................... F-152
Condensed Consolidated Statements of Income................. F-153
Condensed Consolidated Statements of Financial Condition.... F-154
Condensed Consolidated Statements of Cash Flows............. F-155
Notes to Condensed Consolidated Financial Statements........ F-156
Third Quarter 2000.......................................... F-167
Condensed Consolidated Statements of Income................. F-168
Condensed Consolidated Statements of Financial Condition.... F-169
Condensed Consolidated Statements of Cash Flows............. F-170
Notes to Condensed Consolidated Financial Statements........ F-171
</TABLE>
--------------------------------------------------------------------------------
F- i
<PAGE> 203
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Group Executive Board UBS AG:
We have audited the accompanying consolidated balance sheets of UBS AG and
subsidiaries as of 31 December 1999 and 1998, and the related consolidated
statements of income, cash flows and changes in shareholders' equity for each of
the three years in the period ended 31 December 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of UBS AG as of 31 December 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended 31 December 1999, in conformity with
International Accounting Standards ("IAS") and comply with Swiss Law.
IAS vary in certain significant respects from accounting principles generally
accepted in the United States of America. Application of accounting principles
generally accepted in the United States of America would have affected
shareholders' equity as of 31 December 1999 and 1998 and the results of
operations for the two years then ended to the extent summarized in Note 42 of
the Notes to the Financial Statements.
Basel, 8 March 2000, except for Note 38,
as to which the date is 18 April 2000
and Note 1(t) as to which
the date is 17 August 2000
ATAG Ernst & Young Ltd.
<TABLE>
<S> <C>
/s/ ROGER K. PERKIN /s/ PETER HECKENDORN
--------------------------------- ---------------------------------
Roger K. Perkin Peter Heckendorn
Chartered Accountant lic. oec.
in charge of the audit in charge of the audit
</TABLE>
--------------------------------------------------------------------------------
F- 1
<PAGE> 204
CONSOLIDATED FINANCIAL STATEMENTS
UBS GROUP
YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
--------------------------------------------------------------------------------
F- 2
<PAGE> 205
UBS GROUP
INCOME STATEMENT
<TABLE>
<CAPTION>
FOR THE YEAR ENDED NOTE 31.12.1999(1) 31.12.1998(1) 31.12.1997
------------------ ---- ------------- ------------- ----------
CHF MILLION, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
OPERATING INCOME
Interest income................................. 4 35,604 37,442 23,669
Interest expense................................ 4 (29,695) (32,424) (16,733)
------- ------- -------
Net interest income............................. 5,909 5,018 6,936
Credit loss expense............................. 12b (956) (951) (1,278)
------- ------- -------
Net interest income after credit loss expense... 4,953 4,067 5,658
------- ------- -------
Net fee and commission income................... 5 12,607 12,626 12,234
Net trading income.............................. 6 7,719 3,313 5,491
Income from disposal of associates and
subsidiaries.................................. 7 1,821 1,119 198
Other income.................................... 8 1,325 1,122 1,299
------- ------- -------
Total operating income.......................... 28,425 22,247 24,880
OPERATING EXPENSES
Personnel....................................... 9 12,577 9,816 11,559
General and administrative...................... 9 6,098 6,735 5,315
Depreciation and amortization................... 9 1,857 1,825 1,762
------- ------- -------
Total operating expenses........................ 20,532 18,376 18,636
------- ------- -------
OPERATING PROFIT BEFORE RESTRUCTURING COSTS, TAX
AND MINORITY INTERESTS........................ 7,893 3,871 6,244
------- ------- -------
Restructuring costs............................. 7,000
-------
OPERATING PROFIT/(LOSS) BEFORE TAX AND MINORITY
INTERESTS..................................... 7,893 3,871 (756)
------- ------- -------
Tax expense/(benefit)........................... 25 1,686 904 (105)
------- ------- -------
NET PROFIT/(LOSS) BEFORE MINORITY INTERESTS..... 6,207 2,967 (651)
------- ------- -------
Minority interests.............................. 26 (54) 5 (16)
------- ------- -------
NET PROFIT/(LOSS)............................... 6,153 2,972 (667)
======= ======= =======
Basic earnings per share (CHF).................. 10 15.20 7.33 (1.59)
Diluted earnings per share (CHF)................ 10 15.07 7.20 (1.59)
------- ------- -------
</TABLE>
---------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
--------------------------------------------------------------------------------
F- 3
<PAGE> 206
UBS GROUP
BALANCE SHEET
<TABLE>
<CAPTION>
FOR THE YEAR ENDED NOTE 31.12.1999(1) 31.12.1998(1)
------------------ -------- ------------- -------------
<S> <C> <C> <C>
CHF MILLION
ASSETS
Cash and balances with central banks................. 5,073 3,267
Money market paper................................... 11 69,717 18,390
Due from banks....................................... 12a 29,907 68,495
Cash collateral on securities borrowed............... 13 113,162 91,695
Reverse repurchase agreements........................ 14 132,474 141,285
Trading portfolio assets............................. 15 212,440 159,179
Positive replacement values.......................... 27 64,698 90,511
Loans, net of allowance for credit losses............ 12a 234,858 247,926
Financial investments................................ 16 7,039 6,914
Accrued income and prepaid expenses.................. 5,167 6,627
Investments in associates............................ 17 1,102 2,805
Property and equipment............................... 18 8,701 9,886
Intangible assets and goodwill....................... 19 3,543 2,210
Other assets......................................... 20 11,007 12,092
------------- -------------
TOTAL ASSETS......................................... 898,888 861,282
============= =============
Total subordinated assets............................ 600 496
------------- -------------
LIABILITIES
Money market paper issued............................ 64,655 51,527
Due to banks......................................... 21 76,365 85,716
Cash collateral on securities lent................... 13 12,832 19,171
Repurchase agreements................................ 14 196,914 137,617
Trading portfolio liabilities........................ 15 54,586 47,033
Negative replacement values.......................... 27 95,786 125,847
Due to customers..................................... 21 279,960 274,850
Accrued expenses and deferred income................. 12,040 11,232
Long-term debt....................................... 22 56,332 50,783
Other liabilities.................................... 23,24,25 18,376 27,722
------------- -------------
TOTAL LIABILITIES.................................... 867,846 831,498
------------- -------------
MINORITY INTERESTS................................... 26 434 990
------------- -------------
SHAREHOLDERS' EQUITY
Share capital........................................ 4,309 4,300
Share premium account................................ 14,437 13,617
Foreign currency translation......................... (442) (456)
Retained earnings.................................... 20,327 16,224
Treasury shares...................................... (8,023) (4,891)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY........................... 30,608 28,794
------------- -------------
TOTAL LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS' EQUITY............................... 898,888 861,282
============= =============
Total subordinated liabilities....................... 14,801 13,652
------------- -------------
</TABLE>
---------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
--------------------------------------------------------------------------------
F- 4
<PAGE> 207
UBS GROUP
STATEMENT OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999(1) 31.12.1998(1) 31.12.1997
------------------ ------------- ------------- ----------
CHF MILLION
<S> <C> <C> <C>
ISSUED AND PAID UP SHARE CAPITAL
Balance at the beginning of the year................ 4,300 4,296 4,255
Issue of share capital.............................. 9 4 41
------------- ------------- ------
BALANCE AT THE END OF THE YEAR(2)................... 4,309 4,300 4,296
============= ============= ======
SHARE PREMIUM
Balance at the beginning of the year as previously
reported.......................................... 13,740 13,260 13,001
Change in accounting policy......................... (123) 1406(4) 0
Balance at the beginning of the year (restated)..... 13,617 14,666 13,001
Premium on shares issued, and warrants exercised.... 45 111 130
Own equity derivatives.............................. 526 (1,598) 0
Net premium on treasury share and own equity
derivative activity............................... 249 438 129
------------- ------------- ------
BALANCE AT THE END OF THE YEAR...................... 14,437 13,617 13,260
============= ============= ======
FOREIGN CURRENCY TRANSLATION
Balance at the beginning of the year................ (456) (111) (155)
Movements during the year........................... 14 (345) 44
------------- ------------- ------
BALANCE AT THE END OF THE YEAR...................... (442) (456) (111)
============= ============= ======
RETAINED EARNINGS
Balance at the beginning of the year as previously
reported.......................................... 16,293 15,464 16,931
Change in accounting policy......................... (69) 0 0
Balance at the beginning of the year (restated)..... 16,224 15,464 16,931
Net profit/(loss) for the year restated............. 6,153 2,972 (667)
Dividends paid restated............................. (2,050) (2,212) (800)
------------- ------------- ------
BALANCE AT THE END OF THE YEAR...................... 20,327 16,224 15,464
============= ============= ======
TREASURY SHARES, AT COST
Balance at the beginning of the year as previously
reported.......................................... (1,482) (1,982) (702)
Change in accounting policy......................... (3,409) (2,345)(4) 0
Balance at the beginning of the year (restated)..... (4,891) (4,327) (702)
Acquisitions restated............................... (6,595) (3,860) (3,172)
Disposals restated.................................. 3,463 3,296 1,892
------------- ------------- ------
BALANCE AT THE END OF THE YEAR(3)................... (8,023) (4,891) (1,982)
============= ============= ======
TOTAL SHAREHOLDERS' EQUITY.......................... 30,608 28,794 30,927
============= ============= ======
</TABLE>
---------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
(2) Comprising 430,893,162 ordinary shares at 31 December 1999; 429,952,612
ordinary shares at 31 December 1998; and 428,724,700 ordinary shares at 31
December 1997 (as restated for the 1998 merger of Union Bank of Switzerland
and Swiss Bank Corporation), at CHF 10 each, fully paid.
(3) Comprising 36,873,714 shares at 31 December 1999; 24,456,698 shares at 31
December 1998; and 11,692,326 shares at 31 December 1997.
(4) Opening balance sheet adjustment to 1 January 1998, with no restatement to
1997.
In addition to the Treasury shares, a maximum of 1,057,908 unissued shares
(conditional capital) (1,998,458 at 31 December 1998 and 2,884,672 at 31
December 1997) can be issued without the approval of the shareholders. This
amount consists of unissued and reserved shares for the former Swiss Bank
Corporation employee share ownership plan and optional dividend warrants. The
optional dividend warrants were the warrants granted in lieu of a cash dividend
by the former Swiss Bank Corporation in February 1996 (at the option of the
shareholder).
--------------------------------------------------------------------------------
F- 5
<PAGE> 208
UBS GROUP
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999(1) 31.12.1998(1) 31.12.1997
CHF MILLION ------------- ------------- ----------
<S> <C> <C> <C>
CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES
Net profit/(loss)........................................... 6,153 2,972 (667)
ADJUSTMENTS TO RECONCILE TO CASH FLOW FROM/(USED IN)
OPERATING ACTIVITIES
Non cash items included in net profit/(loss) and other
adjustments:
Depreciation and amortization............................. 1,857 1,825 1,762
Provision for credit losses............................... 956 951 1,278
Income from associates.................................... (211) (377) (231)
Deferred tax expense/(benefit)............................ 479 491 (1,035)
Restructuring provision................................... 0 0 7,000
Net gain from investing activities........................ (2,282) (1,803) (967)
Net increase/(decrease) in operating assets:
Net due from/to banks..................................... (5,298) (65,172) 22,503
Reverse repurchase agreements, cash collateral on
securities borrowed..................................... (12,656) 66,031 (52,440)
Trading portfolio including net replacement values........ (49,956) 45,089 (38,388)
Loans due to/from customers............................... 17,222 (5,626) 2,865
Accrued income, prepaid expenses and other assets......... 2,545 2,107 (350)
Net increase/(decrease) in operating liabilities:
Repurchase agreements, cash collateral on securities
lent.................................................... 52,958 (49,145) 24,594
Accrued expenses and other liabilities.................... (7,366) 1,686 1,037
Income taxes paid......................................... (1,063) (733) (1,185)
------------- ------------- -------
NET CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES........... 3,338 (1,704) (34,224)
============= ============= =======
CASH FLOW FROM/(USED IN) INVESTING ACTIVITIES
Investments in subsidiaries and associates.................. (1,720) (1,563) (1,550)
Disposal of subsidiaries and associates..................... 3,782 1,858 1,294
Purchase of property and equipment.......................... (2,820) (1,813) (1,785)
Disposal of property and equipment.......................... 1,880 1,134 1,101
Net (investment)/divestment in financial investments........ 356 6,134 (731)
------------- ------------- -------
NET CASH FLOW FROM/(USED IN) INVESTING ACTIVITIES........... 1,478 5,750 (1,671)
============= ============= =======
CASH FLOW FROM/(USED IN) FINANCING ACTIVITIES
Money market paper issued................................... 13,128 (4,073) 23,303
Net movements in treasury shares and treasury share contract
activity.................................................. (2,312) (2,552) (1,151)
Capital issuance............................................ 9 4 408
Capital repayment........................................... 0 0 (795)
Dividends paid.............................................. (2,050) (2,212) (800)
Issuance of long term debt.................................. 12,661 5,566 17,155
Repayment of long term debt................................. (7,112) (9,068) (9,105)
Repayment of minority interests............................. (689) 0 0
------------- ------------- -------
NET CASH FLOW FROM/(USED IN) FINANCING ACTIVITIES........... 13,635 (12,335) 29,015
Effects of exchange rate differences........................ 148 (386) (571)
============= ============= =======
NET INCREASE/(DECREASE) IN CASH EQUIVALENTS................. 18,599 (8,675) (7,451)
Cash and cash equivalents, beginning of year................ 83,678 92,353 99,805
------------- ------------- -------
Cash and cash equivalents, end of year...................... 102,277 83,678 92,354
============= ============= =======
CASH AND CASH EQUIVALENTS COMPRISE:
Cash and cash balances with central banks................... 5,073 3,267 4,638
Money market paper.......................................... 69,717 18,390 36,353
Bank deposits maturing in less than 3 months................ 27,487 62,021 51,363
------------- ------------- -------
TOTAL....................................................... 102,277 83,678 92,354
============= ============= =======
</TABLE>
---------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
--------------------------------------------------------------------------------
F- 6
<PAGE> 209
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of accounting
UBS AG and subsidiaries ("UBS" or the "Group") provides a broad range of
financial services such as advisory, underwriting, financing, market making,
asset management, brokerage, and retail banking on a global level. The Group was
formed on 29 June 1998 when Swiss Bank Corporation and Union Bank of Switzerland
merged. The merger was accounted for using the pooling of interests method of
accounting. Due to the merger, the Group harmonized its accounting policies,
which have been retrospectively applied for the presentation of comparative
information.
The Group adopted new International Accounting Standards ("IAS") and changed the
presentation of certain financial information effective 1 January 2000. The
consolidated financial statements have been restated, where practicable, to give
retroactive effect to these changes -- see t) below.
The consolidated financial statements are stated in Swiss francs, the currency
of the country in which UBS AG is incorporated. They are prepared in accordance
with International Accounting Standards. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the amounts reported. Actual results could differ from such estimates and the
differences may be material to the consolidated financial statements.
b) Consolidation
The consolidated financial statements comprise those of the parent company (UBS
AG), its subsidiaries and its special purpose entities, presented as a single
economic entity. Subsidiaries and special purpose entities which are directly or
indirectly controlled by the Group are consolidated. Subsidiaries acquired are
consolidated from the date control passes. Companies which are acquired and held
with a view to their subsequent disposal are recorded as financial investments.
The effects of intra-group transactions are eliminated in preparing the Group
financial statements, except for certain intercompany derivatives for which
hedge accounting is used.
Equity and net income attributable to minority interests are shown separately in
the balance sheet and income statement respectively.
c) Offsetting
Assets and liabilities are offset only when the Group has a legal right to
offset amounts with the same counterparty and transactions are expected to be
settled on a net basis.
d) Trade date/settlement date accounting
When the Group becomes party to a contract in its trading activities it
recognizes from that date ("trade date") any unrealized profits and losses
arising from revaluing that contract to fair value. These unrealized profits and
losses are recognized in the income statement.
On a date subsequent to the trade date, the terms of spot and forward trading
transactions are fulfilled ("settlement date") and a resulting financial asset
or liability is recognized on the balance sheet at the fair value of the
consideration given or received.
e) Foreign currency translation
Foreign currency transactions are recorded at the rate of exchange on the date
of the transaction. At the balance sheet date, monetary assets and liabilities
denominated in foreign currencies are reported
--------------------------------------------------------------------------------
F- 7
<PAGE> 210
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
using the closing exchange rate. Exchange differences arising on the settlement
of transactions at rates different from those at the date of the transaction,
and unrealized foreign exchange differences on unsettled foreign currency
monetary assets and liabilities, are recognized in the income statement.
Assets and liabilities of foreign entities are translated at the exchange rates
at the balance sheet date, while income statement items and cash flows are
translated at average rates over the year. Differences resulting from the use of
these different exchange rates are recognized directly in foreign currency
translation within shareholders' equity.
f) Business and geographical segments
The Group is organized on a worldwide basis into five major operating divisions
and Corporate Center. These divisions are the basis upon which the Group reports
its primary segment information.
Segment revenue, segment expenses and segment performance include transfers
between business segments and between geographical segments. Such transfers are
accounted for at competitive prices charged to unaffiliated customers for
similar services.
g) Securities borrowing and lending
Securities borrowed and lent that are collateralized by cash are included in the
balance sheet at amounts equal to the collateral advanced or received.
Income arising from the securities lending and borrowing business is recognized
in the income statement on an accrual basis.
h) Repurchase and reverse repurchase transactions
The Group enters into purchases of securities under agreements to resell and
sales of securities under agreements to repurchase substantially identical
securities. Securities which have been sold subject to repurchase agreements
continue to be recognized in the balance sheet and are measured in accordance
with the accounting policy for trading balances or financial assets as
appropriate. The proceeds from sale of these securities are treated as
liabilities and included in repurchase agreements.
Securities purchased subject to commitments to resell at a future date are
treated as loans collateralized by the security and are included in reverse
repurchase agreements.
Interest earned on reverse repurchase agreements and interest incurred on
repurchase agreements is recognized as interest income and interest expense
respectively over the life of each agreement.
i) Trading portfolio
The trading portfolio consists of debt and equity securities as well as of
precious metals held to meet the financial needs of our customers and to take
advantage of market opportunities. The trading portfolio is carried at fair
value. Short positions in securities are reported as trading portfolio
liabilities. Realized and unrealized gains and losses, net of related
transaction expenses, are recognized as net trading income. Net trading income
also includes interest and dividend income on trading assets as well as the
funding costs for holding these positions.
j) Loans and allowance for credit losses
Loans are initially recorded at cost. For loans originated by the Group, the
cost is the amount lent to the borrower. For loans acquired from a third party
the cost is the fair value at the time of acquisition.
--------------------------------------------------------------------------------
F- 8
<PAGE> 211
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Interest income on an unimpaired loan is recognized on an accrual basis.
Interest includes the amount of amortization of any discount or premium between
the cost of a loan and its amount at maturity and the amortization of any loan
fees and costs.
The allowance for credit losses provides for risks of losses inherent in the
credit extension process, including loans and lending-related commitments. Such
commitments include letters of credit, guarantees and commitments to extend
credit. Counterparties are individually rated and periodically reviewed and
analyzed. The allowance is adjusted for impairments identified on a loan-by-loan
basis. If there are indications that there are significant probable losses in
the portfolio that have not specifically been identified, allowances would also
be provided for on a portfolio basis.
Impairments in loans are recognized when it becomes probable that the Group will
not be able to collect all amounts due according to the contractual terms of the
loans. The carrying amounts of the loans are reduced to their estimated
realizable value through a specific allowance. The impairment is recognized as
an expense for the period. Loans are stated at their principal amount net of any
allowance for credit losses.
This management process has resulted in the following components of the overall
allowance:
Counterparty-specific: Probable losses from individual credit
exposures are evaluated based upon the borrower's character, overall
financial condition, resources and payment record; the prospects for
support from any financially responsible guarantors; and, if appropriate,
the realizable value of any collateral. Impairment is measured and
allowances are established based on discounted expected cash flows.
Country-specific: Probable losses resulting from exposures in
countries experiencing political and transfer risk, countrywide economic
distress, or problems regarding the legal enforceability of contracts are
assessed using country specific scenarios and taking into consideration the
nature of the individual exposures and their importance for the economy.
Specific country allowances exclude exposures addressed in
counterparty-specific allowances.
Specific reserve pools: Specific risk reserve pools were established
in 1996 to absorb probable losses not specifically identified at that time,
but which experience indicated were present in the portfolio. These pools
subsequently have been applied to specific loans based on the analysis of
individual credit exposures. The Group does not believe there is a current
need for such allowances.
A loan is classified as non-performing when the contractual payments of
principal and/or interest are in arrears for 90 days or more. After the 90 day
period the recognition of interest income ceases and a charge is recognized for
the unpaid and accrued interest receivable.
A write-off is made when all or part of a loan is deemed uncollectible or in the
case of debt forgiveness. Write-offs are charged against previously established
allowances and reduce the principal amount of a loan.
k) Financial investments
Financial investments are debt and equity securities held for the accretion of
wealth through distributions, such as interest and dividends, and for capital
appreciation. Financial investments also include real estate held for sale.
Debt securities held to maturity are carried at amortized cost. If necessary,
the carrying amount is reduced to its estimated realizable value. Interest
income on debt securities, including amortization of premiums and discounts, is
recognized on an accrual basis and reported as net interest income.
--------------------------------------------------------------------------------
F- 9
<PAGE> 212
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Financial investments held for sale are carried at the lower of cost or market
value. Reductions to market value and reversals of such reductions as well as
gains and losses on disposal are included in other income. Interest earned and
dividends received are included in net interest income.
Private equity investments are carried at cost less write-downs for impairments
in value. Reductions of the carrying amount and reversals of such reductions as
well as gains and losses on disposal are included in other income.
l) Investments in associates
Investments in associates in which the Group has a significant influence are
accounted for by the equity method. Investments in which the Group has a
significant influence, but which are acquired and held with a view to their
subsequent disposal, are included in financial investments (see the reference to
private equity investments in the paragraph above).
Investments in companies where the parent company does not hold a significant
influence are recorded at cost less value adjustments for less than temporary
declines in value.
m) Property and equipment
Property and equipment includes land, buildings, furnishings, fixtures,
leasehold improvements, computer, telecommunications and other equipment.
Property and equipment is carried at cost less accumulated depreciation and is
periodically reviewed for impairment.
Property and equipment is depreciated on a straight-line basis over their
estimated useful lives as follows:
<TABLE>
<S> <C> <C>
- Buildings Not exceeding 50 years
- Furnishings and Not exceeding 10 years
fixtures
- Leasehold improvements Not exceeding 10 years
- Equipment Not exceeding 5 years
</TABLE>
n) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value
of the Group's share of the net assets of the acquired subsidiary or associate
at the date of acquisition. Goodwill and intangibles resulting from the
acquisition of client franchises are recognized as an asset and are amortized
using the straight-line basis over their estimated useful economic life, not
exceeding 20 years. At each balance sheet date, goodwill is reviewed for
indications of impairment. If such indications exist an analysis is performed
including an assessment of future cash flows to determine if a write-down is
necessary.
Goodwill and fair value adjustments arising on the acquisition of foreign
subsidiaries are treated as local currency balances and are translated into
Swiss francs at the closing rate at subsequent balance sheet dates.
o) Income taxes
Income tax payable on profits, based on the applicable tax laws in each
jurisdiction, is recognized as an expense in the period in which profits arise.
The tax effects on income tax losses available for carry-forward are recognized
as an asset when it is probable that future taxable profit will be available
against which those losses can be utilized.
--------------------------------------------------------------------------------
F- 10
<PAGE> 213
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities are recognized for temporary differences between the
carrying amounts of assets and liabilities in the Group balance sheet and their
amounts as measured for tax purposes, which will result in taxable amounts in
future periods. Deferred tax assets are recognized for temporary differences
which will result in deductible amounts in future periods, but only to the
extent it is probable that sufficient taxable profits will be available against
which these differences can be utilized.
Deferred tax assets and liabilities are measured at the tax rates that are
expected to apply to the period in which the asset will be realized or the
liability will be settled.
Current and deferred tax assets and liabilities are offset when they arise from
the same tax reporting group and relate to the same tax authority and when the
legal right to offset exists.
p) Own shares, own bonds and derivatives on own shares
In the normal course of its trading and market making activities, the Group buys
and sells its own shares, own bonds and derivatives on its own shares. In 1997,
these instruments were held in the trading portfolio similar to other trading
instruments, and carried at fair value. Changes in fair value and dividends
received on UBS AG shares and interest on its own bonds in the trading portfolio
were recognized as net trading income (See Note t).
The Group also holds its own shares for non-trading purposes, for instance
employee compensation schemes and other strategic purposes. These shares are
recorded within treasury shares and are deducted from shareholders' equity. The
difference between the proceeds of the sale of treasury shares and their cost
basis is recognized in share premium. Dividends relating to treasury shares are
not recognized.
q) Retirement benefits
The Group sponsors a number of retirement benefit plans for its employees
worldwide. These plans include both defined benefit and defined contribution
plans and various other retirement benefits such as post-employment medical
benefit. As of 1 January 1999, the Group adopted IAS 19, Employee Benefits
(revised 1998) ("IAS 19") to account for such plans. Under IAS 19, Group
contributions to defined contribution plans are expensed when employees have
rendered services in exchange for such contributions, generally in the year of
contribution.
In accordance with IAS 19, the Group uses the projected unit credit actuarial
method to determine the present value of its defined benefit obligations and the
related current service cost and, where applicable, past service cost.
The principal actuarial assumptions made by the actuary are set out in Note 35.
The Group recognizes a portion of its actuarial gains and losses as income or
expenses if the net cumulative unrecognized actuarial gains and losses at the
end of the previous reporting period exceeded the greater of:
a) 10% of the present value of the defined benefit obligation at that
date (before deducting plan assets); and
b) 10% of the fair value of any plan assets at that date.
The unrecognized actuarial gains and losses exceeding the greater of the two
values are recognized in the income statement over the expected average
remaining working lives of the employees participating in the plans.
--------------------------------------------------------------------------------
F- 11
<PAGE> 214
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
r) Derivative instruments
Derivative instruments are carried at fair value. Fair values are obtained from
quoted market prices, discounted cash flow models and option pricing models as
appropriate. The fair values of derivative instruments are shown in the balance
sheet as positive and negative replacement values. Realized and unrealized gains
and losses are recognized in net trading income. Valuation adjustments to cover
credit and market liquidity risks have been made.
Transactions in derivative instruments entered into for hedging of non-trading
positions are recognized in the income statement on the same basis as to the
underlying item being hedged.
s) Comparability
Certain amounts have been reclassified from previous years to conform to the
1999 presentation.
The prior year financial statements reflect the requirements of the following
revised or new International Accounting Standards, which the Group implemented
in 1999:
<TABLE>
<S> <C> <C>
- IAS 1 Presentation of Financial Statements
- IAS 14 Segment Reporting
- IAS 17 Accounting for Leases
- IAS 19 Employee Benefits
- IAS 36 Impairment of Assets.
</TABLE>
The implementation of the above standards had no material impact for the Group.
t) Retroactive application of accounting changes adopted 1 January 2000
The consolidated financial statements as of and for the years ended 31 December
1999 and 1998 have been restated to reflect retroactively changes in accounting
policy arising from newly applicable IAS and changes in presentation adopted 1
January 2000, as discussed below. 1997 financial information has not been
restated due to unavailability of certain pre-merger data and different
organizational structures.
The following notes to the financial statements also have been revised to
reflect the changes referred to in this Note: Notes 2, 3, 4, 6, 10, 14, 15, 25,
27, 33, 34, 41, 42 and 43.
Standing Interpretations Committee ("SIC") 16, Share Capital -- Reacquired
Own Equity Instruments (Treasury Shares)
In May 1999, the International Accounting Standards Committee ("IASC") issued
Interpretation SIC 16, Share Capital -- Reacquired Own Equity Instruments
(Treasury Shares) which the Group adopted as of 1 January 2000. The
Interpretation provides guidance for the recognition, presentation, and
disclosure of Treasury shares. SIC 16 applies to own shares and derivatives on
own shares held for trading and non-trading purposes. SIC 16 requires own shares
and derivatives on own shares to be presented as Treasury shares and deducted
from Shareholders' equity. Gains and losses relating to the sale of own shares
and derivatives on own shares are not recognized in the income statement but
rather as a change in Shareholders' equity.
As a result of the retroactive application of Interpretation SIC 16, net trading
income was reduced by CHF 196 million and CHF 81 million, and income tax expense
was reduced by CHF 49 million and CHF 23 million for the years ended 31 December
1999 and 1998, respectively; these amounts were recorded in shareholders'
equity. Shareholders' equity and total assets were reduced by CHF 4,227 million
and CHF 3,601 million as of 31 December 1999 and 1998, respectively, to reflect
the
--------------------------------------------------------------------------------
F- 12
<PAGE> 215
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
reclassification of own shares and derivatives on own shares held at those
dates. Of the CHF 4,227 million for 31 December 1999, CHF 4,561 million was a
reduction in trading portfolio assets and the remaining CHF 334 million was an
increase in positive replacement values. Of the CHF 3,601 million for 31
December 1998, CHF 3,409 million was a reduction to trading portfolio assets and
the remaining CHF 192 million was a reduction to positive replacement values. In
addition, shareholders' equity was adjusted as of 1 January 1998.
Offsetting of Amounts Related to Certain Contracts
In order to improve comparability with its main competitors, the Group has
offset positive and negative replacement values and reverse repurchase
agreements and repurchase agreements with the same counter-party for
transactions covered by legally enforceable master netting agreements. Positive
and negative replacement values have been reduced by CHF 66,136 million and CHF
79,233 million as of 31 December 1999 and 1998, respectively. Reverse repurchase
and repurchase agreements have been reduced by CHF 12,322 million as of 31
December 1999.
Interest and Dividend Income and Expense on Trading Assets and Liabilities
In prior periods, interest and dividend income and expense on trading assets and
liabilities were included in net trading income. In order to improve
comparability with its main competitors, the Group has included interest and
dividend income on trading assets and interest expense on trading liabilities in
interest income and interest expense, respectively, and has discontinued the
allocation of funding costs to net trading income.
Interest income was increased by CHF 17,281 million and CHF 14,607 million for
the years ended 31 December 1999 and 1998, respectively. Interest expense was
increased by CHF 17,728 million and CHF 16,251 million for the years ended 31
December 1999 and 1998, respectively. Net trading income was increased by CHF
447 million and CHF 1,644 million for the years ended 31 December 1999 and 1998,
respectively.
Tax Expense
Capital taxes were included in tax expense. The Group has reclassified CHF 80
million and CHF 118 million in Capital taxes from tax expense to General and
administrative expenses for the years ended 31 December 1999 and 1998,
respectively.
Segment Information
In the first half of 2000, the Group reorganized its business divisions. The
segment reporting for the year ended 31 December 1999 and 1998 has been restated
to reflect the new Group structure.
The following IAS were adopted as of 1 January 2000, but this adoption had no
material impact on the prior periods presented herein.
IAS 37, Provisions, Contingent Liabilities and Contingent Assets
In July 1998, the IASC issued IAS 37, Provisions, Contingent Liabilities and
Contingent Assets, which is required to be adopted for the Group's financial
statements as of 1 January 2000. The Standard provides accounting and disclosure
requirements for contingent liabilities and contingent assets. IAS 37 also
provides recognition and measurement requirements for provisions.
--------------------------------------------------------------------------------
F- 13
<PAGE> 216
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
IAS 38, Intangible Assets
In July 1998, the IASC issued IAS 38, Intangible Assets, which is required to be
adopted prospectively for the Group's financial statements as of 1 January 2000.
The Standard requires the capitalization and amortization of intangible assets,
if it is probable that the future economic benefits that are attributable to the
assets will flow to the enterprise and the cost of the asset can be measured
reliably. The amortization period for recognized intangible assets should not
exceed 20 years. If adopted in 1999 this standard would have increased operating
profit by approximately CHF 300 million.
IAS 10 (revised), Events After the Balance Sheet Date
In May 1999, the IASC issued IAS 10 (revised), Events After the Balance Sheet
Date, which is required to be adopted for the Group's financial statements as of
1 January 2000. IAS 10 (revised) establishes requirements for the recognition
and disclosure of events after the balance sheet date.
u) Recent accounting standards not yet adopted
IAS 39, Recognition and Measurement of Financial Instruments
In December 1998, the IASC issued IAS 39, Recognition and Measurement of
Financial Instruments, which is required to be adopted for the Group's financial
statements as of 1 January 2001 on a prospective basis. The Standard provides
comprehensive guidance on accounting for financial instruments. Financial
instruments include conventional financial assets and liabilities and
derivatives. IAS 39 requires that all financial instruments should be recognized
on the balance sheet. Most financial instruments should be carried at fair
value. IAS 39 also establishes hedge accounting criteria and guidelines. While
the specific impact on earnings and financial position of IAS 39 has not been
determined, the activities that will be most affected by the new Standard have
been identified. Specifically, the use of derivatives to hedge loans, deposits,
and issuance of debt, primarily hedge of interest rate risk, will be affected by
IAS 39. Management is currently evaluating the impact of IAS 39. The actual
assessment of the impact of IAS 39 on the Group's earnings and financial
position will be based on the 1 January 2001 financial position, among other
things, in accordance with the Standard.
--------------------------------------------------------------------------------
F- 14
<PAGE> 217
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 SEGMENT REPORTING BY BUSINESS GROUP
The business group results have been presented on a management reporting basis.
Consequently, internal charges and transfer pricing adjustments have been
reflected in the performance of each business. The basis of the reporting
reflects the management of the business within the Group. Total revenue includes
income which is directly attributable to a business group whether from sales to
external customers or from transactions with other segments. Revenue sharing
agreements are used to allocate external customer revenues to a business group
on a reasonable basis. Transactions between business groups are conducted at
arm's length.
<TABLE>
<CAPTION>
UBS
UBS ASSET UBS CORPORATE UBS
FOR THE YEAR ENDED 31 DECEMBER 1999(2) SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
------------------------------------------ ----------- ---------- ------- --------- -------
CHF MILLION
<S> <C> <C> <C> <C> <C>
Revenues.................................. 12,761 1,369 13,241 2,010 29,381
Credit loss expense(1).................... (1,071) 0 (333) 448 (956)
------- ------ ------- -------- -------
Total operating income.................... 11,690 1,369 12,908 2,458 28,425
------- ------ ------- -------- -------
Personnel expenses........................ 4,691 516 7,278 92 12,577
General and administrative expenses....... 2,308 271 2,680 839 6,098
Depreciation.............................. 460 32 659 366 1,517
Amortization of goodwill and other
intangible assets....................... 23 113 154 50 340
------- ------ ------- -------- -------
Total operating expenses.................. 7,482 932 10,771 1,347 20,532
------- ------ ------- -------- -------
SEGMENT PERFORMANCE BEFORE TAX............ 4,208 437 2,137 1,111 7,893
Tax expense............................... 1,686
-------
NET PROFIT BEFORE MINORITY INTERESTS...... 6,207
Minority interests........................ (54)
-------
NET PROFIT................................ 6,153
=======
OTHER INFORMATION AS OF 31.12.1999
Total assets(3)........................... 254,577 10,451 721,900 (88,040) 898,888
Total liabilities(3)...................... 270,137 4,614 695,965 (102,436) 868,280
</TABLE>
---------------
(1) In order to show the relevant business group performance over time, adjusted
expected loss figures rather than the net credit loss expense are reported
for all business groups. The statistically derived adjusted expected losses
reflect the inherent counterparty and country risks in the respective
portfolios. The difference between the statistically derived adjusted
expected loss figures and the net credit loss expense for financial
reporting purposes is reported in the Corporate Center. The divisional
breakdown of the net credit loss expense for financial reporting purposes of
CHF 956 million for the year ended 31 December 1999 is as follows: UBS
Switzerland CHF 985 million, UBS Warburg CHF (20) million, Corporate Center
CHF (9) million.
(2) The 1999 figures have been restated to reflect the new Group structure and
retroactive changes in accounting policy and changes in presentation (see
Note 1: Basis of Accounting).
(3) The funding surplus/requirement is reflected in each business group and
adjusted in Corporate Center.
--------------------------------------------------------------------------------
F- 15
<PAGE> 218
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UBS
UBS ASSET UBS CORPORATE UBS
FOR THE YEAR ENDED 31 DECEMBER 1998(2) SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
-------------------------------------- ----------- ---------- ------- --------- -------
CHF MILLION
-----------
<S> <C> <C> <C> <C> <C>
Revenues................................... 13,958 1,358 7,691 191 23,198
Credit loss expense(1)..................... (1,186) 0 (510) 745 (951)
------- ----- ------- ------- -------
Total operating income..................... 12,772 1,358 7,181 936 22,247
------- ----- ------- ------- -------
Personnel expenses......................... 4,448 515 4,641 212 9,816
General and administrative expenses........ 2,226 228 2,625 1,656 6,735
Depreciation............................... 771 35 549 128 1,483
Amortization of goodwill and other
intangible assets........................ 4 78 173 87 342
------- ----- ------- ------- -------
Total operating expenses................... 7,449 856 7,988 2,083 18,376
------- ----- ------- ------- -------
SEGMENT PERFORMANCE BEFORE TAX............. 5,323 502 (807) (1,147) 3,871
Tax expense................................ 904
-------
NET PROFIT BEFORE MINORITY INTERESTS....... 2,967
Minority interests......................... 5
-------
NET PROFIT................................. 2,972
=======
OTHER INFORMATION AS OF 31.12.1998
Total assets(3)............................ 217,215 7,266 662,006 (25,205) 861,282
Total liabilities(3)....................... 228,583 2,848 637,676 (36,619) 832,488
</TABLE>
---------------
(1) In order to show the relevant divisional performance over time, adjusted
expected loss figures rather than the net credit loss expense are reported
for all business divisions. The statistically derived adjusted expected
losses reflect the inherent counterparty and country risks in the respective
portfolios. The difference between the statistically derived adjusted
expected loss figures and the net credit loss expense for financial
reporting purposes is reported in the Corporate Center. The divisional
breakdown of the net credit loss expense for financial reporting purposes of
CHF 951 million as of 31 December 1998 is as follows: UBS Private Banking
CHF 48 million, UBS Warburg CHF 506 million, UBS Private & Corporate Clients
CHF 397 million.
(2) The 1998 figures have been restated to reflect the new Group structure and
retroactive changes in accounting policy and changes in presentation (see
Note 1: Basis of Accounting).
(3) The funding surplus/requirement is reflected in each division and adjusted
in Corporate Center.
--------------------------------------------------------------------------------
F- 16
<PAGE> 219
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UBS UBS PRIVATE
PRIVATE UBS & CORPORATE UBS ASSET UBS CORPORATE UBS
FOR THE YEAR ENDED 31 DECEMBER 1997 BANKING WARBURG CLIENTS MANAGEMENT CAPITAL CENTER GROUP
----------------------------------- ------- ------- ----------- ---------- ------- --------- -----
CHF MILLION
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... 6,215 10,888 7,005 1,040 492 518 26,158
Credit loss expense(1)............. (59) (300) (1,092) 0 0 173 (1,278)
----- ------ ------ ----- --- --- ------
Total operating income............. 6,156 10,588 5,913 1,040 492 691 24,880
----- ------ ------ ----- --- --- ------
Personnel, general and
administrative expenses.......... 2,869 8,641 4,497 542 110 215 16,874
Depreciation and amortization...... 122 668 660 95 1 216 1,762
----- ------ ------ ----- --- --- ------
Total operating expenses........... 2,991 9,309 5,157 637 111 431 18,636
----- ------ ------ ----- --- --- ------
SEGMENT PERFORMANCE BEFORE TAX..... 3,165 1,279 756 403 381 260 6,244
Tax expense........................ 1,395
------
NET PROFIT BEFORE MINORITY
INTERESTS........................ 4,849
Minority interests................. 16
------
NET PROFIT BEFORE RESTRUCTURING
COSTS............................ 4,833
======
</TABLE>
---------------
(1) Basically the same methodology as for the year 1998 segment reporting is
applied. Due to the unavailability of certain pre-1998 merger data and
different organizational structures, the divisional breakdown of the
financially booked net credit loss expense is not available.
The 1997 results do not take into account the 1998 merger provision and the
impact of the 1998 merger on taxes. The net loss for the Group including these
items was CHF (667) million. Due to the unavailability of certain pre-merger
(1998 merger) data, 1997 assets and liabilities by business group are not
presented.
--------------------------------------------------------------------------------
F- 17
<PAGE> 220
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 SEGMENT REPORTING BY GEOGRAPHICAL LOCATION
The geographical analysis of total assets is based on customer domicile whereas
operating income and capital investment is based on the location of the office
in which the transactions and assets are recorded. Because of the global nature
of financial markets the Group's business is managed on an integrated basis
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
division, as shown in Note 2 to these financial statements, is a more meaningful
representation of the way in which the Group is managed.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31 DECEMBER 1999
------------------ ----------------------------------------------------------------
TOTAL OPERATING INCOME TOTAL ASSETS CAPITAL INVESTMENT
---------------------- ----------------- -------------------
CHF M SHARE % CHF M SHARE % CHF M SHARE %
-------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Switzerland............................. 14,976 52 227,821 25 1,990 70
Europe.................................. 7,626 27 243,427 27 356 13
Americas................................ 3,861 14 316,363 35 386 14
Asia/Pacific............................ 1,945 7 103,703 12 87 3
Africa/Middle East...................... 17 0 7,574 1 1 0
------ --- ------- --- ---- ---
TOTAL................................... 28,425 100 898,888 100 2,820 100
====== === ======= === ==== ===
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31 DECEMBER 1998
------------------ ----------------------------------------------------------------
TOTAL OPERATING INCOME TOTAL ASSETS CAPITAL INVESTMENT
---------------------- ----------------- -------------------
CHF M SHARE % CHF M SHARE % CHF M SHARE %
-------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Switzerland............................. 16,757 75 221,945 26 234 13
Europe.................................. 1,655 8 322,841 38 765 42
Americas................................ 2,548 11 216,989 25 513 28
Asia/Pacific............................ 1,251 6 95,402 11 304 17
Africa/Middle East...................... 36 0 4,105 0 2 0
------ --- ------- --- ----- ---
Total................................... 22,247 100 861,282 100 1,818 100
====== === ======= === ===== ===
</TABLE>
NOTE 4 NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997(1)
------------------ ---------- ---------- -------------
CHF MILLION
<S> <C> <C> <C>
INTEREST INCOME
Interest earned on loans and advances to banks.......... 6,105 7,687 4,031
Interest earned on loans and advances to customers...... 12,077 14,111 17,565
Interest from finance leasing........................... 49 60 90
Interest earned on securities borrowed and reverse
repurchase agreements................................. 11,422 10,380 0
Interest and dividend income from financial
investments........................................... 160 372 498
Interest and dividend income from trading portfolio..... 5,598 3,901 0
Other................................................... 193 931 1,485
------ ------ ------
Total................................................... 35,604 37,442 23,669
------ ------ ------
</TABLE>
--------------------------------------------------------------------------------
F- 18
<PAGE> 221
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997(1)
------------------ ---------- ---------- -------------
CHF MILLION
<S> <C> <C> <C>
INTEREST EXPENSE
Interest on amounts due to banks........................ 5,515 8,205 7,247
Interest on amounts due to customers.................... 8,330 9,890 10,074
Interest on securities lent and repurchase agreements... 8,446 7,543 0
Interest on medium and long term debt................... 5,334 5,045 4,468
Interest and dividend expense from trading portfolio.... 2,070 1,741 0
Funding costs for trading positions..................... 0 0 (5,056)
------ ------ ------
Total................................................... 29,695 32,424 16,733
------ ------ ------
NET INTEREST INCOME..................................... 5,909 5,018 6,936
====== ====== ======
</TABLE>
---------------
(1) Interest and dividends derived from the securities and derivative product
portfolios held for trading are included within net trading income. The
funding costs of holding these assets are charged to net trading income and
credited to interest expense.
NOTE 5 NET FEE AND COMMISSION INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ---------- ---------- ----------
CHF MILLION
<S> <C> <C> <C>
CREDIT-RELATED FEES AND COMMISSIONS....................... 372 559 793
------ ------ ------
SECURITY TRADING AND INVESTMENT ACTIVITY FEES
Underwriting and corporate finance fees................... 1,831 1,694 1,645
Brokerage fees............................................ 3,934 3,670 4,145
Investment fund fees...................................... 1,915 1,778 1,457
Fiduciary fees............................................ 317 349 375
Custodian fees............................................ 1,583 1,386 1,188
Portfolio and other management and advisory fees.......... 2,984 3,335 2,549
Other..................................................... 57 110 233
------ ------ ------
Total..................................................... 12,621 12,322 11,592
------ ------ ------
COMMISSION INCOME FROM OTHER SERVICES..................... 765 776 784
TOTAL FEE AND COMMISSION INCOME...................... 13,758 13,657 13,169
------ ------ ------
FEE AND COMMISSION EXPENSE
Brokerage fees paid....................................... 795 704 694
Other..................................................... 356 327 241
------ ------ ------
Total..................................................... 1,151 1,031 935
------ ------ ------
NET FEE AND COMMISSION INCOME............................. 12,607 12,626 12,234
====== ====== ======
</TABLE>
--------------------------------------------------------------------------------
F- 19
<PAGE> 222
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 NET TRADING INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997(2)
------------------ ---------- ---------- -------------
CHF MILLION
<S> <C> <C> <C>
Foreign exchange(1)..................................... 1,108 1,992 2,550
Fixed income............................................ 2,603 162 1,843
Equities................................................ 4,008 1,159 1,098
------ ----- -----
NET TRADING INCOME...................................... 7,719 3,313 5,491
====== ===== =====
</TABLE>
---------------
(1) Includes other trading income such as banknotes, precious metals and
commodities.
(2) Interest and dividends derived from the securities and derivative product
portfolios held for trading are included within net trading income. The
funding costs of holding these assets are charged to net trading income and
credited to interest expense.
NOTE 7 NET GAINS/(LOSSES) FROM DISPOSAL OF ASSOCIATES AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ---------- ---------- ----------
CHF MILLION
<S> <C> <C> <C>
Net income from disposal of consolidated subsidiaries..... 8 1,149 154
Net gains/(losses) from disposal of investments in
associates.............................................. 1,813 (30) 44
----- ----- -----
NET GAINS FROM DISPOSAL OF ASSOCIATES AND SUBSIDIARIES.... 1,821 1,119 198
===== ===== =====
</TABLE>
While the 1999 figure represents mainly the disposal gains from our investments
in Swiss Life/ Rentenanstalt and Julius Baer registered shares, the 1998 number
is mainly attributable to the disposal of the BSI - Banca della Svizzera
Italiana.
NOTE 8 OTHER INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ---------- ---------- ----------
CHF MILLION
<S> <C> <C> <C>
INVESTMENTS IN FINANCIAL ASSETS (DEBT AND EQUITY)
Net income from disposal of private equity investments.... 374 587 418
Net income from disposal of other financial assets........ 180 398 338
Net gains/(losses) from revaluation of financial assets... (102) (556) (16)
----- ----- -----
Total..................................................... 452 429 740
----- ----- -----
INVESTMENTS IN PROPERTY
Net income from disposal of properties held for resale.... 78 33 20
Net gains/(losses) from revaluation of properties held for
resale.................................................. (49) (106) (90)
Net income from other properties.......................... (20) 328 99
----- ----- -----
Total..................................................... 9 255 29
----- ----- -----
EQUITY INCOME FROM INVESTMENTS IN ASSOCIATES.............. 211 377 231
----- ----- -----
OTHER..................................................... 653 61 299
----- ----- -----
TOTAL OTHER INCOME........................................ 1,325 1,122 1,299
===== ===== =====
</TABLE>
--------------------------------------------------------------------------------
F- 20
<PAGE> 223
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ---------- ---------- ----------
CHF MILLION
<S> <C> <C> <C>
PERSONNEL EXPENSES
Salaries and bonuses...................................... 9,872 7,082(1) 8,932
Contractors............................................... 886 535 365
Insurance and social contributions........................ 717 542(1) 536
Contributions to retirement benefit plans................. 8(2) 614 580
Employee share plans...................................... 151 201 143
Other personnel expenses.................................. 943 842 1,003
------ ------ ------
TOTAL..................................................... 12,577 9,816 11,559
====== ====== ======
GENERAL AND ADMINISTRATIVE EXPENSES
Occupancy................................................. 847 822 830
Rent and maintenance of machines and equipment............ 410 390 460
Telecommunications and postage............................ 756 820 819
Administration............................................ 784 759 794
Marketing and public relations............................ 335 262 306
Travel and entertainment.................................. 552 537 528
Professional fees, including IT outsourcing............... 1,815 1,792 1,464
Other..................................................... 599 1,353 114
------ ------ ------
TOTAL..................................................... 6,098 6,735 5,315
====== ====== ======
DEPRECIATION AND AMORTIZATION
Property and equipment.................................... 1,517 1,483 1,623
Goodwill and other intangible assets...................... 340 342 139
------ ------ ------
TOTAL..................................................... 1,857 1,825 1,762
====== ====== ======
TOTAL OPERATING EXPENSES.................................. 20,532 18,376 18,636
====== ====== ======
</TABLE>
---------------
(1) CHF 121 million of bonus related social contribution costs have been
reclassified from Salaries and bonuses to Insurance and social
contributions.
(2) Includes CHF 456 million prepaid employer contributions.
--------------------------------------------------------------------------------
F- 21
<PAGE> 224
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ----------- ----------- -----------
<S> <C> <C> <C>
BASIC EARNINGS/(LOSS) PER SHARE CALCULATION
Net profit/(loss) for the year (CHF million).... 6,153 2,972 (667)
Weighted average shares outstanding:
Registered ordinary shares...................... 430,497,026 429,710,128 426,994,240
Treasury shares................................. (25,754,544) (24,487,833) (7,724,236)
----------- ----------- -----------
WEIGHTED AVERAGE SHARES FOR BASIC EARNINGS PER
SHARE......................................... 404,742,482 405,222,295 419,270,004
----------- ----------- -----------
BASIC EARNINGS/(LOSS) PER SHARE (CHF)........... 15.20 7.33 (1.59)
=========== =========== ===========
DILUTED EARNINGS/(LOSS) PER SHARE CALCULATION
Net profit/(loss) for the period (CHF
million)...................................... 6,153 2,972 (667)
Weighted average shares for basic earnings per
share......................................... 404,742,482 405,222,295 419,270,004
Potential dilutive ordinary shares resulting
from outstanding options, warrants and
convertible debt securities................... 3,632,670 7,658,746 576,290
----------- ----------- -----------
WEIGHTED AVERAGE SHARES FOR DILUTED EARNINGS PER
SHARE......................................... 408,375,152 412,881,041 419,846,294
----------- ----------- -----------
DILUTED EARNINGS/(LOSS) PER SHARE (CHF)......... 15.07 7.20 (1.59)
=========== =========== ===========
</TABLE>
The weighted average number of shares is calculated based upon the average
outstanding shares at the end of each month. 1999 share figures are restated for
the two-for-one stock split, approved at the shareholder meeting of 18 April
2000.
NOTE 11 MONEY MARKET PAPER
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Government treasury notes and bills......................... 32,724 9,568
Money market placements..................................... 36,540 8,262
Other bills and cheques..................................... 453 560
------ ------
TOTAL MONEY MARKET PAPER.................................... 69,717 18,390
====== ======
thereof eligible for discount at central banks.............. 64,671 16,512
</TABLE>
--------------------------------------------------------------------------------
F- 22
<PAGE> 225
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12a DUE FROM BANKS AND LOANS TO CUSTOMERS
The composition of due from banks, the loan portfolio and the allowances for
credit losses by type of exposure at the end of the year was as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Banks....................................................... 30,785 69,543
Allowance for credit losses................................. (878) (1,048)
------- -------
Net due from banks.......................................... 29,907 68,495
------- -------
Loans to customers:
Mortgages................................................. 127,987 140,785
Other loans............................................... 119,242 120,636
------- -------
Subtotal.................................................... 247,229 261,421
Allowance for credit losses................................. (12,371) (13,495)
------- -------
Net loans to customers...................................... 234,858 247,926
------- -------
NET DUE FROM BANKS AND LOANS TO CUSTOMERS................... 264,765 316,421
======= =======
thereof subordinated........................................ 86 133
------- -------
</TABLE>
The composition of due from banks and loans to customers by geographical region
based on the location of the borrower at the end of the year was as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Switzerland................................................. 183,944 187,223
Europe...................................................... 44,796 53,013
Americas.................................................... 31,285 44,556
Asia/Pacific................................................ 13,451 43,142
Africa/Middle East.......................................... 4,538 3,030
------- -------
Subtotal.................................................... 278,014 330,964
Allowance for credit losses................................. (13,249) (14,543)
------- -------
NET DUE FROM BANKS AND LOANS TO CUSTOMERS................... 264,765 316,421
======= =======
</TABLE>
The composition of due from banks and loans to customers by type of collateral
at the end of the year was as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Secured by mortgages........................................ 130,835 145,247
Collateralized by securities................................ 19,061 13,185
Guarantees and other collateral............................. 28,725 27,953
Unsecured................................................... 99,393 144,579
------- -------
Subtotal.................................................... 278,014 330,964
Allowance for credit losses................................. (13,249) (14,543)
------- -------
NET DUE FROM BANKS AND LOANS TO CUSTOMERS................... 264,765 316,421
======= =======
</TABLE>
--------------------------------------------------------------------------------
F- 23
<PAGE> 226
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12b ALLOWANCE AND PROVISION FOR CREDIT LOSSES
The allowance and provision for credit losses developed as follows:
<TABLE>
<CAPTION>
TOTAL
SPECIFIC COUNTRY RISK ------------------------
CHF MILLION ALLOWANCE PROVISION 31.12.1999 31.12.1998
----------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Balance at the beginning of the year.......... 13,528 1,450 14,978 16,213
Write-offs.................................... (3,271) (4) (3,275) (2,324)
Recoveries.................................... 65 0 65 59
Increase/(decrease) in credit loss allowance
and provision............................... 1,122 (166) 956 951
Net foreign exchange and other
adjustments(1).............................. 578 96 674 79
------ ----- ------ ------
BALANCE AT THE END OF THE YEAR................ 12,022 1,376 13,398 14,978
====== ===== ====== ======
</TABLE>
---------------
(1) Includes allowance for doubtful interest of CHF 409 million at 31 December
1999 and CHF 423 million at 31 December 1998.
At the end of the year the aggregate allowances and provisions were apportioned
and displayed as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
As a reduction of due from banks............................ 878 1,048
As a reduction of loans to customers........................ 12,371 13,495
------ ------
Subtotal.................................................... 13,249 14,543
Included in other liabilities related to commitments and
contingent liabilities.................................... 149 435
------ ------
TOTAL ALLOWANCE AND PROVISION FOR CREDIT LOSSES............. 13,398 14,978
====== ======
</TABLE>
NOTE 12c NON-PERFORMING LOANS
An analysis of changes in non-performing loans is presented in the following
table:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Non-performing loans at beginning of year................... 16,113 16,664
Net additions............................................... (638) 2,258
Write-offs and disposals.................................... (2,402) (2,809)
------ ------
NON-PERFORMING LOANS AT THE END OF THE YEAR................. 13,073 16,113
====== ======
</TABLE>
The non-performing loans by type of exposure at the end of the year were as
follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Banks....................................................... 499 477
------ ------
Loans to customers:
Mortgages................................................. 7,105 9,280
Other..................................................... 5,469 6,356
------ ------
Subtotal.................................................... 12,574 15,636
------ ------
TOTAL NON-PERFORMING LOANS.................................. 13,073 16,113
====== ======
</TABLE>
--------------------------------------------------------------------------------
F- 24
<PAGE> 227
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The non-performing loans by geographical region based on the location of the
borrower were as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Switzerland................................................. 11,435 14,022
Europe...................................................... 223 405
Americas.................................................... 697 1,156
Asia/Pacific................................................ 373 281
Africa/Middle East.......................................... 345 249
------ ------
TOTAL NON-PERFORMING LOANS.................................. 13,073 16,113
====== ======
</TABLE>
When principal and interest are overdue by 90 days, loans are classified as
non-performing, the recognition of interest income ceases and a charge is
recognized against income for the unpaid interest receivable. Allowances are
provided for non-performing loans to reflect their net estimated recoverable
amount. Unrecognized interest related to such loans totaled CHF 409 million for
the year ended 31 December 1999 and CHF 423 million for the year ended 31
December 1998.
NOTE 13 CASH COLLATERAL ON SECURITIES BORROWED AND LENT
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------ ------------------------
SECURITIES SECURITIES SECURITIES SECURITIES
CHF MILLION BORROWED LENT BORROWED LENT
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH COLLATERAL BY COUNTERPARTIES
Banks.............................................. 99,810 8,926 68,186 5,337
Customers.......................................... 13,352 3,906 23,509 13,834
------- ------ ------ ------
TOTAL CASH COLLATERAL ON SECURITIES BORROWED AND
LENT............................................. 113,162 12,832 91,695 19,171
======= ====== ====== ======
</TABLE>
NOTE 14 REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------ ------------------------
REVERSE REVERSE
REPURCHASE REPURCHASE REPURCHASE REPURCHASE
CHF MILLION AGREEMENTS AGREEMENTS AGREEMENTS AGREEMENTS
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AGREEMENTS BY COUNTERPARTIES
Banks........................................ 93,161 125,054 107,565 77,942
Customers.................................... 39,313 71,860 33,720 59,675
------- ------- ------- -------
TOTAL REPURCHASE AND REVERSE REPURCHASE
AGREEMENTS................................. 132,474 196,914 141,285 137,617
======= ======= ======= =======
</TABLE>
NOTE 15 TRADING PORTFOLIO
Trading assets and liabilities are carried at fair value. The following table
presents the carrying value of trading assets and liabilities at the end of the
year.
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
TRADING PORTFOLIO ASSETS
DEBT INSTRUMENTS
Swiss government and government agencies.................... 7,391 13,448
U.S. Treasury and government agency......................... 21,821 9,969
</TABLE>
--------------------------------------------------------------------------------
F- 25
<PAGE> 228
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Other government............................................ 65,821 62,639
Corporate listed instruments................................ 13,646 8,519
Other unlisted instruments.................................. 8,439 8,100
------- -------
TOTAL....................................................... 117,118 102,675
------- -------
EQUITY INSTRUMENTS
Listed instruments (excluding own shares)................... 87,227 49,848
Unlisted instruments........................................ 2,968 841
------- -------
TOTAL....................................................... 90,195 50,689
------- -------
PRECIOUS METALS............................................. 5,127 5,815
------- -------
TOTAL TRADING PORTFOLIO ASSETS.............................. 212,440 159,179
======= =======
TRADING PORTFOLIO LIABILITIES
DEBT INSTRUMENTS
Swiss government and government agencies.................... 0 96
U.S. Treasury and government agency......................... 24,535 4,455
Other government............................................ 11,917 34,979
Corporate listed instruments................................ 6,459 3,154
------- -------
TOTAL....................................................... 42,911 42,684
------- -------
LISTED EQUITY INSTRUMENTS................................... 11,675 4,349
------- -------
TOTAL TRADING PORTFOLIO LIABILITIES......................... 54,586 47,033
======= =======
</TABLE>
The Group trades debt, equity, precious metals, foreign currency and derivatives
to meet the financial needs of its customers and to generate revenue through its
trading activities. Note 27 provides a description of the various classes of
derivatives together with the related volumes used in the Group's trading
activities, whereas Notes 13 and 14 provide further details about cash
collateral on securities borrowed and lent and repurchase and reverse repurchase
agreements.
NOTE 16 FINANCIAL INVESTMENTS
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 12.31.1998
----------- ---------- ----------
<S> <C> <C>
DEBT INSTRUMENTS
Listed...................................................... 1,357 1,880
Unlisted.................................................... 609 547
----- -----
Total....................................................... 1,966 2,427
----- -----
EQUITY INVESTMENTS
Listed...................................................... 356 400
Unlisted.................................................... 557 1,048
----- -----
Total....................................................... 913 1,448
----- -----
PRIVATE EQUITY INVESTMENTS.................................. 3,001 1,759
PROPERTIES HELD FOR RESALE.................................. 1,159 1,280
----- -----
TOTAL FINANCIAL INVESTMENTS................................. 7,039 6,914
===== =====
thereof eligible for discount at central banks.............. 563 544
</TABLE>
--------------------------------------------------------------------------------
F- 26
<PAGE> 229
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The following table gives additional disclosure in respect of the valuation
methods used.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------ ------------------------
CHF MILLION BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
VALUED AT AMORTIZED COST
Debt instruments................................ 677 687 1,530 1,551
----- ----- ----- -----
VALUED AT THE LOWER OF COST OR MARKET VALUE
Debt instruments................................ 1,289 1,314 897 907
Equity instruments.............................. 913 939 1,448 1,552
Properties held for resale...................... 1,159 1,194 1,280 1,369
----- ----- ----- -----
Total........................................... 3,361 3,447 3,625 3,828
----- ----- ----- -----
VALUED AT COST LESS ADJUSTMENTS FOR IMPAIRMENTS
Private equity investments...................... 3,001 4,146 1,759 2,574
----- ----- ----- -----
TOTAL FINANCIAL INVESTMENTS..................... 7,039 8,280 6,914 7,953
===== ===== ===== =====
</TABLE>
NOTE 17 INVESTMENTS IN ASSOCIATES
<TABLE>
<CAPTION>
CARRYING CARRYING
AMOUNT AS OF AMOUNT AS OF
CHF MILLION 31.12.1998 INCOME ADDITIONS DISPOSALS 31.12.1999
----------- ------------ ------ --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Total investments in associates...... 2,805 211 47 (1,961) 1,102
===== === == ====== =====
</TABLE>
The figure of CHF 1,961 million for disposals for the year ended 31 December
1999 primarily consists of the sale of Swiss Life/Rentenanstalt.
NOTE 18 PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED CARRYING CARRYING ACCUMULATED
AMORTIZATION AMOUNT AMOUNT DEPRECIATION
HISTORICAL AS OF AS OF DEPRECIATION, AS OF AS OF
CHF MILLION COST 31.12.1998 31.12.1998 ADDITIONS DISPOSALS WRITE-OFFS 31.12.1999 31.12.1999(3)
----------- ---------- ------------ ---------- --------- --------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bank premises.......... 10,668 (4,096) 6,572 292 (1,050) (354) 5,460 (3,625)
Other properties....... 1,802 (656) 1,146 705 (325) (59) 1,467 (539)
Equipment and
furniture............ 6,035 (3,867) 2,168 1,823 (525) (1,692) 1,774 (4,345)
------ ------ ----- ----- ------ ------ ----- ------
TOTAL PROPERTY AND
EQUIPMENT(1)......... 18,505 (8,619) 9,886 2,820 (1,900) (2,105)(2) 8,701 (8,509)
====== ====== ===== ===== ====== ====== ===== ======
</TABLE>
---------------
(1) Fire insurance value of property and equipment is CHF 15,004 million (1998:
CHF 14,941 million).
(2) Depreciation, write-offs of CHF 2,105 million include a charge of CHF 588
million that was charged against the restructuring provision.
(3) After elimination of CHF 2,215 million accumulated depreciation relating to
disposals.
--------------------------------------------------------------------------------
F- 27
<PAGE> 230
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 INTANGIBLE ASSETS AND GOODWILL
<TABLE>
<CAPTION>
ACCUMULATED CARRYING CARRYING ACCUMULATED
AMORTIZATION AMOUNT AMOUNT AMORTIZATION
HISTORICAL AS OF AS OF AMORTIZATION, AS OF AS OF
CHF MILLION COST 31.12.1998 31.12.1998 ADDITIONS(1) WRITE-OFFS 31.12.1999 31.12.1999(2)
----------- ---------- ------------ ---------- ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Intangible assets............ 553 (301) 252 55 (42) 265 (40)
Goodwill..................... 2,447 (489) 1,958 1,618 (298) 3,278 (951)
----- ---- ----- ----- ---- ----- ----
TOTAL INTANGIBLE ASSETS AND
GOODWILL................... 3,000 (790) 2,210 1,673 (340) 3,543 (991)
===== ==== ===== ===== ==== ===== ====
</TABLE>
---------------
(1) Including currency translation differences.
(2) After elimination of CHF 139 million accumulated amortization relating to
intangible assets fully written off and no longer used.
NOTE 20 OTHER ASSETS
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Deferred tax assets(1)...................................... 742 1,205
Settlement and clearing accounts............................ 4,911 5,543
VAT and other tax receivables............................... 702 839
Other receivables........................................... 4,652 4,505
------ ------
TOTAL OTHER ASSETS.......................................... 11,007 12,092
====== ======
</TABLE>
---------------
(1) Additional tax information is provided in Note 25.
NOTE 21 DUE TO BANKS AND CUSTOMERS
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Due to banks................................................ 76,365 85,716
Due to customers in savings and investment accounts......... 78,640 79,723
Amounts due to customers on demand and time................. 201,320 195,127
------- -------
Total due to customers...................................... 279,960 274,850
------- -------
TOTAL DUE TO BANKS AND CUSTOMERS............................ 356,325 360,566
======= =======
</TABLE>
NOTE 22 LONG-TERM DEBT
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999
----------- -----------
<S> <C>
Total bond issues........................................... 48,305
Shares in bond issues of the Swiss Regional or Cantonal
Banks' Central Bond Institutions.......................... 2,055
Medium term notes........................................... 5,972
------
TOTAL LONG-TERM DEBT........................................ 56,332
======
</TABLE>
--------------------------------------------------------------------------------
F- 28
<PAGE> 231
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
UBS AG (PARENT) SUBSIDIARIES
--------------------- ---------------------
FLOATING FLOATING TOTAL TOTAL
CHF MILLION FIXED RATE RATE FIXED RATE RATE 31.12.1999 31.12.1998
----------- ---------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONTRACTUAL MATURITY DATE
2000................................. 13,395 524 818 0 14,737 8,208
2001................................. 7,866 121 1,354 0 9,341 7,803
2002................................. 5,313 270 2,158 399 8,140 8,368
2003................................. 3,093 147 129 0 3,369 6,534
2004................................. 2,316 47 286 1,705 4,354 3,772
2005-2009............................ 9,795 208 581 1,378 11,962 12,562
Thereafter........................... 3,476 32 921 0 4,429 3,536
------ ----- ----- ----- ------ ------
TOTAL................................ 45,254 1,349 6,247 3,482 56,332 50,783
====== ===== ===== ===== ====== ======
</TABLE>
The Group issues both CHF and non-CHF denominated fixed and floating rate debt.
Publicly placed fixed rate debt pays interest at rates up to 16%. Floating rate
debt pays interest based on the three-month or six-month London Interbank
Offered Rate ("LIBOR").
Subordinated debt securities are unsecured obligations of the Group and are
subordinated in right of payment to all present and future senior indebtedness
and certain other obligations of the Group. At 31 December 1999 and 31 December
1998, the Group had CHF 13,106 million and CHF 12,071 million, respectively, in
subordinated debt excluding convertible and exchangeable debt and notes with
warrants which have been included in the following paragraph. Subordinated debt
usually pays interest annually and provides for single principal payments upon
maturity. At 31 December 1999 and 31 December 1998, the Group had CHF 41,093
million and CHF 36,379 million, respectively, in unsubordinated debt.
The Group issues convertible obligations that can be exchanged for ordinary
shares of UBS AG and notes with warrants attached on UBS AG shares. Furthermore,
the Group issues notes exchangeable into common stock or preferred stock of
other companies, or repaid based on the performance of an index or group of
securities. At 31 December 1999 and 31 December 1998, the Group had CHF 2,133
million and CHF 2,333 million, respectively, in convertible and exchangeable
debt and notes with warrants attached outstanding.
The Group, as part of its interest-rate risk management process, utilizes
derivative instruments to modify the repricing and maturity characteristics of
the notes/bonds issued. The Group also utilizes other derivative instruments to
manage the foreign exchange impact of certain long-term debt obligations.
Interest rate swaps are utilized to convert the economic characteristics of
fixed rate debt to those of floating rate debt.
The Group issues credit-linked notes generally through private placements. The
credit-linked notes are usually senior unsecured obligations of UBS AG, acting
through one of its branches, and can be subject to early redemption at the
option of the Group or in the event of a defined credit event. Payment of
interest and/or principal is dependent upon the performance of a reference
entity or security. The rate of interest on each credit-linked note is either
floating and determined by reference to LIBOR plus a spread or fixed.
Medium-term and credit-linked notes have been included in the amounts disclosed
above as unsubordinated debt.
--------------------------------------------------------------------------------
F- 29
<PAGE> 232
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23 OTHER LIABILITIES
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Provision, including restructuring provision(1)............. 5,995 7,094
Provision for commitments and contingent liabilities........ 149 435
Current tax liabilities..................................... 1,747 875
Deferred tax liabilities.................................... 994 1,012
VAT and other tax payables(2)............................... 888 1,010
Settlement and clearing accounts............................ 4,789 9,502
Other payables.............................................. 3,814 7,794
------ ------
TOTAL OTHER LIABILITIES..................................... 18,376 27,722
====== ======
</TABLE>
---------------
(1) Further details to business risk and restructuring provisions are provided
in Note 24.
(2) Additional information regarding income tax is provided in Note 25.
NOTE 24 PROVISIONS, INCLUDING RESTRUCTURING PROVISION
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
BUSINESS RISK PROVISION
Balance at the beginning of the year........................ 4,121 1,142
New provisions charged to income............................ 539 3,133
Provisions applied.......................................... (705) (484)
Recoveries and adjustments.................................. 611 330
------ ------
BALANCE AT THE END OF THE YEAR.............................. 4,566 4,121
------ ------
RESTRUCTURING PROVISION
Balance at the beginning of the year........................ 2,973 7,000
Addition.................................................... 300 0
Applied(1)
Personnel................................................. (378) (2,024)
IT........................................................ (642) (797)
Premises.................................................. (673) (267)
Other..................................................... (151) (939)
------ ------
Total utilized during the year.............................. (1,844) (4,027)
------ ------
BALANCE AT THE END OF THE YEAR.............................. 1,429 2,973
------ ------
TOTAL PROVISIONS, INCLUDING RESTRUCTURING PROVISION......... 5,995 7,094
====== ======
</TABLE>
---------------
(1) The expense categories refer to the nature of the expense rather than the
income statement expense line.
PROVISION FOR RESTRUCTURING COSTS: At the time of the 1998 merger, it was
announced that the merged banks' operations in various locations would be
combined, resulting in vacant properties, reductions in personnel, elimination
of redundancies in the information technology platforms, exit costs and other
costs. As a result, the individual banks estimated that the cost of the
post-merger (1998 merger) restructuring would be approximately CHF 7 billion, to
be expended over a period of four years. By the end of December 1999, the Group
had utilized CHF 6 billion of the provision.
--------------------------------------------------------------------------------
F- 30
<PAGE> 233
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
As of today, many of the actions under these plans are completed or near
completion. As a result of the real estate lease breaks or disposals which have
been identified, the Group recognized an additional restructuring provision of
CHF 300 million in 1999.
NOTE 25 INCOME TAXES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------------------------------------- 31.12.1999 31.12.1998 31.12.1997
CHF MILLION ---------- ---------- ----------
<S> <C> <C> <C>
FEDERAL AND CANTONAL
Current payable......................................... 849 213 511
Deferred................................................ 511 463 (191)
FOREIGN
Current payable......................................... 359 200 419
Deferred................................................ (33) 28 (844)
----- ----- ----
TOTAL INCOME TAX EXPENSE (BENEFIT)........................ 1,686 904 (105)
===== ===== ====
</TABLE>
The Group made net tax payments, including domestic federal, cantonal and
foreign taxes, of CHF 1,063 million and CHF 733 million for the full year of
1999 and 1998, respectively.
The components of operating profit/(loss) before tax, and the differences
between income tax expense/(benefit) reflected in the financial statements and
the amounts calculated at the statutory rate of 25% are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------------------------------------- 31.12.1999 31.12.1998 31.12.1997
CHF MILLION ---------- ---------- ----------
<S> <C> <C> <C>
Operating profit/(loss) before tax........................ 7,893 3,871 (756)
Domestic................................................ 6,957 10,287 1,202
Foreign................................................. 936 (6,416) (1,958)
----- ------ ------
Income taxes at statutory rate of 25%..................... 1,973 968 (189)
Increase/(decrease) resulting from:
Applicable tax rates differing from statutory rate........ 55 88 (3)
Tax losses not recognized................................. 39 1,436 310
Previously unrecorded tax losses now recognized........... (215) (142) (201)
Lower taxed income........................................ (278) (1,849) (333)
Non-deductible expenses................................... 132 172 171
Adjustments related to prior years........................ (112) 7 (27)
Capital taxes............................................. 0 0 96
Change in deferred tax valuation allowance................ 92 224 71
----- ------ ------
Income tax expense (benefit).............................. 1,686 904 (105)
===== ====== ======
</TABLE>
As of 31 December 1999 the Group had accumulated unremitted earnings from
foreign subsidiaries on which deferred taxes had not been provided as the
undistributed earnings of these foreign subsidiaries are indefinitely
reinvested. In the event these earnings were distributed it is estimated that
Swiss taxes of approximately CHF 35 million would be due.
--------------------------------------------------------------------------------
F- 31
<PAGE> 234
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Group's deferred income tax assets and liabilities
(gross) are as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998 31.12.1997
----------- ---------- ---------- ----------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Compensation and benefits................................. 316 114 106
Restructuring provision................................... 316 718 1,100
Allowance for credit losses............................... 138 370 573
Net operating loss carryforwards.......................... 2,194 1,610 672
Others.................................................... 237 170 270
------ ------ -----
Total..................................................... 3,201 2,982 2,721
Valuation allowance....................................... (2,459) (1,777) (647)
------ ------ -----
NET DEFERRED TAX ASSETS................................... 742 1,205 2,074
====== ====== =====
DEFERRED TAX LIABILITIES
Property and equipment.................................... 342 484 602
Investments in associates................................. 153 299 287
Other provisions.......................................... 142 109 501
Unrealized gains on investment securities................. 93 103 69
Others.................................................... 264 17 36
------ ------ -----
TOTAL..................................................... 994 1,012 1,495
====== ====== =====
</TABLE>
The change in the balance of the net deferred tax asset (liability) at 31
December 1999, 31 December 1998 and 31 December 1997 does not equal the deferred
tax expense (benefit) in those years. This is due to the effect of foreign
currency rate changes on tax assets and liabilities denominated in currencies
other than CHF.
Certain foreign branches and subsidiaries of the Group have deferred tax assets
related to net operating loss carryforwards and other items. Because recognition
of these assets is uncertain, the Group has established valuation allowances of
CHF 2,459 million, CHF 1,777 million and CHF 647 million at 31 December 1999,
1998 and 1997, respectively.
Net operating loss carryforwards totaling CHF 9,149 million at 31 December 1999
are available to reduce future taxable income of certain branches and
subsidiaries.
The carryforwards have lives as follows:
<TABLE>
<CAPTION>
31.12.1999
----------
<S> <C>
One year.................................................... 15
2 to 4 years................................................ 215
More than 4 years........................................... 8,919
-----
Total....................................................... 9,149
=====
</TABLE>
--------------------------------------------------------------------------------
F- 32
<PAGE> 235
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 26 MINORITY INTERESTS
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Minority interests in profit/(loss)......................... 54 (5)
Preferred stock(1).......................................... 0 689
Minority interests in equity................................ 380 306
--- ---
TOTAL MINORITY INTERESTS.................................... 434 990
=== ===
</TABLE>
---------------
(1) Represents Auction Market Preferred Stock, issued by UBS Inc., New York, a
subsidiary whose ordinary share capital is completely owned by UBS AG.
NOTE 27 DERIVATIVE INSTRUMENTS
Derivatives held or issued for trading purposes
Most of the Group's derivative transactions relate to sales and trading
activities. Sales activities include the structuring and marketing of derivative
products to customers at competitive prices to enable them to transfer, modify
or reduce current or expected risks. Trading involves market-making, positioning
and arbitrage activities. Market-making involves quoting bid and offer prices to
other market participants with the intention of generating revenues based on
spread and volume. Positioning involves managing market risk positions with the
expectation of profiting from favorable movements in prices, rates or indices.
Arbitrage activities involve identifying and profiting from price differentials
between markets and products.
Derivatives held or issued for non-trading purposes
The Group also uses derivatives as part of its asset/liability management
activities.
The majority of derivative positions used in UBS's asset and liability
management activities are established via intercompany transactions with
independently managed UBS dealer units within the Group. When the Group
purchases assets and issues liabilities at fixed interest rates it subjects
itself to fair value fluctuations as market interest rates change. These
fluctuations in fair value are managed by entering into interest rate contracts,
mainly interest rate swaps which change fixed rate instruments into variable
rate instruments.
When the Group purchases foreign currency denominated assets, issues foreign
currency denominated debt or has foreign net investments, it subjects itself to
changes in value as exchange rates move. These fluctuations are managed by
entering into currency swaps and forwards.
Type of derivatives
The Group uses the following derivative financial instruments for both trading
and non-trading purposes:
Swaps
Swaps are transactions in which two parties exchange cash flows on a specified
notional amount for a predetermined period.
Interest rate swap contracts generally represent the contractual exchange of
fixed and floating rate payments of a single currency, based on a notional
amount and an interest reference rate.
--------------------------------------------------------------------------------
F- 33
<PAGE> 236
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Cross currency interest rate swaps generally involve the exchange of payments
which are based on the interest reference rates available at the inception of
the contract on two different currency principal balances that are exchanged.
The principal balances are re-exchanged at an agreed upon rate at a specified
future date. Interest rate swaps subject the Group to market risks associated
with changes in interest rates and possibly foreign exchange rates. Exposure to
the credit risk associated with counterparty default also exists.
Forwards and futures
Forwards and futures are contractual obligations to buy or sell a financial
instrument on a future date at a specified price. Forward contracts are
effectively tailor-made agreements that are transacted between counterparties in
the over-the-counter market (OTC), whereas futures are standardized contracts
that are transacted on regulated exchanges. Varying levels of credit risk and
market risk exist with respect to these instruments. For futures contracts
closed prior to settlement, the cash receipt or payment is limited to the change
in value of the underlying instrument. Futures contracts allow for daily cash
settlement, therefore the credit risk is generally limited to one day's
variation margin. Forward contracts are settled at maturity by the exchange of
notional amounts specified under the contracts. Forwards generally have a
greater degree of credit risk since daily cash settlements are not required.
Options
Options are contractual agreements under which the seller (writer) grants the
purchaser the right, but not the obligation, either to buy (call option) or sell
(put option) by or at a set date, a specified amount of a financial instrument
at a predetermined price. The seller receives a premium from the purchaser for
this right. For options purchased, the Group is subject to credit and market
risk to the extent of the carrying value of the options. For options sold, the
Group is subject to market risk in excess of the carrying values but is not
subject to credit risk, except that for put options sold, credit risk may arise
from the underlying instrument that the Group may be obligated to buy.
Notional amounts and replacement values
The table below provides the notional amounts and the positive and negative
replacement values of the Group's derivative transactions. The notional amount
is the amount of a derivative's underlying asset, reference rate or index and is
the basis upon which changes in the value of derivatives are measured. It
provides an indication of the volume of business transacted by the Group but
does not provide any measure of risk.
Some derivatives are standardized in terms of their nominal amounts and
settlement dates, and these are designed to be bought and sold in active markets
(exchange traded). Others are packaged specifically for individual customers and
are not exchange traded although they may be bought and sold between
counterparties at negotiated prices (over-the-counter or OTC instruments).
Positive replacement value represents the cost to the Group of replacing all
transactions with a receivable amount if all the Group's counterparties were to
default. This measure is the industry standard for the calculation of current
credit exposure. Positive replacement values represent current credit risk
without giving effect to any possible reductions due to master netting
agreements, collateral, or other security. Negative replacement value is the
cost to the Group's counterparties of replacing all the Group's transactions
with a commitment if the Group were to default. The total positive and negative
replacement values are reported separately on the balance sheet on a net by
counterparty basis.
--------------------------------------------------------------------------------
F- 34
<PAGE> 237
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999
----------------------------------------------------------------------------------------------------
TERM TO MATURITY
----------------------------------------------------------------------------------------------------
TOTAL
WITHIN NOTIONAL
3 MONTHS 3-12 MONTHS 1-5 YEARS OVER 5 YEARS TOTAL TOTAL AMOUNT
--------------- --------------- --------------- --------------- ------- ------- --------
PRV(1) NRV(2) PRV NRV PRV NRV PRV NRV PRV(4) NRV(4) CHF BN
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- --------
CHF MILLION
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
Over the counter (OTC)
contracts
Forward contracts........ 34 55 68 19 6 1 0 0 108 75 554.0
Swaps.................... 5,386 2,100 3,163 2,871 22,843 24,168 35,942 30,301 67,334 59,440 2,650.9
Options.................. 108 27 47 742 268 12 4 2,018 427 2,799 1,877.0
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Exchange-traded
contracts(3)
Futures.................. 0 0 0 0 0 0 0 0 0 0 774.1
Options.................. 0 0 0 0 0 0 0 0 0 0 54.4
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
TOTAL...................... 5,528 2,182 3,278 3,632 23,117 24,181 35,946 32,319 67,869 62,314 5,910.4
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
FOREIGN EXCHANGE CONTRACTS
Over the counter (OTC)
contracts
Forward contracts........ 9,669 14,264 3,661 7,008 445 851 25 37 13,800 22,160 1,077.1
Interest and currency
swaps.................. 622 520 2,036 1,826 529 6,076 2,567 1,518 5,754 9,940 252.3
Options.................. 3,344 2,708 3,934 3,138 8,883 411 30 10 16,191 6,267 813.5
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Exchange-traded
contracts(3)
Futures.................. 0 1 0 0 0 0 0 0 0 1 3.5
Options.................. 0 1 4 1 0 0 0 0 4 2 3.7
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
TOTAL...................... 13,635 17,494 9,635 11,973 9,857 7,338 2,622 1,565 35,749 38,370 2,150.1
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
PRECIOUS METALS CONTRACTS
Over the counter (OTC)
contracts
Forward contracts........ 1,112 1,047 53 62 80 60 0 0 1,245 1,169 30.0
Options.................. 277 215 594 466 1,168 1,059 117 130 2,156 1,870 82.9
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Exchange-traded
contracts(3)
Futures.................. 0 0 0 0 0 0 0 0 0 0 0.8
Options.................. 0 5 5 8 0 10 0 0 5 23 4.9
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
TOTAL...................... 1,389 1,267 652 536 1,248 1,129 117 130 3,406 3,062 118.6
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
EQUITY/INDEX CONTRACTS
Over the counter (OTC)
contracts
Forward contracts........ 526 1,721 1,148 2,044 503 5,325 1,762 2,787 3,939 11,877 149.4
Options.................. 1,941 1,611 4,013 10,021 10,146 27,182 439 2,985 16,539 41,799 264.7
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Exchange-traded
contracts(3)
Futures.................. 74 46 0 0 0 0 0 0 74 46 25.1
Options.................. 1,395 304 1,744 4,047 72 63 0 0 3,211 4,414 79.8
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
TOTAL...................... 3,936 3,682 6,905 16,112 10,721 32,570 2,201 5,772 23,763 58,136 519.0
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
COMMODITY CONTRACTS
Over the counter (OTC)
contracts
Forward contracts........ 32 25 0 0 0 0 0 0 32 25 167.9
Options.................. 15 15 0 0 0 0 0 0 15 15 79.7
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
TOTAL...................... 47 40 0 0 0 0 0 0 47 40 247.6
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
TOTAL DERIVATIVE
INSTRUMENTS 31.12.1999... 24,535 24,665 20,470 32,253 44,943 65,218 40,886 39,786 130,834 161,922 --
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
---------------
(1) PRV Positive replacement value.
(2) NRV Negative replacement value.
(3) Exchange-traded products include proprietary trades only.
(4) The figures above are presented on a gross by counterparty basis for
disclosure purposes, but shown net in the balance sheet (see Note 1: Basis
of Accounting).
--------------------------------------------------------------------------------
F- 35
<PAGE> 238
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1998
----------------------------------------------------------------------------------------------------
TERM TO MATURITY
----------------------------------------------------------------------------------------------------
TOTAL
WITHIN NOTIONAL
3 MONTHS 3-12 MONTHS 1-5 YEARS OVER 5 YEARS TOTAL TOTAL AMOUNT
--------------- --------------- --------------- --------------- ------- ------- --------
PRV(1) NRV(2) PRV NRV PRV NRV PRV NRV PRV(4) NRV(4) CHF BN
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- --------
CHF MILLION
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
Over the counter (OTC)
contracts
Forward contracts........ 783 932 309 271 45 29 42 23 1,179 1,255 217.7
Swaps.................... 3,488 4,502 6,657 6,024 36,464 35,799 38,056 34,758 84,665 81,084 3,722.5
Options.................. 233 327 465 615 2,947 4,476 3,207 4,427 6,852 9,845 2,519.2
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Exchange-traded
contracts(3)
Futures.................. 12 7 0 1 2 0 0 0 14 7 732.3
Options.................. 0 0 0 0 0 0 0 0 0 0 77.8
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
TOTAL...................... 4,516 5,768 7,431 6,911 39,458 40,304 41,305 39,208 92,710 92,191 7,269.5
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
FOREIGN EXCHANGE CONTRACTS
Over the counter (OTC)
contracts
Forward contracts........ 3,439 498 6,493 9,455 278 261 164 237 10,375 10,451 888.4
Interest and currency
swaps.................. 2,456 3,009 1,718 2,683 4,626 5,202 4,974 5,097 13,775 15,991 235.4
Options.................. 4,718 17,168 10,123 218 1,945 619 604 604 17,390 18,610 921.9
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Exchange-traded
contracts(3)
Futures.................. 0 0 0 0 0 0 0 0 0 0 2.5
Options.................. 156 120 193 0 0 5 0 0 348 124 5.2
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
TOTAL...................... 10,769 20,795 18,527 12,356 6,849 6,087 5,742 5,938 41,888 45,176 2,053.4
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
PRECIOUS METALS CONTRACTS
Over the counter (OTC)
contracts
Forward contracts........ 4,539 4,633 216 295 75 60 10 0 4,840 4,988 47.7
Options.................. 2,840 2,915 24 6 41 0 0 0 2,905 2,921 56.2
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Exchange-traded
contracts(3)
Futures.................. 0 0 0 0 0 0 0 0 0 0 1.2
Options.................. 4 0 15 0 2 0 0 0 21 0 5.0
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
TOTAL...................... 7,383 7,548 255 301 118 60 10 0 7,766 7,909 110.1
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
EQUITY/INDEX CONTRACTS
Over the counter (OTC)
contracts
Forward contracts........ 279 383 325 608 791 2,421 159 446 1,554 3,858 57.3
Options.................. 8,220 15,347 4,619 8,480 8,700 25,726 1,687 4,598 23,227 54,151 939.6
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Exchange-traded
contracts(3)
Futures.................. 3 15 0 0 0 0 0 0 3 15 17.7
Options.................. 128 242 703 392 754 305 75 9 1,659 948 62.0
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
TOTAL...................... 8,630 15,987 5,647 9,480 10,245 28,452 1,921 5,053 26,443 58,972 1,076.6
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
COMMODITY CONTRACTS
Over the counter (OTC)
contracts
Forward contracts........ 114 52 244 214 325 359 65 66 749 691 8.9
Options.................. 8 0 62 70 24 0 5 0 99 70 3.0
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
Exchange-traded
contracts(3)
Futures.................. 0 0 85 65 0 0 0 0 85 65 2.2
Options.................. 0 0 0 7 2 0 0 0 2 7 0.9
------ ------ ------ ------ ------ ------ ------ ------ ------- ------- -------
TOTAL...................... 122 52 391 356 351 359 70 66 935 823 15.0
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
TOTAL DERIVATIVE
INSTRUMENTS 31.12.1998... 31,420 50,150 32,251 29,404 57,022 75,262 49,048 50,265 169,742 205,081 --
====== ====== ====== ====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
---------------
(1) PRV Positive replacement value.
(2) NRV Negative replacement value.
(3) Exchange-traded products include proprietary trades only.
(4) The figures above are presented on a gross by counterparty basis for
disclosure purposes, but shown net in the balance sheet (see Note 1: Basis
of Accounting).
--------------------------------------------------------------------------------
F- 36
<PAGE> 239
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 28 PLEDGED ASSETS
ASSETS PLEDGED OR ASSIGNED AS SECURITY FOR LIABILITIES AND ASSETS SUBJECT TO
RESERVATION OF TITLE
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
--------------------- ---------------------
CARRYING RELATED CARRYING RELATED
AMOUNT LIABILITY AMOUNT LIABILITY
CHF MILLION -------- --------- -------- ---------
<S> <C> <C> <C> <C>
Money market paper..................................... 35,578 707 6,981 5
Mortgage loans......................................... 2,536 1,736 2,955 2,047
Securities(1).......................................... 23,837 585 13,902 5,636
Property and equipment................................. 170 91 147 71
Other.................................................. 2,110 0 0 0
------ ----- ------ -----
TOTAL PLEDGED ASSETS................................... 64,231 3,119 23,985 7,759
====== ===== ====== =====
</TABLE>
---------------
(1) Excluding securities pledged in respect of securities borrowing and
repurchase agreements.
Assets are pledged as collateral for collateralized credit lines with central
banks, loans from central mortgage institutions, deposit guarantees for savings
banks, security deposits relating to stock exchange membership and mortgages on
the Group's property. These assets are also segregated pursuant to certain
regulatory requirements.
NOTE 29 FIDUCIARY TRANSACTIONS
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
CHF MILLION ---------- ----------
<S> <C> <C>
Placements with third parties............................... 60,221 60,612
Fiduciary credits and other fiduciary financial
transactions.............................................. 1,438 652
------ ------
TOTAL FIDUCIARY TRANSACTIONS................................ 61,659 61,264
====== ======
</TABLE>
Fiduciary placements represents funds which customers have instructed the Group
to place in foreign banks. The Group is not liable to the customer for any
default by the foreign bank nor do creditors of the Group have a claim on the
assets placed.
NOTE 30 COMMITMENTS AND CONTINGENT LIABILITIES
Commitments and contingencies represent potential future liabilities of the
Group resulting from credit facilities available to clients, but not yet drawn
upon by them. They are subject to expiration at fixed dates. The Group engages
in providing open credit facilities to allow clients quick access to funds
required to meet their short-term obligations as well as their long-term
financing needs. The credit facilities can take the form of guarantees, whereby
the Group might guarantee repayment of a loan taken out by a client with a third
party; standby letters of credit, which are credit enhancement facilities
enabling the client to engage in trade finance at lower cost; documentary
letters of credit, which are trade finance-related payments made on behalf of a
client; commitments to enter into repurchase agreements; note issuance
facilities and revolving underwriting facilities, which allow clients to issue
money market paper or medium term notes when needed without engaging in the
normal underwriting process each time.
The figures disclosed in the accompanying tables represent the amounts at risk
should clients draw fully on all facilities and then default, and there is no
collateral. Determination of the creditworthiness
--------------------------------------------------------------------------------
F- 37
<PAGE> 240
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
of the clients is part of the normal credit risk management process, and the
fees charged for maintenance of the facilities reflect the various credit risks.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
---------- ----------
<S> <C> <C>
CHF MILLION
CONTINGENT LIABILITIES
Credit guarantees and similar instruments(1)................ 18,822 22,697
Sub-participations.......................................... (3,665) (5,217)
------ -------
Total....................................................... 15,157 17,480
====== =======
Performance guarantees and similar instruments(2)........... 6,782 12,092
Sub-participations.......................................... (42) (216)
------ -------
Total....................................................... 6,740 11,876
====== =======
Irrevocable commitments under documentary credits........... 2,704 2,942
Sub-participations.......................................... 0 (39)
------ -------
Total....................................................... 2,704 2,903
====== =======
GROSS CONTINGENT LIABILITIES................................ 28,308 37,731
SUB-PARTICIPATIONS.......................................... (3,707) (5,472)
------ -------
NET CONTINGENT LIABILITIES.................................. 24,601 32,259
====== =======
IRREVOCABLE COMMITMENTS
Undrawn irrevocable credit facilities....................... 65,693 82,337
Sub-participations.......................................... (1,836) (26)
------ -------
Total....................................................... 63,857 82,311
====== =======
Liabilities for calls on shares and other equities.......... 57 109
------ -------
GROSS IRREVOCABLE COMMITMENTS............................... 65,750 82,446
SUB-PARTICIPATIONS.......................................... (1,836) (26)
------ -------
NET IRREVOCABLE COMMITMENTS................................. 63,914 82,420
====== =======
GROSS COMMITMENTS AND CONTINGENT LIABILITIES................ 94,058 120,177
SUB-PARTICIPATIONS.......................................... (5,543) (5,498)
NET COMMITMENTS AND CONTINGENT LIABILITIES.................. 88,515 114,679
====== =======
</TABLE>
---------------
(1) Credit guarantees in the form of bill of exchange and other guarantees,
including guarantees in the form of irrevocable letters of credit,
endorsement liabilities from bills rediscounted, advance payment guarantees
and similar facilities.
(2) Bid bonds, performance bonds, builders' guarantees, letters of indemnity,
other performance guarantees in the form of irrevocable letters of credit
and similar facilities.
--------------------------------------------------------------------------------
F- 38
<PAGE> 241
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MORTGAGE OTHER
CHF MILLION COLLATERAL COLLATERAL UNSECURED TOTAL
----------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C>
OVERVIEW OF COLLATERAL
Gross contingent liabilities...................... 191 11,356 16,761 28,308
Gross irrevocable commitments..................... 386 8,774 56,533 65,693
Liabilities for calls on shares and other
equities........................................ 0 0 57 57
--- ------ ------ -------
TOTAL 31.12.1999.................................. 577 20,130 73,351 94,058
=== ====== ====== =======
TOTAL 31.12.1998.................................. 389 33,363 86,425 120,177
=== ====== ====== =======
</TABLE>
NOTE 31 OPERATING LEASE COMMITMENTS
Our minimum commitments for non-cancellable leases of premises and equipment are
presented as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999
----------- -----------
<S> <C>
OPERATING LEASES DUE:
2000........................................................ 247
2001........................................................ 202
2002........................................................ 184
2003........................................................ 187
2004........................................................ 153
2005 and thereafter......................................... 1,919
-----
TOTAL COMMITMENTS FOR MINIMUM PAYMENTS UNDER OPERATING
LEASES.................................................... 2,892
=====
</TABLE>
Operating expenses include CHF 742 million and CHF 797 million in respect of
operating lease rentals for the year ended 31 December 1999 and for the year
ended 31 December 1998 respectively.
NOTE 32 LITIGATION
In the United States, several class actions, in relation to what is known as the
Holocaust affair, have been brought against UBS AG (as legal successor to Swiss
Bank Corporation and Union Bank of Switzerland) in the United States District
Court for the Eastern District of New York (Brooklyn). These lawsuits were
initially filed in October 1996. Another Swiss bank has been designated as a
defendant alongside us. On 12 August 1998, however, a settlement was reached
between the parties. This settlement provides for a payment by the defendant
banks to the plaintiffs, under certain terms and conditions, of an aggregate
amount of USD 1.25 billion. UBS agreed to contribute up to two-thirds of this
amount. To the extent that other Swiss companies agreed to participate in this
fund, and to the extent of applicable payments to beneficiaries of eligible
dormant accounts, our share was to be reduced. Based on our estimate of such
expected contributions, we provided a reserve of USD 610 million in 1998 and an
additional USD 95 million in 1999. A number of persons have elected to opt out
of the settlement and not participate in the class action. It is expected that a
decision approving the settlement will be issued in 2000, which will be followed
by hearings on the allocation of the settlement amount. We will continue to
monitor the contributions of other Swiss companies, in order to determine
whether we will need an adjustment to the reserve.
In addition, UBS AG and other companies within the Group are subject to various
claims, disputes and legal proceedings, as part of the normal course of
business. The Group makes provision for such matters when, in the opinion of
management and its professional advisors, it is probable that a
--------------------------------------------------------------------------------
F- 39
<PAGE> 242
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
payment will be made by the Group, and the amount can be reasonably estimated.
All litigation provisions are included under Business risk provision within
Other liabilities in the accompanying Group Balance Sheet.
In respect of the further claims asserted against the Group of which management
is aware (which, according to the principles outlined above, have not been
provided for), it is the opinion of management that such claims are either
without merit, can be successfully defended or will result in exposure to the
Group which is immaterial to both financial position and results of operations.
OTHER INFORMATION
NOTE 33 FINANCIAL INSTRUMENTS RISK POSITION
OVERALL RISK POSITION
The Group manages risk in a number of ways, including the use of a value at risk
model combined with a system of trading limits.
This section presents information about the results of the Group's management of
the risks associated with the use of financial instruments.
(a) Interest Rate Risk
Interest rate risk is the potential impact of changes in market interest rates
on the fair values of assets and liabilities on the balance sheet and on the
annual interest income and expense in the income statement.
Interest rate sensitivity
One commonly used method to present the potential impact of market movements is
to show the effect of a one basis point (0.01%) change in interest rates on the
fair values of assets and liabilities, analyzed by time bands within which the
Group is committed. This type of presentation, described as a sensitivity
analysis, is set out below. Interest rate sensitivity is one of the inputs to
the value at risk model used by the Group to manage its overall market risk, of
which interest rate risk is a part.
The following sets out the extent to which the Group was exposed to interest
rate risk at 31 December 1999 and 31 December 1998. The tables show the
potential impact of a one basis point (0.01%) increase in market interest rates
which would influence the fair values of both assets and liabilities that are
subject to fixed interest rates. The impact of such an increase in rates depends
on the net asset or net liability position of the Group in each category,
currency and time band in the table. A negative amount in the table reflects a
potential loss to the Group due to the changes in fair values as a result of an
increase in interest rates. A positive amount reflects a potential gain as a
result of an increase in interest rates. Both primary and derivative instruments
in trading and non-trading activities, as well as off-balance-sheet commitments,
are included in the table.
--------------------------------------------------------------------------------
F- 40
<PAGE> 243
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate sensitivity position
<TABLE>
<CAPTION>
INTEREST SENSITIVITY BY TIME BANDS AS AT 31.12.1999
----------------------------------------------------------
3 TO
WITHIN 1 1 TO 3 12 1 TO 5 OVER 5
MONTH MONTHS MONTHS YEARS YEARS TOTAL
-------- ------ ------ ------ ------ ------
CHF THOUSAND PER BASIS POINT
<S> <C> <C> <C> <C> <C> <C> <C>
CHF Trading..................... 171 (902) 466 506 (417) (176)
Non-trading................. (30) (8) (398) (6,204) (1,220) (7,860)
---- ------ ---- ------ ------ ------
USD Trading..................... (411) 1,018 386 (109) (908) (24)
Non-trading................. 3 (33) (10) 83 1,207 1,250
---- ------ ---- ------ ------ ------
EUR Trading..................... (39) (239) 113 600 (1,406) (971)
Non-trading................. 0 (3) 3 30 210 240
---- ------ ---- ------ ------ ------
GBP Trading..................... 1 43 10 (34) (77) (57)
Non-trading................. 0 5 (39) 77 815 858
---- ------ ---- ------ ------ ------
JPY Trading..................... 484 (1,708) 927 (101) 135 (263)
Non-trading................. 0 0 0 (1) (4) (5)
---- ------ ---- ------ ------ ------
OTHERS Trading..................... (34) 46 50 (195) 24 (109)
Non-trading................. 0 0 0 0 0 0
==== ====== ==== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY BY TIME BANDS AS AT 31.12.1998
----------------------------------------------------------
3 TO
WITHIN 1 1 TO 3 12 1 TO 5 OVER 5
MONTH MONTHS MONTHS YEARS YEARS TOTAL
-------- ------ ------ ------ ------ ------
CHF THOUSAND PER BASIS POINT
<S> <C> <C> <C> <C> <C> <C> <C>
CHF Trading...................... 189 (672) 450 (322) (464) (819)
Non-trading.................. (23) 6 (350) (7,522) (546) (8,435)
--- ---- ---- ------ ----- ------
USD Trading...................... (28) 93 8 (575) 1,254 752
Non-trading.................. 1 (21) 7 72 1,502 1,561
--- ---- ---- ------ ----- ------
EUR Trading...................... (34) (22) (158) (559) 339 (434)
Non-trading.................. 0 (8) 0 48 256 296
--- ---- ---- ------ ----- ------
GBP Trading...................... 10 (214) 560 (919) 491 (72)
Non-trading.................. 0 2 (18) 130 876 990
--- ---- ---- ------ ----- ------
JPY Trading...................... (32) (698) (402) 1,002 263 133
Non-trading.................. 0 3 (5) 6 146 150
--- ---- ---- ------ ----- ------
OTHERS Trading...................... 11 (98) 47 (158) (152) (350)
Non-trading.................. 0 0 0 0 0 0
=== ==== ==== ====== ===== ======
</TABLE>
Trading
The major part of the trading related interest rate risk is generated in fixed
income securities trading, fixed income derivatives trading, trading in currency
forward contracts and money market trading and is being managed within the Value
at Risk model. Interest rate sensitivity arising from trading activities is
quite sizeable in USD and Euro as these are still the predominantly traded
currencies in the global interest rate markets. It should be noted that it is
management's view that an interest rate sensitivity analysis at a particular
point in time has limited relevance with respect to trading positions, which can
vary significantly on a daily basis.
--------------------------------------------------------------------------------
F- 41
<PAGE> 244
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Non-trading
The interest rate risk related to client business with undefined maturities and
non-interest bearing business including the strategic management of overall
balance sheet interest rate exposure is managed by the Corporate Center.
Significant contributors to the overall USD and GBP interest rate sensitivity
were strategic long-term subordinated note issues which are intentionally
unswapped since they are regarded as constituting a part of the Group's equity
for asset and liability management purposes. At 31 December 1999, the Group's
equity was invested in a portfolio of fixed rate CHF deposits with an average
duration of 2.16 years. As this equity investment is the most significant
component of the CHF book, this results in the entire book having an interest
rate sensitivity of CHF (7.9) million, which is reflected in the table above.
This is in line with the duration and sensitivity targets set by the Group
Executive Board. Investing in shorter-term or variable rate instruments would
mean exposing the earnings stream (interest income) to higher fluctuations.
(b) Credit Risk
Credit risk is the risk of loss from the default by an obligor or counterparty.
This risk is managed primarily based on reviews of the financial status of each
specific counterparty. Credit risk is greater when counterparties are
concentrated in a single industry or geographical region. This is because a
group of otherwise unrelated counterparties could be adversely affected in their
ability to repay their obligations because of economic developments affecting
their common industry or region.
Concentrations of credit risk exist if a number of clients are engaged in
similar activities, or are located in the same geographic region or have
comparable economic characteristics such that their ability to meet contractual
obligations would be similarly affected by changes in economic, political or
other conditions. Concentrations of credit risk indicate the relative
sensitivity of the bank's performance to developments affecting a particular
industry or geographic location.
(b)(i) On-balance sheet assets
As of 31 December 1999, due from banks and loans to customers amounted to CHF
278 billion (as of 31 December 1998 CHF 331 billion). 66.2% (56.6%) of the loans
were with clients domiciled in Switzerland. Please refer to Note 12 for a
breakdown by region.
(b)(ii) Off-balance sheet financial instruments
Credit commitments and contingent liabilities
Of the CHF 94 billion in credit commitment and contingent liabilities as of 31
December 1999 (as of 31 December 1998 CHF 120 billion), 11% (11%) relate to
clients domiciled in Switzerland, 36% (21%) in Europe (excluding Switzerland)
and 42% (55%) in North America.
Derivatives
Credit risk represents the current replacement value of all outstanding
derivative contracts in a gain position without factoring in the impact of
master netting agreements or the value of any collateral. Positive replacement
values amounted to CHF 130 billion as at 31 December 1999 (CHF 169 billion as at
31 December 1998), before applying any master netting agreements. Based on the
location of the ultimate counterparty, 4% (8%) of this credit risk amount
relates to Switzerland, 49% (47%) to Europe (excluding Switzerland) and 37%
(33%) to North America. 71% (76%) of the positive replacement values are with
other banks.
--------------------------------------------------------------------------------
F- 42
<PAGE> 245
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(b)(iii) Credit risk mitigation techniques
Credit risk associated with derivative instruments is mitigated by the use of
master netting agreements. A further method of reducing credit exposure arising
from derivatives transactions is to use collateralization arrangements.
Master netting agreements eliminate risk to the extent that only the net claim
is due to be settled in the case of a default of the counterparty. The impact of
master netting agreements as at 31 December 1999 is to mitigate credit risk on
derivative instruments by approximately CHF 66 billion (as of 31 December 1998
CHF 79 billion). The impact can change substantially over short periods of time,
because the exposure is affected by each transaction subject to the arrangement.
The Group subjects its derivative-related credit risks to the same credit
approval, limit and monitoring standards that it uses for managing other
transactions that create credit exposure. This includes evaluation of
counterparties as to creditworthiness, and managing the size, diversification
and maturity structure of the portfolio. Credit utilization for all products is
compared with established limits on a continual basis and is subject to a
standard exception reporting process.
(c) Currency Risk
The Group views itself as a Swiss entity, with the Swiss franc as its reporting
currency. Hedging transactions are used to manage risks in other currencies.
Breakdown of assets and liabilities by currencies
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------------- -----------------------
CHF USD EUR OTHER CHF USD OTHER
CHF BILLION ----- ----- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and balances with central banks.... 3.4 0.2 0.5 1.0 2.4 0.3 0.6
Money market paper...................... 1.5 38.6 0.7 28.9 2.2 10.3 5.9
Due from banks.......................... 7.5 7.7 5.3 9.4 12.7 13.3 42.5
Cash collateral on securities
borrowed.............................. 0.1 106.4 1.1 5.6 0.2 74.5 17.0
Reverse repurchase agreements........... 2.0 42.5 37.9 50.1 0.2 38.3 102.8
Trading portfolio assets................ 29.5 77.4 26.9 78.6 21.4 40.0 97.8
Positive replacement values............. 8.3 5.7 0.6 50.1 9.5 11.1 69.9
Loans, net of allowance for credit
losses................................ 166.4 35.0 5.3 28.2 173.5 40.0 34.4
Financial investments................... 2.5 2.9 0.7 0.9 2.6 2.5 1.8
Accrued income and prepaid expenses..... 1.7 1.8 0.5 1.2 1.2 1.8 3.6
Investments in associates............... 0.9 0.1 0.0 0.1 2.6 0.0 0.2
Property and equipment.................. 7.4 0.5 0.1 0.7 8.5 0.6 0.8
Intangible assets and goodwill.......... 1.2 2.2 0.0 0.1 0.3 1.7 0.2
Other assets............................ 3.1 1.9 2.5 3.5 4.9 3.1 4.1
----- ----- ---- ----- ----- ----- -----
TOTAL ASSETS............................ 235.5 322.9 82.1 258.4 242.2 237.5 381.6
===== ===== ==== ===== ===== ===== =====
LIABILITIES
Money market paper issued............... 1.0 55.7 0.3 7.7 1.0 38.5 12.0
Due to banks............................ 8.1 36.3 14.5 17.5 25.4 33.6 26.7
Cash collateral on securities lent...... 0.1 6.5 1.0 5.2 0.1 5.9 13.2
Repurchase agreements................... 16.5 91.3 27.8 61.3 10.7 74.3 52.6
Trading portfolio liabilities........... 0.0 38.2 5.4 11.0 0.2 8.1 38.7
Negative replacement values............. 12.8 6.9 2.0 74.0 16.8 12.1 97.0
</TABLE>
--------------------------------------------------------------------------------
F- 43
<PAGE> 246
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------------- -----------------------
CHF USD EUR OTHER CHF USD OTHER
CHF BILLION ----- ----- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Due to customers........................ 127.5 93.8 23.7 35.0 138.0 80.2 56.7
Accrued expenses and deferred income.... 3.1 4.9 0.5 3.6 3.3 2.6 5.3
Long-term debt.......................... 23.7 17.6 3.1 11.9 23.4 16.9 10.5
Other liabilities....................... 9.1 4.0 0.8 4.5 14.6 6.1 7.0
Minority interests...................... 0.3 0.0 0.0 0.1 1.0 0.0 0.0
Shareholders' equity.................... 30.6 0.0 0.0 0.0 28.8 0.0 0.0
----- ----- ---- ----- ----- ----- -----
TOTAL LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS' EQUITY.............. 232.8 355.2 79.1 231.8 263.3 278.3 319.7
===== ===== ==== ===== ===== ===== =====
</TABLE>
(d) Liquidity Risk
Maturity analysis of assets and liabilities
<TABLE>
<CAPTION>
DUE DUE
ON SUBJECT TO DUE WITHIN BETWEEN 3 BETWEEN 1 DUE AFTER 5
DEMAND NOTICE(1) 3 MTHS AND 12 MTHS AND 5 YEARS YEARS TOTAL
CHF BILLION ------ ---------- ---------- ----------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and balances with central banks... 5.1 -- -- -- -- -- 5.1
Money market paper..................... -- -- 67.8 1.9 -- -- 69.7
Due from banks......................... 8.4 -- 19.1 1.6 0.5 0.3 29.9
Cash collateral on securities
borrowed............................. -- -- 112.7 -- 0.5 -- 113.2
Reverse repurchase agreements.......... -- -- 130.6 1.9 -- -- 132.5
Trading portfolio assets............... 212.4 -- -- -- -- -- 212.4
Positive replacement values............ 64.7 -- -- -- -- -- 64.7
Loans, net of allowance for credit
losses............................... -- 53.4 64.9 39.2 70.8 6.6 234.9
Financial investments.................. 5.0 -- 0.1 0.2 0.9 0.8 7.0
Accrued income and prepaid expenses.... 5.2 -- -- -- -- -- 5.2
Investments in associates.............. -- -- -- -- -- 1.1 1.1
Property and equipment................. -- -- -- -- -- 8.7 8.7
Intangible assets and goodwill......... -- -- -- -- -- 3.5 3.5
Other assets........................... 11.0 -- -- -- -- -- 11.0
----- ---- ----- ---- ---- ---- -----
TOTAL 31.12.1999....................... 311.8 53.4 395.2 44.8 72.7 21.0 898.9
===== ==== ===== ==== ==== ==== =====
TOTAL 31.12.1998....................... 293.8 59.9 375.8 43.5 66.0 22.3 861.3
===== ==== ===== ==== ==== ==== =====
LIABILITIES
Money market paper issued.............. -- -- 24.3 40.4 -- -- 64.7
Due to banks........................... 10.1 1.1 60.2 4.4 0.3 0.3 76.4
Cash collateral on securities lent..... -- -- 12.8 -- -- -- 12.8
Repurchase agreements.................. -- -- 185.6 11.3 -- -- 196.9
Trading portfolio liabilities.......... 54.6 -- -- -- -- -- 54.6
Negative replacement values............ 95.7 -- -- -- -- -- 95.7
Due to customers....................... 58.6 82.1 127.0 8.1 1.7 2.5 280.0
</TABLE>
--------------------------------------------------------------------------------
F- 44
<PAGE> 247
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DUE DUE
ON SUBJECT TO DUE WITHIN BETWEEN 3 BETWEEN 1 DUE AFTER 5
DEMAND NOTICE(1) 3 MTHS AND 12 MTHS AND 5 YEARS YEARS TOTAL
CHF BILLION ------ ---------- ---------- ----------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Accrued expenses and deferred income... 12.0 -- -- -- -- -- 12.0
Long-term debt......................... -- 0.4 6.3 8.4 28.0 13.2 56.3
Other liabilities...................... 18.4 -- -- -- -- -- 18.4
----- ---- ----- ---- ---- ---- -----
TOTAL 31.12.1999....................... 249.4 83.6 416.2 72.6 30.0 16.0 867.8
===== ==== ===== ==== ==== ==== =====
Total 31.12.1998....................... 288.7 83.5 371.1 42.2 29.7 16.3 831.5
===== ==== ===== ==== ==== ==== =====
</TABLE>
---------------
(1) Deposits without a fixed term, on which notice of withdrawal or termination
has not been given. (Such funds may be withdrawn by the depositor or repaid
by the borrower subject to an agreed period of notice.)
(e) Capital adequacy
Risk-weighted assets (BIS)
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
--------------------- ---------------------
BALANCE BALANCE
SHEET/ RISK- SHEET/ RISK-
NOTIONAL WEIGHTED NOTIONAL WEIGHTED
AMOUNT AMOUNT AMOUNT AMOUNT
CHF MILLION --------- -------- --------- --------
<S> <C> <C> <C> <C>
BALANCE SHEET ASSETS
Due from banks and other collateralized
lendings................................... 229,794 9,486 244,246 13,845
Net positions in securities(1)............... 77,858 5,805 28,109 7,334
Positive replacement values.................. 64,698 18,175 90,511 29,494
Loans, net of allowances for credit losses
and other collateralized lendings.......... 292,928 159,835 305,155 164,113
Accrued income and prepaid expenses.......... 5,167 3,164 6,627 3,190
Property and equipment(2).................... 8,701 9,860 9,886 11,166
Other assets................................. 11,007 7,686 12,092 7,900
--------- ------- --------- -------
OFF-BALANCE SHEET AND OTHER POSITIONS
Contingent liabilities....................... 28,308 14,459 37,731 19,471
Irrevocable commitments...................... 65,693 17,787 82,337 18,197
Forward and swap contracts(3)................ 4,881,483 13,213 5,177,912 7,130
Purchased options(3)......................... 406,208 2,823 489,005 5,861
--------- ------- --------- -------
MARKET RISK POSITIONS(4)..................... -- 10,813 -- 16,018
--------- ------- --------- -------
TOTAL RISK-WEIGHTED ASSETS................... -- 273,106 -- 303,719
========= ======= ========= =======
</TABLE>
---------------
(1) Excluding positions in the trading book, these are included in market risk
positions.
(2) Including CHF 1,159 million (1998: CHF 1,280 million) foreclosed properties
and properties held for disposal, which are recorded in the balance sheet
under financial investments.
(3) The risk-weighted amount corresponds to the security margin (add-on) of the
contracts.
(4) Value at risk according to the internal model multiplied by a factor of 12.5
to create the risk-weighted amount of the market risk positions in the
trading book.
--------------------------------------------------------------------------------
F- 45
<PAGE> 248
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
BIS Capital ratios
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
---------------- ----------------
CAPITAL BIS % CAPITAL BIS %
------- ----- ------- -----
<S> <C> <C> <C> <C>
Tier 1.................................................. 28,952 10.6% 28,220 9.3%
Tier 2.................................................. 10,730 -- 12,086 --
------ ---- ------ ----
Total BIS............................................... 39,682 14.5% 40,306 13.2%
====== ==== ====== ====
</TABLE>
Among other measures UBS monitors the adequacy of its capital using ratios
established by the Bank for International Settlements (BIS). The Group has
maintained all BIS and Swiss capital adequacy rules for all periods presented.
These ratios measure capital adequacy by comparing the Group's eligible capital
with its risk-weighted positions which include balance sheet assets, net
positions in securities not held in the trading book, off-balance sheet
transactions converted into their credit equivalents and market risk positions
at a weighted amount to reflect their relative risk.
The capital adequacy rules require a minimum amount of capital to cover credit
and market risk exposures. For the calculation of the capital required for
credit risk the balance sheet assets are weighted according to broad categories
of notional credit risk, being assigned a risk weighting according to the amount
of capital deemed to be necessary to support them. Four categories of risk
weights (0%, 20%, 50%, 100%) are applied; for example cash, claims
collateralized by cash or claims collateralized by OECD central-government
securities have a zero risk weighting, which means that no capital is required
to be held in respect of these assets. Uncollateralized loans granted to
corporate or private customers carry a 100% risk weighting, meaning that they
must be supported by capital equal to 8% of the carrying amount. Other asset
categories have weightings of 20% or 50%, which require 1.6% or 4% capital.
The net positions in securities not held in the trading book reflect the Group's
exposure to an issuer of securities arising from its physical holdings and other
related transactions in that security.
For contingent liabilities and irrevocable facilities granted, the credit
equivalent is calculated by multiplying the nominal value of each transaction by
its corresponding credit conversion factor. The resulting amounts are then
weighted for credit risk using the same percentage as for balance sheet assets.
In the case of OTC forward contracts and purchased options, the credit
equivalent is computed on the basis of the current replacement value of the
respective contract plus a security margin (add-on) to cover the future
potential credit risk during the remaining duration of the contract.
UBS calculates its capital requirement for market risk positions, which includes
interest-rate instruments and equity securities in the trading book as well as
positions in foreign exchange and commodities throughout the Group, using an
internal Value at Risk (VaR) model. This approach was introduced in the BIS 1996
market risk amendment to the Basel Accord of July 1988 and incorporated in the
Swiss capital adequacy rules of the Banking Ordinance.
The BIS proposal requires that the regulators perform tests of the bank internal
models before giving permission for these models to be used to calculate the
market risk capital. Based on extensive checks, the use of the Group internal
models was accepted by the Swiss Federal Banking Commission (FBC) in July 1999.
Tier 1 capital consists of permanent shareholders' equity and retained earnings
less goodwill and investments in unconsolidated subsidiaries. Tier 2 capital
includes the Group's subordinated long-term debt.
--------------------------------------------------------------------------------
F- 46
<PAGE> 249
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 34 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the fair value of on- and off-balance sheet
financial instruments based on the following valuation methods and assumptions.
It is presented because not all financial instruments are reflected in the
financial statements at fair value.
Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm's-length transaction.
A market price, where an active market (such as a recognized stock exchange)
exists, is the best evidence of the fair value of a financial instrument.
However, market prices are not available for a significant number of the
financial assets and liabilities held and issued by the Group. Therefore, for
financial instruments where no market price is available, the fair values
presented in the following table have been estimated using present value or
other estimation and valuation techniques based on market conditions existing at
balance sheet date.
The values derived using these techniques are significantly affected by
underlying assumptions concerning both the amounts and timing of future cash
flows and the discount rates used. The following methods and assumptions have
been used:
(a) trading assets, derivatives and other transactions undertaken for
trading purposes are measured at fair value by reference to quoted market
prices when available. If quoted market prices are not available, then fair
values are estimated on the basis of pricing models, or discounted cash
flows. Fair value is equal to the carrying amount for these items;
(b) the fair value of liquid assets and other assets maturing within
12 months is assumed to approximate their carrying amount. This assumption
is applied to liquid assets and the short-term elements of all other
financial assets and financial liabilities;
(c) the fair value of demand deposits and savings accounts with no
specific maturity is assumed to be the amount payable on demand at the
balance sheet date;
(d) the fair value of variable rate financial instruments is assumed
to approximate their carrying amounts; and
(e) the fair value of fixed rate loans and mortgages is estimated by
comparing market interest rates when the loans were granted with current
market rates offered on similar loans. Changes in the credit quality of
loans within the portfolio are not taken into account in determining gross
fair values as the impact of credit risk is recognized separately by
deducting the amount of the allowance for credit losses from both book and
fair values.
The assumptions and techniques have been developed to provide a consistent
measurement of fair value for the Group's assets and liabilities. However,
because other institutions may use different methods and assumptions, such fair
value disclosures cannot necessarily be compared from one financial institution
to another.
--------------------------------------------------------------------------------
F- 47
<PAGE> 250
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------------------ ------------------------------------
UNREALIZED UNREALIZED
CARRYING GAIN/ CARRYING GAIN/
VALUE FAIR VALUE (LOSS) VALUE FAIR VALUE (LOSS)
CHF BILLION -------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and balances with
central banks............. 5.0 5.0 0.0 3.3 3.3 0.0
Money market paper.......... 69.7 69.7 0.0 18.4 18.4 0.0
Due from banks.............. 30.0 30.0 0.0 68.6 68.7 0.1
Cash collateral on
securities borrowed....... 113.2 113.2 0.0 91.7 91.7 0.0
Reverse repurchase
agreements................ 132.5 132.5 0.0 141.3 141.3 0.0
Trading portfolio assets.... 212.4 212.4 0.0 159.2 159.2 0.0
Positive replacement
values.................... 64.7 64.7 0.0 90.5 90.5 0.0
Loans, net of allowance for
credit losses............. 235.1 235.3 0.2 248.3 250.7 2.4
Financial investments....... 5.9 7.1 1.2 5.7 6.5 0.8
----- ----- ---- ----- ----- ----
LIABILITIES
Money market paper issued... 64.7 64.7 0.0 51.5 51.5 0.0
Due to banks................ 76.9 76.9 0.0 86.1 86.1 0.0
Cash collateral on
securities lent........... 12.8 12.8 0.0 19.2 19.2 0.0
Repurchase agreements....... 196.9 196.9 0.0 137.6 137.6 0.0
Trading portfolio
liabilities............... 54.6 54.6 0.0 47.0 47.0 0.0
Negative replacement
values.................... 95.8 95.8 0.0 125.8 125.8 0.0
Due to customers............ 280.1 280.1 0.0 275.3 275.6 (0.3)
Long-term debt.............. 56.4 57.6 (1.2) 51.0 53.3 (2.3)
Fair value effect on income
of hedging derivatives
recorded on the accrual
basis..................... 0.5 1.0
---- ----
Net difference between
carrying value and fair
value..................... 0.7 1.7
==== ====
</TABLE>
The table does not reflect the fair values of non-financial assets and
liabilities such as property (including those properties carried as financial
investments), equipment, prepayments and non-interest accruals. The interest
amounts accrued to date for respective financial instruments are included, for
purposes of the above fair value disclosure, in the carrying value of the
financial instruments.
Substantially all of the Group's commitments to extend credit are at variable
rates. Accordingly, the Group has no significant exposure to fair value
fluctuations related to these commitments.
Changes in the fair value of the Group's fixed rate loans, long and medium term
notes and bonds issued are hedged by derivative instruments, mainly interest
rate swaps. The interest rate risk inherent in the balance sheet positions with
no specific maturity is also hedged with derivative instruments based on the
management view on the economic maturity of the products.
--------------------------------------------------------------------------------
F- 48
<PAGE> 251
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The hedging derivative instruments are carried at fair value on the balance
sheet and are part of the replacement values in the above table. The difference
between the total amount of valuation gains and losses and the amortized amount
is deferred and shown net in the table as fair value effect on income of hedging
derivatives recorded on accruals basis.
During 1999, the interest rate level of leading economies increased
substantially. The biggest move in rates was noted in Switzerland, where in
particular mid- and long-term rates increased. These moves in rates had a direct
impact on the fair value calculation of fixed term transactions.
As the bank has an excess volume of fixed rate long-term assets over fixed rate
long-term liabilities, the net fair value unrealized gain is reduced
substantially. In addition to fixed rate balance sheet positions, the bank has a
number of retail products traditionally offered in Switzerland such as variable
mortgage loans and customer savings and deposits. These instruments have no
maturity or have a contractual repricing maturity of less than one year. Based
on the assumptions and the guidance under IAS, they are excluded from the fair
value calculations of the table above.
The exclusion of the above traditional banking products from the fair value
calculation leads to certain fair value swings. By calculating the fair value
differences based on the economic maturity of the non-maturity liabilities, such
as savings and deposits, in an environment of raising interest rates, they would
generate fair value gains which may offset most of the fair value loss reported
for fixed term transactions.
NOTE 35 RETIREMENT BENEFIT PLANS AND OTHER EMPLOYEE BENEFITS
The Group has established various pension plans inside and outside of
Switzerland. The major plans are located in Switzerland, the UK, the U.S. and
Germany. Independent actuarial valuations are performed for the plans in those
locations.
Swiss Pension Plans until 30 June 1999
The pension funds of the Group are set up as trusts, domiciled in Basel and
Zurich. All domestic employees are covered. The pension funds are defined
benefit plans. The pension plan benefits exceed the minimum benefits required
under the Swiss law.
Contributions are paid for by the Group and the employees. The employee
contributions are calculated as a percentage of the insured annual salary and
are deducted monthly. The percentages deducted from the salary depend on age and
vary between 8% and 12%. The Group contributions are variable and amount from
125% to 250% of the employees' contributions depending on the financial
situation of the pension fund.
The pension plan formula is based on years of contributions and final covered
salary. The benefits covered include retirement benefits, disability, death and
survivor pension.
Swiss Pension Plans starting 1 July 1999
The pension plans of both former banks in Switzerland are in the process of
being liquidated and a new foundation with domicile in Zurich was created as of
21 January 1999. The new pension scheme became operational as of 1 July 1999.
As a result of the merger of the plans of the former banks in Switzerland, on 1
July 1999 there was a one-time increase of vested plan benefits for the
beneficiaries of such plans. This had the effect of increasing the defined
benefit obligation at this date by CHF 3,525 million. In accordance with IAS 19
(revised 1998) this resulted in a one-time charge to income which was offset by
the recognition of
--------------------------------------------------------------------------------
F- 49
<PAGE> 252
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
assets (previously unrecognized due to the paragraph 58(b) limitation of IAS 19
(revised 1998)) used to fund this increase in benefits.
The pension plan covers practically all employees in Switzerland and exceeds the
minimum benefits requirements under the Swiss law.
Contributions for the pension plan are paid for by the employees and the Group.
The employee contributions are calculated as a percentage of the insured annual
salary and are deducted monthly. The percentages deducted from the salary for
the full benefit coverage (including risk benefits) depend on age and vary
between 7% and 10%. The Group pays a variable contribution that ranges between
150% and 220% of the sum of the employees' contributions.
The pension plan formula is based on years of contributions and final covered
salary. The benefits covered include retirement benefits, disability, death and
survivor pension.
The Group booked an amount of CHF 456 million in 1999 related to the recognition
of "Excess Employer Contributions." These assets were recognized in the fourth
quarter as certain legal and regulatory issues related to the Group's ability to
utilize these assets for future funding purposes were resolved.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998 31.12.1997
CHF MILLION ---------- ---------- ----------
<S> <C> <C> <C>
SWISS PENSION PLANS
Defined benefit obligation................................ (17,011) (14,944) (14,431)
Plan assets at fair value................................. 18,565 17,885 17,224
------- ------- -------
PLAN ASSETS IN EXCESS OF BENEFIT OBLIGATION............... 1,554 2,941 2,793
Unrecognized net actuarial (gains)/losses................. (724) (385) (385)
Unrecognized assets....................................... (374) (2,556) (2,408)
------- ------- -------
Prepaid pension cost...................................... 456 0 0
======= ======= =======
ADDITIONAL DETAILS TO FAIR VALUE OF PLAN ASSETS
Own financial instruments and securities lent to UBS
included in plan assets................................. 6,785 2,761 2,202
Any assets used by the bank included in plan assets....... 187 176 176
------- ------- -------
RETIREMENT BENEFITS EXPENSE
Current service cost...................................... 464 535 524
Interest cost............................................. 636 726 705
Expected return on plan assets............................ (883) (856) (756)
Adjustment to limit prepaid pension cost.................. (150) 148 22
Amortization of unrecognized prior service costs.......... 172 6 (8)
Employee contributions.................................... (180) (185) (194)
------- ------- -------
ACTUARIALLY DETERMINED NET PERIODIC PENSION COST.......... 59 374 293
======= ======= =======
Actual return on plan assets.............................. 11.9% 6.7% 15.5%
PRINCIPAL ACTUARIAL ASSUMPTIONS USED (%)
Discount rate............................................. 4.0 5.0 5.0
Expected rate of return on assets p.a..................... 5.0 5.0 5.0
Expected rate of salary increase.......................... 2.0-3.0 3.5-5.5 3.5-5.5
Rate of pension increase.................................. 1.5 2.0 2.0
======= ======= =======
</TABLE>
--------------------------------------------------------------------------------
F- 50
<PAGE> 253
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Pension Plans
The foreign locations of UBS operate various pension schemes in accordance with
local regulations and practices. Among these schemes are defined contribution
plans as well as defined benefit plans. The locations with defined benefit plans
of a material nature are in the UK, the U.S. and Germany. These locations,
together with Switzerland, cover nearly 90% of the active workforce. Certain of
these schemes permit employees to make contributions and earn matching or other
contributions from the Group.
The retirement plans provide benefits in the event of retirement, death,
disability or employment termination. The plans' retirement benefits depend on
age, contributions and level of compensation. The principal plans are financed
in full by the Group. The funding policy for these plans is consistent with
local government and tax requirements.
The assumptions used in foreign plans take into account local economic
conditions.
The amounts shown for foreign plans reflect the net funded positions of the
major foreign plans.
Postretirement Medical and Life Plans
The Group in the U.S. and the UK offers retiree medical benefits that contribute
to the health care coverage of the employees and beneficiaries after retirement.
In addition to retiree medical, the U.S. also provides retiree life insurance
benefits.
The benefit obligation in excess of plan assets for those plans amounts to CHF
113 million as of 31 December 1999 (1998 CHF 93 million, 1997 CHF 100 million)
and the total unfunded accrued postretirement liabilities to CHF 83 million
(1998 CHF 62 million, 1997 CHF 50 million). The actuarially determined net
postretirement cost amounts to CHF 17 million for 1999 (1998 CHF 17 million,
1997 CHF 14 million).
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998 31.12.1997
----------- ---------- ---------- ----------
<S> <C> <C> <C>
PENSION PLANS ABROAD
Defined benefit obligation............................. (2,444) (2,009) (1,950)
Plan assets at fair value.............................. 2,880 2,173 2,187
--------- --------- ---------
PLAN ASSETS IN EXCESS OF BENEFIT OBLIGATION............ 436 164 237
Unrecognized net actuarial (gains)/losses.............. (474) (63) (160)
Unrecognized transition amount......................... 1 2 (17)
Unrecognized past service cost......................... 2 0 0
Unrecognized assets.................................... (28) (60) (24)
--------- --------- ---------
(Unfunded accrued)/Prepaid pension cost................ (63) 43 36
========= ========= =========
MOVEMENT OF NET (LIABILITY)/ASSET
Prepaid pension cost/(benefit) at the beginning of the
year................................................. 43 36 (12)
Net periodic pension cost.............................. (123) (33) 9
Employer contributions................................. 22 43 39
Currency adjustment (5) (3)
--------- --------- ---------
(Unfunded accrued)/Prepaid pension cost at the end of
the year............................................. (63) 43 36
========= ========= =========
</TABLE>
--------------------------------------------------------------------------------
F- 51
<PAGE> 254
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998 31.12.1997
----------- ---------- ---------- ----------
<S> <C> <C> <C>
RETIREMENT BENEFITS EXPENSE
Current service cost................................... 118 116 114
Interest cost.......................................... 123 140 115
Expected return on plan assets......................... (195) (191) (147)
Amortization of net transition (assets)/liability...... 0 2 (85)
Adjustment to limit prepaid pension cost............... 21 2 0
Immediate recognition of transition assets under IAS
8.................................................... 0 (23) 0
Amortization of unrecognized prior service costs....... 77 7 0
Amortization of unrecognized net (gain)/losses......... (6) (3) 0
Effect of any curtailment or settlement................ 0 (8) 0
Employee contributions................................. (15) (9) (6)
--------- --------- ---------
ACTUARIALLY DETERMINED NET PERIODIC PENSION COST....... 123 33 (9)
========= ========= =========
Actual return on plan assets........................... 15.3% 5.2% 21.4%
PRINCIPAL ACTUARIAL ASSUMPTIONS USED (%)
Discount rate.......................................... 5.75-7.50 6.50-7.50 6.50-7.50
Expected rates of return on assets p.a................. 8.00-8.50 8.50-8.75 8.50-8.75
Expected rate of salary increase....................... 3.50-5.60 3.50-9.00 3.50-9.00
Rate of pension increase............................... 0.00-2.50 0.00-3.75 0.00-3.75
========= ========= =========
</TABLE>
NOTE 36 EQUITY PARTICIPATION PLANS
UBS AG has established various equity participation plans in the form of stock
plans and stock option plans to further align the long-term interests of
managers, staff and shareholders.
Key personnel are awarded a portion of their performance-related compensation in
UBS AG shares or options, which are restricted for a specified number of years.
Long-term stock options are granted to key employees under another plan. A
number of awards under these plans are made in notional shares or options, which
generally are settled in cash and are treated as liabilities. Participation in
both plans is mandatory. Long-term stock options are blocked for three or five
years, during which they cannot be exercised. For the 1997 options and certain
of the 1998 options, one half of each award is subject to an acceleration clause
after which certain forfeiture provisions lapse. One option gives the right to
purchase one registered UBS AG share at the option's strike price. Neither the
fair value nor the intrinsic value of the options granted is recognized as an
expense in the financial statements.
Other employees have the choice to invest part of their annual bonus in UBS AG
shares or in options or derivatives on UBS AG shares, which may be exercised or
settled in cash. A number of awards under these plans are made in notional
shares or instruments, which generally are settled in cash. A holding period,
generally three years, applies during which the instruments cannot be sold or
exercised. In addition, participants in the plan receive a restricted matching
contribution of additional UBS AG shares or derivatives. Shares awarded under
the plan are purchased or hedged in the market. Under another plan, employees in
Switzerland are entitled to purchase a specified number of UBS AG shares at a
predetermined discounted price each year (the discount is recorded as
compensation expense). The number of shares that can be purchased depends
primarily on years of service and rank. Any such shares purchased must be held
for a specified period of time. Information on shares available for issuance
under these plans is included in the Group Statement of Changes in Equity.
--------------------------------------------------------------------------------
F- 52
<PAGE> 255
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The Group's policy is to recognize expense as of the date of grant for equity
participation instruments (stock, warrants, options and other derivatives for
which the underlying is the Group's own shares). The amount of expense
recognized is equal to the intrinsic value of the instrument at such date.
Options in UBS AG Shares
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE EXERCISE NUMBER OF AVERAGE EXERCISE NUMBER OF AVERAGE EXERCISE
OPTIONS PRICE (IN CHF) OPTIONS PRICE (IN CHF) OPTIONS PRICE (IN CHF)
31.12.1999 31.12.1999 31.12.1998 31.12.1998 31.12.1997 31.12.1997
---------- ---------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, at the
beginning of the
year............... 7,202,786 177 1,899,924 186 0 --
Granted during the
year............... 3,439,142 237 5,811,778 182 1,899,924 186
Exercised during the
year............... (71,766) 179 (22,970) 178 0 --
Forfeited during the
year............... (431,700) 190 (485,946) 268 0 --
---------- --- --------- --- --------- ---
Outstanding, at the
end of the year.... 10,138,462 197 7,202,786 177 1,899,924 186
---------- --- --------- --- --------- ---
Exercisable, at the
end of the year.... 650,640 186 0 0 0 --
========== === ========= === ========= ===
</TABLE>
Of the total options outstanding at 31 December 1999: 9,974,770 options (650,640
of which were exercisable) had exercise prices ranging from CHF 170 to CHF 237,
or CHF 196 on average, and had a weighted-average remaining contractual life of
4.58 years; and 163,692 options (none of which were exercisable) had exercise
prices ranging from CHF 255 to CHF 270, or CHF 261 on average, and had a
weighted-average remaining contractual life of 4.45 years.
NOTE 37 RELATED PARTIES
Related parties include the Board of Directors, the Group Executive Board, the
Group Managing Board, close family members and enterprises which are controlled
by these individuals.
Total remuneration of related parties recognized in the income statement during
the year amounted to CHF 193.1 million and CHF 102.8 million for the year ended
1998. The number of long-term stock options outstanding from equity plans was
274,616 at 31 December 1999 and 255,000 at 31 December 1998. This scheme is
further explained in Note 36.
Total amount of shares and warrants held by members of the Board of Directors,
Group Executive Board and Group Managing Board were 2,456,092 and 22,849,028 as
of 31 December 1999 and 4,635,804 and 6,178,748 as of 31 December 1998.
Total loans and advances receivable (mortgages only) from related parties were
as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999
----------- -----------
<S> <C>
Mortgages at the beginning of the year...................... 27
Additions................................................... 6
Reductions.................................................. (5)
--
MORTGAGES AT THE END OF THE YEAR............................ 28
==
</TABLE>
--------------------------------------------------------------------------------
F- 53
<PAGE> 256
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Members of the Board of Directors, Group Executive Board and Group Managing
Board are granted mortgages at the same terms and conditions as other employees.
Terms and conditions are based on third party conditions excluding credit
margin.
Loans and advances to significant associated companies were as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999
----------- -----------
<S> <C>
Loans and advances at the beginning of the year............. 165
Additions................................................... 42
Reductions.................................................. (145)
----
LOANS AND ADVANCES AT THE END OF THE YEAR................... 62
====
</TABLE>
Note 39 provides a list of significant associates.
NOTE 38 POST BALANCE SHEET EVENTS
There have been no material post-balance sheet events which would require
disclosure or adjustment to the December 1999 financial statements except as
follows: at the annual general meeting of shareholders held on 18 April 2000, a
two-for-one stock split was approved to be effective 8 May 2000. Accordingly,
the share, per share, stock options and exercise price information have been
adjusted to retroactively reflect the stock split.
NOTE 39 SIGNIFICANT SUBSIDIARIES AND ASSOCIATES
Significant Subsidiaries
<TABLE>
<CAPTION>
EQUITY
SHARE INTEREST
REGISTERED CAPITAL ACCUMULATED
COMPANY OFFICE DIVISION IN MILLIONS IN %
------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C>
Armand von Ernst & Cie AG Bern PB(1) CHF 5.0 100.0
Aventic AG Zurich PCC(2) CHF 30.0 100.0
Bank Ehinger & Cie AG Basel PB CHF 6.0 100.0
BDL Banco di Lugano Lugano PB CHF 50.0 100.0
Brinson Partners Inc. Chicago AM(3) USD -- 100.0
Brunswick Warburg Limited Georgetown WA(4) USD 50.0 50.0
Cantrade Privatbank AG Zurich PB CHF 10.0 100.0
Cantrade Private Bank Switzerland (CI)
Ltd St Helier PB GBP 0.7 100.0
Credit Industriel SA Zurich CAP(5) CHF 10.0 100.0
EIBA "Eidgenossische Bank" Zurich CAP CHF 14.0 100.0
Factors AG Zurich PCC CHF 5.0 100.0
Ferrier Lullin & Cie SA Geneva PB CHF 30.0 100.0
Global Asset Management Ltd Hamilton AM USD 2.0 100.0
HYPOSWISS, Schweizerische Hypotheken-
und Handelsbank Zurich PB CHF 26.0 100.0
IL Immobilien-Leasing AG Opfikon PCC CHF 5.0 100.0
</TABLE>
--------------------------------------------------------------------------------
F- 54
<PAGE> 257
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
SHARE INTEREST
REGISTERED CAPITAL ACCUMULATED
COMPANY OFFICE DIVISION IN MILLIONS IN %
------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C>
Indelec Holding AG Basel CAP CHF 10.0 100.0
Intrag Zurich PB CHF 10.0 100.0
Klinik Hirslanden AG Zurich CC(6) CHF 22.5 91.2
NYRE Holding Corp Wilmington WA USD 102.9(7) 100.0
Phillips & Drew Fund Management
Limited London AM GBP -- 100.0
Phillips & Drew Limited London AM GBP 8.0 100.0
PT Warburg Dillon Read Indonesia Jakarta WA IDR 11000.0 85.0
SBC Equity Partners AG Opfikon CAP CHF 71.7 100.0
Schroder Munchmeyer Hengst AG Hamburg PB DEM 100.0 100.0
SG Warburg & Co International BV Amsterdam WA GBP 148.0(7) 100.0
SG Warburg Securities SA Geneva WA CHF 14.5 100.0
Solothurner Bank SoBa Solothurn PCC CHF 50.0 100.0
Systor AG Zurich PCC CHF 5.0 100.0
Thesaurus Continentale Effekten-
Gesellschaft Zurich Zurich CAP CHF 30.0 100.0
UBS Investment Management Pte Ltd Singapore WA SGD 0.5 90.0
UBS (Bahamas) Ltd Nassau PB USD 4.0 100.0
UBS (Cayman Islands) Ltd Georgetown PB USD 5.6 100.0
UBS (France) SA Paris WA EUR 10.0 100.0
UBS (Italia) SpA Milan PB ITL 43000.0 100.0
UBS (Luxembourg) SA Luxembourg PB CHF 150.0 100.0
UBS (Monaco) SA Monte Carlo PB EUR 9.2 100.0
UBS (Panama) SA Panama PB USD 6.0 100.0
UBS (Sydney) Limited Sydney WA AUD 12.7 100.0
UBS (Trust and Banking) Ltd Tokyo PB JPY 10500.0 100.0
UBS (USA), Inc. Delaware WA USD 763.3(7) 100.0
UBS Australia Holdings Ltd Sydney WA AUD 11.7 100.0
UBS Australia Ltd Sydney WA AUD 15.0 100.0
UBS Bank (Canada) Toronto PB CAD 90.4(7) 100.0
UBS Beteiligungs-GmbH & Co KG Frankfurt WA EUR 398.8 100.0
UBS Brinson Asset Management Co. Ltd Tokyo AM JPY 800.0 100.0
UBS Brinson Inc. New York AM USD 72.7(7) 100.0
UBS Brinson Investment GmbH Frankfurt AM DEM 10.0 100.0
UBS Brinson Limited London AM GBP 8.8 100.0
UBS Brinson Ltd Sydney AM AUD 8.0 100.0
UBS Brinson Pte Ltd Singapore AM SGD 4.0 100.0
</TABLE>
--------------------------------------------------------------------------------
F- 55
<PAGE> 258
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
SHARE INTEREST
REGISTERED CAPITAL ACCUMULATED
COMPANY OFFICE DIVISION IN MILLIONS IN %
------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C>
UBS Brinson SA Paris AM EUR 0.8 100.0
UBS Capital AG Zurich CAP CHF 0.5 100.0
UBS Capital Asia Pacific Ltd Georgetown CAP USD 5.0 100.0
UBS Capital BV The Hague CAP EUR 104.1(7) 100.0
UBS Capital GmbH Frankfurt CAP EUR -- 100.0
UBS Capital II LLC Delaware CAP USD 2.7 100.0
UBS Capital LLC New York CAP USD 18.6(7) 100.0
UBS Capital Partners Ltd London CAP GBP 6.7 100.0
UBS Capital S.p.A Milan CAP ITL 50000.0 100.0
UBS Card Center AG Glattbrugg PCC CHF 40.0 100.0
UBS Espana SA Madrid PB EUR 35.3 100.0
UBS Finance (Cayman Islands) Limited Georgetown CC USD 0.5 100.0
UBS Finance (Curacao) NV Curacao CC USD 0.1 100.0
UBS Finance (Delaware) LLC Wilmington WA USD 37.3(7) 100.0
UBS Finanzholding AG Zurich CC CHF 10.0 100.0
UBS Fund Holding (Luxembourg) SA Luxembourg PB CHF 42.0 100.0
UBS Fund Holding (Switzerland) AG Basel PB CHF 18.0 100.0
UBS Fund Management (Japan) Co. Ltd Tokyo PB JPY 1000.0 100.0
UBS Fund Management (Switzerland) AG Basel PB CHF 1.0 100.0
UBS Fund Services (Luxembourg) S.A. Luxembourg PB CHF 2.5 100.0
UBS Futures & Options Limited London WA GBP 2.0 100.0
UBS Immoleasing AG Zurich PCC CHF 3.0 100.0
UBS Inc. New York WA USD 308.7(7) 100.0
UBS International Holdings BV Amsterdam CC CHF 5.5 100.0
UBS Invest Kapitalanlagegesellschaft
mbH Frankfurt PB DEM 5.0 64.0
UBS Lease Finance LLC New York WA USD 16.7 100.0
UBS Leasing AG Brugg PCC CHF 10.0 100.0
UBS Limited London WA GBP 10.0 100.0
UBS Overseas Holding BV Amsterdam CAP EUR 18.1(7) 100.0
UBS Securities (Hong Kong) Ltd Hong Kong WA HKD 20.0 100.0
UBS Securities Limited London WA GBP 10.0 100.0
UBS International Limited London WA GBP 10.0 100.0
UBS Services (Japan) Ltd London WA JPY 41,358.5 100.0
UBS Services Limited London WA GBP -- 100.0
UBS Trust (Canada) Toronto PB CAD 10.0 100.0
UBS UK Holding Ltd London WA GBP 5.0 100.0
</TABLE>
--------------------------------------------------------------------------------
F- 56
<PAGE> 259
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
SHARE INTEREST
REGISTERED CAPITAL ACCUMULATED
COMPANY OFFICE DIVISION IN MILLIONS IN %
------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C>
UBS UK Limited London WA GBP 609.0 100.0
Warburg Dillon Read (Asia) Ltd Hong Kong WA HKD 20.0 100.0
Warburg Dillon Read (Australia)
Corporation Pty Limited Sydney WA AUD 50.4(7) 100.0
Warburg Dillon Read (Espana) SA Madrid WA EUR 1.2 100.0
Warburg Dillon Read (France) SA Paris WA EUR 22.9 100.0
Warburg Dillon Read (Hong Kong) Ltd Hong Kong WA HKD 30.0 100.0
Warburg Dillon Read (Italia) S.I.M.
SpA Milan WA EUR 1.8 100.0
Warburg Dillon Read (Japan) Ltd Georgetown WA JPY 30000.0 50.0
Warburg Dillon Read (Malaysia) Sdn.
Bhd Kuala Lumpur WA MYR 0.5 100.0
Warburg Dillon Read (Nederland) BV Amsterdam WA EUR 10.9 100.0
Warburg Dillon Read AG Frankfurt WA EUR 155.7 100.0
Warburg Dillon Read Australia Ltd Sydney WA AUD 571.5(7) 100.0
Warburg Dillon Read Derivatives Ltd Hong Kong WA HKD 20.0 100.0
Warburg Dillon Read Futures Inc. Chicago WA USD 14.3(7) 100.0
Warburg Dillon Read International
Limited London WA GBP 18.0 100.0
Warburg Dillon Read LLC New York WA USD 535.0(7) 100.0
Warburg Dillon Read Pte. Ltd Singapore WA SGD 3.0 100.0
Warburg Dillon Read Securities
(Espana) SVB SA Madrid WA EUR 13.4 100.0
Warburg Dillon Read Securities (India)
Private Ltd Mumbai WA INR 0.4 75.0
Warburg Dillon Read Securities
(Philippines) Inc Makati WA PHP 120.0 100.0
Warburg Dillon Read Securities (South
Africa) (Pty) Ltd Sandton WA ZAR 22.0 100.0
Warburg Dillon Read Securities Co. Ltd Bangkok WA THB 400.0 100.0
Warburg Dillon Read Securities Ltd London WA GBP 140.0 100.0
</TABLE>
---------------
(1) PB: UBS Private Banking.
(2) PCC: UBS Private and Corporate Clients.
(3) AM: UBS Asset Management.
(4) WA: UBS Warburg.
(5) CAP: UBS Capital.
(6) CC: Corporate Center.
(7) Share Capital + share premium.
--------------------------------------------------------------------------------
F- 57
<PAGE> 260
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
SIGNIFICANT ASSOCIATES
<TABLE>
<CAPTION>
EQUITY SHARE CAPITAL
COMPANY INTEREST IN MILLIONS
------- -------- -------------
<S> <C> <C>
Giubergia Warburg SIM SpA, Milan............................ 50.0% ITL 29,000
Motor Columbus AG, Baden.................................... 35.6% CHF 253
National Versicherung AG, Basel............................. 28.4% CHF 35
Telekurs Holding AG, Zurich................................. 33.3% CHF 45
Swiss Financial Services Group AG, Zurich................... 30.7% CHF 26
</TABLE>
None of the above investments carry voting rights that are significantly
different from the proportion of shares held.
Consolidated Companies: Changes in 1999
New companies
<TABLE>
<S> <C>
Global Asset Management Ltd., Hamilton
Klinik Hirslanden AG, Zurich
UBS Brinson Realty Investors LLC, Hartford
(formerly Allegis Realty Investors LLC)
UBS Capital AG, Zurich
UBS Espana SA. Madrid
UBS (France) SA, Paris
UBS Trustees (Channel Island) Ltd., Jersey
(formerly Bankamerica Trust Company)
</TABLE>
Deconsolidated companies
<TABLE>
<CAPTION>
NAME REASON FOR DECONSOLIDATION
---- --------------------------
<S> <C>
UBS (East Asia) Ltd., Singapore Deregistered
UBS Securities (Singapore) Pte Ltd., Singapore Deregistered
</TABLE>
NOTE 40 SIGNIFICANT FOREIGN CURRENCY TRANSLATION RATES
The following table shows the significant rates used to translate the financial
statements of foreign entities into Swiss francs.
<TABLE>
<CAPTION>
SPOT RATE AVERAGE RATE
-------------------------------------- --------------------------------------
31.12.1999 31.12.1998 31.12.1997 31.12.1999 31.12.1998 31.12.1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 EUR................. 1.61 -- -- 1.60 -- --
1 GBP................. 2.58 2.29 2.41 2.43 2.41 2.37
1 USD................. 1.59 1.38 1.46 1.50 1.45 1.45
100 DEM............... 82.07 82.19 81.24 81.88 82.38 83.89
100 JPY............... 1.56 1.22 1.12 1.33 1.11 1.19
</TABLE>
--------------------------------------------------------------------------------
F- 58
<PAGE> 261
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 41 SWISS BANKING LAW REQUIREMENT
The significant differences between International Accounting Standards (IAS),
which are the principles followed by the Group, and the accounting for banks
under Swiss laws and regulations, are as follows:
Securities borrowing and lending
Under IAS, only the cash collateral delivered or received is recognized in the
balance sheet. There is no recognition or derecognition for the securities
received or delivered. The Swiss requirement is to recognize the securities
received or delivered in the balance sheet along with any collateral in respect
of those securities for which control is transferred.
Treasury shares
Treasury shares is the term used to describe the holding by an enterprise of its
own equity instruments. In accordance with IAS, treasury shares are presented in
the balance sheet as a deduction from equity. No gain or loss is recognized in
the income statement on the sale, issuance, or cancellation of those shares.
Consideration received is presented in the financial statement as a change in
equity.
Under Swiss requirements, treasury shares and derivatives on treasury shares
would be carried in the balance sheet as financial investments with gains and
losses on the sale, issuance, or cancellation of treasury shares reflected in
the income statement.
Extraordinary income and expense
Under IAS, most items of income and expense arise in the course of ordinary
business, and extraordinary items are expected to be rare. Under the Swiss
requirements, income and expense not directly related with the core business
activities of the enterprise (e.g., sale of fixed assets or bank premises) are
recorded as extraordinary income or expense.
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C> <C>
DIFFERENCES IN THE BALANCE SHEET
Securities borrowing and lending
Assets
Trading portfolio assets/Money market
paper...................................... 47,401 97,907
Due from banks/customers..................... 273,093 40,915
Liabilities
Due to banks/customers....................... 375,080 185,855
Trading portfolio liabilities................ (54,586) (47,033)
Treasury shares
Assets
Trading portfolio assets..................... 4,561 3,409
Positive replacement values.................. 334 192
Financial investments........................ 3,136 1,482
</TABLE>
--------------------------------------------------------------------------------
F- 59
<PAGE> 262
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 31.12.1999 31.12.1998 31.12.1997
------------------ ---------- ---------- ----------
CHF MILLION
<S> <C> <C> <C>
DIFFERENCES IN THE INCOME STATEMENT
Treasury shares........................................... (36) 427 129
RECLASSIFICATION OF EXTRAORDINARY INCOME AND EXPENSE
Other income, including income from associates............ (1,726) (1,350) (162)
General and administrative expenses....................... (519) (1,235) (114)
DIFFERENCES IN THE SHAREHOLDERS' EQUITY
Treasury shares........................................... 7,543 5,025 1,982
</TABLE>
NOTE 42 DIFFERENCES BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
42.1 VALUATION AND INCOME RECOGNITION DIFFERENCES BETWEEN INTERNATIONAL
ACCOUNTING STANDARDS AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Group have been prepared in
accordance with IAS. The principles of IAS differ in certain respects from
United States Generally Accepted Accounting Principles ("U.S. GAAP").
The following is a summary of the significant accounting and valuation
differences between IAS and U.S. GAAP.
a. Purchase accounting
Under IAS, the Group accounted for the 1998 merger of Union Bank of Switzerland
and Swiss Bank Corporation under the pooling of interests method. The balance
sheets and income statements of the banks were combined and no adjustments to
the carrying values of the assets and liabilities were made.
Under U.S. GAAP, the business combination creating UBS AG is being accounted for
under the purchase method with Union Bank of Switzerland being considered the
accounting acquirer. Under the purchase method, the cost of acquisition is
measured at fair value and the acquirer's interests in identifiable tangible
assets and liabilities of the acquiree are restated to fair values at the date
of acquisition. Any excess consideration paid over the fair value of net
tangible assets acquired is allocated, first to identifiable intangible assets
based on their fair values, if determinable, with the remainder allocated to
goodwill.
Goodwill
Under U.S. GAAP, goodwill and other intangible assets acquired are capitalized
and amortized over the expected periods to be benefited with adjustments, if
any, for impairment.
For purposes of the U.S. GAAP reconciliation, the excess of the consideration
paid for Swiss Bank Corporation over the fair value of the net tangible assets
received has been recorded as goodwill and is being amortized on a straight line
basis over a weighted average life of 13 years beginning 29 June 1998.
In 1999, goodwill was reduced by CHF 118 million due to the recognition of
deferred tax assets of Swiss Bank Corporation which had previously been subject
to valuation reserves.
--------------------------------------------------------------------------------
F- 60
<PAGE> 263
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Other purchase accounting adjustments
Under U.S. GAAP, the results of operations of Swiss Bank Corporation would have
been included in the Group's consolidated financial statements beginning 29 June
1998. For purposes of the U.S. GAAP reconciliation, Swiss Bank Corporation's Net
profit for the six-month period ended 29 June 1998 has been excluded from the
Group's Net profit. For purposes of the U.S. GAAP reconciliation, the
restatement of Swiss Bank Corporation's net assets to fair value resulted in
decreasing net tangible assets by CHF 1,077 million. This amount will be
amortized over a period ranging from 2 years to 20 years depending upon the
nature of the restatement.
b. Harmonization of accounting policies
The business combination noted above was accounted for under the pooling of
interests method under IAS. Under the pooling of interests method of accounting,
a single uniform set of accounting policies was adopted and applied to all
periods presented. This resulted in a restatement of 1997 Shareholders' equity
and Net loss.
U.S. GAAP requires that accounting changes be accounted for in the income
statement in the period the change is made. For purposes of the U.S. GAAP
reconciliation the accounting policy harmonization recorded in 1997 was reversed
because the business contribution noted above is being accounted for under the
purchase method and the impact of the accounting changes was recorded in 1998.
The income statement effects of this conforming adjustment was as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Depreciation policies....................................... (20) (338)
Credit risk adjustments on derivatives...................... 0 (193)
Policies for other real estate owned........................ 0 (140)
Retirement benefit and equity participation plans........... 0 (47)
Settlement-risk adjustments on derivatives.................. 0 (33)
--- ----
Total....................................................... (20) (751)
=== ====
</TABLE>
c. Restructuring provision
Under IAS, restructuring provisions are recognized when a legal or constructive
obligation has been incurred. In 1997, the Group recognized a CHF 7,000 million
restructuring provision to cover personnel, information technology ("IT"),
premises and other costs associated with combining and restructuring the merged
Group. An additional CHF 300 million provision was recognized in the fourth
quarter of 1999, reflecting the impact of increased precision in the estimation
of certain leased and owned property costs.
Under U.S. GAAP, restructuring provisions for business combinations are not
recognized prior to the consummation date of the business combination. Also, the
criteria for establishing liabilities of this nature are more stringent than
under IAS. Established restructuring provisions are required to be periodically
reviewed for appropriateness and revised if necessary.
For purposes of the U.S. GAAP reconciliation, the aggregate CHF 7,300 million
restructuring provision was reversed. As a result of the business combination
with Swiss Bank Corporation, and the decision to combine and streamline certain
activities of the banks for the purpose of reducing costs and improving
efficiencies, Union Bank of Switzerland recognized a restructuring provision of
CHF 1,575 million during 1998 for purposes of the U.S. GAAP reconciliation. CHF
759 million of this provision related to estimated costs for restructuring the
operations and activities of Swiss Bank Corporation and
--------------------------------------------------------------------------------
F- 61
<PAGE> 264
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
such amount was recorded as a liability of the acquired business. The remaining
CHF 816 million of estimated costs were charged to restructuring expense during
1998. A CHF 600 million adjustment to the restructuring provision was recognized
in 1999 for purposes of the U.S. GAAP reconciliation. The reserve is expected to
be substantially exhausted by the end of 2001.
The restructuring provision initially included CHF 756 million for employee
termination benefits, CHF 332 million for the closure and write downs of owned
and leased premises, and CHF 487 million for professional fees, IT costs,
miscellaneous transfer taxes and statutory fees.
The usage of the U.S. GAAP restructuring provision was as follows:
<TABLE>
<CAPTION>
1998 1998 BALANCE 1999 1999 BALANCE
PROVISION USAGE 31.12.1998 PROVISION USAGE 31.12.1999
CHF MILLION --------- ----- ---------- --------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Personnel....................... 756 (374) 382 553 (254) 681
Premises........................ 332 (27) 305 179 (244) 240
IT.............................. 93 (68) 25 7 (5) 27
Other........................... 394 (81) 313 (139) (45) 129
---- ---- ----- ---- ---- -----
Total........................... 1,575 (550) 1,025 600 (548) 1,077
==== ==== ===== ==== ==== =====
</TABLE>
Additionally, for purposes of the U.S. GAAP reconciliation, CHF 150 million and
CHF 273 million of restructuring costs were expensed as incurred in 1999 and
1998, respectively.
d. Derivatives instruments held or issued for non-trading purposes
Under IAS, the Group recognizes transactions in derivative instruments hedging
non-trading positions in the income statement using the accrual or deferral
method, which is generally the same accounting as the underlying item being
hedged.
U.S. GAAP requires that derivatives be reported at fair value with changes in
fair value recorded in income unless specified criteria are met to obtain hedge
accounting treatment (accrual or deferral method).
The Group is not required to comply with all of the criteria necessary to obtain
hedge accounting treatment under U.S. GAAP. Accordingly, for purposes of the
U.S. GAAP reconciliation, derivative instruments held or issued for non-trading
purposes that did not meet U.S. GAAP hedging criteria have been carried at fair
value with changes in fair value recognized as adjustments to net trading
income.
e. Own shares and derivatives on own shares -- trading
As of 1 January 2000, upon adoption of SIC 16 "Share Capital -- Reacquired Own
Equity Instruments (Treasury Shares)" for IAS, all own shares are treated as
treasury shares and reduce total shareholders' equity. This applies also to the
number of shares outstanding. Derivatives on own shares are classified as
assets, liabilities or shareholders' equity depending upon the manner of
settlement. As a result of this adoption, there is no difference between IAS and
U.S. GAAP. For 1999 and 1998, figures have been retroactively restated (see Note
1(t)).
f. Financial investments
Under IAS, financial investments are classified as either current investments or
long-term investments. The Group considers current financial investments to be
held for sale and carried at lower of cost or market value. The Group accounts
for long-term financial investments at cost, less any permanent impairments.
--------------------------------------------------------------------------------
F- 62
<PAGE> 265
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Under U.S. GAAP, investments are classified as either held to maturity
(essentially debt securities) which are carried at amortized cost or available
for sale (debt and marketable equity securities), which are carried at fair
value with changes in fair value recorded as a separate component of
shareholders' equity. Realized gains and losses are recognized in net profit in
the period sold.
For purposes of the U.S. GAAP reconciliation, amounts reflected in Other income
for the changes in market values of held for sale investments are reclassified
as a component of Shareholders' equity. Held to maturity investments that do not
meet U.S. GAAP criteria are reclassified to the available for sale category.
Unrealized gains or unrealized losses relating to these investments are recorded
as a component of Shareholders' equity.
g. Retirement benefit plans
Under IAS, the Group has recorded pension expense based on a specific method of
actuarial valuation of projected plan liabilities for accrued service including
future expected salary increases and expected return on plan assets. Plan assets
are held in a separate trust to satisfy plan liabilities. Plan assets are
recorded at fair value. The recognition of a prepaid asset on the books of the
Group is subject to certain limitations. These limitations generally cause
amounts recognized as expense to equal amounts funded in the same period. Any
amount not recognized as a prepaid asset and the corresponding impact on pension
expense has been disclosed in the financial statements.
Under U.S. GAAP, pension expense, generally, is based on the same method of
valuation of liabilities and assets as under IAS. Differences in the levels of
expense and liabilities (or prepaid assets) exist due to the different
transition date rules and the stricter provisions as well as industry practice
under IAS for recognition of a prepaid asset.
As a result of the merger of the benefit plans of Union Bank of Switzerland and
Swiss Bank Corporation, there was a one time increase of the vested plan
benefits for the beneficiaries of such plans. This had the effect of increasing
the defined benefit obligation at this date by CHF 3,020 million. Under IAS this
resulted in a one time charge to income which was offset by the recognition of
assets (previously unrecognized due to certain limitations under IAS).
Under U.S. GAAP, in a business combination that is accounted for under the
purchase method, the assignment of the purchase price to individual assets
acquired and liabilities assumed must include a liability for the projected plan
liabilities in excess of plan assets or an asset for plan assets in excess of
the projected plan liabilities, thereby recognizing any previously existing
unrecognized net gains or losses, unrecognized prior service cost, or
unrecognized net liabilities or assets.
For purposes of the U.S. GAAP reconciliation, the Group recorded a prepaid asset
for the Union Bank of Switzerland plans as of 1 January 1998. Swiss Bank
Corporation recorded a purchase price adjustment to recognize its prepaid asset
at 29 June 1998. The recognition of these assets impacts the pension expense
recorded under U.S. GAAP versus IAS. The pension expense for the year ended 31
December 1999 is also impacted by the different treatment of the merger of the
plans under IAS versus U.S. GAAP. The assets recognized under IAS (which had
been previously unrecognized due to certain limitations under IAS) were already
recognized under U.S. GAAP due to the absence of such limitations under U.S.
GAAP.
h. Other employee benefits
Under IAS, the Group has recorded expenses and liabilities for post-retirement
benefits determined under a methodology similar to that described above under
retirement benefit plans.
--------------------------------------------------------------------------------
F- 63
<PAGE> 266
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Under U.S. GAAP, expenses and liabilities for post-retirement benefits would be
determined under a similar methodology as under IAS. Differences in the levels
of expenses and liabilities have occurred due to different transition date rules
and the treatment of the merger of Union Bank of Switzerland and Swiss Bank
Corporation under the purchase method.
i. Equity participation plans
IAS does not specifically address the recognition and measurement requirements
for equity participation plans.
U.S. GAAP permits the recognition of compensation cost on the grant date for the
estimated fair value of equity instruments issued (Statement of Financial
Accounting Standard ("SFAS") No. 123) or based on the intrinsic value of equity
instruments issued (APB No. 25), with the disclosure of the pro forma effects of
equity participation plans on net profit and earnings per share, as if the fair
value had been recorded on the grant date. The Group recognized only intrinsic
values at the grant date with subsequent changes in value not recognized.
For purposes of the U.S. GAAP reconciliation, certain of the Group's option
awards have been determined to be variable, primarily because they may be
settled in cash or the Group has offered to hedge their value. Additional
compensation expense from these options awards for the years ended 31 December
1999 and 31 December 1998 is CHF 41 million and CHF 1 million, respectively. In
addition, certain of the Group's equity participation plans provide for deferral
of the awards, and the instruments are held in trusts for the participants.
Certain of these trusts are recorded on the Group's balance sheet for U.S. GAAP
presentation. The effect of recording these asset and liabilities is a debit to
expense of CHF 8 million and CHF nil for the years ended 31 December 1999 and 31
December 1998, respectively.
j. Software capitalization
Costs associated with the acquisition or development of internal use software
are recorded as Operating expenses as incurred by the Group.
Under U.S. GAAP, effective 1 January 1999, certain costs associated with the
acquisition or development of internal use software are required to be
capitalized. Once the software is ready for its intended use, the costs
capitalized are amortized to the Income statement over estimated lives.
For purposes of the U.S. GAAP reconciliation, costs associated with the
acquisition or development of internal use software that meet U.S. GAAP software
capitalization criteria have been reversed from Operating expenses and amortized
over a period of 2 years.
k. Credit loss expense
The allowance for credit losses provides for risks of losses inherent in the
credit extension process. Counterparties are individually rated and continuously
reviewed and analyzed. The allowance is adjusted for impairments identified on a
loan-by-loan basis. If there are indications that there are significant probable
losses in the portfolio that have not specifically been identified allowances
would also be provided for on a portfolio basis. As described in Note 1(j),
"Loans and allowance for credit losses," the allowance for credit losses has
three components: counterparty-specific, country-specific, and specific reserve
pools.
Specific reserve pools were established in 1996 to absorb losses not
specifically identified at that time but which experience indicated were present
in the portfolio. These pools have been applied to specific loans based on the
analysis of individual credit exposures. The utilization of the unallocated
specific
--------------------------------------------------------------------------------
F- 64
<PAGE> 267
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
reserve pools was periodically reviewed by the Group. At 31 December 1999 there
were no specific reserve pools and none were required.
Under U.S. GAAP, the allowance for loan losses also is an accounting estimate of
credit losses inherent in a company's loan portfolio that have been incurred as
of the balance-sheet date. The practice of using a procedural discipline in
determining all components of the allowance for loan losses to be reported is
followed under U.S. GAAP. The Group's evaluation of the specific reserve pools
at 30 September 1999 did not follow a procedural discipline and therefore is not
in full compliance with U.S. GAAP. An adjustment to the U.S. GAAP reconciliation
was made at 30 September 1999 but not required at 31 December 1999.
l. Recently issued US accounting standards
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the US Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which, as
amended, is required to be adopted for financial statements as of 1 January
2001. The standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. While the specific impact on earnings and
financial position of SFAS No. 133 has not been determined, the activities that
will be most affected by the new Standard have been identified. Specifically,
UBS Warburg and Corporate Center use derivatives to hedge loans, deposits, and
issuance of debt, primarily to hedge interest rate risk. The Group's lending
activities use credit derivatives to hedge credit risk, and to a lesser extent,
use other derivatives to hedge interest rate risk. Management is currently
evaluating the impact of SFAS No. 133 on the Group's hedging strategies. The
actual assessment of the impact on the Group's earnings and financial position
will be based on the 1 January 2001 positions in accordance with the Standard.
--------------------------------------------------------------------------------
F- 65
<PAGE> 268
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
42.2 RECONCILIATION OF IAS SHAREHOLDERS' EQUITY AND NET PROFIT/(LOSS) TO U.S.
GAAP
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY NET PROFIT/(LOSS)
----------------------- ------------------------
CHF MILLION 31.12.1999 31.12.1998 31.12.1999 31.12.1998
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
AMOUNTS DETERMINED IN ACCORDANCE WITH IAS:....... 30,608 28,794 6,153 2,972
Adjustments in respect of:
a. SBC purchase accounting:
Goodwill................................... 19,765 21,612 (1,729) (864)
Other purchase accounting adjustments...... (858) (895) 37 (2,415)
b. Harmonization of accounting policies....... 0 20 (20) (751)
c. Restructuring provision.................... 350 1,948 (1,598) (3,982)
d. Derivative instruments held or issued for 507 1,052 (545) (405)
non-trading purposes.......................
f. Financial investments...................... 52 108 36 23
g. Retirement benefit plans................... 1,839 1,858 (19) 88
h. Other employee benefits.................... (24) (26) 2 (20)
i. Equity participation plans................. (113) (40) (47) (1)
j. Software capitalization.................... 389 0 389 0
k. Credit loss expense........................ 0 0 0 0
l. Tax adjustments............................ (682) 330 178 1,690
------ ------ ------ ------
Total adjustments................................ 21,225 25,967 (3,316) (6,637)
------ ------ ------ ------
AMOUNTS DETERMINED IN ACCORDANCE WITH U.S.
GAAP:.......................................... 51,833 54,761 2,837 (3,665)
====== ====== ====== ======
</TABLE>
--------------------------------------------------------------------------------
F- 66
<PAGE> 269
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
42.3 EARNINGS PER SHARE
Under IAS and U.S. GAAP, basic earnings per share ("EPS") is computed by
dividing income available to common shareholders' by the weighted average number
of common shares outstanding. Diluted EPS includes the determinants of basic EPS
and, in addition, gives effect to dilutive potential common shares that were
outstanding during the period.
The computation of basic and diluted EPS for the years ended 31 December 1999
and 31 December 1998 are presented in the following table:
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
----------- ------------
<S> <C> <C>
Net profit/(loss) available for ordinary shares (CHF
million):
IAS....................................................... 6,153 2,972
U.S. GAAP................................................. 2,837 (3,665)
Weighted average shares outstanding:
IAS....................................................... 404,742,482 405,222,295
U.S. GAAP................................................. 404,742,482 414,609,886
Diluted weighted average shares outstanding:
IAS....................................................... 408,375,152 412,881,041
U.S. GAAP................................................. 408,375,152 414,609,886
Basic earnings/(loss) per share (CHF):
IAS....................................................... 15.20 7.33
U.S. GAAP................................................. 7.01 (8.84)
Diluted earnings/(loss) per share (CHF):
IAS....................................................... 15.07 7.20
U.S. GAAP................................................. 6.95 (8.84)
</TABLE>
The following are adjustments to the calculation of weighted average outstanding
common shares which result from valuation and presentation differences between
IAS and U.S. GAAP:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE SHARES OUTSTANDING: 31.12.1999 31.12.1998
------------------------------------ ----------- -----------
<S> <C> <C>
Basic weighted-average ordinary shares (IAS)................ 404,742,482 405,222,295
add: Treasury shares adjustments.......................... 0 9,387,591(2)
----------- -----------
Basic weighted-average ordinary shares (U.S. GAAP).......... 404,742,482 414,609,886
----------- -----------
Diluted weighted-average ordinary shares (IAS).............. 408,375,152 0(1)
----------- -----------
Diluted weighted-average ordinary shares (U.S. GAAP)........ 408,375,152 414,609,886
----------- -----------
</TABLE>
---------------
(1) No potential ordinary shares may be included in the computation of any
diluted per-share amount when a loss from continuing operations exists.
(2) This adjustment is due to the difference in weighted average shares
calculated under purchase accounting for U.S. GAAP versus the pooling method
under IAS for the Union Bank of Switzerland merger with Swiss Bank
Corporation on 29 June 1998. There is otherwise no difference between IAS
and U.S. GAAP for the calculation of weighted average shares for EPS.
--------------------------------------------------------------------------------
F- 67
<PAGE> 270
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
42.4 PRESENTATION DIFFERENCES BETWEEN IAS AND U.S. GAAP
In addition to the differences in valuation and income recognition, other
differences, essentially related to presentation, exist between IAS and U.S.
GAAP. Although these differences do not cause differences between IAS and U.S.
GAAP reported shareholders' equity and net profit, it may be useful to
understand them to interpret the financial statements presented in accordance
with U.S. GAAP. The following is a summary of presentation differences that
relate to the basic IAS financial statements.
1. Purchase accounting
As described in Note 42.1, under U.S. GAAP the business combination creating UBS
AG was accounted for under the purchase method with Union Bank of Switzerland
being considered the accounting acquirer. In the U.S. GAAP Condensed
Consolidated Balance Sheet, the assets and liabilities of Swiss Bank Corporation
have been restated to fair value at the date of acquisition (29 June 1998). In
addition, the following table presents summarized financial results of SBC for
the period from 1 January to 29 June 1998 which, under U.S. GAAP, would be
excluded from the U.S. GAAP condensed consolidated Income statement for the year
ended 31 December 1998:
<TABLE>
<S> <C>
OPERATING INCOME
Interest income............................................. 8,205
Less: interest expense...................................... 6,630
-----
Net interest income......................................... 1,575
Less: Credit loss expense................................... 164
-----
Total....................................................... 1,411
-----
Net fee and commission income............................... 3,701
Net trading income.......................................... 2,135
Income from disposal of associates and subsidiaries......... 1,035
Other income................................................ 364
-----
Total....................................................... 8,646
-----
OPERATING EXPENSES
Personnel................................................... 3,128
General and administrative.................................. 1,842
Depreciation and amortization............................... 511
-----
Total....................................................... 5,481
-----
OPERATING PROFIT BEFORE TAXES AND MINORITY INTERESTS........ 3,165
-----
Tax expense................................................. 552
-----
PROFIT...................................................... 2,613
-----
Less: Minority interests.................................... (1)
-----
NET PROFIT.................................................. 2,614
=====
</TABLE>
2. Settlement date vs. trade date accounting
The Group's transactions from securities activities are recorded on the
settlement date for balance sheet and on the trade date for income statement
purposes. This results in recording an off-balance sheet forward transaction
during the period between the trade date and the settlement date. Forward
--------------------------------------------------------------------------------
F- 68
<PAGE> 271
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
positions relating to trading activities are revalued to fair value and any
unrealized profits and losses are recognized in Net profit.
Under U.S. GAAP, trade date accounting is required for purchases and sales of
securities. For purposes of U.S. GAAP presentation, all purchases and sales of
securities previously recorded on settlement date have been recorded as of trade
date for balance sheet purposes. Trade date accounting has resulted in
receivables and payables to broker-dealers and clearing organizations recorded
in Other assets and Other liabilities.
3. Repurchase, resale and securities lending transactions
Under IAS, the Group's repurchase agreements and securities borrowed are
accounted for as collateralized borrowings. Reverse repurchase agreements and
securities lending are accounted for as collateralized lending transactions.
Cash collateral is reported on the balance sheet at amounts equal to the
collateral advanced or received.
Under U.S. GAAP, securities lending and repurchase transactions are also
generally accounted for as collateralized borrowing and lending transactions.
However, certain such transactions may be deemed sale or purchase transactions
under specific circumstances. Additionally, under U.S. GAAP, the Group is
required to recognize securities collateral controlled and an offsetting
obligation to return such securities collateral on certain financing
transactions, when specific control conditions exist.
For purposes of U.S. GAAP presentation, securities collateral recognized under
financing transactions is reflected in Due from banks or Due from customers,
depending on the counterparty. The related obligation to return the securities
collateral is reflected in the Balance sheet in Due to banks or Due to
customers, as appropriate.
4. Financial investments
Under IAS, the Group's private equity investments, real estate held for sale and
non-marketable equity financial investments have been included in Financial
investments.
Under U.S. GAAP, private equity investments, real estate held for sale and
non-marketable financial investments generally are reported in Other assets or
reported as a separate caption in the Balance sheet.
For purposes of U.S. GAAP presentation, private equity investments are reported
as a separate caption in the Balance sheet and real estate held for sale and
non-marketable equity financial investments are reported in Other assets.
5. Net trading income
The Group has implemented a change in accounting policy for interest and
dividend income and expenses on trading related assets and liabilities (see Note
1(t)). For the years ended 31 December 1999 and 31 December 1998, figures have
been retroactively restated. As a result of this change, there is no longer a
difference between IAS and U.S. GAAP.
6. Equity participation plans
Certain of the Group's equity participation plans provide for deferral of the
awards, and the instruments are held in trusts for the participants. Certain of
these trusts are recorded on the Group's balance sheet for U.S. GAAP
presentation, the effect of which is to increase assets by CHF 655 million and
CHF 197 million, liabilities by CHF 717 million and CHF 236 million, and
decrease shareholders'
--------------------------------------------------------------------------------
F- 69
<PAGE> 272
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
equity by CHF 62 million and CHF 39 million (for UBS AG shares held by the
trusts which are treated as treasury shares) at 31 December 1999 and 31 December
1998, respectively.
7. Own bonds -- trading
Under IAS, the Group's own bonds held for trading are carried at fair value
similar to other trading assets and liabilities. Changes in fair value and
interest on own bonds held for trading are recognized as Net trading income
Under U.S. GAAP, all own bonds are treated as Long-term debt and a reduction to
the amount of own bonds outstanding.
For purposes of U.S. GAAP presentation, own bond positions included in the
Trading portfolio and Trading portfolio liabilities have been reclassified to
Long-term debt.
42.5 CONSOLIDATED INCOME STATEMENT
The following is a Consolidated Income Statement of the Group, for the years
ended 31 December 1999 and 31 December 1998, restated to reflect the impact of
valuation and income recognition differences and presentation differences
between IAS and U.S. GAAP.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
----------------- -----------------
CHF MILLION US GAAP IAS US GAAP IAS
----------- REFERENCE ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
OPERATING INCOME
Interest income.................. a, 1 35,404 35,604 29,136 37,442
Less: interest expense........... a, 1 29,660 29,695 25,773 32,424
------ ------ ------ ------
Net interest income.............. 5,744 5,909 3,363 5,018
Less: Credit loss expense........ 1 956 956 787 951
------ ------ ------ ------
Total............................ 4,788 4,953 2,576 4,067
------ ------ ------ ------
Net fee and commission income.... 1 12,607 12,607 8,925 12,626
Net trading income............... b, c, d, 1 7,174 7,719 455 3,313
Net gains from disposal of
associates and subsidiaries.... 1 1,821 1,821 84 1,119
Other income..................... b, f, 1 1,361 1,325 641 1,122
------ ------ ------ ------
Total............................ 27,751 28,425 12,681 22,247
------ ------ ------ ------
OPERATING EXPENSES
Personnel........................ b, c, g, h, i, j, 1 12,483 12,577 7,938 9,816
General and administrative....... a, c, j, 1 6,664 6,098 6,259 6,735
Depreciation and amortization.... a, b, j, 1 3,454 1,857 2,403 1,825
Restructuring costs.............. c 750 0 1,089 0
------ ------ ------ ------
Total............................ 23,351 20,532 17,689 18,376
------ ------ ------ ------
</TABLE>
--------------------------------------------------------------------------------
F- 70
<PAGE> 273
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
----------------- -----------------
CHF MILLION US GAAP IAS US GAAP IAS
----------- REFERENCE ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
OPERATING PROFIT/(LOSS) BEFORE
TAX AND MINORITY INTERESTS..... 4,400 7,893 (5,008) 3,871
------ ------ ------ ------
Tax expense/(benefit)............ 1 1,509 1,686 (1,339) 904
------ ------ ------ ------
NET PROFIT/(LOSS) BEFORE MINORITY
INTERESTS...................... 2,891 6,207 (3,669) 2,967
------ ------ ------ ------
Minority interests............... 1 (54) (54) 4 5
------ ------ ------ ------
NET PROFIT/(LOSS)................ 2,837 6,153 (3,665) 2,972
====== ====== ====== ======
</TABLE>
---------------
NOTE: References above coincide with the discussions in Note 42.1 and Note 42.4.
These references indicate which IAS to U.S. GAAP adjustments affect an
individual financial statement caption.
--------------------------------------------------------------------------------
F- 71
<PAGE> 274
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
42.6 CONDENSED CONSOLIDATED BALANCE SHEET
The following is a Condensed Consolidated Balance Sheet of the Group, as of 31
December 1999 and 31 December 1998, restated to reflect the impact of valuation
and income recognition principles and presentation differences between IAS and
U.S. GAAP.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------- -------------------
CHF MILLION U.S. GAAP IAS U.S. GAAP IAS
----------- REFERENCE --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and balances with central
banks........................... 5,073 5,073 3,267 3,267
Money market paper................ 69,717 69,717 18,390 18,390
Due from banks.................... 3, a 50,103 29,907 103,158 68,495
Cash collateral on securities
borrowed........................ 113,162 113,162 91,695 91,695
Reverse repurchase agreements..... 132,474 132,474 141,285 141,285
Trading portfolio assets.......... b, 2, 3, 7 189,504 212,440 161,440 159,179
Positive replacement values....... 2 64,035 64,698 90,520 90,511
Loans, net of allowance for credit
losses.......................... 3, a 235,714 234,858 254,750 247,926
Financial investments............. b, f, 4 2,378 7,039 2,962 6,914
Accrued income and prepaid
expenses........................ 5,167 5,167 6,627 6,627
Investments in associates......... 1,102 1,102 2,805 2,805
Property and equipment............ a, b, j 9,655 8,701 10,523 9,886
Intangible assets and goodwill.... a 21,428 3,543 21,707 2,210
Private equity investments........ 4 3,001 0 1,759 0
Other assets...................... b, d, g, h, 4, 6 18,717 11,007 29,398 12,092
------- ------- --------- -------
TOTAL ASSETS...................... 921,230 898,888 940,286 861,282
======= ======= ========= =======
LIABILITIES
Money market paper issued......... 64,655 64,655 51,528 51,527
Due to banks...................... 3 90,112 76,365 114,903 85,716
Cash collateral on securities
lent............................ 3 12,832 12,832 19,127 19,171
Repurchase agreements............. 3 173,840 196,914 136,824 137,617
Trading portfolio liabilities..... 2,3,7 52,606 54,586 51,600 47,033
Negative replacement values....... 2 95,004 95,786 125,857 125,847
Due to customers.................. 3,a 291,595 279,960 282,543 274,850
Accrued expenses and deferred
income.......................... 12,040 12,040 11,232 11,232
Long-term debt.................... a, 7 56,049 56,332 50,445 50,783
Other liabilities................. a, b, c, d, f, i, 2, 3 20,230 18,376 40,476 27,722
------- ------- --------- -------
</TABLE>
--------------------------------------------------------------------------------
F- 72
<PAGE> 275
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------- -------------------
CHF MILLION U.S. GAAP IAS U.S. GAAP IAS
----------- REFERENCE --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
TOTAL LIABILITIES................. 868,963 867,846 884,535 831,498
------- ------- --------- -------
MINORITY INTERESTS................ 434 434 990 990
------- ------- --------- -------
TOTAL SHAREHOLDERS' EQUITY........ 51,833 30,608 54,761 28,794
------- ------- --------- -------
TOTAL LIABILITIES, MINORITY
INTERESTS AND SHAREHOLDERS'
EQUITY.......................... 921,230 898,888 940,286 861,282
======= ======= ========= =======
</TABLE>
---------------
NOTE: References above coincide with the discussions in Note 42.1 and Note 42.4.
These references indicate which IAS to U.S. GAAP adjustments affect an
individual financial statement caption.
42.7 COMPREHENSIVE INCOME
Comprehensive income is defined as the change in Shareholders' equity excluding
transactions with shareholders. Comprehensive income has two major components:
Net profit, as reported in the income statement, and Other comprehensive income.
Other comprehensive income includes such items as foreign currency translation
and unrealized gains in available-for-sale securities. The components and
accumulated other comprehensive income amounts for the years ended 31 December
1999 and 31 December 1998 are as follows:
<TABLE>
<CAPTION>
UNREALIZED ACCUMULATED
FOREIGN GAINS IN OTHER
CURRENCY AVAILABLE-FOR-SALE COMPREHENSIVE COMPREHENSIVE
CHF MILLION TRANSLATION SECURITIES INCOME INCOME
----------- ----------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance, 1 January 1998............... (111) 47 (64)
Net loss.............................. (3,665)
Other comprehensive income
Foreign currency translation........ (345) (345)
Unrealized gains, arising during the
year, net of CHF 89 million
tax.............................. 267 267
Less: Reclassification adjustment
for gains realized in net
profit, net of CHF 76 million
tax........................... (229) (229) (307)
------
Comprehensive loss.................... (3,972)
---- ---- ---- ------
Balance, 31 December 1998............. (456) 85 (371)
---- ---- ----
NET PROFIT............................ 2,837
OTHER COMPREHENSIVE INCOME
FOREIGN CURRENCY TRANSLATION........ 14 14
UNREALIZED GAINS, ARISING DURING THE
YEAR, NET OF CHF 18 MILLION
TAX.............................. 74 74
LESS: RECLASSIFICATION ADJUSTMENT
FOR GAINS REALIZED IN NET
PROFIT, NET OF CHF 40 MILLION
TAX........................... (143) (143) (55)
------
COMPREHENSIVE INCOME.................. 2,782
---- ---- ---- ------
BALANCE, 31 DECEMBER 1999............. (442) 16 (426)
---- ---- ----
</TABLE>
--------------------------------------------------------------------------------
F- 73
<PAGE> 276
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 43 ADDITIONAL DISCLOSURES REQUIRED UNDER U.S. GAAP
In addition to the differences in valuation and income recognition and
presentation, disclosure differences exist between IAS and U.S. GAAP. The
following are additional U.S. GAAP disclosures that relate to the basic
financial statements.
43.1 BUSINESS COMBINATIONS
On 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation
consummated a merger of the banks, resulting in the formation of UBS. New shares
totaling 428,746,982 were issued exclusively for the exchange of the existing
shares of Union Bank of Switzerland and Swiss Bank Corporation. Under the terms
of the merger agreement, Union Bank of Switzerland shareholders received 5
registered shares for each bearer share held and 1 registered share for each
registered share held, totaling 257,500,000 shares of UBS AG. Swiss Bank
Corporation shareholders received 1 1/13 registered shares of the Group for each
Swiss Bank Corporation registered share held, totaling 171,246,982 shares. The
combined share capital amounted to CHF 5,754 million. As a result of the
exchange of shares, CHF 1,467 million were transferred from share capital to the
share premium account. The merger was accounted under the pooling of interests
method and, accordingly, the information included in the financial statements
presents the combined results of Union Bank of Switzerland and Swiss Bank
Corporation as if the merger had been in effect for all periods presented.
Summarized results of operations of the separate companies for the period from 1
January 1998 through 29 June 1998, the date of combination, are as follows:
<TABLE>
<CAPTION>
CHF MILLION UNION BANK OF SWITZERLAND SWISS BANK CORPORATION
----------- ------------------------- ----------------------
<S> <C> <C>
Total operating income................... 5,702 8,646
Net profit............................... 739 2,614
</TABLE>
As a result of the merger, the Group harmonized its accounting policies that
have then been retrospectively applied for the restatement of comparative
information and opening retained earnings at 1 January 1997. As a result,
adjustments were required for the accounting for treasury shares, netting of
balance sheet items, repurchase agreements, depreciation, and employee share
plans.
Summarized results of operations of the separate companies for the year ended 31
December 1997 are as follows:
<TABLE>
<CAPTION>
CHF MILLION TOTAL OPERATING INCOME NET LOSS
----------- ---------------------- --------
<S> <C> <C>
Union Bank of Switzerland............................... 13,114 (129)
Swiss Bank Corporation.................................. 13,026 (248)
------ ----
Total as previously reported............................ 26,140 (377)
Impact of accounting policy harmonization............... (1,260) (290)
------ ----
Consolidated............................................ 24,880 (667)
</TABLE>
Prior to 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation
entered into certain transactions with each other in the normal course of
business. These intercompany transactions have been eliminated in the
accompanying financial statements.
43.2 RESTRUCTURING PROVISION
See Note 24 for information on the restructuring provision.
--------------------------------------------------------------------------------
F- 74
<PAGE> 277
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
At the time of the merger announcement in December 1997, it was announced that
the merged bank's operations in various locations would be combined, resulting
in vacant properties, reductions in personnel, elimination of redundancies in
the IT platforms, exit costs and other costs. As a result, restructuring
provisions of CHF 7,300 million (of which CHF 7,000 million was recognized as a
restructuring expense in 1997 and CHF 300 million was recognized as a component
of general and administrative expense in the fourth quarter of 1999) were
established, to be used over a period of four years. At 31 December 1999, the
Group had utilized CHF 5,871 million of the provisions.
The restructuring provisions included CHF 3,000 million for employee termination
benefits, CHF 1,500 million for sale and lease breakage costs associated with
the closure of premises, CHF 1,650 for IT integration projects and write-offs of
equipment which management had committed to dispose of; and CHF 1,150 million
for other costs, including professional fees, miscellaneous transfer taxes and
statutory fees. For income statement purposes, these costs would normally be
classified as personnel expense, general and administrative expense or other
income.
<TABLE>
<CAPTION>
UTILIZATION THROUGH 31 DECEMBER 1999
------------------------------------------------
CHF MILLION PERSONNEL IT PREMISES OTHER TOTAL
----------- --------- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C>
UBS Switzerland............................... 300 1,054 180 203 1,737
Private and Corporate Clients............... 205 929 176 201 1,511
Private Banking............................. 95 125 4 2 226
UBS Asset Management.......................... 25 9 0 3 37
UBS Warburg................................... 1,983 373 1 414 2,771
Corporate Center.............................. 94 3 759 470 1,326
----- ----- --- ----- -----
GROUP TOTAL................................... 2,402 1,439 940 1,090 5,871
===== ===== === ===== =====
</TABLE>
<TABLE>
<CAPTION>
31.12.99
--------
<S> <C> <C> <C> <C> <C>
Restructuring provision as of 31.12.1997... 7,000
Additional provision in 1999............... 300
Used in 1998............................... 4,027
Used in 1999............................... 1,844
--------
Total used through 31.12.1999.............. 5,871
--------
RESTRUCTURING PROVISION REMAINING.......... 1,429
========
</TABLE>
The employee terminations affected all functional levels and all operating
divisions within the Group. The CHF 2,000 million portion of the provision
related to employee severance and early retirement costs reflects the costs of
eliminating approximately 7,800 positions, after considering attrition and
redeployment within the Company. CHF 1,000 million of the provision relates to
payments to maintain stability in the workforce during the integration period.
As of 31 December 1999, approximately 5,700 employees had been severed or early
retired and the remaining personnel restructuring reserve balance was CHF 598
million.
43.3 Segment Reporting
See Note 2 and Note 3 for segment reporting information.
UBS is organized into three business groups: UBS Switzerland, UBS Warburg and
UBS Asset Management, and our Corporate Center.
UBS Switzerland encompasses Private Banking and Private and Corporate Clients.
--------------------------------------------------------------------------------
F- 75
<PAGE> 278
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Private Banking offers a broad portfolio of financial products and services to
offshore and Swiss high net worth clients who bank in Switzerland or other
offshore centers, and to the financial intermediaries advising them. The
business unit's products and services are aimed at encompassing the complete
life cycle of the client, including succession planning and the generational
change. Private Banking provides a number of asset-based, transaction-based and
other services. Asset-based services include custodial services, deposit
accounts, loans and fiduciary services while transaction-based services include
trading and brokerage and investment fund services. The business unit also
provides financial planning and consulting and offers financial planning
instruments to clients. These services include establishing proprietary trusts
and foundations, the execution of wills, corporate and tax structuring and tax
efficient investments.
Private and Corporate Clients is the leading retail bank in Switzerland and
targets individual clients with assets of up to approximately CHF 1 million and
business and corporate clients in Switzerland. Private and Corporate Clients
provides a broad range of products and services to these clients, including
retail banking, investment services and lending.
UBS Warburg is made up of four business units, Corporate and Institutional
Clients, UBS Capital, Private Clients and e-services.
Corporate and Institutional Clients is one of the leading global investment
banks and is headquartered in London. It provides wholesale financial and
investment products and services globally to a diversified client base, which
includes institutional investors (including institutional asset managers and
broker-dealers), corporations, sovereign governments and supranational
organizations. Corporate and Institutional Clients also manages cash and
collateral trading on behalf of the Group and executes the vast majority of the
Group's retail securities, derivatives and foreign currency exchange
transactions.
UBS Capital is the Group's global private equity business. UBS Capital invests
in unlisted companies, managing these investments over a medium term time
horizon to increase their value and "exiting" the investment in a manner that
will maximize the capital gain. The business unit seeks to make both majority
and minority equity investments in established and emerging unlisted companies,
either with the Group's own capital or through sponsored investment funds. UBS
Capital endeavors to create investment value by working together with management
to develop the businesses it invests in over the medium term in order to
optimize their performance.
Private Clients provides onshore private banking services for high net worth
individuals in key markets world-wide, providing a similar range of services to
Private Banking, but specializing in combining traditional private banking
services with investment banking innovation. For example, Private Clients offers
innovative products allowing clients to release value from own-company
shareholdings or options.
e-services is a new business, currently working towards a client launch in
Germany in the Autumn of 2000. e-services will provide personalized investments
and advisory services at competitive fees for affluent clients in Europe,
delivered via a multi-channel structure which integrates internet, call centers
and investment centers. e-services will deliver a distinctive set of services,
including advanced financial planning and asset allocation, and investment
products such as UBS and third-party funds, securities and pension products.
UBS Asset Management is made up of two business units: Institutional Asset
Management and Investment Funds/GAM.
Institutional Asset Management is responsible for the Group's institutional
asset management business, and for the investment management of the Groups
mutual funds. Its diverse institutional client base located throughout the world
consists of corporate and public pension plans, endowments and private
--------------------------------------------------------------------------------
F- 76
<PAGE> 279
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
foundations, insurance companies, central banks and supranationals,
quasi-institutions, and financial advisers.
Investment Funds/GAM is the mutual funds business of UBS. Investment Funds is
one of the leading mutual funds providers in Europe and the seventh largest in
the world. GAM is a diversified asset management group with assets composed
primarily of private client accounts, institutional and mutual funds. Global
Asset Management operates under its established brand name within UBS Asset
Management and employs its own distinctive investment style. UBS Asset
Management will increasingly leverage Global Asset Management's range of mutual
funds and its multi-manager selection process, in which it selects the top 90
out of about 6,000 third-party fund providers, to enhance the range of its
investment styles and products.
The Corporate Center encompasses Group level functions which cannot be devolved
to the operating divisions. Additionally, the Corporate Center plays an active
role with regard to funding, capital and balance sheet management and management
of foreign currency earnings.
43.4 NET TRADING INCOME
See Note 6 for information on net trading income. Foreign exchange net trading
income include gains and losses from spot and forward contracts, options,
futures, and translation of foreign currency assets and liabilities, bank notes,
precious metals, and commodities. Fixed income net trading income includes the
results of making markets in both developed and emerging countries in government
securities, corporate debt securities, money market instruments, interest rate
and currency swaps, options, and other derivatives. Equities net trading income
includes the results of making markets in global equity securities and equity
derivatives such as swaps, options, futures, and forward contracts.
43.5 LOANS
See Note 12 for information on loans. The following table summarizes the Group's
impaired loans at and for the years ended 31 December 1999 and 31 December 1998:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Impaired loans(1),(2)....................................... 22,456 26,447
Amount of allowance for credit losses related to impaired
loans..................................................... 12,471 13,582
Average impaired loans(3)................................... 24,467 25,939
</TABLE>
Included in the impaired loans information above are non-performing loans, which
are as set forth below. Unrecognized interest on non-performing loans was CHF
409 million and CHF 423 million for the years ended 31 December 1999 and year
ended 31 December 1998, respectively.
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Non-performing loans........................................ 13,073 16,113
Amount of allowance for credit losses related to
non-performing loans...................................... 8,661 10,006
Average non-performing loans(2)............................. 14,615 16,587
</TABLE>
---------------
(1) All impaired loans have a specific allowance for credit losses.
(2) Interest income on impaired loans recognized in the years ended 31 December
1999 and 31 December 1998 is immaterial.
(3) Average balances for the year ended 31 December 1999 are calculated from
quarterly data. Average balances for the year ended 31 December 1998 are
calculated from year-end balances.
--------------------------------------------------------------------------------
F- 77
<PAGE> 280
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
43.6 FINANCIAL INVESTMENTS
See Note 16 for information on financial investments. The following table
summarizes the Group's financial investments as of 31 December 1999 and 31
December 1998:
<TABLE>
<CAPTION>
GROSS GROSS
BOOK AMORTIZED UNREALIZED UNREALIZED FAIR
CHF MILLION VALUE COST GAINS LOSSES VALUE
----------- ----- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
31 DECEMBER 1999
EQUITY SECURITIES....................... 356 388 3 14 377
DEBT SECURITIES ISSUED BY THE SWISS
NATIONAL GOVERNMENT AND AGENCIES..... 78 78 3 0 81
DEBT SECURITIES ISSUED BY SWISS LOCAL
GOVERNMENTS.......................... 81 81 3 1 83
DEBT SECURITIES ISSUED BY THE U.S.
TREASURY AND AGENCIES................ 410 410 0 0 410
DEBT SECURITIES ISSUED BY FOREIGN
GOVERNMENTS AND OFFICIAL
INSTITUTIONS......................... 321 321 6 1 326
CORPORATE DEBT SECURITIES............... 847 851 24 6 869
MORTGAGE-BACKED SECURITIES.............. 109 109 1 1 109
OTHER DEBT SECURITIES................... 120 120 3 0 123
----- ----- --- -- -----
TOTAL................................ 2,322 2,358 43 23 2,378
===== ===== === == =====
31 December 1998
Equity Securities....................... 400 423 82 0 505
Debt Securities Issued by the Swiss
National Government and Agencies..... 85 85 8 0 93
Debt Securities Issued by Swiss Local
Governments.......................... 89 89 7 0 96
Debt Securities Issued by the U.S.
Treasury and Agencies................ 373 373 4 0 377
Debt Securities Issued by Foreign
Governments and Official
Institutions......................... 426 426 9 0 435
Corporate Debt Securities............... 1,044 1,044 4 9 1,039
Mortgage-Backed Securities.............. 26 26 3 0 29
Other Debt Securities................... 384 384 5 1 388
----- ----- --- -- -----
Total................................ 2,827 2,850 122 10 2,962
===== ===== === == =====
</TABLE>
--------------------------------------------------------------------------------
F- 78
<PAGE> 281
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The following presents an analysis of the contractual maturities of the
investments in debt securities as of 31 December 1999:
<TABLE>
<CAPTION>
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS
----------------- ----------------- ----------------- -----------------
CHF MILLION, EXCEPT PERCENTAGES AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%) AMOUNT YIELD(%)
------------------------------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SWISS NATIONAL GOVERNMENT AND
AGENCIES................... 22 5.49% 42 4.91% 9 5.32% 5 3.59%
SWISS LOCAL GOVERNMENTS...... 6 5.79% 46 5.31% 29 4.18% 0
U.S. TREASURY AND AGENCIES... 0 4 4.93% 0 406 5.11%
FOREIGN GOVERNMENTS AND
OFFICIAL INSTITUTIONS...... 87 5.60% 199 3.09% 22 3.61% 13 5.56%
CORPORATE DEBT SECURITIES.... 107 5.14% 469 5.60% 275 2.11% 0
MORTGAGE-BACKED SECURITIES... 0 107 5.96% 2 2.46% 0
OTHER DEBT SECURITIES........ 37 6.59% 71 5.81% 12 8.16% 0
--- --- --- ---
TOTAL AMORTIZED COST......... 259 938 349 424
=== === === ===
TOTAL MARKET VALUE........... 260 966 351 424
=== === === ===
</TABLE>
Proceeds from sales and maturities of investment securities available for sale
during the year ended 31 December 1999 and the year ended 31 December 1998 were
CHF 1,482 million and CHF 1,002 million, respectively. Gross gains of CHF 180
million and gross losses of CHF 3 million were realized in 1999 on those sales,
and gross gains of CHF 398 million and gross losses of CHF 92 million were
realized in 1998.
43.7 DERIVATIVE INSTRUMENTS
The Group uses derivative instruments for trading and non-trading purposes. All
derivatives instruments held or issued for trading or used to hedge another
financial instrument carried at fair value are accounted at fair value with
changes in fair value recorded in Net trading income. The Group uses interest
rate swaps in its asset/liability management. These interest rate swaps are
accounted for on the accrual basis of accounting as an adjustment of Net
interest income. No specific criteria is required for interest rate swaps to be
classified on the accrual basis. Gains and losses on terminations of non-trading
interest rate swaps are deferred and amortized to Net interest income over the
remaining original maturity of the contract. All other derivatives used in
asset/liability management are accounted for on a fair value basis of accounting
due to the short term nature of these derivatives.
--------------------------------------------------------------------------------
F- 79
<PAGE> 282
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the fair value, average fair value and notional
amounts for each class of derivative financial instrument for the years ended 31
December 1999 and 31 December 1998 distinguished between held or issued for
trading purposes and held or issued for non-trading purposes. See Note 27 for
information on derivative instruments including a discussion of the distinction
between trading and non-trading. Positive replacement values ("PRV") and
negative replacement values ("NRV") represent the fair values of derivative
instruments. Average balances for the years ended 31 December 1999 and 31
December 1998 are calculated from quarterly data.
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------------------------------ ------------------------------------------------
TOTAL TOTAL
TOTAL AVERAGE TOTAL AVERAGE NOTIONAL TOTAL AVERAGE TOTAL AVERAGE NOTIONAL
PRV PRV NRV NRV CHF BN PRV PRV NRV NRV CHF BN
------- ------- ------- ------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CHF MILLIONS, EXCEPT WHERE STATED
TRADING
Interest rate
contracts.......... 67,857 80,880 62,311 79,260 5,909 92,627 75,741 92,036 73,835 12,081
Foreign exchange
contracts.......... 35,649 36,407 38,239 37,634 2,136 41,857 49,358 45,169 45,101 2,048
Precious metals
contracts.......... 3,407 4,630 3,063 4,501 119 7,766 5,659 7,909 5,511 110
Equity/Index
contracts.......... 23,558 18,217 58,011 42,788 517 26,134 30,242 58,467 59,936 1,061
Commodity
contracts.......... 47 383 40 213 248 936 420 832 389 15
------- ------- ------- ------- ------- ------- ------- -------
Total trading........ 130,518 140,517 161,664 164,396 169,320 161,420 204,413 184,772
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
------------------------------------------------ ------------------------------------------------
TOTAL TOTAL
TOTAL AVERAGE TOTAL AVERAGE NOTIONAL TOTAL AVERAGE TOTAL AVERAGE NOTIONAL
PRV PRV NRV NRV CHF BN PRV PRV NRV NRV CHF BN
------- ------- ------- ------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CHF MILLIONS, EXCEPT WHERE STATED
NON-TRADING
Interest rate
contracts.......... 12 57 4 81 1 84 80 156 229 10
Foreign exchange
contracts.......... 100 105 131 63 14 32 200 5 157 6
Equity/Index
contracts.......... 204 149 123 196 2 308 1141 506 1310 15
------- ------- ------- ------- ------- ------- ------- -------
Total non-trading.... 316 311 258 340 424 1421 667 1696
======= ======= ======= ======= ======= ======= ======= =======
TOTAL................ 130,834 140,828 161,922 164,736 169,744 162,841 205,080 186,468
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
---------------
(1) The figures above are presented on a gross by counterparty basis for
disclosure purposes, but shown net in the balance sheet (see Note 1: Basis
of Accounting).
--------------------------------------------------------------------------------
F- 80
<PAGE> 283
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
43.8 RETIREMENT BENEFIT PLANS AND OTHER EMPLOYEE BENEFITS
See Note 35 for information on retirement benefit plans and other employee
benefits. Under U.S. GAAP, a reconciliation of beginning and ending balances of
the plan benefit obligation is required. The following is the reconciliation of
the plan benefit obligation for the Swiss and foreign pension plans:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
SWISS PENSION PLANS
Defined benefit obligation at beginning of year............. 14,944 14,431
Service cost.............................................. 464 535
Interest cost............................................. 636 726
Plan amendments........................................... 3,517 119
Special termination benefits.............................. (1,000) 0
Actuarial gain (loss)..................................... (571) 6
Benefits paid............................................. (979) (873)
------ ------
Defined benefit obligation at end of year................... 17,011 14,944
</TABLE>
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
FOREIGN PENSION PLANS
Defined benefit obligation at beginning of year............. 2,009 1,950
Service cost.............................................. 118 116
Interest cost............................................. 123 140
Plan amendments........................................... 2 7
Special termination benefits.............................. 0 (40)
Actuarial gain (loss)..................................... (2) (32)
Benefits paid............................................. (133) (60)
Other..................................................... 327 (72)
----- --------
Defined benefit obligation at end of year................... 2,444 2,009
</TABLE>
Under U.S. GAAP, a reconciliation of beginning and ending balances of the fair
value of plan assets is required. The following is the reconciliation of the
fair value of plan assets for the Swiss and foreign pension plans:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
SWISS PENSION PLANS
Fair value of plan assets at beginning of year.............. 17,885 17,224
Actual return of plan assets.............................. 2,136 856
Employer contributions.................................... 515 493
Plan participant contributions............................ 180 185
Benefits paid............................................. (979) (873)
Special termination benefits.............................. (1,172) 0
------ -----
Fair value of plan assets at end of year.................... 18,565 17,885
</TABLE>
--------------------------------------------------------------------------------
F- 81
<PAGE> 284
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
FOREIGN PENSION PLANS
Fair value of plan assets at beginning of year.............. 2,173 2,188
Actual return of plan assets.............................. 352 267
Employer contributions.................................... 21 41
Plan participant contributions............................ 14 9
Benefits paid............................................. (133) (60)
Other..................................................... 452 (272)
----- -----
Fair value of plan assets at end of year.................... 2,879 2,173
</TABLE>
43.9 OTHER EMPLOYEE BENEFITS
The United Kingdom and the United States of America offer postretirement health
care benefits that contribute to the health care coverage of the employees after
retirement. U.S. GAAP presentation requires that a reconciliation of beginning
and ending balances of the postretirement health care benefits be disclosed. The
following is the reconciliation of the postretirement health care benefits
obligation:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Postretirement benefit obligation at beginning of year...... 96 103
Service cost.............................................. 2 7
Interest cost............................................. 6 8
Plan amendments........................................... 0 5
Actuarial gain (loss)..................................... 0 9
Benefits paid............................................. (4) (4)
Other..................................................... 17 (32)
--- ---
Postretirement benefit obligation at end of year............ 117 96
</TABLE>
Under U.S. GAAP, a reconciliation of beginning and ending balances of the
postretirement plan assets is required. The following is the reconciliation of
the postretirement care plan assets:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Fair value of plan assets at beginning of year.............. 3 3
Actual return of plan assets.............................. 1 1
Company contributions..................................... 4 3
Benefits paid............................................. (4) (4)
--- ---
Fair value of plan assets at end of year.................... 4 3
</TABLE>
The assumed health care cost trend rate used in determining benefit expense for
December 1999 is 4.6%. Assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plan. A one-percentage-point
change in assumed health care cost trend rates would change the U.S.
postretirement benefit obligation and the service and interest cost components
of net periodic postretirement benefit costs by CHF 7.8 million.
43.10 EQUITY PARTICIPATION PLANS
See Note 36 for information on equity participation plans. Additional disclosure
for the equity participation plans required by U.S. GAAP follows. The accrued
expense for the years ended 31 December 1999 and 31 December 1998 was CHF 2,045
million and CHF 996 million, respectively. The accruals include awards earned
currently but issued in the following year.
--------------------------------------------------------------------------------
F- 82
<PAGE> 285
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Stock award and stock purchase plans
The following table shows the shares awarded and the weighted-average
fair-market value per share for these plans. The fair values for the stock
purchase awards reflect the purchase price paid. For 1999, in addition to the
1998 plan-year awards, the stock bonus awards include 1,405,000 shares issued in
an exchange for previously issued non-share awards and for special bonuses and
the stock purchase awards include 666,000 shares issued for the current year.
<TABLE>
<CAPTION>
STOCK BONUS PLANS 31.12.1999 31.12.1998
----------------- ---------- ----------
<S> <C> <C>
Shares awarded.............................................. 3,469,000 2,524,000
Weighted-average fair market value per share (in CHF)....... 220 210
</TABLE>
<TABLE>
<CAPTION>
STOCK PURCHASE PLANS
--------------------
<S> <C> <C>
Shares awarded.............................................. 1,802,000 1,338,000
Weighted-average fair market value per share (in CHF)....... 148 155
</TABLE>
Shares awarded in 1998 under both types of plans included Swiss Bank Corporation
shares issued to employees prior to the merger. For the above table, the number
of these shares and their fair market value have been adjusted for the 1 1/13
Swiss Bank Corporation to UBS AG share conversion rate of the merger.
Stock Option Plans
During 1998, options that had been issued to Swiss Bank Corporation employees
were revised to reflect the 1 1/13 SBC to UBS AG share conversion rate of the
merger. Also, during 1998, because of a significant drop in UBS AG share price
in the third quarter, employees were given the opportunity to convert options
received earlier in the year with a strike price of CHF 270 to a reduced number
(2/3) of options with a strike price of CHF 170. The stock option award
information in Note 36 reflects both these changes.
Companies that apply APB 25 in determining compensation costs for stock-based
compensation awards are required to disclose the effects of the application of
the "fair value method" determined under the guidance provided in SFAS No. 123.
Under SFAS No. 123, the fair value of compensation cost is recognized, using
option pricing models intended to estimate the fair value of the awards at the
grant date. The table below illustrates the pro forma effects of applying the
fair value method.
<TABLE>
<CAPTION>
CHF MILLION, EXCEPT PER SHARE DATA 31.12.99 31.12.98
---------------------------------- -------- --------
<S> <C> <C> <C>
Net income As reported 6,153 2,972
Pro forma 6,027 2,893
Basic EPS As reported 15.20 7.33
Pro forma 14.89 7.14
Diluted EPS As reported 15.07 7.20
Pro forma 14.76 7.01
</TABLE>
--------------------------------------------------------------------------------
F- 83
<PAGE> 286
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma amounts in the table above reflect the vesting periods of all
options granted. The effects of applying the guidance contained in SFAS 123 for
recognizing compensation expense and providing pro forma disclosures are not
likely to be representative of the effects on reported Net profit for future
years.
The weighted-average fair-value of options granted in 1999 and 1998 was CHF 59
and CHF 54 per share, respectively. The fair value of options granted was
determined as of the date of issuance using a proprietary option pricing model,
substantially similar to the Black-Scholes, with the following assumptions:
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
---------- ----------
<S> <C> <C>
Expected volatility................................... 33% 40%
Risk free interest rate............................... 2.07% 2.56%
Expected dividends.................................... 6.2 6.9
Expected life......................................... 6 YEARS 6 years
</TABLE>
43.11 REGULATORY CAPITAL
See Note 33 for information on regulatory capital. Internationally, it has been
agreed that the Bank for International Settlements (BIS) ratio must be at least
8%. At 31 December 1999, the Group's BIS ratio and Tier 1 ratios were 14.5% and
10.6%, respectively, as compared to 13.2% and 9.3%, respectively, as of 31
December 1998. At 31 December 1999 and 1998, the Group was adequately
capitalized under the regulatory provisions outlined under BIS.
--------------------------------------------------------------------------------
F- 84
<PAGE> 287
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UBS GROUP
SIX-MONTH PERIODS ENDED 30 JUNE 2000 AND 1999
(UNAUDITED)
--------------------------------------------------------------------------------
F- 85
<PAGE> 288
UBS GROUP
INCOME STATEMENT
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED
CHF MILLION, EXCEPT PER SHARE DATA NOTE 30.6.00 30.6.99(1)
---------------------------------- ---- ------- ----------
<S> <C> <C> <C>
OPERATING INCOME
Interest income............................................. 3 24,079 16,293
Interest expense............................................ 3 (19,753) (13,540)
------- -------
Net interest income......................................... 4,326 2,753
Credit loss recovery/expense................................ 83 (635)
------- -------
Net interest income after credit loss recovery/expense...... 4,409 2,118
------- -------
Net fee and commission income............................... 4 7,835 6,184
Net trading income.......................................... 5 5,669 4,460
Net gains from disposal of associates and subsidiaries...... 6 23 1,778
Other income................................................ 7 621 562
------- -------
Total operating income...................................... 18,557 15,102
------- -------
OPERATING EXPENSES
Personnel................................................... 8 8,876 6,819
General and administrative.................................. 8 3,174 2,388
Depreciation and amortization............................... 8 947 864
------- -------
Total operating expenses.................................... 12,997 10,071
OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS.......... 5,560 5,031
------- -------
Tax expense................................................. 1,257 1,151
------- -------
NET PROFIT BEFORE MINORITY INTERESTS........................ 4,303 3,880
------- -------
Minority interests.......................................... (35) (21)
------- -------
NET PROFIT.................................................. 4,268 3,859
======= =======
Basic earnings per share (CHF)(3)........................... 9 10.91 9.38
Basic earnings per share before goodwill (CHF)(2)(3)........ 9 11.61 9.79
Diluted earnings per share (CHF)(3)......................... 9 10.79 9.30
Diluted earnings per share before goodwill (CHF)(2)(3)...... 9 11.49 9.71
------- -------
</TABLE>
---------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
(2) The amortization of goodwill and other purchased intangible assets is
excluded from this calculation.
(3) 1999 share figures are restated for the two-for-one stock split, approved at
the shareholder meeting of 18 April 2000.
--------------------------------------------------------------------------------
F- 86
<PAGE> 289
UBS GROUP
BALANCE SHEET
<TABLE>
<CAPTION>
CHF MILLION 30.6.00 31.12.99(1)
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and balances with central banks........................ 3,457 5,073
Money market paper.......................................... 61,504 69,717
Due from banks.............................................. 25,761 29,907
Cash collateral on securities borrowed...................... 146,199 113,162
Reverse repurchase agreements............................... 164,866 132,474
Trading portfolio assets.................................... 215,649 212,440
Positive replacement values................................. 57,758 64,698
Loans, net of allowance for credit losses................... 233,015 234,858
Financial investments....................................... 9,504 7,039
Accrued income and prepaid expenses......................... 5,817 5,167
Investments in associates................................... 818 1,102
Property and equipment...................................... 8,216 8,701
Intangible assets and goodwill.............................. 3,545 3,543
Other assets................................................ 10,198 11,007
------- -------
TOTAL ASSETS................................................ 946,307 898,888
======= =======
Total subordinated assets................................... 330 600
------- -------
LIABILITIES
Money market paper issued................................... 85,409 64,655
Due to banks................................................ 75,172 76,365
Cash collateral on securities lent.......................... 15,334 12,832
Repurchase agreements....................................... 230,565 196,914
Trading portfolio liabilities............................... 60,279 54,586
Negative replacement values................................. 77,926 95,786
Due to customers............................................ 279,915 279,960
Accrued expenses and deferred income........................ 14,492 12,040
Long term debt.............................................. 52,990 56,332
Other liabilities........................................... 21,950 18,376
------- -------
TOTAL LIABILITIES........................................... 914,032 867,846
------- -------
MINORITY INTERESTS.......................................... 399 434
------- -------
SHAREHOLDERS' EQUITY
Share capital............................................... 4,317 4,309
Share premium account....................................... 14,554 14,437
Foreign currency translation................................ (557) (442)
Retained earnings........................................... 22,431 20,327
Treasury shares............................................. (8,869) (8,023)
------- -------
TOTAL SHAREHOLDERS' EQUITY.................................. 31,876 30,608
------- -------
TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS'
EQUITY.................................................... 946,307 898,888
======= =======
Total subordinated liabilities.............................. 14,089 14,801
======= =======
</TABLE>
---------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
--------------------------------------------------------------------------------
F- 87
<PAGE> 290
UBS GROUP
STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1)
------------------------------ ------- ----------
CHF MILLION
<S> <C> <C>
ISSUED AND PAID UP SHARE CAPITAL
Balance at the beginning of the period...................... 4,309 4,300
Issue of share capital...................................... 8 6
------ ------
BALANCE AT THE END OF THE PERIOD(2)......................... 4,317 4,306
====== ======
SHARE PREMIUM
Balance at the beginning of the period as previously
reported.................................................. 13,929 13,740
Change in accounting policy................................. 508 (123)
Balance at the beginning of the period (restated)........... 14,437 13,617
Premium on shares issued, and warrants exercised............ 74 9
Own equity derivatives...................................... (181) 467
Net premium on treasury share and own equity derivative
activity.................................................. 224 179
------ ------
BALANCE AT THE END OF THE PERIOD............................ 14,554 14,272
====== ======
FOREIGN CURRENCY TRANSLATION
Balance at the beginning of the period...................... (442) (456)
Movements during the period................................. (115) (81)
------ ------
BALANCE AT THE END OF THE PERIOD............................ (557) (537)
====== ======
RETAINED EARNINGS
Balance at the beginning of the period as previously
reported.................................................. 20,501 16,293
Changes in accounting policy................................ (174) (69)
Balance at the beginning of the period (restated)........... 20,327 16,224
Net profit for the period................................... 4,268 3,859
Dividends paid.............................................. (2,164) (2,051)
------ ------
BALANCE AT THE END OF THE PERIOD............................ 22,431 18,032
====== ======
TREASURY SHARES, AT COST
Balance at the beginning of the period as previously
reported.................................................. (3,462) (1,482)
Change in accounting policy................................. (4,561) (3,409)
Balance at the beginning of the period (restated)........... (8,023) (4,891)
Acquisitions................................................ (6,591) (2,983)
Disposals................................................... 5,745 3,002
------ ------
BALANCE AT THE END OF THE PERIOD(3)......................... (8,869) (4,872)
====== ======
TOTAL SHAREHOLDERS' EQUITY.................................. 31,876 31,201
====== ======
</TABLE>
---------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
(2) Comprising 431,696,624 ordinary shares as of 30 June 2000 and 430,577,614
ordinary shares as of 30 June 1999, at CHF 10 each, fully paid.
(3) Comprising 40,269,350 ordinary shares as of 30 June 2000 and 22,395,766
ordinary shares as of 30 June 1999.
In addition to treasury shares, a maximum of 254,446 unissued shares
(conditional capital) (1,373,456 as of 30 June 1999) can be issued without the
approval of the shareholders. This amount consists of unissued and reserved
shares for the former Swiss Bank Corporation employee share ownership plan and
optional dividend warrants. The optional dividend warrants were granted in lieu
of a cash dividend by the former Swiss Bank Corporation in February 1996 (at the
option of the shareholder).
--------------------------------------------------------------------------------
F- 88
<PAGE> 291
UBS GROUP
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1)
------------------------------ ------- ----------
CHF MILLION
-----------
<S> <C> <C>
CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES
Net profit.................................................. 4,268 3,859
ADJUSTMENTS TO RECONCILE TO CASH FLOW FROM/(USED IN)
OPERATING ACTIVITIES
Non cash items included in net profit and other adjustments:
Depreciation and amortization............................. 947 864
Provision for credit losses............................... (83) 635
Income from associates.................................... (59) (102)
Deferred tax expense...................................... 213 193
Net gain from investing activities........................ (299) (1,997)
Net increase/(decrease) in operating assets:................
Net due from/to banks..................................... (1,005) (2,091)
Reverse repurchase agreements, cash collateral on
securities borrowed.................................... (65,429) 13,509
Trading portfolio including net replacement values........ (8,436) 1,257
Loans due to/from customers............................... 1,881 14,486
Accrued income, prepaid expenses and other assets......... 159 306
Net increase/(decrease) in operating liabilities:...........
Repurchase agreements, cash collateral on securities
lent................................................... 36,153 (2,637)
Accrued expenses and other liabilities.................... 6,354 (6,647)
Income taxes paid......................................... (535) (591)
------- -------
NET CASH FLOW FROM/(USED IN) OPERATING ACTIVITIES........... (25,871) 21,044
======= =======
CASH FLOW FROM/(USED IN) INVESTING ACTIVITIES
Investments in subsidiaries and associates.................. (282) (339)
Disposal of subsidiaries and associates..................... 370 3,350
Purchase of property and equipment.......................... (928) (1,096)
Disposal of property and equipment.......................... 763 279
Net (investment)/divestment in financial investments........ (2,216) 293
------- -------
NET CASH FLOW FROM/(USED IN) INVESTING ACTIVITIES........... (2,293) 2,487
======= =======
CASH FLOW FROM FINANCING ACTIVITIES
Money market paper issued................................... 20,754 4,463
Net movements in treasury shares and treasury share contract
activity.................................................. (729) 674
Capital issuance............................................ 8 6
Dividends paid.............................................. (2,164) (2,051)
Issuance of long term debt.................................. 7,452 5,225
Repayment of long term debt................................. (10,794) (1,081)
Repayment of minority interests............................. (20) (689)
------- -------
NET CASH FLOW FROM FINANCING ACTIVITIES..................... 14,507 6,547
Effects of exchange rate differences........................ (131) (46)
======= =======
NET INCREASE/(DECREASE) IN CASH EQUIVALENTS................. (13,788) 30,032
Cash and cash equivalents, beginning of period.............. 102,277 83,678
------- -------
Cash and cash equivalents, end of period.................... 88,489 113,710
======= =======
CASH AND CASH EQUIVALENTS COMPRISE:
Cash and balances with central banks........................ 3,457 3,135
Money market paper.......................................... 61,504 65,688
Bank deposits maturing in less than 3 months................ 23,528 44,887
------- -------
TOTAL....................................................... 88,489 113,710
======= =======
</TABLE>
---------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
--------------------------------------------------------------------------------
F- 89
<PAGE> 292
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF ACCOUNTING
The consolidated interim financial statements have been prepared in accordance
with and comply with International Accounting Standard ("IAS") 34, "Interim
Financial Reporting."
In the first half of 2000, the Group reorganized its business divisions. The
segment reporting for the six-month period ended 30 June 2000, as well as the
comparative segment reporting for the first six-month period ended 30 June 1999,
have been restated to reflect the new Group structure.
At the Annual General Meeting of shareholders held on 18 April 2000, a
two-for-one stock split was approved to be effective 8 May 2000. Share and per
share information have been adjusted to retroactively reflect the stock split.
In preparing the consolidated interim financial statements, the same accounting
policies and methods of computation are followed as in the consolidated
financial statements as of 31 December 1999 and for the year then ended, with
the exception of the following changes in accounting policies:
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
In July 1998, the IASC issued IAS 37, Provisions, Contingent Liabilities and
Contingent Assets, which has been adopted for the Group's financial statements
as of 1 January 2000. The Standard provides recognition and measurement
requirements for provisions. IAS 37 also provides accounting and disclosure
requirements for contingent liabilities and contingent assets.
IAS 38 Intangible Assets
In July 1998, the IASC issued IAS 38 Intangible Assets, which the Group adopted
prospectively as of 1 January 2000. The standard requires the capitalization and
amortization of certain intangible assets, if it is probable that the future
economic benefits that are attributable to the assets will flow to the
enterprise and the cost can be measured reliably.
IAS 10 (revised), Events after the Balance Sheet Date
In May 1999, the IASC issued IAS 10 (revised), Events after the Balance Sheet
Date, which has been adopted for the Group's financial statements as of 1
January 2000. IAS 10 (revised) establishes requirements for the recognition and
disclosure of events after the balance sheet date. The adoption of IAS 10
(revised) had no impact on any comparative financial information.
Interpretation SIC 16, Share Capital -- Reacquired Own Equity Instruments
(Treasury Shares)
In May 1999, the IASC issued Interpretation SIC 16, Share Capital -- Reacquired
Own Equity Instruments (Treasury Shares), which the Group adopted as of 1
January 2000. The interpretation provides guidance for the recognition,
presentation and disclosure of treasury shares. SIC 16 applies to own shares and
derivatives on own shares held for trading and non-trading purposes. SIC 16
requires own shares and derivatives on own shares to be presented as treasury
shares and deducted from shareholders' equity. Gains and losses relating to the
sale of own shares and derivatives on own shares are recognized as a change in
shareholders' equity.
As a result of the adoption of Interpretation SIC 16, prior periods presented
have been retroactively restated. Net trading income and income tax expense were
reduced by CHF 138 million and CHF 35 million, respectively, for the six-month
period ended 30 June 1999. Shareholders' equity and total assets were reduced by
CHF 4,277 million for 31 December 1999. Of the CHF 4,227 million
--------------------------------------------------------------------------------
F- 90
<PAGE> 293
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
reduction to total assets, CHF 4,561 million was a reduction in trading
portfolio assets and the remaining CHF 334 million was a reduction to negative
replacement values. In addition, the opening balance in shareholders' equity was
adjusted as of 1 January 1998.
Offsetting of Amounts Related to Certain Contracts
In order to improve comparability with its main competitors, the Group has
offset positive and negative replacement values and reverse repurchase
agreements and repurchase agreements with the same counter-party for
transactions covered by legally enforceable master netting agreements. This
change became effective as of 1 January 2000 and all prior periods presented
have been restated. Positive and negative replacement values have been reduced
by CHF 66,136 million as of 31 December 1999. Reverse repurchase and repurchase
agreements have been reduced by CHF 12,322 million as of 31 December 1999.
Interest and Dividend Income and Expenses on Trading Assets and Liabilities
In prior periods, interest and dividend income and expense on trading assets and
liabilities were included in net trading income. In order to improve
comparability with its main competitors, the Group has included interest and
dividend income on trading assets and interest expense on trading liabilities in
interest income and interest expense, respectively, and has discontinued the
allocation of funding costs to net trading income. This change in presentation
became effective as of 1 January 2000. The comparative financial information for
1999 has been restated to comply with this change.
Interest income and interest expense was increased by CHF 8,144 million and CHF
8,756 million, respectively, for the six-month period ended 30 June 1999. In
addition, net trading income was increased by CHF 612 million for the six-month
period ended 30 June 1999.
Tax Expense
In prior periods, capital taxes were included in tax expense. The Group has
reclassified capital taxes from tax expense to general and administrative
expenses for the six-month period ended 30 June 1999.
NOTE 2 REPORTING BY BUSINESS GROUP
The business group results have been presented on a management reporting basis.
Consequently, internal charges and transfer pricing adjustments have been
reflected in the performance of each business. The basis of the reporting
reflects the management of the business within the Group. Total revenue includes
income, which is directly attributable to a business group whether from sales to
external customers or from transactions with other segments. Revenue sharing
agreements are used to allocate external customer revenues to a business group
on a reasonable basis. Transactions between business groups are conducted at
arms length.
--------------------------------------------------------------------------------
F- 91
<PAGE> 294
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
UBS
UBS ASSET UBS CORPORATE UBS
SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
CHF MILLION ----------- ---------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
Revenues............................. 7,274 972 10,195 33 18,474
Credit loss recovery(1).............. (423) 0 (115) 621 83
----- --- ------ ---- ------
Total operating income............... 6,851 972 10,080 654 18,557
----- --- ------ ---- ------
Personnel expenses................... 2,416 421 5,749 290 8,876
General and administrative
expenses........................... 1,163 196 1,437 378 3,174
Depreciation......................... 230 22 285 135 672
Amortization of goodwill and other
intangible assets.................. 44 131 77 23 275
----- --- ------ ---- ------
Total operating expenses............. 3,853 770 7,548 826 12,997
----- --- ------ ---- ------
SEGMENT PERFORMANCE BEFORE TAX....... 2,998 202 2,532 (172) 5,560
Tax expense.......................... 1,257
----- --- ------ ---- ------
NET PROFIT BEFORE MINORITY
INTERESTS.......................... 4,303
Minority interests................... (35)
----- --- ------ ---- ------
NET PROFIT........................... 4,268
===== === ====== ==== ======
</TABLE>
---------------
(1) In order to show the relevant business group performance over time, adjusted
expected loss figures rather than the net credit recovery are reported for
all business groups. The statistically derived adjusted expected losses
reflect the inherent counterparty and country risks in the respective
portfolios. The difference between the statistically derived adjusted
expected loss figures to the net credit loss expenses for financial
reporting purposes is reported in the Corporate Center. The divisional
breakdown of the net credit recovery/(expense) for financial reporting
purposes of CHF 83 million for the six month period ended 30 June 2000 is as
follows: UBS Switzerland CHF 237 million, UBS Warburg CHF (154) million.
--------------------------------------------------------------------------------
F- 92
<PAGE> 295
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 1999(2)
<TABLE>
<CAPTION>
UBS
UBS ASSET UBS CORPORATE UBS
SWITZERLAND MANAGEMENT WARBURG CENTER GROUP
CHF MILLION ----------- ---------- ------- --------- ------
<S> <C> <C> <C> <C> <C>
Revenues............................. 6,327 644 7,179 1,587 15,737
Credit loss expense(1)............... (560) 0 (171) 96 (635)
----- --- ----- ----- ------
Total operating income............... 5,767 644 7,008 1,683 15,102
----- --- ----- ----- ------
Personnel expenses................... 2,383 281 4,073 82 6,819
General and administrative
expenses........................... 988 125 1,175 100 2,388
Depreciation......................... 229 9 332 123 693
Amortization of goodwill and other
intangible assets.................. 9 57 82 23 171
----- --- ----- ----- ------
Total operating expenses............. 3,609 472 5,662 328 10,071
----- --- ----- ----- ------
SEGMENT PERFORMANCE BEFORE TAX....... 2,158 172 1,346 1,355 5,031
Tax expense.......................... 1,151
----- --- ----- ----- ------
NET PROFIT BEFORE MINORITY
INTERESTS.......................... 3,880
Minority interests................... (21)
----- --- ----- ----- ------
NET PROFIT........................... 3,859
===== === ===== ===== ======
</TABLE>
---------------
(1) In order to show the relevant business group performance over time, adjusted
expected loss figures rather than the net credit loss expense are reported
for all business groups. The statistically derived adjusted expected losses
reflect the inherent counterparty and country risks in the respective
portfolios. The difference between the statistically derived adjusted
expected loss figures to the net credit loss expenses for financial
reporting purposes is reported in the Corporate Center. The divisional
breakdown of the net credit loss expense for financial reporting purposes of
CHF 635 million for the six-month period ended 30 June 1999 is as follows:
UBS Switzerland CHF 617 million, UBS Warburg CHF 14 million, Corporate
Center CHF 4 million.
(2) The 1999 figures have been restated to reflect the new Group structure and
retroactive changes in accounting policy arising from newly applicable IAS
and changes in presentation (see Note 1: Basis of Accounting).
--------------------------------------------------------------------------------
F- 93
<PAGE> 296
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
INCOME STATEMENT
NOTE 3 NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.06.00 30.06.99(1)
------------------------------ -------- -----------
CHF MILLION
<S> <C> <C>
INTEREST INCOME
Interest earned on loans and advances to banks.............. 2,079 2,467
Interest earned on loans and advances to customers.......... 7,153 5,639
Interest from finance leasing............................... 19 23
Interest earned on securities borrowed and reverse
repurchase agreements..................................... 9,019 5,392
Interest and dividend income from financial investments..... 100 66
Interest and dividend income from trading portfolio......... 5,576 2,622
Other....................................................... 133 84
------ ------
TOTAL....................................................... 24,079 16,293
====== ======
INTEREST EXPENSE
Interest on amounts due to banks............................ 2,230 1,695
Interest on amounts due to customers........................ 4,453 4,060
Interest on securities lent and repurchase agreements....... 6,707 4,218
Interest and dividend expense from trading portfolio........ 2,724 1,078
Interest on medium and long term debt....................... 3,639 2,489
------ ------
TOTAL....................................................... 19,753 13,540
====== ======
NET INTEREST INCOME......................................... 4,326 2,753
====== ======
</TABLE>
---------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
--------------------------------------------------------------------------------
F- 94
<PAGE> 297
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 4 NET FEE AND COMMISSION INCOME
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99
------------------------------ ------- -------
CHF MILLION
<S> <C> <C>
CREDIT-RELATED FEES AND COMMISSIONS......................... 145 215
----- -----
SECURITY TRADING AND INVESTMENT ACTIVITY FEES
Underwriting and corporate finance fees..................... 1,069 826
Brokerage fees.............................................. 2,979 1,882
Investment fund fees........................................ 1,360 925
Fiduciary fees.............................................. 175 162
Custodian fees.............................................. 726 788
Portfolio and other management and advisory fees............ 1,913 1,476
Other....................................................... 29 53
----- -----
TOTAL....................................................... 8,251 6,112
----- -----
COMMISSION INCOME FROM OTHER SERVICES....................... 391 367
----- -----
TOTAL FEE AND COMMISSION INCOME............................. 8,787 6,694
----- -----
FEE AND COMMISSION EXPENSE
Brokerage fees paid......................................... 582 359
Other....................................................... 370 151
----- -----
TOTAL....................................................... 952 510
----- -----
NET FEE AND COMMISSION INCOME............................... 7,835 6,184
===== =====
</TABLE>
NOTE 5 NET TRADING INCOME
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1)
------------------------------ ------- ----------
<S> <C> <C>
CHF MILLION
FOREIGN EXCHANGE(2)......................................... 680 718
Fixed income................................................ 643 1,303
Equities.................................................... 4,346 2,439
------ -----
NET TRADING INCOME.......................................... 5,669 4,460
====== =====
</TABLE>
---------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
(2) Includes other trading income such as bank notes, precious metals and
commodities.
NOTE 6 NET GAINS FROM DISPOSAL OF ASSOCIATES AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99
------------------------------ ------- -------
CHF MILLION
<S> <C> <C>
Net income from disposal of consolidated subsidiaries....... 0 1
Net gains from the disposal of investments in associates.... 23 1,777
-- -----
NET GAINS FROM DISPOSAL OF ASSOCIATES AND SUBSIDIARIES...... 23 1,778
== =====
</TABLE>
--------------------------------------------------------------------------------
F- 95
<PAGE> 298
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 7 OTHER INCOME
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99
------------------------------ ------- -------
CHF MILLION
<S> <C> <C>
INVESTMENTS IN FINANCIAL ASSETS (DEBT AND EQUITY)
Net income from disposal of private equity investments...... 411 150
Net income from disposal of other financial assets.......... 84 30
Net losses from revaluation of financial assets............. (218) (20)
---- ---
TOTAL....................................................... 277 160
---- ---
INVESTMENTS IN PROPERTY
Net income from disposal of properties held for resale...... 37 36
Net losses from revaluation of properties held for resale... (66) (9)
Net income from other properties............................ 28 33
---- ---
TOTAL....................................................... (1) 60
---- ---
EQUITY INCOME FROM INVESTMENTS IN ASSOCIATES................ 59 102
---- ---
OTHER....................................................... 286 240
---- ---
TOTAL OTHER INCOME.......................................... 621 562
==== ===
</TABLE>
--------------------------------------------------------------------------------
F- 96
<PAGE> 299
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 8 OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99
------------------------------ ------- -------
CHF MILLION
<S> <C> <C>
PERSONNEL EXPENSES
Salaries and bonuses........................................ 7,270 5,372(1)
Contractors................................................. 335 386
Insurance and social contributions.......................... 490 372(1)
Contributions to retirement benefit plans................... 238 242
Employee share plans........................................ 41 109
Other personnel expenses.................................... 502 338
------ ------
TOTAL....................................................... 8,876 6,819
====== ======
GENERAL AND ADMINISTRATIVE EXPENSES
Occupancy................................................... 474 400
Rent and maintenance of machines and equipment.............. 256 123
Telecommunications and postage.............................. 412 371
Administration.............................................. 358 337
Marketing and public relations.............................. 209 107
Travel and entertainment.................................... 292 247
Professional fees........................................... 278 297
IT and other outsourcing.................................... 564 399
Other....................................................... 331 107
------ ------
TOTAL....................................................... 3,174 2,388
====== ======
DEPRECIATION AND AMORTIZATION
Property, equipment and software............................ 672 693
Goodwill and other intangible assets........................ 275 171
------ ------
TOTAL....................................................... 947 864
====== ======
TOTAL OPERATING EXPENSES.................................... 12,997 10,071
====== ======
</TABLE>
---------------
(1) Bonus related social contribution costs of CHF 125 million for the six
months ended 30 June 1999 have been reclassified from Salaries and bonuses
to Insurance and social contributions.
--------------------------------------------------------------------------------
F- 97
<PAGE> 300
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 9 EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00 30.6.99(1)
------------------------------ ----------- -----------
<S> <C> <C>
BASIC EARNINGS PER SHARE CALCULATION
Net profit for the period (CHF million)..................... 4,268 3,859
Net profit for the period before goodwill amortization (CHF
million)(2)............................................... 4,543 4,030
Weighted average shares outstanding:
Registered ordinary shares.................................. 431,147,206 430,232,988
Treasury shares............................................. (39,936,372) (18,746,327)(3)
----------- -----------
WEIGHTED AVERAGE SHARES FOR BASIC EARNINGS PER SHARE........ 391,210,834 411,486,661
=========== ===========
BASIC EARNINGS PER SHARE (CHF).............................. 10.91 9.38
BASIC EARNINGS PER SHARE BEFORE GOODWILL AMORTIZATION
(CHF)(2).................................................. 11.61 9.79
=========== ===========
DILUTED EARNINGS PER SHARE CALCULATION
Net profit for the period (CHF million)..................... 4,268 3,859
Net profit for the period before goodwill amortization (CHF
million)(2)............................................... 4,543 4,030
Weighted average shares for basic earnings per share........ 391,210,834 411,486,661
Potential dilutive ordinary shares resulting from
outstanding options, warrants and convertible debt
securities................................................ 4,201,494 3,673,968(4)
=========== ===========
WEIGHTED AVERAGE SHARES FOR DILUTED EARNINGS PER SHARE...... 395,412,328 415,160,629
=========== ===========
DILUTED EARNINGS PER SHARE (CHF)............................ 10.79 9.30
DILUTED EARNINGS PER SHARE BEFORE GOODWILL AMORTIZATION
(CHF)(2).................................................. 11.49 9.71
=========== ===========
</TABLE>
---------------
(1) The 1999 figures have been restated to reflect retroactive changes in
accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
(2) The amortization of goodwill and other purchased intangible assets is
excluded from this calculation.
(3) Treasury shares have increased by 6,679,451 for the six-month period ended
30 June 1999, due to a change in accounting policy (see Note 1: Basis of
Accounting).
(4) Share amount has been adjusted by 1,247,968, representing other potential
dilutive instruments for the six-month period ended 30 June 1999, due to a
change in accounting policy (see Note 1: Basis of Accounting).
The 1999 share figures are restated for the two-for-one stock split, approved at
the shareholder meeting of 18 April 2000.
--------------------------------------------------------------------------------
F- 98
<PAGE> 301
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 10 DIFFERENCES BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND UNITED
STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Group have been prepared in
accordance with IAS. The principles of IAS differ in certain respects from U.S.
GAAP. A summary of the significant accounting valuation and presentation
differences between IAS and U.S. GAAP can be found at Notes 42.1 and 42.4 of the
31 December 1999 financial statements. The following is provided to supplement
those discussions for the six month period ended 30 June 2000.
10.1 Valuation, income recognition and presentation differences between
International Accounting Standards and United States Generally Accepted
Accounting Principles
10.1.1 Goodwill
For the six month period ended 30 June 2000, goodwill was reduced by CHF 178
million due to the recognition of deferred tax assets of Swiss Bank Corporation
which had previously been subject to valuation reserves.
10.1.2 Restructuring provision
For the six-month period ended 30 June 2000, a CHF 130 million additional
restructuring expense was recognized for U.S. GAAP. The usage of the U.S. GAAP
restructuring provision was as follows:
<TABLE>
<CAPTION>
JAN-JUNE JAN-JUNE
BALANCE 2000 2000 BALANCE
1.1.00 USAGE REVISION 30.6.00
CHF MILLION -------- -------- -------- ---------
<S> <C> <C> <C> <C>
PERSONNEL................................................. 681 57 70 694
PREMISES.................................................. 240 98 45 187
IT........................................................ 27 3 0 24
OTHER..................................................... 129 6 15 138
---- ----- ----- -----
TOTAL............................................ 1,077 164 130 1,043
---- ----- ----- -----
</TABLE>
10.1.3 Software capitalization
Under IAS, effective 1 January 2000, certain costs associated with the
acquisition or development of internal use software are required to be
capitalized. Once the software is ready for its intended use, the costs
capitalized are amortized to the Income statement over estimated lives. Under
U.S. GAAP, the same principle applies, however this standard was effective 1
January 1999. For purposes of the U.S. GAAP reconciliation, the costs associated
with the acquisition or development of internal use software that met the U.S.
GAAP software capitalization criteria in 1999 have been reversed from Operating
expenses and amortized over a life of 2 years. From 1 January 2000, the only
remaining reconciliation item is the amortization of software capitalized in
1999 for U.S. GAAP purposes.
--------------------------------------------------------------------------------
F- 99
<PAGE> 302
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
10.2 Reconciliation of IAS Shareholders' equity and Net profit to U.S. GAAP
<TABLE>
<CAPTION>
30.06.00
-----------------------------
NET PROFIT
SIX-MONTH
SHAREHOLDERS' PERIOD
EQUITY ENDED
------------- ------------
<S> <C> <C>
CHF MILLION
AMOUNTS DETERMINED IN ACCORDANCE WITH IAS................... 31,876 4,268
------ ------
ADJUSTMENTS IN RESPECT OF:
a. SBC PURCHASE ACCOUNTING:
GOODWILL................................................. 18,728 (860)
OTHER PURCHASE ACCOUNTING ADJUSTMENTS.................... (833) 25
c. RESTRUCTURING PROVISION.................................. 193 (157)
d. DERIVATIVE INSTRUMENTS HELD OR ISSUED FOR NON-TRADING
PURPOSES................................................. (763) (1,270)
f. FINANCIAL INVESTMENTS.................................... 190 25
g. PENSION LIABILITIES AND PENSION COSTS.................... 1,886 47
h. POSTRETIREMENT BENEFITS.................................. (20) 4
i. EQUITY PARTICIPATION PLANS............................... (187) (44)
j. SOFTWARE CAPITALIZATION.................................. 309 (80)
TAX ADJUSTMENTS.......................................... (433) 71
------ ------
TOTAL ADJUSTMENTS................................. 19,070 (2,239)
------ ------
AMOUNTS DETERMINED IN ACCORDANCE WITH U.S. GAAP: ........... 50,946 2,029
====== ======
OTHER COMPREHENSIVE INCOME.................................. 34
COMPREHENSIVE INCOME........................................ 2,063
======
</TABLE>
Note: References above refer to the discussions in Note 42.1 of the restated 31
December 1999 financial statements.
--------------------------------------------------------------------------------
F- 100
<PAGE> 303
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
10.3 Earnings per share
Under IAS and U.S. GAAP, basic earnings per share ("EPS") is computed by
dividing income available to common shareholders' by the weighted-average number
of common shares outstanding. Diluted EPS includes the determinants of basic EPS
and, in addition, gives effect to dilutive potential common shares that were
outstanding during the period.
The computation of basic and diluted EPS for the six-month period ended 30 June
2000 is presented in the following table:
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00
------------------------------ ------------
<S> <C>
Net profit available for ordinary shares (CHF million):
IAS....................................................... 4,268
U.S. GAAP................................................. 2,029
Weighted average shares outstanding:........................ 391,210,834
Diluted weighted average shares outstanding:................ 395,412,328
Basic earnings per share (CHF):
IAS....................................................... 10.91
U.S. GAAP................................................. 5.19
Diluted earnings per share (CHF):
IAS....................................................... 10.79
U.S. GAAP................................................. 5.13
</TABLE>
10.4 Consolidated Income Statement
The following is a Consolidated Income Statement of the Group, for the six month
period ended 30 June 2000, restated to reflect the impact of valuation and
income recognition differences and presentation differences between IAS and U.S.
GAAP.
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00
------------------------------ -------------------
CHF MILLION U.S. GAAP IAS
----------- --------- ------
<S> <C> <C> <C>
OPERATING INCOME
Interest income............................................. a 23,988 24,079
Less: interest expense...................................... a 19,738 19,753
------ ------
Net interest income......................................... 4 250 4,326
Credit loss recovery........................................ 83 83
------ ------
Total....................................................... 4,333 4,409
Net fee and commission income............................... 7,835 7,835
Net trading income.......................................... d 4,399 5,669
Other income, including income from associates.............. f 669 644
------ ------
Total....................................................... 17,236 18,557
------ ------
</TABLE>
--------------------------------------------------------------------------------
F- 101
<PAGE> 304
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED 30.6.00
------------------------------ -------------------
CHF MILLION U.S. GAAP IAS
----------- --------- ------
<S> <C> <C> <C>
OPERATING EXPENSES
Personnel................................................... g,h,i 8,869 8,876
General and administrative.................................. c 3,201 3,174
Depreciation and amortization............................... a,j 1,786 947
Restructuring costs......................................... c 130 0
------ ------
Total....................................................... 13,986 12,997
------ ------
OPERATING PROFIT BEFORE TAX AND MINORITY INTERESTS.......... 3,250 5,560
------ ------
Tax expense................................................. 1,186 1,257
NET PROFIT BEFORE MINORITY INTERESTS........................ 2,064 4,303
------ ------
Less: Minority interests.................................... 35 35
------ ------
NET PROFIT.................................................. 2,029 4,268
====== ======
Other comprehensive income.................................. 34
COMPREHENSIVE INCOME........................................ 2,063
======
</TABLE>
---------------
Note: References above refer to the discussions in Note 42.1 and Note 42.4 of
the restated 31 December 1999 financial statements. These references
indicate which IAS to U.S. GAAP adjustments affect an individual
financial statement caption.
--------------------------------------------------------------------------------
F- 102
<PAGE> 305
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
10.5 Condensed Consolidated Balance Sheet
The following is a Condensed Consolidated Balance Sheet of the Group, as of 30
June 2000, restated to reflect the impact of valuation and income recognition
principles and presentation differences between IAS and U.S. GAAP.
<TABLE>
<CAPTION>
30.06.00
------------------
U.S.
GAAP IAS
CHF MILLION ------- -------
<S> <C> <C> <C>
ASSETS
Cash and balances with central banks..................... 3,457 3,457
Money market paper....................................... 61,504 61,504
Due from banks........................................... 3,a 44,627 25,761
Cash collateral on securities borrowed................... 146,199 146,199
Reverse repurchase agreements............................ 164,866 164,866
Trading portfolio........................................ 2,3 205,342 215,649
Positive replacement values.............................. 2 57,378 57,758
Loans, net of allowance for credit losses................ 3,a 241,802 233,015
Financial investments.................................... f,4 3,624 9,504
Accrued income and prepaid expenses...................... 5,817 5,817
Investments in associates................................ 818 818
Property and equipment................................... a,j 9,094 8,216
Intangible assets and goodwill........................... a 20,510 3,545
Private equity investments............................... 4 3,881 0
Other assets............................................. d,g,h,i,2,3,4 21,342 10,198
------- -------
TOTAL ASSETS............................................. 990,261 946,307
------- -------
LIABILITIES
Money market paper issued................................ 85,409 85,409
Due to banks............................................. 3 93,276 75,172
Cash collateral on securities lent....................... 15,334 15,334
Repurchase agreements.................................... 3 214,862 230,565
Trading portfolio liabilities............................ 60,279 60,279
Negative replacement values.............................. 2 77,548 77,926
Due to customers......................................... 3,a 298,434 279,915
Accrued expenses and deferred income..................... 14,492 14,492
Long-term debt........................................... a 53,120 52,990
Other liabilities........................................ a,c,d,f,i,2,6 26,162 21,950
------- -------
TOTAL LIABILITIES........................................ 938,916 914,032
------- -------
MINORITY INTERESTS....................................... 399 399
------- -------
TOTAL SHAREHOLDERS' EQUITY............................... 50,946 31,876
------- -------
TOTAL LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS'
EQUITY................................................. 990,261 946,307
======= =======
</TABLE>
---------------
Note: References above refer to the discussions in Note 42.1 and Note 42.4 of
the restated 31 December 1999 financial statements. These references
indicate which IAS to U.S. GAAP adjustments affect an individual financial
statement caption.
--------------------------------------------------------------------------------
F- 103
<PAGE> 306
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 11 ADDITIONAL DISCLOSURES REQUIRED UNDER U.S. GAAP
In addition to the differences in valuation and income recognition and
presentation, disclosure differences exist between IAS and U.S. GAAP. The
following are additional U.S. GAAP disclosures that relate to the basic
financial statements.
11.1 IAS Restructuring Provision Usage
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD
ENDED
CHF MILLION PERSONNEL IT PREMISES OTHER 30.6.00
----------- --------- --- -------- ----- ---------
<S> <C> <C> <C> <C> <C>
UBS Switzerland................................. 53 19 1 20 93
Private and Corporate Clients................. 53 14 1 20 88
Private Banking............................... 0 5 0 0 5
UBS Asset Management............................ 1 0 0 0 1
UBS Warburg..................................... 0 0 0 0 0
Corporate Center................................ 3 0 91 3 97
-- --- -- -- -------
GROUP TOTAL..................................... 57 19 92 23 191
-- --- -- -- -------
</TABLE>
<TABLE>
<CAPTION>
30.6.00
---------
<S> <C> <C> <C> <C> <C>
Restructuring provision as of 31.12.1997........ 7,000
Additional provision in 1999.................... 300
Used in 1998.................................... (4,027)
Used in 1999.................................... (1,844)
Used in 2000.................................... (191)
-------
Total used through 30.06.2000................... 6,062
-------
RESTRUCTURING PROVISION REMAINING............... 1,238
-------
</TABLE>
11.2 Segment Reporting
UBS is organized into three business groups: UBS Switzerland, UBS Warburg and
UBS Asset Management, and our Corporate Center.
UBS Switzerland encompasses Private Banking and Private and Corporate Clients.
Private Banking offers a broad portfolio of financial products and services to
offshore and Swiss high net worth clients who bank in Switzerland or other
offshore centers, and to the financial intermediaries advising them. The
business unit's products and services are aimed at encompassing the complete
life cycle of the client, including succession planning and the generational
change. Private Banking provides a number of asset-based, transaction-based and
other services. Asset-based services include custodial services, deposit
accounts, loans and fiduciary services while transaction-based services include
trading and brokerage and investment fund services. The division also provides
financial planning and consulting and offers financial planning instruments to
clients. These services include establishing proprietary trusts and foundations,
the execution of wills, corporate and tax structuring and tax efficient
investments.
Private and Corporate Clients is the leading retail bank in Switzerland and
targets individual clients with assets of up to approximately CHF 1 million and
business and corporate clients in Switzerland. Private and Corporate Clients
provides a broad range of products and services to these clients, including
retail banking, investment services and lending.
--------------------------------------------------------------------------------
F- 104
<PAGE> 307
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
UBS Warburg is made up of four business units; Corporate and Institutional
Clients, UBS Capital, Private Clients and e-services.
Corporate and Institutional Clients is one of the leading global investment
banks and is headquartered in London. It provides wholesale financial and
investment products and services globally to a diversified client base, which
includes institutional investors (including institutional asset managers and
broker-dealers), corporations, sovereign governments and supranational
organizations. Corporate and Institutional Clients also manages cash and
collateral trading on behalf of the Group and executes the vast majority of the
Group's retail securities, derivatives and foreign currency exchange
transactions.
UBS Capital is the Group's global private equity business. UBS Capital invests
in unlisted companies, managing these investments over a medium-term time
horizon to increase their value and "exiting" the investment in a manner that
will maximize the capital gain. The business unit seeks to make both majority
and minority equity investments in established and emerging unlisted companies,
either with the Group's own capital or through sponsored investment funds. UBS
Capital endeavors to create investment value by working together with management
to develop the businesses it invests in over the medium term in order to
optimize their performance.
Private Clients provides onshore private banking services for high net worth
individuals in key markets world-wide, providing a similar range of services to
Private Banking, but specializing in combining traditional private banking
services with investment banking innovation. For example, Private Clients offers
innovative products allowing clients to release value from own-company
shareholdings or options.
e-services is a new business, currently working towards a client launch in
Germany in the Autumn of 2000. e-services will provide personalized investment
and advisory services at competitive fees for affluent clients in Europe,
delivered via a multi-channel structure which integrates internet, call centers
and investment centers. e-services will deliver a distinctive set of services,
including advanced financial planning and asset allocation, and investment
products such as UBS and third-party funds, securities and pension products.
UBS Asset Management is made up of two business units: Institutional Asset
Management and Investment Funds/GAM.
Institutional Asset Management is responsible for the Group's institutional
asset management business, and for the investment management of the Groups
mutual funds. Its diverse institutional client base located throughout the world
consists of corporate and public pension plans, endowments and private
foundations, insurance companies, central banks and supranationals,
quasi-institutions, and financial advisers.
Investment Funds/GAM is the mutual funds business of UBS. Investment Funds is
one of the leading mutual funds providers in Europe and the seventh largest in
the world. GAM is a diversified asset management group with assets composed
primarily of private client accounts, institutional and mutual funds. Global
Asset Management operates under its established brand name within UBS Asset
Management and employs its own distinctive investment style. UBS Asset
Management will increasingly leverage Global Asset Management's range of mutual
funds and its multi-manager selection process, in which it selects the top 90
out of about 6,000 third-party fund providers, to enhance the range of its
investment styles and products.
The Corporate Center encompasses Group level functions which cannot be devolved
to the operating divisions. Additionally, the Corporate Center plays an active
role with regard to funding, capital and balance sheet management and management
of foreign currency earnings.
--------------------------------------------------------------------------------
F- 105
<PAGE> 308
PAINE WEBBER GROUP INC.
CONSOLIDATED YEAR-END FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
F- 106
<PAGE> 309
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
------------------------ ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
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
---------- ---------- ----------
</TABLE>
---------------
(1) The 1999 amounts reflect the effect of the unamortized discount of $59,883
charged to stockholders' equity resulting from the redemption of preferred
stock on December 16, 1999.
See Notes to Consolidated Financial Statements.
--------------------------------------------------------------------------------
F- 107
<PAGE> 310
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
------------ ----------- -----------
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C>
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
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
--------------------------------------------------------------------------------
F- 108
<PAGE> 311
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
6%
CUMULATIVE
CONVERTIBLE ADDITIONAL
REDEEMABLE COMMON PAID-IN
PREFERRED STOCK STOCK CAPITAL
--------------- -------- ----------
<S> <C> <C> <C>
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
========= ======== ==========
</TABLE>
--------------------------------------------------------------------------------
F- 109
<PAGE> 312
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED NUMBER OF
OTHER TOTAL SHARES
RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' COMMON TREASURY
EARNINGS STOCK INCOME EQUITY STOCK STOCK
---------- ----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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)
========== =========== ======= ========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
F- 110
<PAGE> 313
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED NUMBER OF
OTHER TOTAL SHARES
RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' COMMON TREASURY
EARNINGS STOCK INCOME EQUITY STOCK STOCK
---------- ----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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)
========== =========== ======= ========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
F- 111
<PAGE> 314
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
------------------------ ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
--------------------------------------------------------------------------------
F- 112
<PAGE> 315
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share amounts)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Paine Webber Group Inc. ("PWG") is a holding company which, together with its
operating subsidiaries (collectively, the "Company"), forms one of the largest
full-service securities firms in the industry. The Company is engaged in one
principal line of business, that of serving the investment and capital needs of
individual and institutional clients.
The consolidated financial statements include the accounts of PWG and its wholly
owned subsidiaries, including its principal subsidiary PaineWebber Incorporated
("PWI"). All material intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior year amounts to
conform to current year presentations. The consolidated financial statements are
prepared in conformity with accounting principles generally accepted in the
United States which require management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Financial Instruments Owned and Sold, Not Yet Purchased
Financial instruments used in the Company's trading activities, including
derivative contracts held or issued for trading purposes, are recorded on a
trade date basis at fair value or amounts approximating fair value. Fair value
is generally based upon quoted market prices. If quoted market prices are not
available, or if liquidating the Company's position is reasonably expected to
impact market prices, fair value is determined based upon other relevant
factors, including dealer price quotations, price activity of similar
instruments and pricing models. Pricing models consider the time value and
volatility factors underlying the financial instruments and other economic
measurements.
Related revenues and expenses are recorded in the accounts on a trade date
basis. Unrealized gains and losses from marking-to-market trading instruments
daily are included in principal transactions revenues. Realized gains and losses
on trading instruments and any related interest amounts are included in
principal transactions revenues and interest revenues and expenses,
respectively.
Equity and debt securities purchased in connection with the Company's principal
investing activities, as well as investments in partnerships and other entities
that invest in financial instruments, in which there are no available market
quotations or may be otherwise restricted, are reported at cost or estimated net
realizable value. Realized and unrealized gains and losses are included in
principal transactions revenues.
Derivative Financial Instruments
A derivative instrument is typically defined as a contractual agreement whose
value is "derived" from an underlying asset, rate or index and includes products
such as forwards, futures, swaps or option contracts and other financial
instruments with similar characteristics. A derivative financial instrument also
includes firm or standby commitments for the purchase of securities. The
derivative definition does not include cash instruments whose values are derived
from changes in the value of some asset or index, such as mortgage-backed
securities and structured notes. Derivative contracts used by the Company
generally represent future commitments to exchange interest payment streams
based on the gross contract or notional amount or to purchase or sell financial
instruments at specified terms and future dates.
In connection with the Company's market risk management and trading activities,
the Company may enter into a derivative contract to manage the risk arising from
other financial instruments or to take a
--------------------------------------------------------------------------------
F- 113
<PAGE> 316
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands of dollars except share and per share amounts)
position based upon expected future market conditions. The Company also takes
positions to facilitate client transactions.
A large portion of the Company's derivative financial instruments are "to be
announced" mortgage securities requiring forward settlement. As a principal in
the mortgage-backed securities business, the Company has outstanding forward
purchase and sale agreements committing the Company to receive or deliver
mortgage-backed securities. These forward contracts are generally short-term
with maturity or settlement dates ranging from 30 to 90 days.
Derivative instruments held or issued for trading purposes are marked-to-market
daily with the resulting unrealized gains and losses recorded on the
Consolidated Statement of Financial Condition in financial instruments owned or
financial instruments sold, not yet purchased, and the related profit or loss
reflected in principal transactions revenues on the Consolidated Statement of
Income. The fair value of an exchange-traded derivative, such as futures and
certain option contracts, is determined by quoted market prices while the fair
value of derivatives negotiated in over-the-counter markets are valued based
upon dealer price quotations or pricing models which consider time value and the
volatility of the underlying instruments, as well as other economic factors.
The Company also enters into interest rate swaps to modify the interest rate
characteristics of its outstanding fixed rate debt. These agreements generally
involve the exchange between the Company and its counterparties of amounts based
on a fixed interest rate for amounts based on a variable interest rate over the
life of the agreement without the exchange of the notional amount upon which the
payments are based. The Company accounts for interest rate swap agreements used
for hedging purposes on the accrual method. The difference to be paid or
received on the swap agreements is accrued as an adjustment to interest expense
as incurred. The related receivable from or payable to counterparties is
reflected as an asset or liability, accordingly. The fair values of the swap
agreements are not recognized in the financial statements. Any gains and losses
on early terminations of swap agreements are deferred as an adjustment to the
carrying amount of the debt and amortized as an adjustment to interest expense
over the remaining term of the original contract life of the hedged item. In the
event of the early extinguishment of debt, any unrealized gain or loss from the
related swap would be recognized in income coincident with the extinguishment.
Collateralized Securities Transactions
Securities purchased under agreements to resell ("resale agreements") and
securities sold under agreements to repurchase ("repurchase agreements"),
principally government and agency securities are, for accounting purposes,
treated as financing transactions and are recorded at their contractual amounts,
plus accrued interest. It is Company policy to obtain possession or control of
securities, which have a fair value in excess of the original principal amount
loaned, in order to collateralize resale agreements. The Company is required to
provide securities to counterparties in order to collateralize repurchase
agreements. The Company monitors the fair value of the securities purchased and
sold under these agreements daily versus the related receivable or payable
balances. Should the fair value of the securities purchased decline or the fair
value of the securities sold increase, additional collateral is requested or
excess collateral is returned when deemed appropriate to maintain contractual
margin protection. When specific conditions are met, including the existence of
a legally enforceable master netting agreement, balances related to resale
agreements and repurchase agreements are netted by counterparty on the
Consolidated Statements of Financial Condition.
Resale agreements and repurchase agreements for which the resale/repurchase date
corresponds to the maturity date of the underlying securities are accounted for
as purchases and sales, respectively.
--------------------------------------------------------------------------------
F- 114
<PAGE> 317
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, obliga-
--------------------------------------------------------------------------------
F- 115
<PAGE> 318
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands of dollars except share and per share amounts)
tions 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:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
NOTE 3 SHORT-TERM BORROWINGS
The Company meets its short-term financing needs principally by obtaining bank
loans on either a secured or unsecured basis; by issuing commercial paper and
medium-term notes; by entering into
--------------------------------------------------------------------------------
F- 116
<PAGE> 319
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:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
--------------------------------------------------------------------------------
F- 117
<PAGE> 320
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:
<TABLE>
<S> <C>
2000........................................................ $ 875,373
2001........................................................ 357,500
2002........................................................ 602,465
2003........................................................ 706,837
2004........................................................ 850,434
Thereafter.................................................. 1,831,217
----------
$5,223,826
</TABLE>
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:
<TABLE>
<S> <C>
2000........................................................ $ 747,000
2001........................................................ 284,000
2002........................................................ 279,500
2003........................................................ 645,500
2004........................................................ 690,200
Thereafter.................................................. 1,559,810
----------
$4,206,010
</TABLE>
At December 31, 1999 and 1998, the fair values of long-term borrowings were
$5,140,331 and $4,325,014, respectively, as compared to the carrying amounts of
$5,223,826 and $4,255,802, respectively. The estimated fair value of long-term
borrowings was based upon quoted market prices for the same or similar issues
and pricing models. The fair values of the interest rate swaps were $127,097
payable and $113,226 receivable at December 31, 1999 and 1998, respectively. The
fair value of interest rate swaps used to hedge the Company's long-term
borrowings was based upon the amounts the Company would receive or pay to
terminate the agreements, taking into account current
--------------------------------------------------------------------------------
F- 118
<PAGE> 321
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands of dollars except share and per share amounts)
interest rates. The carrying amounts of the interest rate swap agreements
included in the Company's Consolidated Statements of Financial Condition at
December 31, 1999 and 1998 were net receivables of $12,075 and $8,827,
respectively. See Notes 1 and 8 for a further discussion of interest rate swap
agreements used for hedging purposes.
NOTE 5 PREFERRED STOCK
Preferred Stock Issued by Paine Webber Group Inc.
The Company is authorized to issue up to 20,000,000 shares of preferred stock,
in one or more series.
Redeemable Preferred Stock -- In connection with the acquisition of certain net
assets and specific businesses of Kidder, Peabody Group Inc. ("Kidder") in
December 1994, the Company issued 2,500,000 shares of 20-year 9 percent
Cumulative Redeemable Preferred Stock, Series C (the "Redeemable Preferred
Stock"), with a stated value and liquidation preference of $100.00 per share.
The Redeemable Preferred Stock was recorded at its fair value of $185,000 at the
date of issuance, which was increased periodically by charges to retained
earnings, using the interest method, so that the carrying amount would have
equaled the redemption amount of $250,000 at the mandatory redemption date on
December 15, 2014. The Redeemable Preferred Stock was redeemable at any time, in
whole or in part, on or after December 16, 1999 at the option of the Company at
a price of $100.00 per share, plus accrued and unpaid dividends.
At the earliest redemption date of December 16, 1999, the Company redeemed the
Redeemable Preferred Stock which resulted in a charge to stockholders' equity
equal to the difference between the carrying value and par value (unamortized
discount) of $59,883. Dividends on the Redeemable Preferred Stock were
cumulative and payable in quarterly installments. Holders of the Redeemable
Preferred Stock had no voting rights, except in the event of certain dividend
payment defaults.
Preferred Stock Issued by Subsidiary Trusts
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts holding solely Company Guaranteed Related Subordinated Debt -- In
December 1996, PWG Capital Trust I, a business trust formed under Delaware law
and a wholly owned subsidiary of the Company, issued $195,000 (7,800,000 shares)
of 8.30 percent Preferred Trust Securities to the public at $25.00 per security
and $6,031 (241,238 securities) of 8.30 percent Common Trust Securities to the
Company at $25.00 per security. In March 1997, PWG Capital Trust II, a business
trust formed under Delaware law and a wholly owned subsidiary of the Company,
issued $198,750 (7,950,000 securities) of 8.08 percent Preferred Trust
Securities to the public at $25.00 per security and $6,147 (245,877 securities)
of 8.08 percent Common Trust Securities to the Company at $25.00 per security.
The 8.30 percent Preferred Trust Securities and the 8.08 percent Preferred Trust
Securities (collectively, the "Preferred Trust Securities") have a stated
liquidation amount of $25.00 per share.
PWG Capital Trust I and PWG Capital Trust II (collectively, the "Trusts") exist
for the sole purpose of issuing the Preferred Trust Securities and common
securities and investing the proceeds in an equivalent amount of junior
subordinated debentures of the Company. The sole assets of PWG Capital Trust I
at December 31, 1999 were $201,031 of 8.30 percent Junior Subordinated
Debentures due December 1, 2036 issued by the Company. The sole assets of PWG
Capital Trust II at December 31, 1999 were $204,897 of 8.08 percent Junior
Subordinated Debentures due March 1, 2037 issued by the Company. The 8.30
percent Junior Subordinated Debentures and the 8.08 percent Junior Subordinated
Debentures (collectively, the "Junior Subordinated Debentures") held by the
Trusts are redeemable by the Company, in whole or in part, on or after December
1, 2001 and March 1, 2002, respectively. If the Company redeems Junior
Subordinated Debentures, the Trust must redeem Preferred Trust
--------------------------------------------------------------------------------
F- 119
<PAGE> 322
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands of dollars except share and per share amounts)
Securities and common securities having an aggregate liquidation amount equal to
the aggregate principal amount of Junior Subordinated Debentures.
The Company guarantees payment to the holders of the Preferred Trust Securities,
on a subordinated basis, to the extent the Company has made principal and
interest payments on the Junior Subordinated Debentures. This guarantee,
together with the Company's obligations under the Junior Subordinated
Debentures, provides a full and unconditional guarantee on a subordinated basis
of amounts due on the Preferred Trust Securities. Dividends on the Preferred
Trust Securities are cumulative, payable monthly in arrears, and are deferrable
at the Company's option for periods not to exceed sixty consecutive months. The
Company generally cannot pay dividends on its preferred and common stocks during
such deferments. Dividends on the Preferred Trust Securities have been
classified as minority interest in the Company's Consolidated Statements of
Income.
NOTE 6 COMMON STOCK
In accordance with the repurchase programs, the Company had available to
repurchase at December 31, 1999 a maximum of 18,681,999 shares of its common
stock. Subsequent to December 31, 1999, the Company's Board of Directors
increased the number of shares of common stock authorized for repurchase by
18,000,000.
NOTE 7 CAPITAL REQUIREMENTS
PWI, a registered broker-dealer, is subject to the Securities and Exchange
Commission ("SEC") Uniform Net Capital Rule and New York Stock Exchange ("NYSE")
Growth and Business Reduction capital requirements. Under the method of
computing capital requirements adopted by PWI, minimum net capital shall not be
less than 2 percent of combined aggregate debit items arising from client
transactions, plus excess margin collected on securities purchased under
agreements to resell, as defined. A reduction of business is required if net
capital is less than 4 percent of such aggregate debit items. Business may not
be expanded if net capital is less than 5 percent of such aggregate debit items.
As of December 31, 1999, PWI's net capital of $892,165 was 7.5 percent of
December 29, 1999 aggregate debit items and its net capital in excess of the
minimum required was $649,034.
Advances, dividend payments and other equity distributions by PWI and other
regulated subsidiaries are restricted by the regulations of the SEC, NYSE, and
international securities and banking agencies, as well as by covenants in
various loan agreements. At December 31, 1999, the equity of PWG's subsidiaries
totaled approximately $2,900,000. Of this amount, approximately $453,000 was not
available for payment of cash dividends and advances to PWG.
Under the terms of certain credit agreements, PWG is subject to dividend payment
restrictions and minimum net worth and net capital requirements. At December 31,
1999, these restrictions did not affect PWG's ability to pay dividends to its
shareholders.
NOTE 8 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Held or Issued for Trading Purposes
Set forth below are the gross contract or notional amounts of the Company's
outstanding off-balance-sheet derivative and other financial instruments held or
issued for trading purposes. These amounts are not reflected in the Consolidated
Statements of Financial Condition and are indicative only of the volume of
activity at December 31, 1999 and 1998. They do not represent amounts subject to
market risks, and in many cases, limit the Company's overall exposure to market
losses by hedging other on-and off-balance-sheet transactions.
--------------------------------------------------------------------------------
F- 120
<PAGE> 323
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
NOTIONAL OR CONTRACT AMOUNT AT DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------ -------------------------- --------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
FAIR VALUE AT DECEMBER 31, 1999 DECEMBER 31, 1998
------------- ----------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- ------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE FOR THE YEARS ENDED DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------- ----------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
--------------------------------------------------------------------------------
F- 121
<PAGE> 324
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998
------------------------ ---------- --------
<S> <C> <C>
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
========== ========
</TABLE>
Held or Issued for Purposes other than Trading
The Company enters into interest rate swap agreements to manage the interest
rate characteristics of its assets and liabilities. As of December 31, 1999 and
1998, the Company had outstanding interest rate swap agreements with commercial
banks with notional amounts of $4,206,010 and $3,096,985, respectively. These
agreements effectively converted substantially all of the Company's fixed rate
debt at December 31, 1999 into floating rate debt. The Company had no deferred
gains or losses related to terminated swap agreements on the Company's long-term
borrowings at December 31, 1999 and 1998. The Company is subject to market risk
as interest rates fluctuate. The interest rate swaps contain credit risk to the
extent the Company is in a receivable or gain position and the counterparty
defaults. However, the counterparties to the agreements generally are large
financial institutions, and the Company has not experienced defaults in the
past, and management does not anticipate any counterparty defaults in the
foreseeable future. See Notes 1 and 4 for further discussion of interest rate
swap agreements used for hedging purposes.
NOTE 9 RISK MANAGEMENT
Transactions involving derivative and non-derivative financial instruments
involve varying degrees of both market and credit risk. The Company monitors its
exposure to market and credit risk on a daily
--------------------------------------------------------------------------------
F- 122
<PAGE> 325
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands of dollars except share and per share amounts)
basis and through a variety of financial, security position and credit exposure
reporting and control procedures.
Market Risk
Market risk is the potential change in value of the financial instrument caused
by unfavorable changes in interest rates, equity prices and foreign currency
exchange rates. The Company has a variety of methods to monitor its market risk
profile. The senior management of each business group is responsible for
reviewing trading positions, exposures, profits and losses, and trading
strategies. The Company also has an independent risk management group which
reviews the Company's risk profile and aids in setting and monitoring risk
management policies of the Company, including monitoring adherence to the
established limits, performing market risk modeling, and reviewing trading
positions and hedging strategies. The Asset/Liability Management Committee,
comprised of senior corporate and business group managers, is responsible for
establishing trading position and exposure limits.
Market risk modeling is based on estimating loss exposure through sensitivity
testing. These results are compared to established limits, and exceptions are
subject to review and approval by senior management. Other market risk control
procedures include monitoring inventory agings, reviewing traders' marks, and
holding regular meetings between the senior management of the business groups
and the risk management group.
Credit Risk in Proprietary Transactions
Counterparties to the Company's proprietary trading, hedging, financing and
arbitrage activities are primarily financial institutions, including banks,
brokers and dealers, investment funds, and insurance companies. Credit losses
could arise should counterparties fail to perform and the value of any
collateral proves inadequate. The Company manages credit risk by monitoring net
exposure to individual counterparties on a daily basis, monitoring credit limits
and requiring additional collateral where appropriate.
Derivative credit exposures are calculated, aggregated and compared to
established limits by the credit department. Credit reserve requirements are
determined by senior management in conjunction with the Company's continuous
credit monitoring procedures. Historically, reserve requirements arising from
instruments with off-balance-sheet risk have not been material.
Receivables and payables with brokers and dealers, agreements to resell and
repurchase securities, and securities borrowed and loaned are generally
collateralized by cash, government and agency securities, and letters of credit.
The market value of the initial collateral received approximates or is greater
than the contract value. Additional collateral is requested when considered
necessary. The Company may pledge clients' margined securities as collateral in
support of securities loaned and bank loans, as well as to satisfy margin
requirements at clearing organizations. The amounts loaned or pledged are
limited to the extent permitted by applicable margin regulations. Should the
counterparty fail to return the clients' securities, the Company may be required
to replace them at prevailing market prices. At December 31, 1999, the market
value of client securities loaned to other brokers approximated the amounts due
or collateral obtained.
Credit Risk in Client Activities
Client transactions are entered on either a cash or margin basis. In a margin
transaction, the Company extends credit to a client for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Receivables from customers
are substantially collateralized by customer securities. Amounts loaned are
limited by margin regulations of
--------------------------------------------------------------------------------
F- 123
<PAGE> 326
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:
<TABLE>
<S> <C>
2000.................................................. $ 166,168
2001.................................................. 155,240
2002.................................................. 146,857
2003.................................................. 142,583
2004.................................................. 136,963
Thereafter............................................ 897,467
----------
$1,645,278
==========
</TABLE>
--------------------------------------------------------------------------------
F- 124
<PAGE> 327
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands of dollars except share and per share amounts)
Rentals are subject to periodic escalation charges and do not include amounts
payable for insurance, taxes and maintenance. In addition, minimum payments have
not been reduced by future minimum sublease rental income of $7,859.
For the years ended December 31, 1999, 1998 and 1997, rent expense under
operating leases was $183,967, $168,417 and $160,973, respectively.
Other Commitments and Contingencies
At December 31, 1999 and 1998, the Company was contingently liable under
unsecured letters of credit totaling $139,156 and $159,647, respectively, which
approximated fair value. At December 31, 1999, certain of the Company's
subsidiaries were contingently liable as issuer of approximately $45,000 of
notes payable to managing general partners of various limited partnerships
pursuant to certain partnership agreements. In addition, as part of the 1995
limited partnership settlements, the Company has agreed, under certain
circumstances, to provide to class members additional consideration including
assignment of fees the Company is entitled to receive from certain partnerships.
In the opinion of management, these contingencies will not have a material
adverse effect on the Company's consolidated financial statements, taken as a
whole.
In meeting the financing needs of certain of its clients, the Company may also
issue standby letters of credit which are fully collateralized by customer
margin securities. At December 31, 1999, the Company had outstanding $101,400 of
such standby letters of credit. At December 31, 1999 and 1998, securities with a
fair value of $2,536,073 and $2,008,145, respectively, had been loaned or
pledged as collateral for securities borrowed of approximately equal fair value.
In the normal course of business, the Company enters into when-issued
transactions, underwriting and other commitments. Also, at December 31, 1999,
the Company had commitments of $858,122, consisting of secured credit lines to
real estate operators, mortgage and asset-backed originators, and other
commitments to investment partnerships. Settlement of these transactions at
December 31, 1999 would not have had a material impact on the Company's
consolidated financial statements, taken as a whole.
The Company has been named as a defendant in numerous legal actions in the
ordinary course of business. While the outcome of such matters cannot be
predicted with certainty, in the opinion of management of the Company, after
consultation with various counsel handling such matters, these actions will be
resolved with no material adverse effect on the Company's consolidated financial
statements, taken as a whole.
NOTE 11 EMPLOYEE INCENTIVE AWARDS
The Company's various Stock Option and Award Plans (the "Plans") provide for the
granting to officers and other key employees nonqualified stock options,
restricted stock awards, stock appreciation rights, restricted stock units,
stock purchase rights, performance units and other stock based awards. At
December 31, 1999 and 1998, there were 10,597,664 and 9,502,661 shares,
respectively, available for future stock option, common stock and restricted
stock awards under these plans. The Company had no stock appreciation rights,
performance units or stock purchase rights outstanding at December 31, 1999.
Nonqualified Stock Options
Officers and other key employees are granted nonqualified stock options to
purchase shares of common stock at a price not less than the fair market value
of the stock on the date the option is granted. Options for the Company's common
stock have also been granted to limited partnerships, in
--------------------------------------------------------------------------------
F- 125
<PAGE> 328
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.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE WEIGHTED-AVERAGE
SHARES PER SHARE EXERCISE PRICE
---------- -------------- ----------------
<S> <C> <C> <C>
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
========== ============== ======
</TABLE>
--------------------------------------------------------------------------------
F- 126
<PAGE> 329
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:
<TABLE>
<CAPTION>
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
--------------- ----------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 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
</TABLE>
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
------------------------ -------- -------- --------
<S> <C> <C> <C>
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
</TABLE>
------------
(1) Reflects the effect of the unamortized discount of $59,883 charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16, 1999.
--------------------------------------------------------------------------------
F- 127
<PAGE> 330
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands of dollars except share and per share amounts)
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 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
------------------------ -------- -------- -------
<S> <C> <C> <C>
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
======== ======== =======
</TABLE>
--------------------------------------------------------------------------------
F- 128
<PAGE> 331
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands of dollars except share and per share amounts)
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 included in other assets on the
Company's Consolidated Statements of Financial Condition at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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.
--------------------------------------------------------------------------------
F- 129
<PAGE> 332
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands of dollars except share and per share amounts)
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 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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
--------------------------------------------------------------------------------
F- 130
<PAGE> 333
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
------------------------ -------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
YEARS ENDED DECEMBER 31, AMOUNT % AMOUNT % AMOUNT %
------------------------ -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
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
======== ==== ======== ==== ======== ====
</TABLE>
Income taxes paid for the years ended December 31, 1999, 1998 and 1997 were
$379,194, $236,597 and $278,553, respectively.
Undistributed earnings of the Company's foreign subsidiaries are considered to
be permanently reinvested and, accordingly, no provision for U.S. income taxes
is required on such earnings. As of December 31, 1999, such earnings were
estimated to be $293,000. The estimated U.S. income taxes that would be payable
upon the repatriation of such earnings were not material.
NOTE 14 EARNINGS PER COMMON SHARE
Earnings per common share are computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per share excludes the dilutive effects of
options and convertible securities and is calculated by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects all potentially
dilutive securities.
--------------------------------------------------------------------------------
F- 131
<PAGE> 334
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
------------
(1) The 6% Convertible Preferred Stock was converted into 8,273,600 common
shares on December 4, 1997.
(2) Reflects the effect of the unamortized discount of $59,883 charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16,1999.
NOTE 15 SEGMENT REPORTING DATA
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company offers a wide variety of
products and services, primarily those of a full service broker-dealer to a
domestic market, through its two operating segments: Individual and
Institutional. The Individual segment offers brokerage services and products
(such as the purchase and sale of securities, insurance annuity contracts,
mutual funds, wrap fee products, and margin and
--------------------------------------------------------------------------------
F- 132
<PAGE> 335
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).
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------- ----------------------------------------- -----------
INDIVIDUAL INSTITUTIONAL TOTAL INDIVIDUAL INSTITUTIONAL TOTAL INDIVIDUAL
----------- ------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues........ $ 4,676,467 $ 3,146,286 $ 7,822,753 $ 3,978,301 $ 3,271,281 $ 7,249,582 $ 3,556,246
Net interest
revenues............. 368,853 222,009 590,862 314,078 194,162 508,240 274,762
Net revenues.......... 4,014,049 1,276,126 5,290,175 3,373,456 1,031,658 4,405,114 3,082,359
Depreciation and
amortization......... 78,868 20,855 99,723 49,639 24,657 74,296 37,637
Income before taxes
and minority
interest............. 641,870 392,932 1,034,802 494,666 220,341 715,007 443,376
Total assets.......... 21,828,324 39,784,052 61,612,376 18,330,427 35,845,494 54,175,921 14,736,069
Expenditures for long-
lived assets......... 145,531 106,655 252,186 89,460 91,957 181,417 45,950
=========== =========== =========== =========== =========== =========== ===========
<CAPTION>
1997
---------------------------
INSTITUTIONAL TOTAL
------------- -----------
<S> <C> <C>
Total revenues........ $ 3,100,706 $ 6,656,952
Net interest
revenues............. 143,812 418,574
Net revenues.......... 1,030,043 4,112,402
Depreciation and
amortization......... 31,063 68,700
Income before taxes
and minority
interest............. 229,731 673,107
Total assets.......... 42,328,964 57,065,033
Expenditures for long-
lived assets......... 44,997 90,947
=========== ===========
</TABLE>
The following presents information about the Company's operations by geographic
area:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------- ----------------------------------------- -------------
UNITED STATES NON-U.S.(1) TOTAL UNITED STATES NON-U.S.(1) TOTAL UNITED STATES
------------- ----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $ 7,531,898 $ 290,855 $ 7,822,753 $ 7,001,967 $ 247,615 $ 7,249,582 $ 6,461,976
Net revenues............ 5,022,697 267,478 5,290,175 4,239,413 165,701 4,405,114 3,965,289
Income before taxes and
minority interest...... 907,253 127,549 1,034,802 677,646 37,361 715,007 647,268
Total assets............ 53,921,208 7,691,168 61,612,376 44,691,427 9,484,494 54,175,921 46,610,462
=========== ========== =========== =========== ========== =========== ===========
<CAPTION>
1997
-------------------------
NON-U.S.(1) TOTAL
----------- -----------
<S> <C> <C>
Total revenues.......... $ 194,976 $ 6,656,952
Net revenues............ 147,113 4,112,402
Income before taxes and
minority interest...... 25,839 673,107
Total assets............ 10,454,571 57,065,033
=========== ===========
</TABLE>
------------
(1) Predominantly the United Kingdom.
--------------------------------------------------------------------------------
F- 133
<PAGE> 336
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Paine Webber Group Inc.
We have audited the accompanying consolidated statements of financial condition
of Paine Webber Group Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Paine
Webber Group Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
New York, New York
January 31, 2000
--------------------------------------------------------------------------------
F- 134
<PAGE> 337
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997 1996 1995(2)
------------------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS OF DOLLARS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
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
----------- ----------- ----------- ----------- -----------
</TABLE>
---------------
(1) All per share data reflect a three-for-two common stock split in November
1997.
(2) The 1995 results include after-tax charges of $146 million ($230 million
before income taxes) related to the resolution of the issues arising from
the Company's sale of public proprietary limited partnerships.
(3) Reflects the effect of the unamortized discount of $59.9 million charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16, 1999.
--------------------------------------------------------------------------------
F- 135
<PAGE> 338
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:
<TABLE>
<CAPTION>
CALENDAR QUARTER 4TH 3RD 2ND 1ST
---------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
1999.................................................. $.11 $.11 $.11 $.11
1998.................................................. .11 .11 .11 .11
1997.................................................. .11 .10 .10 .10
</TABLE>
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:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
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
</TABLE>
On February 11, 2000 the last reported sale price per share of Paine Webber
Group, Inc. common stock on the NYSE was $37.56. The approximate number of
holders of record of Paine Webber Group Inc. common stock as of the close of
business on February 11, 2000 was 6,077.
--------------------------------------------------------------------------------
F- 136
<PAGE> 339
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
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
------------------------- ---------- ---------- ----------------- -------- -------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
------------
(1) Reflects the effect of unamortized discount of $59,883 charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16, 1999.
The sum of the quarterly earnings per share amounts does not equal the annual
amount reported, as per share amounts are computed independently for each
quarter and the full year based on respective weighted-average common and common
equivalent shares outstanding during each period.
--------------------------------------------------------------------------------
F- 137
<PAGE> 340
FIVE-YEAR FINANCIAL SUMMARY
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997 1996
-------------------- -------------------- -------------------- --------------------
YEARS ENDED DECEMBER 31, AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------------------------ ------------ ----- ------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
============ ===== ============ ===== ============ ===== ============ =====
<CAPTION>
1995(1)
--------------------
YEARS ENDED DECEMBER 31, AMOUNT %
------------------------ ------------ -----
<S> <C> <C>
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
============ =====
</TABLE>
<TABLE>
<CAPTION>
NON-INTEREST EXPENSES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
============ ============ ============ ============
<CAPTION>
NON-INTEREST EXPENSES
<S> <C> <C>
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
============
</TABLE>
------------
(1) The 1995 results include after-tax charges of $146 million ($230 million
before income taxes) related to the resolution of the issues arising from
the Company's sale of public proprietary limited partnerships.
(2) All share and per share data reflect a three-for-two common stock split in
November 1997.
(3) Reflects the effect of the unamortized discount of $59.9 million charged to
stockholders' equity resulting from the redemption of preferred stock on
December 16, 1999.
--------------------------------------------------------------------------------
F- 138
<PAGE> 341
PAINE WEBBER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIRST QUARTER 2000
MARCH 31, 2000
--------------------------------------------------------------------------------
F- 139
<PAGE> 342
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
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
</TABLE>
See notes to condensed consolidated financial statements.
--------------------------------------------------------------------------------
F- 140
<PAGE> 343
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
--------------------------------------------------------------------------------
F- 141
<PAGE> 344
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
--------------------------------------------------------------------------------
F- 142
<PAGE> 345
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Paine
Webber Group Inc. ("PWG") and its wholly owned subsidiaries, including its
principal subsidiary PaineWebber Incorporated ("PWI") (collectively, the
"Company"). All material intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior year amounts to
conform to current year presentations. The December 31, 1999 Condensed
Consolidated Statement of Financial Condition was derived from the audited
consolidated financial statements of the Company. The financial information as
of and for the periods ended March 31, 2000 and 1999 is unaudited. All normal
recurring adjustments which, in the opinion of management, are necessary for a
fair presentation have been made.
Certain financial information that is normally in annual financial statements
but is not required for interim reporting purposes has been condensed or
omitted. The condensed consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
which require management to make estimates and assumptions that affect the
amounts reported in the condensed consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. The results of
operations reported for interim periods are not necessarily indicative of the
results of operations for the entire year.
Statement of Cash Flows
Total interest payments, which relate principally to agreements to repurchase,
short-term borrowings, securities loaned and long-term borrowings, were $865,029
and $577,797 for the three months ended March 31, 2000 and 1999, respectively.
Income taxes paid were $86,657 and $63,680 for the three months ended March 31,
2000 and 1999, respectively.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes revised accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity measure all derivative instruments at fair value and
recognize such instruments as either assets or liabilities in the consolidated
statements of financial condition. The accounting for changes in the fair value
of a derivative instrument will depend on the intended use of the derivative as
either a fair value hedge, a cash flow hedge or a foreign currency hedge. The
effect of the changes in fair value of the derivatives and, in certain cases,
the hedged items are to be reflected in either the consolidated statements of
income or as a component of other comprehensive income, based upon the resulting
designation. As issued, SFAS No. 133 was effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No.
133 for one year to fiscal years beginning after June 15, 2000. The Company has
not yet determined the impact of this statement on the Company's Consolidated
Financial Statements, taken as a whole.
--------------------------------------------------------------------------------
F- 143
<PAGE> 346
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:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
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
=========== ===========
</TABLE>
NOTE 3: LONG-TERM BORROWINGS
Long-term borrowings at March 31, 2000 and December 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
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
========== ==========
</TABLE>
At March 31, 2000, interest rates on the U.S. dollar-denominated fixed rate
notes and fixed rate subordinated notes ranged from 6.25 percent to 9.25 percent
and the weighted-average interest rate was 7.19 percent. Interest on the notes
is payable semi-annually. The fixed rate notes and fixed rate subordinated notes
outstanding at March 31, 2000 had an average maturity of 5.8 years.
At March 31, 2000, the Company had outstanding U.S. dollar-denominated fixed
rate Medium-Term Notes of $1,324,040 and variable rate Medium-Term Notes of
$904,150. The Medium-Term Notes outstanding at March 31, 2000 had an average
maturity of 4.1 years and a weighted-average interest rate of 6.73 percent.
At March 31, 2000, the interest rate on the Non-U.S. dollar-denominated
Medium-Term note was 1.27 percent.
--------------------------------------------------------------------------------
F- 144
<PAGE> 347
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.
<TABLE>
<CAPTION>
NOTIONAL OR CONTRACT AMOUNT
-----------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
------------------------- -------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
--------------------------------------------------------------------------------
F- 145
<PAGE> 348
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.
<TABLE>
<CAPTION>
FAIR VALUE AT FAIR VALUE AT
MARCH 31, 2000 DECEMBER 31, 1999
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE AVERAGE FAIR VALUE
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, 2000 DECEMBER 31, 1999
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
The Company also sells securities, at predetermined prices, which have not yet
been purchased. The Company is exposed to market risk since to satisfy the
obligation, the Company must acquire the securities at market prices, which may
exceed the values reflected on the Condensed Consolidated Statements of
Financial Condition.
The off-balance-sheet derivative trading transactions are generally short-term.
At March 31, 2000 substantially all of the off-balance-sheet trading-related
derivative and other financial instruments had remaining maturities of less than
one year.
The Company's risk of loss in the event of counterparty default is limited to
the current fair value or the replacement cost on contracts in which the Company
has recorded an unrealized gain. These amounts are reflected as assets on the
Company's Condensed Consolidated Statements of Financial Condition and amounted
to $275,245 and $392,679 at March 31, 2000 and December 31, 1999, respectively.
Options written do not expose the Company to credit risk since they do not
obligate the counterparty to perform. Transactions in futures contracts are
conducted through regulated exchanges which have margin requirements, and are
settled in cash on a daily basis, thereby minimizing credit risk.
--------------------------------------------------------------------------------
F- 146
<PAGE> 349
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.
<TABLE>
<CAPTION>
PRINCIPAL TRANSACTIONS
REVENUES
-----------------------
THREE MONTHS
ENDED MARCH 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
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
======== ========
</TABLE>
Held or Issued for Purposes Other Than Trading
The Company enters into interest rate swap agreements to manage the interest
rate characteristics of its assets and liabilities. As of March 31, 2000 and
December 31, 1999, the Company had outstanding interest rate swap agreements
with commercial banks with notional amounts of $3,891,010 and $4,206,010,
respectively. These agreements effectively converted substantially all of the
Company's fixed rate debt at March 31, 2000 into floating rate debt. The
interest rate swap agreements entered into have had the effect of reducing net
interest expense on the Company's fixed rate debt by $282 and $5,753 for the
three months ended March 31, 2000 and 1999, respectively. The Company had no
deferred gains or losses related to terminated swap agreements on the Company's
long-term borrowings at March 31, 2000 and December 31, 1999. The Company is
subject to market risk as interest rates fluctuate. The interest rate swaps
contain credit risk to the extent the Company is in a receivable or gain
position and the counterparty defaults. However, the counterparties to the
agreements generally are large financial institutions, and the Company has not
experienced defaults in the past, and management does not anticipate any
counterparty defaults in the foreseeable future. See Note 3 for further
discussion of interest rate swap agreements used for hedging purposes.
NOTE 6: RISK MANAGEMENT
Transactions involving derivative and non-derivative financial instruments
involve varying degrees of both market and credit risk. The Company monitors its
exposure to market and credit risk on a daily basis and through a variety of
financial, security position and credit exposure reporting and control
procedures.
Market Risk
Market risk is the potential change in value of the financial instrument caused
by unfavorable changes in interest rates, equity prices, and foreign currency
exchange rates. The Company has a variety of methods to monitor its market risk
profile. The senior management of each business group is responsible for
reviewing trading positions, exposures, profits and losses, and trading
strategies. The Company also has an independent risk management group which
reviews the Company's risk profile and aids in setting and monitoring risk
management policies of the Company, including monitoring adherence to the
established limits, performing market risk modeling, and reviewing trading
positions and hedging strategies. The Asset/Liability Management Committee,
comprised of senior corporate and business group managers, is responsible for
establishing trading position and exposure limits.
--------------------------------------------------------------------------------
F- 147
<PAGE> 350
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Market risk modeling is based on estimating loss exposure through sensitivity
testing. These results are compared to established limits, and exceptions are
subject to review and approval by senior management. Other market risk control
procedures include monitoring inventory agings, reviewing traders' marks and
holding regular meetings between the senior management of the business groups
and the risk management group.
Credit Risk in Proprietary Transactions
Counterparties to the Company's proprietary trading, hedging, financing and
arbitrage activities are primarily financial institutions, including banks,
brokers and dealers, investment funds and insurance companies. Credit losses
could arise should counterparties fail to perform and the value of any
collateral proves inadequate. The Company manages credit risk by monitoring net
exposure to individual counterparties on a daily basis, monitoring credit limits
and requiring additional collateral where appropriate.
Derivative credit exposures are calculated, aggregated and compared to
established limits by the credit department. Credit reserve requirements are
determined by senior management in conjunction with the Company's continuous
credit monitoring procedures. Historically, reserve requirements arising from
instruments with off-balance-sheet risk have not been material.
Receivables and payables with brokers and dealers, agreements to resell and
repurchase securities, and securities borrowed and loaned are generally
collateralized by cash, government and government-agency securities, and letters
of credit. The market value of the initial collateral received approximates or
is greater than the contract value. Additional collateral is requested when
considered necessary. The Company may pledge clients' margined securities as
collateral in support of securities loaned and bank loans, as well as to satisfy
margin requirements at clearing organizations. The amounts loaned or pledged are
limited to the extent permitted by applicable margin regulations. Should the
counterparty fail to return the clients' securities, the Company may be required
to replace them at prevailing market prices. At March 31, 2000, the market value
of client securities loaned to other brokers approximated the amounts due or
collateral obtained.
Credit Risk in Client Activities
Client transactions are entered on either a cash or margin basis. In a margin
transaction, the Company extends credit to a client for the purchase of
securities, using the securities purchased and/or other securities in the
client's account as collateral for amounts loaned. Receivables from customers
are substantially collateralized by customer securities. Amounts loaned are
limited by margin regulations of the Federal Reserve Board and other regulatory
authorities and are subject to the Company's credit review and daily monitoring
procedures. Market declines could, however, reduce the value of any collateral
below the principal amount loaned, plus accrued interest, before the collateral
can be sold.
Client transactions include positions in commodities and financial futures,
trading liabilities and written options. The risk to the Company's clients in
these transactions can be substantial, principally due to price volatility which
can reduce the clients' ability to meet their obligations. Margin deposit
requirements pertaining to commodity futures and exchange-traded options
transactions are generally lower than those for exchange-traded securities. To
the extent clients are unable to meet their commitments to the Company and
margin deposits are insufficient to cover outstanding liabilities, the Company
may take market action and credit losses could be realized.
Client trades are recorded on a settlement date basis. Should either the client
or broker fail to perform, the Company may be required to complete the
transaction at prevailing market prices. Trades pending at March 31, 2000 were
settled without material adverse effect on the Company's consolidated financial
statements, taken as a whole.
--------------------------------------------------------------------------------
F- 148
<PAGE> 351
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.
--------------------------------------------------------------------------------
F- 149
<PAGE> 352
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net income.................................................. $176,349 $160,599
Foreign currency translation adjustment..................... (882) (1,512)
-------- --------
Total comprehensive income.................................. $175,467 $159,087
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
------------
(1) Included in the calculation of employee stock options and awards was the
dilutive effect of 1,925,000 instruments related to convertible debentures.
--------------------------------------------------------------------------------
F- 150
<PAGE> 353
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).
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000 THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------- ---------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
Total assets for the Individual and Institutional segments were $25,175,880 and
$38,339,043, respectively, at March 31, 2000 and $21,828,324 and $39,784,052,
respectively at December 31, 1999.
NOTE 11: SUBSEQUENT EVENTS
On April 27, 2000, PWG entered into an agreement and plan of merger (the "Merger
Agreement") with J.C. Bradford & Co. L.L.C. ("J.C. Bradford"), a leading
privately-held brokerage firm in the Southeast, pursuant to which a subsidiary
of PWG will merge with and into J.C. Bradford. The all cash transaction, valued
at $620 million, is expected to close in the third quarter of this year.
At the May 4, 2000 Annual Meeting of Stockholders, the Company approved to amend
the Restated Certificate of Incorporation of PWG to authorize the issuance of up
to 150,000,000 shares of Non-Voting Common Stock, par value of $1.00 per share.
--------------------------------------------------------------------------------
F- 151
<PAGE> 354
PAINE WEBBER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SECOND QUARTER 2000
JUNE 30, 2000
--------------------------------------------------------------------------------
F- 152
<PAGE> 355
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
</TABLE>
Results for the quarter and six months ended June 30, 2000 include J.C. Bradford
merger-related costs of $30 million, $18.8 million after taxes.
See notes to condensed consolidated financial statements.
--------------------------------------------------------------------------------
F- 153
<PAGE> 356
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
--------------------------------------------------------------------------------
F- 154
<PAGE> 357
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
--------------------------------------------------------------------------------
F- 155
<PAGE> 358
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.
--------------------------------------------------------------------------------
F- 156
<PAGE> 359
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (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:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
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
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
F- 157
<PAGE> 360
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: LONG-TERM BORROWINGS
Long-term borrowings at June 30, 2000 and December 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
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
========== ==========
</TABLE>
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.
--------------------------------------------------------------------------------
F- 158
<PAGE> 361
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (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.
<TABLE>
<CAPTION>
NOTIONAL OR CONTRACT AMOUNT
--------------------------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------- --------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
--------------------------------------------------------------------------------
F- 159
<PAGE> 362
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 June 30, 2000 and December 31, 1999. The fair
value amounts are netted by counterparty when specific conditions are met.
<TABLE>
<CAPTION>
FAIR VALUE AT FAIR VALUE AT
JUNE 30, 2000 DECEMBER 31, 1999
---------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- -------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE AVERAGE FAIR VALUE
JUNE 30, 2000 DECEMBER 31, 1999
----------------------- -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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 which have margin requirements, and are
settled in cash on a daily basis, thereby minimizing credit risk.
--------------------------------------------------------------------------------
F- 160
<PAGE> 363
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<TABLE>
<CAPTION>
PRINCIPAL TRANSACTIONS REVENUES
--------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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 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
--------------------------------------------------------------------------------
F- 161
<PAGE> 364
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
--------------------------------------------------------------------------------
F- 162
<PAGE> 365
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
--------------------------------------------------------------------------------
F- 163
<PAGE> 366
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
-------- -------- -------- --------
</TABLE>
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.
--------------------------------------------------------------------------------
F- 164
<PAGE> 367
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
------------
(1) Included in the calculation of employee stock options and awards was the
dilutive effective of 1,931,250 instruments related to convertible
debentures.
NOTE 12: SEGMENT REPORTING DATA
The Company offers a wide variety of products and services, primarily those of a
full service domestic broker-dealer to a domestic market, through its two
operating segments: Individual and Institutional. The Individual segment offers
brokerage services and products (such as the purchase and sale of securities,
insurance annuity contracts, mutual funds, wrap fee products, and margin and
securities lending), asset management and other investment advisory and
portfolio management products and services, and execution and clearing services
for transactions originated by individual investors. The Institutional segment
principally includes capital market products and services (such as the placing
of securities and other financial instruments for--and the execution of trades
on behalf of--institutional clients, investment banking services such as the
underwriting of debt and equity securities, and mergers and acquisitions
advisory services).
--------------------------------------------------------------------------------
F- 165
<PAGE> 368
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (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).
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
-----------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ----------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
-----------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ----------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ----------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ----------
<S> <C> <C> <C>
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
</TABLE>
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.
--------------------------------------------------------------------------------
F- 166
<PAGE> 369
PAINE WEBBER GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THIRD QUARTER 2000
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
F- 167
<PAGE> 370
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
</TABLE>
See notes to condensed consolidated financial statements.
--------------------------------------------------------------------------------
F- 168
<PAGE> 371
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
--------------------------------------------------------------------------------
F- 169
<PAGE> 372
PAINE WEBBER GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
--------------------------------------------------------------------------------
F- 170
<PAGE> 373
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Paine
Webber Group Inc. ("PWG") and its wholly owned subsidiaries, including its
principal subsidiary PaineWebber Incorporated ("PWI") (collectively, the
"Company"). All material intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior year amounts to
conform to current year presentations. The December 31, 1999 Condensed
Consolidated Statement of Financial Condition was derived from the audited
consolidated financial statements of the Company. The financial information as
of and for the periods ended September 30, 2000 and 1999 is unaudited. All
normal recurring adjustments which, in the opinion of management, are necessary
for a fair presentation have been made.
Certain financial information that is normally in annual financial statements
but is not required for interim reporting purposes has been condensed or
omitted. The condensed consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
which require management to make estimates and assumptions that affect the
amounts reported in the condensed consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 and the Company's
Quarterly Reports on Form 10-Q for the quarters ended June 30, and March 31,
2000. The results of operations reported for interim periods are not necessarily
indicative of the results of operations for the entire year.
Statement of Cash Flows
Total interest payments, which relate principally to agreements to repurchase,
short-term borrowings, securities loaned and long-term borrowings, were
$2,782,961 and $1,834,039 for the nine months ended September 30, 2000 and 1999,
respectively. Income taxes paid were $232,558 and $268,289 for the nine months
ended September 30, 2000 and 1999, respectively.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes revised accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity measure all derivative instruments at fair value and
recognize such instruments as either assets or liabilities in the consolidated
statements of financial condition. The accounting for changes in the fair value
of a derivative instrument will depend on the intended use of the derivative as
either a fair value hedge, a cash flow hedge or a foreign currency hedge. The
effect of the changes in fair value of the derivatives and, in certain cases,
the hedged items are to be reflected in either the consolidated statements of
income or as a component of other comprehensive income, based upon the resulting
designation. As issued, SFAS No. 133 was effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133
for one year to fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities--an Amendment to FASB Statement No. 133". The
Company expects that the adoption of these statements will not have a material
effect on the Company's Consolidated Financial Statements, taken as a whole.
--------------------------------------------------------------------------------
F- 171
<PAGE> 374
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". SFAS No. 140 revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of the
provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001 and is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company has not
yet determined the impact of this statement on the Company's Consolidated
Financial Statements, taken as a whole.
NOTE 2: RECENT EVENTS
On October 23, 2000, the stockholders of PWG adopted the Agreement and Plan of
Merger (the "Merger Agreement"), dated as of July 12, 2000, by and among PWG,
UBS AG ("UBS") and a subsidiary of UBS, pursuant to which PWG will merge with
and into that subsidiary. Under the terms of the agreement, PWG's stockholders
will have the right to elect to receive either $73.50 in cash or 0.4954 of an
ordinary share of UBS AG stock for each share of PWG's common stock, $1 par
value ("common stock") that they own. The percentage of PWG's common stock that
will be converted into the right to receive UBS AG stock is fixed at 50 percent.
Adjustments to elections may therefore be necessary so that, in the aggregate,
50 percent of the shares of PWG's common stock is converted into the right to
receive UBS AG stock, and 50 percent is converted into the right to receive
cash. The transaction, which is expected to be completed in November of 2000, is
subject to customary closing conditions, including certain regulatory approvals.
NOTE 3: MERGER WITH J.C. BRADFORD
On June 9, 2000, the Company completed its merger with J.C. Bradford & Co.
L.L.C. ("J.C. Bradford"), a leading privately-held brokerage firm in the
Southeastern U.S., for approximately $622,000 in cash. The merger was accounted
for as a purchase and, accordingly, the excess of the purchase cost over the
fair value of the net assets acquired of approximately $185,000, resulted in the
Company recording $560,000 in goodwill, which is being amortized over 25 years
on a straight-line basis. The consolidated financial statements of the Company
include the results of J.C. Bradford from the closing date. As a result of the
merger, in the second quarter of 2000, the Company recorded after-tax costs of
approximately $18,800 ($30,000 pre-tax) relating primarily to the elimination of
the Company's duplicate facilities, severance and other costs.
--------------------------------------------------------------------------------
F- 172
<PAGE> 375
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:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
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
=========== ===========
</TABLE>
NOTE 5: LONG-TERM BORROWINGS
Long-term borrowings at September 30, 2000 and December 31, 1999 consisted of
the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
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
========== ==========
</TABLE>
At September 30, 2000, interest rates on the U.S. dollar-denominated fixed rate
notes and fixed rate subordinated notes ranged from 6.25 percent to 9.25 percent
and the weighted-average interest rate was 7.19 percent. Interest on the notes
is payable semi-annually. The fixed rate notes and fixed rate subordinated notes
outstanding at September 30, 2000 had an average maturity of 5.3 years.
At September 30, 2000, the Company had outstanding U.S. dollar-denominated fixed
rate Medium-Term Notes of $1,071,100 and variable rate Medium-Term Notes of
$963,950. The Medium-Term Notes outstanding at September 30, 2000 had an average
maturity of 4.2 years and a weighted-average interest rate of 5.97 percent.
--------------------------------------------------------------------------------
F- 173
<PAGE> 376
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 2000, the Non-U.S. dollar-denominated Medium-Term Notes
outstanding had a weighted-average interest rate of 1.18 percent and an average
maturity of 2.16 years.
In 2000, the Company issued to certain employees, 6.25% Convertible Debentures
due 2007 (the "Debentures"). The Debentures were initially convertible, at the
option of the holders beginning on January 20, 2003, into 1,931,250 shares of
Convertible Preferred Stock, which were then convertible into 1,931,250 shares
of common stock of the Company.
As a result of the Company entering into the Merger Agreement, the Debentures
became convertible effective upon the adoption by the stockholders of the
Company of the Merger Agreement, which occurred on October 23, 2000. Pursuant to
their terms, on October 16, 2000, the Company called for redemption on October
23, 2000 all of the outstanding Debentures. All outstanding Debentures were
converted into common stock.
At September 30, 2000 and December 31, 1999, the fair values of long-term
borrowings were $4,924,528 and $5,140,331, respectively, as compared to the
carrying amounts of $4,943,484 and $5,223,826, respectively. The estimated fair
value of long-term borrowings is based upon quoted market prices for the same or
similar issues and pricing models. However, for substantially all of its fixed
rate debt, the Company enters into interest rate swap agreements to convert its
fixed rate payments into floating rate payments.
The net fair values of the interest rate swaps were $61,739 and $127,097 payable
at September 30, 2000 and December 31, 1999, respectively. The fair value of
interest rate swaps used to hedge the Company's long-term borrowings is based
upon the amounts the Company would receive or pay to terminate the agreements,
taking into account current interest rates.
The carrying amounts of the interest rate swap agreements included in the
Company's Condensed Consolidated Statements of Financial Condition at September
30, 2000 and December 31, 1999 were net receivables of $4,780 and $12,075,
respectively. See Note 7 for further discussion of interest rate swap agreements
used for hedging purposes.
NOTE 6: CAPITAL REQUIREMENTS
PWI, a registered broker-dealer, is subject to the Securities and Exchange
Commission Uniform Net Capital Rule and New York Stock Exchange Growth and
Business Reduction capital requirements. Under the method of computing capital
requirements adopted by PWI, minimum net capital shall not be less than 2
percent of combined aggregate debit items arising from client transactions, plus
excess margin collected on securities purchased under agreements to resell, as
defined. A reduction of business is required if net capital is less than 4
percent of such aggregate debit items. Business may not be expanded if net
capital is less than 5 percent of such aggregate debit items. As of September
30, 2000, PWI's net capital of $1,608,364 was 10.1 percent of aggregate debit
items and its net capital in excess of the minimum required was $1,281,410.
--------------------------------------------------------------------------------
F- 174
<PAGE> 377
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.
<TABLE>
<CAPTION>
NOTIONAL OR CONTRACT AMOUNT
-----------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------- -------------------------
PURCHASES SALES PURCHASES SALES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
FAIR VALUE AT FAIR VALUE AT
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- -------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
--------------------------------------------------------------------------------
F- 175
<PAGE> 378
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.
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE AVERAGE FAIR VALUE
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- -------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
PRINCIPAL TRANSACTIONS REVENUES
-----------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
--------------------------------------------------------------------------------
F- 176
<PAGE> 379
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.
--------------------------------------------------------------------------------
F- 177
<PAGE> 380
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.
--------------------------------------------------------------------------------
F- 178
<PAGE> 381
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
--------------------------------------------------------------------------------
F- 179
<PAGE> 382
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
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.
--------------------------------------------------------------------------------
F- 180
<PAGE> 383
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).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000 THREE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------- ---------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------- ---------------------------------------
INDIVIDUAL INSTITUTIONAL TOTAL INDIVIDUAL INSTITUTIONAL TOTAL
---------- ------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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.
--------------------------------------------------------------------------------
F- 181
<PAGE> 384
[UBS LOGO]
THIRD QUARTER
2000 REPORT.
<PAGE> 385
UBS GROUP
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------------- ------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
--------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT KEY FIGURES
Operating income 8,545 9,200 6,534 (7) 31 27,102 21,636
Operating expenses 5,842 6,548 4,921 (11) 19 18,839 14,992
Operating profit before tax 2,703 2,652 1,613 2 68 8,263 6,644
Net profit 2,075 2,052 1,225 1 69 6,343 5,084
Cost / income ratio (%) 2 69.5 72.8 72.3 70.1 66.5
Cost / income ratio before
goodwill amortization (%) 2, 3 68.0 71.4 71.1 68.6 65.4
--------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (CHF)
Basic earnings per share 4, 7 5.15 5.24 3.07 (2) 68 16.05 12.48
Basic earnings per share before goodwill 3, 4, 7 5.46 5.57 3.27 (2) 67 17.07 13.10
Diluted earnings per share 4, 7 5.09 5.19 3.05 (2) 67 15.88 12.38
Diluted earnings per share before goodwill 3, 4, 7 5.40 5.51 3.26 (2) 66 16.88 13.00
--------------------------------------------------------------------------------------------------------------------------------
RETURN ON SHAREHOLDERS' EQUITY (%)
Return on shareholders' equity 5 26.9 23.0
Return on shareholders' equity before goodwill 3, 5 28.6 24.2
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
% change from
--------------------
<S> <C> <C> <C> <C> <C>
As of 30.9.00 30.6.00 31.12.99 1 30.6.00 31.12.99
------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET KEY FIGURES
Total assets 1,010,233 946,307 898,888 7 12
Shareholders' equity 36,928 31,876 30,608 16 21
Market capitalization 95,053 98,797 92,642
------------------------------------------------------------------------------------------------------------------------
BIS CAPITAL RATIOS
Tier 1 (%) 11.7 12.1 10.6
Total BIS (%) 15.4 15.9 14.5
Risk-weighted assets 276,837 264,706 273,107
------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS UNDER
MANAGEMENT (CHF BILLION) 1,746 1,711 1,744 2 0
------------------------------------------------------------------------------------------------------------------------
HEADCOUNT (FULL TIME EQUIVALENTS) 6 48,099 47,744 49,058 1 (2)
------------------------------------------------------------------------------------------------------------------------
LONG-TERM RATINGS
Moody's, New York Aa1 Aa1 Aa1
Fitch/IBCA, London AAA AAA AAA
Standard & Poor's, New York AA+ AA+ AA+
========================================================================================================================
</TABLE>
EARNINGS ADJUSTED FOR SIGNIFICANT FINANCIAL EVENTS
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
-------------------------------------- --------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CHF million 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
------------------------------------------------------------------------------------------------------------------------------------
Operating income 8,545 9,200 6,508 (7) 31 27,102 19,810
Operating expenses 5,842 6,348 4,921 (8) 19 18,639 14,992
Operating profit before tax 2,703 2,852 1,587 (5) 70 8,463 4,818
Net profit 2,075 2,207 1,202 (6) 73 6,498 3,606
------------------------------------------------------------------------------------------------------------------------------------
Cost / income ratio before
goodwill (%) 2, 3 68.0 69.2 71.4 67.9 71.1
Basic earnings per share
before goodwill (CHF) 3, 4, 7 5.46 5.97 3.22 (9) 70 17.46 9.47
Diluted earnings per share
before goodwill (CHF) 3, 4, 7 5.40 5.90 3.20 (8) 69 17.27 9.40
------------------------------------------------------------------------------------------------------------------------------------
Return on shareholders' equity before
goodwill (%) 3, 5 29.1 18.8
====================================================================================================================================
</TABLE>
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: Basis of Accounting). 2
Operating expenses / operating income before credit loss expense. 3 The
amortization of goodwill and other purchased intangible assets are excluded from
the calculation. 4 For EPS calculation, see Note 8 to the Financial Statements.
5 Annualized net profit / average shareholders' equity excluding dividends. 6
The Group headcount does not include the Klinik Hirslanden AG headcount of
1,859, 1,885 and 1,853 for 30 September 2000, 30 June 2000 and 31 December 1999,
respectively. 7 1999 share figures are restated for the two-for-one share split,
effective 8 May 2000.
<PAGE> 386
TABLE OF CONTENTS
Shareholders' Letter 2
Group Review 4
Developments in Financial Disclosure at UBS 11
UBS Switzerland 12
UBS Asset Management 19
UBS Warburg 24
Corporate Center 34
Financial Statements
UBS Group Income Statement 35
UBS Group Balance Sheet 36
UBS Group Statement of Changes in Equity 37
UBS Group Statement of Cash Flows 38
Notes to the Financial Statements 39
1
<PAGE> 387
SHAREHOLDERS' LETTER
28 NOVEMBER 2000
SHAREHOLDERS' LETTER
DEAR SHAREHOLDERS,
On 23 October 2000, PaineWebber shareholders overwhelmingly approved the merger
between PaineWebber and UBS. This followed the near unanimous approval by UBS
shareholders on 7 September 2000 of the capital increase for use in the merger.
We were extremely pleased that such a substantial majority of PaineWebber and
UBS shareholders endorsed the merger, giving their vote of confidence in our
plans to create a pre-eminent global investment services firm. The merger was
formally completed on 3 November 2000.
PaineWebber's leading position with affluent clients in the US and its
success in using technology to support client relationships provide exciting
growth opportunities for UBS.
PaineWebber's management, products and services are world class and will
help UBS to build a top-tier global private client business. PaineWebber
complements the existing US strengths and client base of UBS Warburg's
institutional business, adding particular skills in US equity research and
specialized fixed income products. It also provides UBS Warburg with a
completely new distribution channel to US investors, giving it access to a
uniquely balanced network of private and institutional investors worldwide. UBS
Warburg, meanwhile, will provide truly global investment banking content for
PaineWebber to supply to an increasingly demanding private client base, and give
PaineWebber the backing of a very strong balance sheet and an excellent credit
rating.
The integration of PaineWebber and UBS Warburg is proceeding well, with full
business integration of the capital markets activities due to be completed in
early December 2000, and the integration of the UBS Warburg Private Clients
business into PaineWebber's management structure already almost complete.
The reception of the merger by PaineWebber staff has been overwhelmingly
positive with no increase in staff turnover in the period around the merger and
the vast majority of PaineWebber option holders now established as UBS options
holders.
We look forward to PaineWebber's continuing success as a growth firm in a
growth industry.
THIRD QUARTER RESULTS
We reported preliminary third quarter results on 26 October, in order to provide
additional transparency for investors before the closing of the PaineWebber
merger. You will therefore already know that UBS has produced another very
successful result this quarter, with a net profit after tax of CHF 2,075
million. This represents continuing strong growth of 73% over third quarter
1999, once the effect of one-off gains is stripped out. In the first three
quarters of this year we have already made 39% more adjusted net profit after
tax than we did in the whole of 1999.
The development of assets under management during the quarter was
encouraging, with improvement in net new money across all Business Groups and
positive investment performance.
Adjusted for divestments and one-off provisions, and before goodwill
amortization, the Group's annualized return on equity for the first nine months
of this year increased to 29.1%, from 18.8% in the same period of 1999. Adjusted
basic earnings per share for third quarter 2000 increased 70% to CHF 5.46 from
CHF 3.22 in third quarter 1999. The adjusted pre-goodwill cost/income ratio of
68.0% is significantly below the 71.4% recorded in the same quarter last year,
and a slight improvement over the second quarter this year.
BUSINESS GROUP HIGHLIGHTS
UBS Warburg's Corporate and Institutional Clients business unit continued a very
good year, reporting profits before tax more than double those achieved in the
same quarter last year. The strength of our secondary markets franchise and
relatively small exposure to the telecoms, media and technology sectors ensured
that whilst earnings fell somewhat from second quarter 2000 in line with market
conditions, the effect was less than for the investment banking and securities
industry in general.
The continued enhancement of our clients' experience of UBS through
e-banking, combined with successful cost reduction through our Strategic
Projects Portfolio contributed to another very good result for the Private and
Corporate Clients business unit, only slightly behind the last two record
quarters.
Private Banking continued its improved performance with earnings increasing
very slightly from second quarter 2000, but up 22% from a year ago. Net new
money was slightly positive, reflecting continued focus on this key growth
driver.
2
<PAGE> 388
SHAREHOLDERS' LETTER
28 NOVEMBER 2000
A PERSONAL NOTE FROM THE CHAIRMAN
AS YOU MIGHT BE AWARE, I HAVE DECIDED TO STEP DOWN FROM MY FUNCTION AS CHAIRMAN
OF THE BOARD OF DIRECTORS AFTER THE ANNUAL GENERAL MEETING IN APRIL 2001.
I CONSIDER THIS TO BE THE RIGHT MOMENT. WE HAVE SUCCESSFULLY COMPLETED THE
MERGER BETWEEN UNION BANK OF SWITZERLAND AND SWISS BANK CORPORATION. THE
BUSINESS GROUPS AND THEIR RESPECTIVE RESPONSIBILITIES HAVE BEEN REDESIGNED. WE
RECENTLY COMPLETED THE MERGER OF PAINEWEBBER INTO OUR GROUP. UBS IS IN GOOD
FINANCIAL HEALTH.
THE BOARD OF DIRECTORS WILL SUBMIT THE ELECTION OF MARCEL OSPEL, CURRENTLY GROUP
CHIEF EXECUTIVE OFFICER, FOR YOUR APPROVAL AT THE AGM OF 26 APRIL 2001, AND WILL
THEN APPOINT HIM AS CHAIRMAN. LUQMAN ARNOLD, CURRENTLY GROUP CHIEF FINANCIAL
OFFICER, HAS BEEN ELECTED TO BECOME THE NEW PRESIDENT OF THE GROUP EXECUTIVE
BOARD, ADDING THIS NEW ROLE TO HIS RESPONSIBILITY FOR THE GROUP'S FINANCE AND
RISK FUNCTIONS.
A NEW TOP-MANAGEMENT TEAM IS READY, AND I AM RELAXED AND CONFIDENT ABOUT HANDING
OVER FULL RESPONSIBILITY TO THE YOUNGER GENERATION. PLEASE JOIN ME AND THE BOARD
OF DIRECTORS IN WISHING MARCEL OSPEL AND LUQMAN ARNOLD SUCCESS AND LUCK IN THEIR
NEW FUNCTIONS.
ALEX KRAUER
SENIOR MANAGEMENT SUCCESSION PLANS
On 11 October, we announced plans for changes in the senior management of UBS
which will take effect after the Annual General Meeting in April next year.
Details are in the note which you will find opposite.
At the Annual General Meeting in April you will also be asked to approve the
election of three other new members of the Board of Directors. The British,
Dutch and American candidates will help accurately reflect at Board level UBS's
international culture and global reach. The three candidates are: Sir Peter
Davis, CEO of J. Sainsbury plc; Johannes Antonie de Gier, former Chairman and
CEO of Warburg Dillon Read; and Lawrence Allen Weinbach, Chairman and CEO of
Unisys Corporation.
UBS AG
/s/ Alex Krauer
Alex Krauer
Chairman of the Board of Directors
OUTLOOK
We are pleased to have been able to report strong results so far this year and
to have maintained this performance through the recent more mixed market
conditions. The fourth quarter is normally the quietest part of the year in most
of our businesses, and we expect this year to be no exception. In addition, we
expect a one-off impact from PaineWebber integration and restructuring costs.
Nevertheless, we are confident that we can complete 2000 in robust form and that
we are excellently positioned for further success in 2001.
The history of our bank has been one of forging new partnerships and
learning from the cultures and skills of new colleagues. As an organization we
are naturally excited about change and the PaineWebber merger makes next year
one of our most eagerly anticipated.
/s/ Marcel Ospel
Marcel Ospel
Group Chief Executive Officer
3
<PAGE> 389
GROUP REVIEW
28 NOVEMBER 2000
GROUP REVIEW
[RoE 1 ANNUALIZED BAR CHART]
[BASIC ADJUSTED EPS 2,3 (CHF) BAR CHART]
[COST/INCOME RATIO 2 BAR CHART]
[NET NEW MONEY, PRIVATE BANKING AND PRIVATE CLIENTS (CHF bn) BAR GRAPH]
1 Annualized, before goodwill amortization and adjusted for significant
financial events.
2 Before goodwill amortization and adjusted for significant financial events.
3 1999 share figures are restated for the two-for-one share split, effective 8
May 2000.
UBS GROUP PERFORMANCE AGAINST TARGETS
<TABLE>
<CAPTION>
For the period 9M2000 6M2000 9M1999 1
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RoE (%, ANNUALIZED)
as reported 26.9 29.5 23.0
before goodwill amortization and adjusted for significant financial
events 3, 4 29.1 31.9 18.8
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the quarter ended 30.9.00 30.6.00 30.9.99 1
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS (CHF) 2
as reported 5.15 5.24 3.07
before goodwill amortization and adjusted for significant financial
events 3, 4 5.46 5.97 3.22
--------------------------------------------------------------------------------------------------------------------
COST / INCOME RATIO (%)
as reported 69.5 72.8 72.3
before goodwill amortization and adjusted for significant financial
events 3, 4 68.0 69.2 71.4
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ASSETS UNDER MANAGEMENT NET NEW
MONEY 5
CHF billion 30.9.00 30.6.00 % change 3Q00
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UBS GROUP 1,746 1,711 2
---------------------------------------------------------------------------------------------
UBS SWITZERLAND
Private and Corporate Clients 440 439 0 1
Private Banking 707 683 4 1
---------------------------------------------------------------------------------------------
UBS ASSET MANAGEMENT
Institutional Asset Management 6 528 525 1 (9)
Investment Funds / GAM 227 225 1 0
---------------------------------------------------------------------------------------------
UBS Warburg
Private Clients 44 37 19 8
=============================================================================================
</TABLE>
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: Basis of Accounting). 2 1999
share figures are restated for the two-for-one share split, effective 8 May
2000. 3 The amortization of goodwill and other purchased intangible assets are
excluded from the calculation. 4 Significant financial events are excluded from
the calculation. 5 Excludes interest and dividend income. 6 Includes
non-institutional assets also reported in the Investment Funds / GAM business
unit.
GROUP TARGETS
UBS focuses on four key performance targets, designed to ensure that we deliver
continually improving returns to our shareholders. Our performance against these
targets has continued to be very good this quarter. Adjusted for significant
financial events, our annualized pre-goodwill return on equity for the first
nine months of 2000 is 29.1%, once again well above our target range of 15-20%.
Pre-goodwill earnings per share grew 70% over third quarter 1999, adjusted for
one-off gains, clearly beating our double-digit growth target. The cost/income
ratio is also well below that of third quarter 1999 and slightly lower than
second quarter 2000. Net new money in both the private banking units was
positive this quarter, although the volatility in the quarter-on-quarter net new
money trend in the Private Clients business unit reflects its relatively early
stage of business development.
SIGNIFICANT FINANCIAL EVENTS
There were no significant financial events in third quarter 2000. Second quarter
2000 included an additional and final provision of CHF 200 million before tax in
respect of the US Global Settlement regarding World War II related claims. Third
quarter 1999 included a capital gain of CHF 26 million before tax relating to
our residual holding in Long Term Capital Management.
RESULTS SUMMARY
Excellent third quarter results, with net profit after taxes and minority
interests of CHF 2,075 million, demonstrate continued strong profitability.
Group net profit after tax and minority interests has now been above CHF 2
billion for a third straight quarter and is up 73% compared to third quarter
1999, on an adjusted basis.
4
<PAGE> 390
GROUP REVIEW
28 NOVEMBER 2000
SIGNIFICANT FINANCIAL EVENTS
<TABLE>
<CAPTION>
Quarter ended Year-to-date
----------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
CHF million 30.9.00 30.6.00 30.9.99 30.9.00 30.9.99
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME AS REPORTED 8,545 9,200 6,534 27,102 21,636
Julius Baer registered shares divestment 110
International Global Trade Finance divestment 200
Swiss Life/Rentenanstalt divestment 1,490
LTCM gain 26 26
ADJUSTED OPERATING INCOME 8,545 9,200 6,508 27,102 19,810
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES AS REPORTED 5,842 6,548 4,921 18,839 14,992
US Global Settlement provision 200 200
ADJUSTED OPERATING EXPENSES 5,842 6,348 4,921 18,639 14,992
-----------------------------------------------------------------------------------------------------------------------------------
ADJUSTED OPERATING PROFIT BEFORE TAX AND
MINORITY INTERESTS 2,703 2,852 1,587 8,463 4,818
===================================================================================================================================
Tax expense 621 591 374 1,878 1,525
Tax effect of significant financial events 45 (3) 45 (348)
Minority interests (7) (9) (14) (42) (35)
-----------------------------------------------------------------------------------------------------------------------------------
ADJUSTED NET PROFIT 2,075 2,207 1,202 6,498 3,606
===================================================================================================================================
</TABLE>
Year-to-date adjusted net profit after tax of CHF 6,498 million represents
an increase of 80% over the first nine months of 1999, and already exceeds the
adjusted 1999 full-year results by 39%.
Net interest income before credit loss expense increased 30% over third
quarter 1999 to CHF 1,831 million. Higher interest rates increased the cost of
medium and long term debt, but also helped to increase net income from lending
to clients and banks. Trading-related net interest income was up 24% over third
quarter 1999.
Net fee and commission income was CHF 3,865 million in third quarter 2000,
an increase of 26% over third quarter 1999. Brokerage fees reflected higher
levels of client activity in UBS Switzerland and busier markets, rising 36% from
the same period last year. Underwriting fees were up 65% thanks to another
strong performance in equity underwriting, and Corporate finance fees also
increased 71%, with strong results worldwide. Portfolio and other management and
advisory fees increased CHF 81 million compared to second quarter 2000, chiefly
as a result of the performance of the new O'Connor business, and were up nearly
50% from the same quarter last year, due to O'Connor and the acquisition of GAM
in fourth quarter 1999. The 34% increase in Investment fund fees since third
quarter 1999 reflects the addition of GAM, increased fund assets and a greater
proportion of client money invested in higher margin equity funds.
Net trading income was CHF 2,368 million in third quarter 2000, 13% up on
the same quarter last year, as a result of increased global market activity and
the strong client-driven performance of UBS Warburg. Equity trading revenues are
well ahead of this time last year, but when combined with dividend income fell
in comparison to second quarter 2000, reflecting the usual seasonal reduction in
market activity and trading opportunities experienced during the summer holiday
season.
The increase of CHF 100 million in Other income compared to third quarter
1999, is primarily due to the inclusion of income from Klinik Hirslanden, which
was not consolidated in the income statement at that time.
Total operating expenses increased 19% over third quarter last year to CHF
5,842 million. This is largely due to increased performance-related compensation
as revenues continue to exceed levels in 1999. Personnel expenses were down 11%
from last quarter, in line with slower revenues, but were 24% higher than in
third quarter 1999.
General and administrative expenses increased only 8% over third quarter
1999, to CHF 1,503 million, mainly due to currency movements and the impact of
the consolidation of Klinik Hirslanden. The underlying figure was roughly static
relative to third quarter last year, reflecting our continued efforts to control
non-revenue driven costs.
Depreciation and amortization increased 12% to CHF 476 million compared to
third quarter 1999, with increases in goodwill amortization due to the
acquisitions of Allegis and GAM.
UBS Group incurred a tax expense of CHF 621 million for third quarter 2000,
an effective tax rate of 23%.
5
<PAGE> 391
GROUP REVIEW
28 NOVEMBER 2000
RESTRUCTURING PROVISION USED
<TABLE>
<CAPTION>
Quarter ended
-------------------
CHF million Personnel IT Premises Other 30.9.00 30.6.00
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UBS Switzerland 38 7 0 0 45 54
Private and Corporate Clients 37 5 0 0 42 52
Private Banking 1 2 0 0 3 2
UBS Asset Management 5 0 0 0 5 1
UBS Warburg 0 0 0 0 0 0
Corporate Center 2 0 29 0 31 18
------------------------------------------------------------------------------------------------------------------------
GROUP TOTAL 45 7 29 0 81 73
========================================================================================================================
------------------------------------------------------------------------------------------------------------------------
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 272
------------------------------------------------------------------------------------------------------------------------
Total used through 30.9.2000 6,143
------------------------------------------------------------------------------------------------------------------------
RESTRUCTURING PROVISION REMAINING AT 30.9.2000 1,157
========================================================================================================================
</TABLE>
UBS/SBC MERGER RESTRUCTURING PROVISION
Of the CHF 7,300 million restructuring provision relating to the 1998 merger
between Union Bank of Switzerland and Swiss Bank Corporation, CHF 81 million was
used in third quarter 2000, leaving CHF 1,157 million still to be used. As in
the second quarter, the main use of the provision this quarter related to
severance costs in Private and Corporate Clients and vacancy-related premises
costs in Corporate Center. UBS expects that the provision will be completely
utilized by the end of 2001.
The sale of Solothurner Bank to Baloise Insurance in August this year
represents the completion of UBS's compliance with the sale of business
conditions set by the Swiss Competition Commission as a result of the merger.
The sale was completed on 19 October 2000, and will be reflected in fourth
quarter results.
CREDIT RISK
During third quarter 2000, UBS realized a write-back of credit loss expenses of
CHF 142 million, compared to a write-back of CHF 208 million in the second
quarter 2000. This is the result of a continued improvement in the quality of
our Swiss loan portfolio and is in sharp contrast to the CHF 275 million of
credit loss expenses recorded in third quarter 1999.
In accordance with the trend in the previous quarter, the unprecedentedly
strong rebound of the Swiss economy, combined with UBS's disciplined credit
underwriting standards, enabled additional recoveries of previously established
loan loss provisions in the Swiss portfolio, which by far exceeded new
requirements. On the other hand, this positive scenario was partially offset by
the need for additional loan loss provisions in UBS Warburg's portfolio, in line
with trends in the international credit markets. The significant reduction in
the international loan portfolio achieved during the past two years, coupled
with the active use of credit derivatives and reluctance to engage in balance
sheet-led earnings growth, positions UBS well for the less positive credit
conditions expected outside Switzerland, notably in the US. In particular, in
line with its commitment to risk diversification, UBS's loan exposure to the
telecom sector is relatively small compared to many of our peers, representing
less than 2% of gross loans outstanding at 30 September 2000. The vast majority
of our telecom loan book is rated investment grade.
The further improvement in UBS's credit risk portfolio is also evident in
the reduction of non-performing loans by CHF 956 million, or 8%, during the
quarter. UBS's loan portfolio increased by CHF 11.4 billion over the quarter, to
CHF 282.4 billion. The increase of CHF 17.5 billion in the UBS Warburg
portfolio, principally as a result of zero risk-weighted money market and Group
treasury positions held by UBS Warburg, was partially offset by a decrease of
CHF 5.3 billion in UBS Switzerland, where the write-off and repayment of
impaired positions exceeded new business. The reduction in non-performing loans
combined with the increase in size of the overall portfolio means that the
non-performing loans to total loans ratio fell to
6
<PAGE> 392
GROUP REVIEW
28 NOVEMBER 2000
ALLOWANCES AND PROVISIONS FOR CREDIT RISK
<TABLE>
<CAPTION>
UBS Asset
CHF million UBS Switzerland Management UBS Warburg
<S> <C> <C> <C> <C> <C> <C>
As of 30.9.00 30.6.00 30.9.00 30.6.00 30.9.00 30.6.00
------------------------------------------------------------------------------------------------------------------------------------
Loans (gross) 195,000 200,252 463 411 86,654 69,200
------------------------------------------------------------------------------------------------------------------------------------
Impaired loans 1 15,209 16,658 -- -- 4,377 4,310
Allowances for impaired loans 8,505 9,267 -- -- 2,462 2,279
------------------------------------------------------------------------------------------------------------------------------------
Non-performing loans 9,319 10,270 -- -- 1,767 1,772
Allowances for non-performing loans 5,760 6,486 -- -- 1,389 1,383
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCES FOR IMPAIRED AND
NON-PERFORMING LOANS 8,505 9,267 -- -- 2,462 2,279
------------------------------------------------------------------------------------------------------------------------------------
Other allowances and provisions
for credit and country risk 12 12 -- -- 878 826
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCES AND PROVISIONS 8,517 9,279 -- -- 3,340 3,105
====================================================================================================================================
of which country allowances and provisions -- -- -- -- 1,356 1,317
------------------------------------------------------------------------------------------------------------------------------------
RATIOS
Impaired loans as a % of gross loans 7.8 8.3 -- -- 5.1 6.2
------------------------------------------------------------------------------------------------------------------------------------
Non-performing loans as a % of gross loans 4.8 5.1 -- -- 2.0 2.6
------------------------------------------------------------------------------------------------------------------------------------
Allowances and provisions
for credit loss as a % of gross loans 4.4 4.6 -- -- 3.9 4.5
------------------------------------------------------------------------------------------------------------------------------------
Allocated allowances as a % of impaired loans 55.9 55.6 -- -- 56.2 52.9
------------------------------------------------------------------------------------------------------------------------------------
Allocated allowances as a % of non-performing loans 61.8 63.2 -- -- 78.6 78.0
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CHF million Corporate Center UBS Group
<S> <C> <C> <C> <C>
As of 30.9.00 30.6.00 30.9.00 30.6.00
----------------------------------------------------------------------------------------------------------------
Loans (gross) 253 1,115 282,370 270,978
----------------------------------------------------------------------------------------------------------------
Impaired loans 1 44 43 19,630 21,011
Allowances for impaired loans 5 6 10,972 11,552
----------------------------------------------------------------------------------------------------------------
Non-performing loans 43 43 11,129 12,085
Allowances for non-performing loans 5 5 7,154 7,874
----------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCES FOR IMPAIRED AND
NON-PERFORMING LOANS 5 6 10,972 11,552
----------------------------------------------------------------------------------------------------------------
Other allowances and provisions
for credit and country risk -- -- 890 838
----------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCES AND PROVISIONS 5 6 11,862 12,390
================================================================================================================
of which country allowances and provisions -- -- 1,356 1,317
----------------------------------------------------------------------------------------------------------------
RATIOS
Impaired loans as a % of gross loans 17.4 3.9 7.0 7.8
----------------------------------------------------------------------------------------------------------------
Non-performing loans as a % of gross loans 17.0 3.9 3.9 4.5
----------------------------------------------------------------------------------------------------------------
Allowances and provisions
for credit loss as a % of gross loans 2.0 0.5 4.2 4.6
----------------------------------------------------------------------------------------------------------------
Allocated allowances as a % of impaired loans 11.4 14.0 55.9 55.0
----------------------------------------------------------------------------------------------------------------
Allocated allowances as a % of non-performing loans 11.6 11.6 64.3 65.2
=================================================================================================================
</TABLE>
1 Includes non-performing loans.
UBS WARBURG: SUMMARY OF 10-DAY 99% CONFIDENCE VALUE AT RISK
<TABLE>
<CAPTION>
3 months ending 29.9.00 3 months ending 30.6.00
------------------------------------------ ----------------------------------------------
CHF million Min. Max. Average 29.9.00 Min. Max. Average 30.6.00
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RISK TYPE
Equities 179.9 238.4 204.0 192.7 183.2 245.9 214.0 189.6
Interest rates 113.8 165.0 137.2 122.3 127.0 173.8 147.7 133.7
Foreign exchange 7.6 75.4 26.0 19.7 8.7 97.5 32.2 9.5
Precious metals 2.8 19.7 8.3 15.8 4.3 15.3 9.4 12.1
Diversification effect -- 1 -- 1 (137.2) (125.5) -- 1 -- 1 (150.3) (113.6)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL UBS WARBURG 213.2 261.6 238.4 224.9 218.4 284.0 253.0 231.3
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1 As the minimum and maximum occur on different days for different risk types,
it is not meaningful to calculate a portfolio diversification effect.
VALUE AT RISK LIMITS AND UTILIZATION
<TABLE>
<CAPTION>
Utilization
---------------------------------
CHF million Limit 29.9.00 30.6.00
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UBS Warburg 450.0 224.9 231.3
UBS Switzerland 50.0 4.0 3.8
Corporate Center 350.0 79.4 62.8
Reserves 100.0
Diversification effects n/a (79.0) (69.2)
-----------------------------------------------------------------------------------------------------------------------------------
UBS GROUP 600.0 229.3 228.7
===================================================================================================================================
</TABLE>
Remark: VaR numbers include interest rate exposures in the banking book of the
Private Label Banks and Group Treasury.
7
<PAGE> 393
GROUP REVIEW
28 NOVEMBER 2000
3.9%, compared to 4.5% at the end of the second quarter.
Although, UBS's non performing loans ratio is somewhat higher than
comparable US banks, 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
generally to write off non-performing loans much sooner, reducing the amount of
such loans and corresponding provisions recorded at any given date.
MARKET RISK
Market risk is incurred primarily through UBS's trading activities, which are
centered in the Corporate and Institutional Clients business unit of UBS
Warburg. Market risk in UBS Warburg, as measured by the 10-day, 99% confidence
level Value at Risk (VaR), has decreased slightly. VaR exposure closed the
quarter at CHF 224.9 million, compared to CHF 231.3 million at the end of the
second quarter. Average exposure over the period was CHF 238.4 million, which is
slightly below the CHF 253.0 million average observed over the previous quarter.
Potential stress loss is measured against a set of standard forward-looking
scenarios. Stress loss exposure, which is defined as the outcome of the worst of
our stress scenarios, amounted to CHF 349 million at the end of the third
quarter, slightly up from CHF 293 million at the end of the second quarter.
Market risk exposure at the Group level has remained nearly unchanged. At
the end of the quarter the 10 day, 99% confidence VaR amounted to CHF 229.3
million.
ACCOUNTING CHANGES AND RESTATEMENTS
In Note 4 to the Financial Statements we have broken out Underwriting and
Corporate Finance Fees for the first time this quarter, showing the two
components separately. In addition, some corporate finance related fees
previously reported in Portfolio and Other Management and Advisory Fees are now
included in the new Corporate Finance Fees line. Previous periods have been
restated accordingly.
In first quarter 2000 we introduced a number of changes in accounting
treatment. For comparative purposes, 1999 figures were restated to reflect these
changes, primarily:
- The removal from net trading income of profit on UBS Group shares held for
trading purposes.
- The treatment of these shares as treasury shares, reducing both the number
of shares and the shareholder's equity used in ratio calculations.
- The reclassification of trading-related interest revenues, from net trading
income to net interest income.
- The removal of the credit to net interest income and matching debit to net
trading income for the cost of funding trading positions.
Since the beginning of the year, we have capitalized costs relating to the
in-house development of software, reducing operating expenses this quarter by
CHF 58 million.
CAPITAL STRUCTURE
FINANCING THE PAINEWEBBER TRANSACTION
At the completion of the merger, a total of 163.8 million PaineWebber shares
were cancelled, in exchange for a total consideration of USD 11.8 billion (CHF
20.8 billion), based on the closing UBS share price on the SWX Swiss Exchange on
3 November 2000 of CHF 252.50 per share, and a CHF/USD exchange rate of 1.762.
SHARE CONSIDERATION
At the 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 issue additional shares as
required during the three months following completion, up to the 38 million
shares limit.
The share portion of the merger consideration was 41 million shares. In
order to minimize the dilution effects for existing shareholders, UBS initially
issued only 12 million new shares from authorized capital on the completion
date, 3 November 2000. 7 million shares were re-issued
8
<PAGE> 394
GROUP REVIEW
28 NOVEMBER 2000
from Treasury and the remaining 22 million shares required were borrowed in the
market.
CASH CONSIDERATION AND ISSUE OF TRUST PREFERRED SECURITIES
The cash portion of the merger consideration was USD 6.0 billion, or CHF 10.6
billion. The majority of this amount was financed from existing cash resources
and credit lines. However, UBS also took advantage of the focus on the company
in US markets to make its inaugural US public offering, issuing USD 1.5 billion
of 8.622% Trust Preferred Securities on 10 October 2000.
The securities were priced at a spread of 278 basis points over the 5.75%
August 2010 US Treasury securities. They have a perpetual maturity with a
step-up and call on 1 October 2010, and will qualify as Tier 1 capital for UBS
under Swiss regulations. The securities are rated aa2 by Moody's and AA- by
Standard and Poors, making them the highest rated in their sector. Approximately
87% of the issue was placed in the US and 13% internationally. Thanks to the
strong demand for the securities, the issue was increased from the initially
announced target of USD 1.25 billion, underlining the positive investor
reception for the UBS name, credit and liquidity, and creating a new benchmark
for the sector.
OVERALL ECONOMIC COST OF THE TRANSACTION
Following the exercise of options by PaineWebber employees, 12.7 million
PaineWebber options remained outstanding and have been converted into 6.3
million new UBS options, with an implied fair value of USD 0.54 billion (CHF
0.95 billion). As a result of the exercise of options since the announcement of
the merger, PaineWebber has received cash proceeds of USD 0.55 billion (CHF
0.97 billion).
Based on the value of the consideration paid to PaineWebber shareholders and
the implied fair value of the converted options, less the receipt of option
exercise proceeds, the total economic cost of the transaction to UBS is
estimated to amount to USD 11.8 billion (CHF 20.8 billion).
BIS RATIO
As a result of these transactions, UBS's Tier 1 capital ratio, which was 12.1%
at the end of June 2000 and 11.7% on 30 September 2000, is expected to be lower,
but at least 8.5% at the end of December 2000.
SHARE BUY-BACK PROGRAM
On 6 November 2000, UBS announced a share buy-back program, running until June
2001. Unlike the second trading line program earlier this year it will not
result in the cancellation of the repurchased shares.
TREASURY SHARES
At 30 September 2000, UBS held 25,069,074 shares or 5.8% of its outstanding
capital in treasury shares, down from 40,269,350 shares or 9.3% of its
outstanding capital at 30 June 2000. This total included 18,421,783 shares which
were purchased earlier this year in the second trading line buy-back program.
These shares are held pending their cancellation after the Annual General
Meeting in April 2001.
UBS Warburg acts as a market maker in both UBS shares and derivatives. It
has therefore historically held a significant number of UBS shares as a hedge
for derivatives issued to retail and institutional investors, but has recently
changed its trading approach for these positions, reducing its direct
shareholding of UBS shares. This change accounts for the significant drop in
treasury share holdings this quarter.
UBS SHARES AND MARKET CAPITALIZATION
<TABLE>
<CAPTION>
Number of shares as of % change from
------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C>
30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
-------------------------------------------------------------------------------------------------------------------------
TOTAL ORDINARY SHARES OUTSTANDING 431,697,629 431,696,624 430,893,162 0 0
less second trading line treasury shares 18,421,783 18,321,783 0 1
-------------------------------------------------------------------------------------------------------------------------
NET SHARES OUTSTANDING 413,275,846 413,374,841 430,893,162 (0) (4)
=========================================================================================================================
MARKET CAPITALIZATION (CHF MILLION) 95,053 98,797 92,642 (4) 3
=========================================================================================================================
Second trading line treasury shares 18,421,783 18,321,783 0 1
Other treasury shares 1 6,647,291 21,947,567 36,873,714 (70) (82)
-------------------------------------------------------------------------------------------------------------------------
TOTAL NUMBER OF TREASURY SHARES 25,069,074 40,269,350 36,873,714 (38) (32)
=========================================================================================================================
</TABLE>
1 Includes own shares held for trading purposes.
9
<PAGE> 395
GROUP REVIEW 28
NOVEMBER 2000
FINANCIAL IMPACT OF THE PAINEWEBBER MERGER
RESTRUCTURING COSTS
UBS currently expects that the restructuring and other one-off costs it will
incur as a result of the PaineWebber merger will be in the region of the USD 400
million (CHF 700 million) predicted in the original merger announcement,
although the analysis necessary to determine the final amount involved has not
been finalized. This analysis includes investigating additional opportunities
for premises consolidation in New York.
In accordance with IAS purchase accounting rules, a portion of these costs
will be accounted for as a liability of PaineWebber and will therefore be added
to the goodwill amount for the transaction. The remaining costs currently
foreseen will be charged to income, by way of a one-off charge in the fourth
quarter 2000, and will be treated in our reporting as a Significant Financial
Event.
In addition to this one-off restructuring charge, reported fourth quarter
2000 results for UBS Warburg will be significantly impacted by the initial
retention payments payable to PaineWebber staff, as well as goodwill
amortization and funding costs.
GOODWILL
The goodwill amount for the merger is expected to be significantly higher than
that shown in the Form F-4 registration statement submitted to the US Securities
and Exchange Commission in connection with the merger. Although the analysis
required to calculate the goodwill amount has not been finalized, several
assumptions and data inputs have changed since the pro forma financial
statements in the Form F-4 were prepared in August 2000. The more significant
changes include:
- Using the actual UBS stock price at the time of completion;
- Reflecting the actual number of employee stock options ultimately exercised;
- Revaluation of outstanding PaineWebber debt as a result of UBS's announced
intention to provide a guarantee;
- A final identification of all acquisition related liabilities;
- Fair value adjustments for PaineWebber assets and liabilities in accordance
with purchase accounting rules.
10
<PAGE> 396
DEVELOPMENTS IN
FINANCIAL DISCLOSURE AT UBS
DEVELOPMENTS IN 28 NOVEMBER 2000
FINANCIAL DISCLOSURE AT UBS
FOURTH QUARTER REPORT
In order to continue our focus on reporting and analyzing the quarterly
performance of UBS's businesses, and to ensure that market sensitive data about
UBS's results can be released as early as possible, we will issue a fourth
quarter report on 22 February 2001. This report will be similar in style and
level of disclosure to this one, although slightly abbreviated in recognition of
the forthcoming Annual Report, which will be issued on 15 March 2001, as
originally planned.
ACCELERATED TIMETABLE FOR QUARTERLY REPORTING
With effect from first quarter 2001, UBS will release its quarterly results
approximately six weeks after quarter end, rather than the current eight weeks.
Quarterly reports will be issued on 15 May 2001 for the first quarter, 14 August
2001 for the second quarter and 13 November 2001 for the third quarter.
FOURTH QUARTER REPORTING OF PAINEWEBBER RESULTS
In our fourth quarter report and Annual Report, we will continue to report
results for the existing UBS Warburg business units. We will also report an
additional business unit, comprising results for the previous PaineWebber
businesses for the period from 3 November 2000, with the exception of the
capital markets activities which will be fully integrated within the Corporate
and Institutional Clients business unit.
The business unit reporting structure for subsequent quarters will be
announced in the fourth quarter report.
CLIENT ASSETS REPORTING
There is currently no consistently defined client assets measure in use across
the asset gathering industry, nor is there generally accepted reporting practice
applicable to client assets. There is also no standard level of transparency,
with UBS one of the few firms to disclose both net new money flows and total
client assets development on a quarterly basis.
This lack of consistency and transparency hinders comparison between
companies by analysts and investors. In practice, disclosed metrics vary widely
across the industry, with the term Assets under Management ("AuM") being
particularly ambiguous.
UBS has therefore reviewed its own definition for reporting these assets and
has suggested that its ideas could form the starting point for a broader
standards-setting exercise across the industry. Further details of the proposal
can be found on our Investor Relations website at
http://www.ubs.com/investor-relations.
UBS itself intends to phase in the new definitions with effect from first
quarter 2001, after consultation with analysts, investors, and our investment
services peers.
11
<PAGE> 397
UBS SWITZERLAND
28 NOVEMBER 2000
UBS SWITZERLAND
BUSINESS GROUP REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
--------------------------------------- --------------- --------------------
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income 3,411 3,526 3,255 (3) 5 10,685 9,582
Credit loss expense (183) (191) (286) 4 36 (606) (846)
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 3,228 3,335 2,969 (3) 9 10,079 8,736
-----------------------------------------------------------------------------------------------------------------------------------
Personnel expenses 1,218 1,218 1,156 0 5 3,634 3,539
General and administrative expenses 537 591 699 (9) (23) 1,700 1,687
Depreciation 114 105 86 9 33 344 315
Amortization of goodwill and
other intangible assets 8 10 9 (20) (11) 52 18
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,877 1,924 1,950 (2) (4) 5,730 5,559
-----------------------------------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 1,351 1,411 1,019 (4) 33 4,349 3,177
===================================================================================================================================
</TABLE>
ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------------------- ----------------- -----------------
30.9.00 30.6.00 30.9.99 2Q00 3Q99 30.9.00 30.9.99
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets under management (CHF billion) 2 1,147 1,122 1,042 2 10
-----------------------------------------------------------------------------------------------------------------------------------
Cost / income ratio (%) 3 55 55 60 54 58
Cost / income ratio before
goodwill amortization (%) 3, 4 55 54 60 53 58
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
% change from
---------------------
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Regulatory equity used (avg) 10,500 10,750 10,059 (2) 4
Headcount (full time equivalents) 29,421 29,717 31,354 (1) (6)
---------------------------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 As of
quarter end. 3 Before credit loss expense. 4 The amortization of goodwill and
other purchased intangible assets is excluded from this calculation.
COOPERATION ACROSS UBS SWITZERLAND
Since the creation of UBS Switzerland earlier this year, a number of initiatives
have been launched to ensure that the benefits of cooperation within the new
Business Group are realized, such as the e-Channels and Products area which was
set up to coordinate electronic banking initiatives.These cross-group
initiatives have expanded this quarter with the launch of the Investment Center
and the consolidation of all Financial Planning and Wealth Management services
within a single unit. This quarter has also seen the introduction to Private
Banking of the Strategic Project Portfolio concept, already proven in the
Private and Corporate Clients unit.
e-CHANNELS AND PRODUCTS
BEST ONLINE BROKER IN SWITZERLAND
Our ongoing e-banking successes were again rewarded by BlueSky Ratings, an
independent provider of online broker ratings, who ranked UBS as the best online
broker in Switzerland at the end of September.
WAP
On 21 September 2000, after a highly successful two-month pilot phase, UBS
launched e-banking wap for all e-banking clients, making it one of the first
banks in the world to offer stock-market transactions via wap mobile phones.
UBS e-banking wap provides access to UBS e-banking, UBS Quotes and other
personalized functions based on pre-defined client profiles. UBS e-banking wap
clients can check on their cash account and securities account balances; place,
monitor and cancel stock-market orders; and carry out account transfers and
foreign-exchange transactions.Like all other UBS e-banking tools, e-banking wap
services are multi-language and multi-currency. e-banking wap is another
successful combination of UBS's leading e-banking technology and its powerful
strategic alliances with technology and content providers
12
<PAGE> 398
UBS SWITZERLAND
28 NOVEMBER 2000
meeting clients' growing demand for convenience and independence.
e-banking highlights for the period include:
- UBS e-banking contracts increased to 534,000 by the end of September, from
506,000 in June;
- 20% of all payment orders are now transacted via e-banking;
- 12% of all UBS Switzerland stock exchange transactions this quarter were
routed through e-banking, up from 11% in the second quarter;
- During the quarter, the number of accounts with UBS Tradepac, our discount
share trading package targeted at active traders, increased by 11.5%;
- UBS Quotes received an average of more than 22 million page views per month;
- UBS Quotes on wap received an average of more than 9,000 page views per day.
Despite the growth of online banking, we have not experienced a significant
level of cannibalization of our traditional revenues and, based on continuous
monitoring, we estimate that in excess of 80% of e-banking transactions
represent additional revenue.
13
<PAGE> 399
UBS SWITZERLAND
28 NOVEMBER 2000
Private and Corporate Clients
BUSINESS UNIT REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
--------------------------------- ----------------- ---------------------
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income 1,784 1,888 1,848 (6) (3) 5,587 5,447
Credit loss expense (175) (187) (282) 6 38 (587) (836)
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 1,609 1,701 1,566 (5) 3 5,000 4,611
-----------------------------------------------------------------------------------------------------------------------------------
Personnel expenses 807 843 827 (4) (2) 2,454 2,550
General and administrative expenses 241 246 381 (2) (37) 748 882
Depreciation 97 85 68 14 43 289 267
Amortization of goodwill and
other intangible assets 0 1 1 (100) (100) 27 2
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1,145 1,175 1,277 (3) (10) 3,518 3,701
-----------------------------------------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 464 526 289 (12) 61 1,482 910
===================================================================================================================================
KPI'S
Assets under management (CHF billion) 2, 3 440 439 427 0 3
-----------------------------------------------------------------------------------------------------------------------------------
Cost / income ratio (%) 4 64 62 69 63 68
Cost / income ratio before
goodwill amortization (%) 4, 5 64 62 69 62 68
-----------------------------------------------------------------------------------------------------------------------------------
Non-performing loans/Gross loans outstanding(%) 5.6 6.0 6.9
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL INFORMATION % change from
--------------------------
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Regulatory equity used (avg) 8,600 8,850 8,550 (3) 1
Headcount (full time equivalents) 21,767 22,270 24,098 (2) (10)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 As
of quarter end. 3 Bank transaction accounts are included. 4 Before credit
loss expense. 5 The amortization of goodwill and other purchased intangible
assets is excluded from this calculation.
KEY PERFORMANCE INDICATORS
The continued strengthening of the Swiss economy and successful recovery
efforts, have favorably impacted the quality of the loan portfolio, leading to a
further reduction in the non-performing loans to total loans ratio to 5.6% at 30
September 2000, down from 6.0% at the end of second quarter.
Assets under management increased by CHF 1 billion from CHF 439 billion to
CHF 440 billion during the third quarter, with net new money of CHF 1 billion.
Compared to second quarter 2000, the cost/income ratio deteriorated
marginally from 62% to 64% as revenues fell slightly. Continued strong cost
control has brought the cost/income ratio down from 69% a year ago.
INITIATIVES AND ACHIEVEMENTS
e-COMMERCE
UBS and Paynet implemented a new electronic billing presentment and payment
system at the end of the third quarter, making UBS the first Swiss bank to
provide a fully integrated business to business electronic payment solution.
The service allows bills to be sent electronically from supplier to
customer, reviewed online by the customer, and paid online from the customer's
bank account to the supplier's. This integrated electronic process provides
real-time enquiry capabilities, shorter processing times, automated remittance,
and enhanced customer relationship management possibilities, leading to smoother
service for both supplier and customer.
UBS plans to expand the service early next year to cover business to
consumer billing.
14
<PAGE> 400
UBS SWITZERLAND
28 NOVEMBER 2000
LIFE INSURANCE COMPANY
In September, UBS announced the creation of its own life insurance company,
which it plans to launch in early 2001. The new company will provide a range of
products, but will have a strong focus on fund-linked life insurance. Some of
its risk products will be supplied by its new partner Providentia, a Swiss life
insurance company belonging to the Mobiliar Group, but will still be sold under
the UBS name.
UBS will continue to distribute products of other companies in addition to
its own range, working as it has done up to now with a select group of insurance
companies, through an open sales architecture. Through this initiative, UBS is
strengthening its life insurance business content, concentrating on providing
insurance products that cater to capital accumulation and retirement saving
needs.
STRATEGIC PROJECT PORTFOLIO
The Strategic Project Portfolio is a series of carefully designed and controlled
projects, whose aim is to enhance revenues and control costs, by improving
processes, products, distribution and pricing and by delivering cost savings
resulting from the merger between Union Bank of Switzerland and Swiss Bank
Corporation.
For the past two years, one of the most important cost control measures has
been the removal of overlap and redundancy from the combined branch network.
During the third quarter, a further five branches were closed, bringing the
post-merger reduction to 205 branches, or 37% of the network. At the same time,
traditional automated teller machines are being replaced by more sophisticated
multi-functional BancomatPlus and Multimat machines which allow clients to
perform core banking transactions at their convenience, 24 hours a day. 189
BancomatPlus and 212 Multimat terminals have now been installed at strategic
sites throughout Switzerland.
Private and Corporate Clients was recently honored with the 2000 SAS
Enterprise Computing Award for its Advanced Marketing System initiative which
has seen the implementation of sophisticated analytical software to personalize
and manage client relationships. This use of data mining technologies provides
effective identification of targeted cross-selling opportunities and enables UBS
to cater more precisely to the information, product and service needs of our
customers, positively influencing revenues.
Optimization of IT processes during third quarter, including centralization
of IT operating sites and process standardization, has also realized substantial
savings from lower headcount and infrastructure costs.
LOAN PORTFOLIO
The Private and Corporate Clients loan portfolio reduced by CHF 4 billion to CHF
165 billion at the end of the third quarter, mainly due to transfers of clients
to UBS Warburg. During the quarter, the recovery portfolio decreased to CHF 17
billion from CHF 18 billion as a result of continued workout initiatives.
CLIENT SERVICE INITIATIVES
At the end of the third quarter, Private and Corporate Clients launched the UBS
Moneyline Mortgage, a new LIBOR-based mortgage product developed in cooperation
with UBS Warburg. Moneyline Mortgage allows clients to take advantage of money
market rates, which are typically lower than standard mortgage rates, and uses
interest rate derivatives to give clients the option to limit their interest
rate risk. By offering this type of mortgage at much lower minimum mortgage
amounts than its competitors, UBS is making LIBOR-based real estate financing
available to all client segments in Switzerland for the first time, extending an
opportunity previously reserved for corporate clients and high net worth
individuals. Based on initial indications, Money-line Mortgage is proving highly
popular.
SALE OF SOLOTHURNER BANK
On 22 August 2000, UBS Switzerland announced the sale of Solothurner Bank, a
100% owned subsidiary, to Baloise Insurance, in compliance with a condition set
out by the Swiss Competition Commission at the time of the merger between Union
Bank of Switzerland and Swiss Bank Corporation.
In 1999, Solothurner Bank achieved a pre-tax profit of CHF 28.7 million and
had around 400 staff.
The transaction was completed on 19 October 2000 after having received
approval from the Swiss supervisory and regulatory authorities. Any impact on
results will be reflected in the fourth quarter.
15
<PAGE> 401
UBS SWITZERLAND
28 NOVEMBER 2000
RESULTS
Performance decreased by CHF 62 million, or 12%, to CHF 464 million from CHF 526
million during the second quarter and increased by CHF 175 million, or 61%,
compared to third quarter 1999. This good result is slightly lower than the last
two record quarters, but higher than any quarter in 1999.
OPERATING INCOME
Private and Corporate Clients operating income of CHF 1,609 million was CHF 92
million, or 5%, lower than the second quarter. This was the result of lower net
interest income, which fell slightly due to higher refinancing costs, and
certain one-off revenues recorded in second quarter 2000. Expected credit loss
expense decreased again thanks to continued improvements in asset quality due to
an improving economy and the further implementation of risk-adjusted pricing.
OPERATING EXPENSES
Our continued focus on cost control led to total operating expenses of CHF 1,145
million, CHF 30 million, or 3%, lower than the second quarter. Personnel and
general and administrative expenses both fell as a result of the reducing
headcount and other cost reduction initiatives during the quarter.
HEADCOUNT
Private and Corporate Clients headcount declined by 503 to 21,767 at the end of
the third quarter. This reduction reflects the transfer of 148 Financial
Planning and Wealth Management staff to Private Banking, the ongoing
implementation of our Strategic Project Portfolio and the continued realization
of merger benefits.
OUTLOOK
The continued strong performance of our business, with both robust revenues and
declining costs, makes us confident of very good full-year results compared to
1999.
16
<PAGE> 402
UBS SWITZERLAND
28 NOVEMBER 2000
Private Banking
BUSINESS UNIT REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
--------------------------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
-----------------------------------------------------------------------------------------------------------------------------------
Income 1,627 1,638 1,407 (1) 16 5,098 4,135
Credit loss expense (8) (4) (4) (100) (100) (19) (10)
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 1,619 1,634 1,403 (1) 15 5,079 4,125
-----------------------------------------------------------------------------------------------------------------------------------
Personnel expenses 411 375 329 10 25 1,180 989
General and administrative expenses 296 345 318 (14) (7) 952 805
Depreciation 17 20 18 (15) (6) 55 48
Amortization of goodwill and
other intangible assets 8 9 8 (11) 0 25 16
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 732 749 673 (2) 9 2,212 1,858
-----------------------------------------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 887 885 730 0 22 2,867 2,267
===================================================================================================================================
KPI'S
Assets under management (CHF billion) 2 707 683 615 4 15
-----------------------------------------------------------------------------------------------------------------------------------
Net new money (CHF billion) 3 0.5 (2.8) (3.0) (0.2) (0.2)
Gross AuM margin (bps) 94 95 90 (1) 4 99 91
-----------------------------------------------------------------------------------------------------------------------------------
Cost / income ratio (%) 4 45 46 48 43 45
Cost / income ratio before
goodwill amortization (%) 4, 5 44 45 47 43 45
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL INFORMATION % change from
--------------------------
<S> <C> <C> <C> <C> <C>
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
-----------------------------------------------------------------------------------------------------------------------------------
Regulatory equity used (avg) 1,900 1,900 1,509 0 26
Headcount (full time equivalents) 7,654 7,447 7,256 3 5
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 As of
quarter end. 3 Excludes interest and dividend income. 4 Before credit loss
expense. 5 The amortization of goodwill and other purchased intangible assets is
excluded from this calculation.
KEY PERFORMANCE INDICATORS
Assets under management increased by CHF 24 billion during third quarter 2000
from CHF 683 billion to CHF 707 billion, primarily due to positive investment
performance. Net new money of CHF 0.5 billion for the quarter represented
encouraging progress compared to last quarter, achieved against a background of
more subdued inflows industry-wide.
The gross margin declined very slightly from 95 bps to 94 bps during third
quarter 2000, but was still well ahead of the 90 bps average for 1999. UBS
Private Banking continues to expand the range and client penetration of its
added-value services.
The pre-goodwill cost/income ratio fell a little to 44%, with a matching
small decline in both costs and income.
INITIATIVES AND ACHIEVEMENTS
INVESTMENT CENTER
The UBS Switzerland Investment Center formally commenced operations on 1 October
2000.
The Center is responsible for developing coherent and high quality investment
strategies for the core investment products and services offered by both the
Private Banking and Private and Corporate Clients business units. These
strategies 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 "buy-side"
oriented. The Center conducts secondary research by drawing on sources inside
UBS and from complementary external providers, and transforms this into
investment strategies and advice specifically suited
17
<PAGE> 403
UBS SWITZERLAND
28 NOVEMBER 2000
to private clients. The Investment Center also controls the tactical asset
allocation for the active advisory products, the UBS Strategy Funds and for
discretionary managed portfolios.
This new investment process will continue and enhance UBS's tradition of
providing top quality customized investment advice.
NEW PRODUCTS AND SERVICES
In September 2000, UBS Private Banking launched GAM funds and GAM discretionary
portfolio management for clients of UBS Switzerland. GAM's mission is to provide
its clients access to the best investment talent, both in-house and external,
bringing together some of the world's top fund managers. Different active
investment styles such as "long only" and "equity hedge" are offered through an
extensive range of funds, based in all major markets. GAM mutual funds are
well-renowned, and have received many awards for outstanding performance over
the last 15 years.
UBS Private Banking will further develop its open funds architecture during
fourth quarter 2000. This initiative will make available a pre-screened
selection of best-in-class funds from UBS, GAM and third-parties through
multiple access channels.
During the third quarter, Private Banking also launched a new trustee
operation based in Singapore. UBS Trustees (Singapore) Ltd, will provide access
to a full range of global trustee services for private clients in the Asian time
zone, working within Singapore's sophisticated legal and regulatory framework.
This underlines Private Banking's continuing commitment to the Asian region and
to the use of Singapore as a booking center.
The number of client mandates relating to our new Active Portfolio Advisory
(APA) and Active Portfolio Supervision (APS) services continues to grow at a
significant rate. APS provides clients with investment recommendations whenever
their portfolio breaches specified parameters, while APA additionally gives
direct access to a dedicated investment specialist and tailor made strategies.
Both services are available for an additional fee, or clients can pay an all-in
fee, based on asset volume, asset allocation and expected activity levels. The
success of these products is a key contributor to the increasing level of
recurring asset based fees earned by Private Banking.
RESULTS
Pre-tax profit during the third quarter of CHF 887 million reflects a further
quarter's strong earnings performance, up CHF 2 million from second quarter
2000.
OPERATING INCOME
Private Banking's operating income of CHF 1,619 million was stable, dipping just
CHF 15 million, or 1%, since the second quarter.
OPERATING EXPENSES
Total operating expenses of CHF 732 million were CHF 17 million, or 2% lower
than second quarter 2000. Personnel expenses increased by CHF 36 million, or 10%
compared to second quarter 2000 largely due to the transfer of Financial
Planning and Wealth Management activities from Private and Corporate Clients.
However, general and administrative expenses fell CHF 49 million due to lower
processing costs.
HEADCOUNT
Private Banking headcount reached 7,654 at the end of the third quarter, 207 up
from the end of second quarter 2000. This was mainly due to the transfer of 148
Financial Planning and Wealth Management staff from the Private and Corporate
Clients business unit, and a slight increase in client-facing staff. Private
Banking continues to shift headcount from support areas to client-facing roles.
Client adviser turnover remains consistent with pre-merger levels.
OUTLOOK
Whilst the fourth quarter of the year is often the quietest, Private Banking
expects to continue to outpace its 1999 performance. Dedicated focus on client
service, coupled with the steps being taken to strengthen our investment
advisory capabilities and the benefits of cooperation across UBS Switzerland
provide a firm foundation for continued success.
18
<PAGE> 404
UBS ASSET MANAGEMENT
28 NOVEMBER 2000
UBS Asset Management
BUSINESS GROUP REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
-----------------------------------------------------------------------------------------------------------------------------
Income 493 490 369 1 34 1,465 1,013
Credit loss expense 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 493 490 369 1 34 1,465 1,013
-----------------------------------------------------------------------------------------------------------------------------
Personnel expenses 225 219 125 3 80 646 406
General and administrative expenses 105 100 73 5 44 301 198
Depreciation 12 12 13 0 (8) 34 22
Amortization of goodwill and
other intangible assets 67 66 26 2 158 198 83
-----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 409 397 237 3 73 1,179 709
-----------------------------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 84 93 132 (10) (36) 286 304
=============================================================================================================================
</TABLE>
ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
30.9.00 30.6.00 30.9.99 2Q00 3Q99 30.9.00 30.9.99
-----------------------------------------------------------------------------------------------------------------------------
Assets under management (CHF billion) 2 555 552 538 1 3
-----------------------------------------------------------------------------------------------------------------------------
Cost / income ratio (%) 3 83 81 64 80 70
Cost / income ratio before
goodwill amortization (%) 3, 4 69 68 57 67 62
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
% change from
-------------------------
<S> <C> <C> <C> <C> <C>
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
-------------------------------------------------------------------------------------------------------------------------------
Regulatory equity used (avg) 1,250 1,250 162 0 672
Headcount (full time equivalents) 2,811 2,750 2,576 2 9
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 As
of quarter end. 3 Before credit loss expense. 4 The amortization of goodwill
and other purchased intangible assets is excluded from this calculation.
19
<PAGE> 405
UBS ASSET MANAGEMENT
28 NOVEMBER 2000
Institutional Asset Management
BUSINESS UNIT REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
--------------------------------- ---------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
--------------------------------------------------------------------------------------------------------------------------------
Income 336 325 272 3 24 974 814
Credit loss expense 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 336 325 272 3 24 974 814
--------------------------------------------------------------------------------------------------------------------------------
Personnel expenses 168 162 109 4 54 467 361
General and administrative expenses 60 55 42 9 43 163 121
Depreciation 7 6 12 17 (42) 19 18
Amortization of goodwill and
other intangible assets 43 43 26 0 65 129 83
--------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 278 266 189 5 47 778 583
--------------------------------------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 58 59 83 (2) (30) 196 231
================================================================================================================================
Assets under management (CHF billion) 2 528 525 538 1 (2)
Net new money (CHF billion) (9.1) (20.2) (10.9) 55 17 (61.7) (33.3)
Gross AuM margin (bps) 3 35 32 24 9 46 32 24
--------------------------------------------------------------------------------------------------------------------------------
Cost / income ratio (%) 4 83 82 69 80 72
Cost / income ratio before
goodwill amortization (%) 4, 5 70 69 60 67 61
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL INFORMATION % change from
-------------------------
<S> <C> <C> <C> <C> <C>
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
-------------------------------------------------------------------------------------------------------------------------------
Regulatory equity used (avg) 500 500 160 0 213
Headcount (full time equivalents) 1,725 1,712 1,653 1 4
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 As
of quarter end. 3 Revenues divided by average assets under management, for the
institutional portion of the business only. 4 Before credit loss expense. 5
The amortization of goodwill and other purchased intangible assets is excluded
from this calculation.
KEY PERFORMANCE INDICATORS
During the third quarter, total assets under management increased slightly from
CHF 525 billion to CHF 528 billion, largely as a result of currency movements.
Institutional assets increased very slightly to CHF 326 billion at 30 September
2000, with net new money losses offset by currency related gains.
Net outflows moderated further, with net new money losses reducing from CHF
20 billion in the second quarter to CHF 9 billion during the third quarter.
Client losses continued to be concentrated within US equity-related and UK
balanced mandates reflecting past investment performance issues.
The gross AuM margin increased to 35 bps during the third quarter, from 32
bps the previous quarter reflecting the continued good performance of the
O'Connor business unit, established in June 2000. The cost/income ratio before
goodwill increased slightly to 70% compared to the 69% recorded in second
quarter 2000.
INITIATIVES AND ACHIEVEMENTS
EXPANSION IN HONG KONG
Over the next few months, the Hong Kong office will expand with the
establishment of an Equities Investment Team covering Greater China. This new
team will allow Institutional Asset Management to provide better access to the
Hong Kong domestic equity market for institutional and mutual fund clients. The
expansion will also help Institutional Asset Management to develop institutional
and mutual fund business in Taiwan and mainland China.
PAINEWEBBER DISTRIBUTION CHANNEL
An open funds distribution architecture is a core element of PaineWebber's
strategy. On 9 August
20
<PAGE> 406
UBS ASSET MANAGEMENT
28 NOVEMBER 2000
2000, PaineWebber awarded Institutional Asset Management a mandate to act as the
sub-advisor for the PaineWebber Management High Yield Plus Fund. Management of
these funds was transferred to UBS on 1 October 2000.
The merger with PaineWebber will provide additional opportunities both to
compete for management of PaineWebber funds and to distribute UBS funds.
ADAMS STREET PARTNERS
The formation of Adams Street Partners, a new entity composed of UBS Asset
Management's existing Private Equity Investment Team, will facilitate growth in
the increasingly competitive private equity marketplace. Its creation was driven
by new US regulations under the Gramm-Leach-Bliley Act which limit ownership
positions in various investments. Effective 1 January 2001, Adams Street
Partners will be controlled by the existing UBS Asset Management private equity
management team with UBS Asset Management as the only other shareholder, holding
24.9%. Adams Street Partners will provide UBS Asset Management with more
flexibility and operational efficiency in structuring investment vehicles while
continuing to provide existing and new clients with access to its very popular
private equity investment vehicles.
INVESTMENT CAPABILITIES AND PERFORMANCE
Major markets made modest advances at the start of the quarter but then
retreated partially as concerns about inflation, a number of profit warnings and
other signs of economic deceleration turned sentiment negative. Sectoral
movements within equity markets did not show the marked divergence between old
and new economy sectors seen in previous quarters. However, within the "old
economy" there was a clear split between winners and losers from rising oil
prices. Bond markets undulated but did not move significantly in either
direction. Inflationary pressure from high oil prices was balanced by signs of
slower growth in some Western economies.
Institutional Asset Management's third quarter and year-to-date portfolio
returns compare favorably to most relevant benchmarks. Solid performances this
quarter by the US Equity and US and Global Balanced Portfolios particularly
enhanced year-to-date returns, contributing to the favorable benchmark
comparison.
RESULTS
Institutional Asset Management's pre-tax profit fell 2% from second quarter
2000, to CHF 58 million.
OPERATING INCOME
Operating income grew 3% compared to the previous quarter, to CHF 336 million.
Institutional income increased from CHF 274 million in second quarter 2000, to
CHF 285 million due to good results at the new O'Connor business, offset by
lower performance fees and reduced asset-based fees reflecting the impact of
negative net new money flows earlier this year on assets under management.
Non-institutional operating income was unchanged from the previous quarter, at
CHF 51 million.
OPERATING EXPENSES
Personnel costs increased CHF 6 million from the previous quarter to CHF 168
million, mainly as a result of the inclusion of a full quarter of the new
O'Connor business. General and administrative expenses increased CHF 5 million
to CHF 60 million in the third quarter, principally as the result of the new
O'Connor business.
HEADCOUNT
Headcount was almost unchanged, increasing by 13 over the quarter to 1,725.
OUTLOOK
While moderate client losses may continue over the next few quarters, the
overall trend remains encouraging. New business development appears promising as
strategic initiatives progress, performance relative to benchmarks improves and
our pipeline of new business prospects grows. However, results will continue to
be impacted by the effect of previous client losses which impact revenue with a
slight time-lagged effect.
21
<PAGE> 407
UBS ASSET MANAGEMENT
28 NOVEMBER 2000
Investment Funds/GAM
BUSINESS UNIT REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
--------------------------------------------------------------------------------------------------------------------------------
Income 157 165 97 (5) 62 491 199
Credit loss expense 0 0 0 0 0
--------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 157 165 97 (5) 62 491 199
--------------------------------------------------------------------------------------------------------------------------------
Personnel expenses 57 57 16 0 256 179 45
General and administrative expenses 45 45 31 0 45 138 77
Depreciation 5 6 1 (17) 400 15 4
Amortization of goodwill and
other intangible assets 24 23 0 4 69 0
--------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 131 131 48 0 173 401 126
--------------------------------------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 26 34 49 (24) (47) 90 73
================================================================================================================================
KPI'S
Assets under management (CHF billion) 2 227 225 186 1 22
Net new money (CHF billion) 0.2 0.8 (0.8) (75) 125 1.6 2.6
Gross AuM margin (bps) 3 37 38 31 (3) 19 38 25
--------------------------------------------------------------------------------------------------------------------------------
Cost / income ratio (%) 4 83 79 49 82 63
Cost / income ratio before
goodwill amortization (%) 4, 5 68 65 49 68 63
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL INFORMATION % change from
--------------------------
<S> <C> <C> <C> <C> <C>
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
--------------------------------------------------------------------------------------------------------------------------------
Regulatory equity used (avg) 750 750 2 0 --
Headcount (full time equivalents) 1,086 1,038 923 5 18
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 As of
quarter end. 3 All non-institutional revenues, including those booked in
Institutional Asset Management, divided by average assets under management. 4
Before credit loss expense. 5 The amortization of goodwill and other purchased
intangible assets is excluded from this calculation.
KEY PERFORMANCE INDICATORS
Assets under management increased slightly from CHF 225 billion to CHF 227
billion due to investment performance. Net new money of CHF 0.2 million
reflected contraction in lower margin fixed income and money market funds,
largely shifted into higher margin equity fund products.
The cost/income ratio before goodwill increased from 65% during the second
quarter to 68% in third quarter 2000 reflecting lower revenues from performance
fees. The gross margin was 37 bps, a slight decline from second quarter.
INITIATIVES AND ACHIEVEMENTS
NEW DISTRIBUTION CHANNEL - FUNDS@UBS
On 13 November 2000, Investment Funds and Lufthansa announced the launch of a
joint marketing effort to provide Lufthansa Miles and More clients with access
to UBS Investment Funds. A new website dedicated to Lufthansa clients will
provide, investment education, advice on investment strategies and online
decision support tools, and will allow automated online fund purchases.
This is the first such tie-up to be announced as a result of UBS's
intermediary strategy, funds@ubs, which 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. Over the
coming months UBS expects to announce similar cooperation agreements with other
non-traditional intermediaries, using the same strategy and technical platform.
SCREENED OPEN ARCHITECTURE FOR CLIENTS OF UBS SWITZERLAND
During the third quarter, UBS continued to develop investment solutions that
combine UBS, GAM and third-party funds. This initiative reflects UBS's
commitment to providing an attractive range of high quality investment funds,
through multiple access channels, on a pre-screened basis. In early De-
22
<PAGE> 408
UBS ASSET MANAGEMENT
28 NOVEMBER 2000
cember a screened selection of the products of several external mutual fund
groups will be made available to clients alongside funds from UBS and GAM.
Further fund groups will be added over the coming months, with the eventual aim
of providing funds from a panel of over 20 different providers.
ACQUISITION OF FONDVEST
UBS Asset Management is to acquire Fondvest AG, a specialist independent funds
advisory and distribution firm. Fondvest offers clients such as banks, insurance
companies and asset managers access to a comprehensive range of funds from Swiss
and foreign providers. The acquisition will extend and enhance UBS's open fund
architecture, and provide opportunities to leverage Fondvest's renowed
expertise in this area.
UBS INVESTMENT FUNDS PRODUCT INNOVATION
Much investment advice concentrates on finding ways for investors to diversify
their risks through investments in funds rather than holdings in a small number
of individual stocks. Two of UBS Investment Funds' latest products offer a
middle way between these extremes - they help investors to focus on particular
sectors where they think opportunities for growth exist, without having to pick
specific stocks. The UBS (Lux) Focused Fund - Top Luxury and the UBS (Lux)
Focused Fund - Top Leisure were both launched during third quarter. These two
equity funds are the first products under the new "Focused" label and they
differ from existing UBS funds in that each focuses on shares in only 16 to 25
promising companies in its particular sector, chosen for their excellent growth
potential. The funds are designed to appeal to experienced investors with a
strong risk appetite and a longer-term investment horizon.
JAPANESE REAL ESTATE INVESTMENT TRUSTS JOINT VENTURE
In September 2000, UBS Asset Management and Mitsubishi Corporation announced the
launch in 2001 of a joint venture investment advisory firm which will manage
Real Estate Investment Trusts (REITs) in Japan. The joint venture plans to
establish REITs with an emphasis on commercial properties, such as shopping
malls, and to distribute them to both institutional and retail clients. UBS
Asset Management will provide expertise in REIT management as well as
distribution access to Japanese pension funds, while Mitsubishi will contribute
its extensive experience in Japanese real estate and access to its distribution
network.
ACQUISITION OF TAIWAN-BASED MUTUAL FUND PROVIDER
UBS Asset Management has acquired a majority holding in Taiwan-based mutual fund
provider, Fortune Securities Investment & Trust Company. The acquisition gives
UBS Asset Management the ability to produce and distribute domestically-
regulated mutual funds for Taiwanese investors and provides a platform to
establish a solid domestic presence in a key market while raising its profile
further throughout the region. Fortune's ability to attract new clients should
benefit considerably from the good reputation enjoyed by UBS in Taiwan.
INVESTMENT CAPABILITIES AND PERFORMANCE
Investment Funds performance during the third quarter was slightly positive and
in line with major indices. GAM's performance was also positive as most funds
continued to exceed benchmark indices during the quarter.
RESULTS
OPERATING INCOME
Lower performance fees led to a slight decrease in operating income to CHF 157
million during third quarter compared to CHF 165 million the previous quarter.
OPERATING EXPENSES
Operating expenses were unchanged from the previous quarter, reflecting
continued careful cost control.
HEADCOUNT
Headcount rose 48 or 5% to 1,086 at the end of September 2000, from 1,038 at the
end of June, primarily due to continued investment in the third party
distribution and open architecture initiatives.
OUTLOOK
Although the competitive environment is intense, the business outlook remains
favorable for Investment Funds and GAM. The expansion of distribution channels
within Investment Funds is expected to be a strong driver of future revenue
growth, although the cost of investments in multi-channel distribution
initiatives will continue to impact profits in the coming months.
23
<PAGE> 409
UBS WARBURG
28 NOVEMBER 2000
UBS Warburg
BUSINESS GROUP REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------------- ---------------- --------------------
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1,3
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income 4,458 4,926 3,179 (10) 40 14,653 10,158
Credit loss expense (49) (40) (69) (23) 29 (164) (240)
-------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 4,409 4,886 3,110 (10) 42 14,489 9,918
-------------------------------------------------------------------------------------------------------------------------
Personnel expenses 2,321 2,761 1,713 (16) 35 8,070 5,786
General and administrative expenses 765 727 662 5 16 2,202 1,837
Depreciation 146 145 156 1 (6) 431 488
Amortization of goodwill and
other intangible assets 41 40 36 3 14 118 118
-------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,273 3,673 2,567 (11) 28 10,821 8,229
-------------------------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 1,136 1,213 543 (6) 109 3,668 1,689
=========================================================================================================================
</TABLE>
ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
----------------------------- ------------- -------------------
30.9.00 30.6.00 30.9.99 2Q00 3Q99 30.9.0 30.9.99 1,3
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets under management (CHF
billion) 2 44 37 27 19 63
-----------------------------------------------------------------------------------------------------------
Cost / income ratio (%) 4 73 75 81 74 81
Cost / income ratio before
goodwill amortization (%) 4,5 72 74 80 73 80
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
% change from
--------------------
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Regulatory equity used (avg) 10,690 10,690 10,679 0 0
Headcount (full time equivalents) 14,946 14,346 14,266 4 5
-------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 As of
quarter end. 3 1999 income adjusted for the CHF 200 million significant
financial event relating to the sale of the international Global Trade Finance
business. 4 Before credit loss expense. 5 The amortization of goodwill and other
purchased intangible assets is excluded from this calculation.
24
<PAGE> 410
UBS WARBURG
28 NOVEMBER 2000
CORPORATE AND INSTITUTIONAL CLIENTS
BUSINESS UNIT REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------------- ------------- -------------------
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1, 2
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income 4,314 4,860 2,999 (11) 44 14,223 9,765
Credit loss expense (48) (39) (67) (23) 28 (161) (238)
-------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 4,266 4,821 2,932 (12) 45 14,062 9,527
-------------------------------------------------------------------------------------------------------------
Personnel expenses 2,193 2,601 1,596 (16) 37 7,555 5,494
General and administrative expenses 689 631 594 9 16 1,928 1,668
Depreciation 135 132 150 2 (10) 394 472
Amortization of goodwill and
other intangible assets 39 37 31 5 26 110 102
-------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,056 3,401 2,371 (10) 29 9,987 7,736
-------------------------------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 1,210 1,420 561 (15) 116 4,075 1,791
=========================================================================================================================
KPI'S
Compensation/income (%) 3 51 54 53 53 56
-------------------------------------------------------------------------------------------------------------------------
Cost/income ratio (%) 3 71 70 79 70 79
Cost/income ratio before
goodwill amortization (%) 3, 4 70 69 78 69 78
-------------------------------------------------------------------------------------------------------------------------
Non-performing loans/Gross loans outstanding (%) 2.1 2.7 5 1.8
Average VaR (10-day 99%) 238 253 197
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
LEAGUE TABLE RANKINGS Year-to-date
----------------
30.9.00 30.6.00
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Global Mergers and Acquisitions completed 6
Rank 5 6
Market share (%) 18.2 20.3
--------------------------------------------------------------------------------------------------
International Equity New Issues 7
Rank 9 11
Market share (%) 3.7 3.8
--------------------------------------------------------------------------------------------------
International Bonds 7
Rank 5 5
Market share (%) 8.1 8
--------------------------------------------------------------------------------------------------
Eurobonds 7
Rank 1 1
Market share (%) 9.3 8.7
--------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL INFORMATION % change from
-------------------
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Regulatory equity used (avg) 9,850 9,850 10,050 0 (2)
Headcount (full time equivalents) 13,268 12,730 12,694 4 5
-----------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 1999
income adjusted for the CHF 200 million significant financial event relating to
the sale of the international Global Trade Finance business. 3 Before credit
loss expense. 4 The amortization of goodwill and other purchased intangible
assets is excluded from this calculation. 5 Incorrectly reported as 2.0 in
second quarter report. 6 Source: Thomson Financial Securities data. 7 Source:
Capital Data Bondware.
25
<PAGE> 411
UBS WARBURG
28 NOVEMBER 2000
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%, up less than 1% on the previous quarter
and a significant improvement over the 78% recorded in third quarter 1999. UBS
Warburg's ratio of personnel cost to income fell to 51% in third quarter 2000,
two percentage points lower than the same period last year. UBS Warburg
continues to invest in top quality professionals to help expand its capabilities
and client reach and therefore 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
increased to 20% this quarter, from 16% in second quarter, although this is
well below the third quarter 1999 level of 26%. The growth in non-personnel
costs in third quarter 2000 was driven by continued investment in technology.
Market risk utilization, as measured by average Value at Risk, continued to
remain well within the limit of CHF 450 million, decreasing from CHF 253 million
in second quarter to CHF 238 million in the third quarter.
Corporate and Institutional Clients continues to manage its loan book
closely. Total loans increased by CHF 16.6 billion from the end of second
quarter 2000, reaching CHF 80.9 billion at 30 September 2000, an increase of
26%. This increase related almost solely to zero risk-weighted money market
operations and group treasury positions held by UBS Warburg. The absolute value
of non-performing loans fell slightly, bringing the ratio of non-performing
loans to total loans down from 2.7% to 2.1%.
Corporate and Institutional Clients will continue to use the balance sheet
selectively for higher margin, value-added corporate business to support our
clients.
LEAGUE TABLE RANKINGS
MERGERS AND ACQUISITIONS
UBS Warburg's ranking in Completed Global Mergers and Acquisitions has
improved during the quarter, to fifth year-to-date from sixth at half year, with
market share of 18.2%. In Announced Global Mergers and Acquisitions, UBS Warburg
remained in sixth place with a market share of 11.9%.
Mergers and Acquisitions market growth has been largest in Europe this year,
where UBS Warburg was ranked third in completed transactions with a market share
of 35.3%. During third quarter 2000, UBS Warburg was involved as advisor in
several significant global transactions, including:
- Advising the Italian internet service provider and portal company Tiscali on
its recommended USD 5.4 billion offer for its Dutch rival, World Online -
the largest new economy Mergers and Acquisitions deal in Europe to date.
- Advising Foster's Brewing Group on its AUD 2.6 billion purchase of
California-based Beringer Wine Estates Holdings Inc. In this transaction UBS
Warburg was awarded both the advisory work and the financing: underwriting
an AUD 500m issue of ordinary shares and a USD 400m convertible bond issue
to finance the acquisition.
FIXED INCOME UNDERWRITING
UBS Warburg's ranking in the international bond markets remains good, with year
to date positions of first in Eurobonds and fifth in International Bonds
matching our performance at half year, with slightly increased market shares of
9.3% and 8.1% respectively. In its franchise markets, UBS Warburg has improved
from fifth place at half year to third place year-to-date with a market share of
8.6%. "Franchise Markets" excludes specific segments in which UBS Warburg has
chosen not to compete actively.
In addition to the Eurobond market, where UBS Warburg is the leading player,
the firm has substantially improved its performance in the Global Bonds sector
(bonds registered for sale both in the US and internationally), including
transactions for an increasing number of American issuers. During third
quarter 2000, financings were arranged for several leading US firms including
IBM, Federal Home Loan Bank, Household Finance Corporation and Monumental Life
Insurance Company.
The recent investment in European Leveraged Finance and US High Yield is
also beginning to deliver results in terms of deal flow, revenues and league
table and research rankings, with UBS
26
<PAGE> 412
UBS WARBURG
28 NOVEMBER 2000
Warburg recording the biggest jump in rankings of any firm in the All America
Fixed Income Research Team 2000 - ranked 8th, as compared with 20th in 1999.
EQUITY UNDERWRITING
UBS Warburg continued to improve its performance in the international primary
equity markets, with its ranking in International Equity New Issues increasing
from 11th at half year to 9th year-to-date, with a market share of 3.7%. Our
ranking in Europe remained at 8th year-to-date with a market share of 5.1%.
The relative weakness in these rankings compared to last year's performance
is due to the large number of Technology, Media and Telecoms ("TMT") deals this
year and UBS Warburg's relatively limited involvement in this sector. Several
strategic initiatives designed to improve our long-term position have been
implemented in recent months, including expansion of our capabilities in the
global TMT sector, increased corporate coverage in Germany and France and
enhanced product capabilities in block trades and convertibles. PaineWebber will
significantly enhance the scope and scale of UBS Warburg's retail and
institutional distribution capabilities in the US market for foreign and
domestic issuers.
EQUITY RESEARCH
UBS Warburg is one of the top equity research firms globally, according to
Institutional Investor rankings. PaineWebber will help to cement this position,
by improving the breadth of our equity research coverage in the US. UBS Warburg
now has over 100 publishing analysts in the US, similar to the levels of the
leading US-based firms. PaineWebber's research team provides a significant
boost to our coverage strength in several key sectors, including Consumer Goods,
Energy, Healthcare and Technology. Through PaineWebber, UBS Warburg has also
gained Institutional Investor's top-ranked portfolio strategy analyst, who will
fill a coverage gap and help to raise UBS Warburg's public profile.
e-COMMERCE
UBS Warburg continues to enhance its e-commerce offerings as a core element of
its content and execution services for institutional and corporate clients.
Approximately USD 12 billion of primary debt was raised through DebtWeb in
third quarter 2000, which brings the year-to-date total to approximately USD
54 billion.
UBS Warburg marketed approximately USD 17 billion of new equity issues on
DealKey during the third quarter, leveraging the enhanced capabilities
introduced on the site in July 2000. The new features streamline the
communication process between salespeople, traders and syndicate members,
provide the salesforce with online tools to manage their client orders, and
facilitate the pre-marketing and bookbuilding processes.
Client usage of ResearchWeb, UBS Warburg's leading edge site for research
distribution, and IBOL, our portal for corporate and institutional clients,
continues to grow, with 58% more users at 30 September 2000 than at the end of
June 2000.
Institutional clients can now access UBS Warburg's equity research via
electronic hand-held devices. This pioneering mobile distribution service is
available on Palm OS, Windows CE and Pocket PC, and makes use of technology from
mobile internet firm AvantGo. The solution satisfies the growing demand within
the investment community for on the move access to broker research, and can be
used in real-time via a wireless connection, or offline through synchronization
with a personal computer.
UBS Warburg is one of seven of the world's largest investment banks who have
joined together to create a new internet portal, TheMarkets.com. Expected to
launch in December, TheMarkets.com will provide real-time access for
institutional investors to proprietary equity information from each of the
consortium members, including equity research, new issue information, news and
market data. It will also offer direct access to participants' individual web
offerings.
RESULTS
UBS Warburg's Corporate and Institutional Clients business unit produced strong
profit growth again this quarter, with pre-tax profit of CHF 1,210 million, up
116% over third quarter 1999. The consistent strong performance in each quarter
this year means that pre-tax profits year-to-date have increased 128% from the
same period in 1999, to CHF 4,075 million.
27
<PAGE> 413
UBS WARBURG
28 NOVEMBER 2000
OPERATING INCOME
Corporate and Institutional Clients generated revenues of CHF 4,314 million in
third quarter 2000, an increase of 44% over third quarter 1999.
Equities revenues during third quarter 2000 were somewhat lower than in
second quarter, reflecting almost exactly the reduction in market volumes
during the period. The equity franchise continued to perform extremely well over
the usually quieter summer months, with strong performances in European
Equities, especially in the UK, and Japanese Equities. Revenues were
approximately 40% higher than for the same quarter last year, largely driven by
secondary client activity, although primary equities revenues also recorded
their best ever quarterly performance. UBS Warburg's secondary equity sales
franchise is now ranked as one of the global leaders, and the leading non-US
equities house.
In Fixed Income, UBS Warburg's Governments, Derivatives, Investment Grade
& Emerging Markets businesses continued to deliver strong results, ahead of
expectations. The Principal Finance group continues to expand and is delivering
excellent results.
In the Treasury Products business area, revenues continued to be slow in
the third quarter, as in the first half of this year, although significant cost
savings have been made as a result of re-engineering front-to-back processes.
Market conditions for Mergers and Acquisitions, advisory work and primary
underwriting continued to be strong, driving Corporate Finance's good
performance.
The recent expansion of Corporate and Institutional Clients high yield
bonds and leveraged finance business has not resulted in any significant
holdings of unsyndicated bond or loan positions, or material mark-downs. The
business has been developed as "distribution-led", with secondary market
positions carefully controlled, and, as with all UBS Warburg businesses, there
are vigorous risk management policies in place. In addition, UBS Warburg has
only recently begun to build its franchise in the Telecommunications, Media and
Technology sector, and as such, is not significantly impacted by the recent
swings in valuations and shifts in levels of client activity.
OPERATING EXPENSES
Corporate and Institutional Clients continues to carefully manage its cost base,
with the cost/income ratio remaining well below 1999 levels, at 71%. Personnel
expenses increased 37% from the same quarter last year, to CHF 2,193 million,
reflecting increased performance-related compensation. General and
administrative expenses increased 16% compared to third quarter 1999, as a
result of increased expenditure on technology. Overall costs are growing at a
slower rate than revenues, delivering continued strong pre-tax profit growth.
HEADCOUNT
Corporate and Institutional Clients headcount rose 4% during the quarter, to
13,268, mainly due to increases in Corporate Finance and Equities.
OUTLOOK
Client and market activity are important drivers of this business unit's
performance. However, the solid institutional franchise in both equities and
fixed income, combined with an expanding corporate client franchise have
provided the firm with much improved sustainability and quality of earnings.
Ongoing volatility in financial markets has not significantly impacted
performance to date, although the current market environment remains challenging
and the fourth quarter is traditionally the quietest of the year.
28
<PAGE> 414
UBS WARBURG
28 NOVEMBER 2000
UBS CAPITAL
BUSINESS UNIT REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
--------------------------- --------------- -------------------
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income 79 4 134 -- (41) 230 254
Credit loss expense 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 79 4 134 -- (41) 230 254
------------------------------------------------------------------------------------------------------------------
Personnel expenses 23 33 37 (30) (38) 76 78
General and administrative expenses 10 12 14 (17) (29) 33 33
Depreciation 0 1 0 (100) 2 0
Amortization of goodwill and
other intangible assets 0 1 1 (100) (100) 2 4
------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 33 47 52 (30) (37) 113 115
------------------------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX 46 (43) 82 207 (44) 117 139
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
KPI'S % change from
--------------------
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Book value (CHF billion) 4.5 3.8 3.0 18 50
Value creation (CHF billion) 2 N/A 0.4 0.6
================================================================================================
ADDITIONAL INFORMATION
------------------------------------------------------------------------------------------------
Regulatory equity used (avg) 500 500 340 0 47
Headcount (full time equivalents) 117 113 116 4 1
------------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting).
2 Value creation is reported semi-annually, at the end of June and December.
KEY PERFORMANCE INDICATORS
The book value of UBS Capital's investments has grown from CHF 3.8 billion at
the end of June 2000 to CHF 4.5 billion at the end of September 2000. It has
made approximately CHF 1.5 billion of new investments and add-ons this year,
significantly above the amounts in the equivalent period in 1999.
UBS Capital accounts for its private equity investments at the lower of cost
or market value, showing only realized gains. As a full valuation of the
portfolio is produced only every six months, value creation and unrealized gains
will next be reported with UBS's fourth quarter results.
INITIATIVES AND ACHIEVEMENTS
In July 2000, UBS Capital established a private equity operation in Japan. This
group will focus primarily on the rapidly evolving market in Japan for
management buy-outs, leveraged buy-outs ("LBOs") and other restructuring
opportunities. It will also assist the Technology, Media and Telecoms group in
pursuing early stage investment opportunities in those important sectors.
During the third quarter, new investments of CHF 0.7 billion were made,
including shareholdings in:
- The printed circuit board business of Singapore-listed Wong's Circuits
(Holdings) Limited. The acquisition is the largest financial
sponsor-backed LBO to be launched in the Hong Kong market.
- Katwijk Farma BV, a Dutch manufacturer of generic drugs. The company is a
well established group, and represents one of Holland's leading generic
and OTC drug manufacturers with a significant drug wholesale business.
- Demantra Ltd - an Israeli software development company specializing in
providing internet-enabled demand management solutions which provide clients
with an online, real time planning and decision-making environment.
29
<PAGE> 415
UBS WARBURG
28 NOVEMBER 2000
RESULTS
Operating income decreased 41% to CHF 79 million, from CHF 134 million in third
quarter 1999. UBS Capital's income is mainly driven by the timing of divestments
and can therefore vary from period to period. During second quarter 2000, the
business group recorded very low income due to write-downs of the value of some
under-performing investments in the portfolio.
Personnel, general and administrative expense was CHF 33 million this
quarter, a decrease from the previous quarter of CHF 12 million, or 27%, mainly
driven by bonus expenses. Bonuses are accrued when an investment is successfully
exited, so personnel expenses move in line with divestments.
UBS Capital is gradually increasing its annual investment rate. UBS Capital
has a target portfolio book value of approximately CHF 5 billion from its own
investments and CHF 5 billion from third party funds.
OUTLOOK
UBS Capital is currently preparing for the establishment of two new funds - an
EUR 2 billion European fund which is due to launch in first quarter next year
and a USD 1 billion Asian fund which is due to launch in third quarter 2001.
These funds will help meet demand for access to private equity investments from
UBS's private clients, giving them an opportunity to diversify from more
traditional investments.
30
<PAGE> 416
UBS WARBURG
28 NOVEMBER 2000
PRIVATE CLIENTS
BUSINESS UNIT REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
---------------------------------- ----------------- ---------------------
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income 70 62 46 13 52 205 139
Credit loss expense (1) (1) (2) 0 50 (3) (2)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 69 61 44 13 57 202 137
---------------------------------------------------------------------------------------------------------------------------------
Personnel expenses 73 80 76 (9) (4) 323 210
General and administrative expenses 35 45 53 (22) (34) 150 135
Depreciation 7 3 6 133 17 17 16
Amortization of goodwill and
other intangible assets 1 2 4 (50) (75) 5 12
---------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 116 130 139 (11) (17) 495 373
---------------------------------------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX (47) (69) (95) 32 51 (293) (236)
==================================================================================================================================
KPI'S
Assets under management (CHF
billion) 2 44 37 27 19 63
Net new money (CHF billion) 3 8.1 0.8 (0.2) 913 -- 12.9 1.7
Gross AuM margin (bps) 69 64 65 8 6 69 67
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL INFORMATION % change from
------------------
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Regulatory equity used (avg) 340 340 289 0 18
Headcount (full time equivalents) 1,177 1,277 1,386 (8) (15)
----------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 As of
quarter end. 3 Excludes interest and dividend income.
KEY PERFORMANCE INDICATORS
Assets under management increased from CHF 37 billion at the end of the second
quarter to CHF 44 billion at 30 September 2000. Performance was slightly
negative, in line with market movements, but was more than offset by net new
money of CHF 8 billion. The sharp changes in the quarter-on-quarter net new
money trend in UBS Warburg Private Clients reflect the relatively early stage of
this unit's business development. UBS Warburg Private Clients does not expect to
repeat this exceptional performance in the fourth quarter.
Gross margin increased to 69 bps from 64 bps in second quarter as the
positive effects of the recent restructuring began to show through.
INITIATIVES AND ACHIEVEMENTS
Considerable progress was made during the quarter on preparing for the
integration with PaineWebber. New management structures have been agreed and
new business plans are being developed.
At the same time UBS Warburg Private Clients has continued to restructure
and refocus the existing onshore private client business. This restructuring,
including a headcount reduction of about 250 since its announcement at the end
of March, is now largely completed. Considerable cost savings have been
realized, producing a firm foundation for the integration with PaineWebber, with
total expenses down 26% from CHF 156 million, the underlying level in first
quarter before the restructuring.
RESULTS
Revenues in the third quarter increased by 13% to CHF 70 million, compared to
CHF 62 million in the second quarter, driven by higher average assets and the
positive effects of the completed restructuring in terms of management focus
and staff motivation. Expenses fell CHF 14 million to
31
<PAGE> 417
UBS WARBURG
28 NOVEMBER 2000
CHF 116 million, reflecting completion of the restructuring, with headcount
falling by another 100 during the third quarter.
OUTLOOK
UBS Warburg's Private Clients unit will be combined with PaineWebber's
existing businesses targeting core affluent investors. The US portion of UBS
Warburg's Private Clients business will be added to the existing PaineWebber US
private clients business.
The European and Asia-Pacific Private Clients businesses will be combined
with the e-services project, under a single management and integrated business
model. UBS Warburg will leverage the management, technology and experience of
PaineWebber to establish a truly advisor-centric business model, focused on core
affluent and high net worth clients, building on the existing client base,
content and resources.
32
<PAGE> 418
UBS WARBURG
28 NOVEMBER 2000
e-SERVICES
BUSINESS UNIT REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------- ------------- ------------------
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 2Q00 3Q99 30.9.00 30.9.99
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (5) 0 0 (5) 0
Credit loss expense 0 0 0 0 0
--------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME (5) 0 0 (5) 0
--------------------------------------------------------------------------------------------------------------
Personnel expenses 32 47 4 (32) 700 116 4
General and administrative expenses 31 39 1 (21) -- 91 1
Depreciation 4 9 0 (56) 18 0
Amortization of goodwill and
other intangible assets 1 0 0 1 0
--------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 68 95 5 (28) -- 226 5
--------------------------------------------------------------------------------------------------------------
BUSINESS UNIT PERFORMANCE BEFORE TAX (73) (95) (5) 23 -- (231) (5)
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL INFORMATION % change from
-------------------
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Regulatory equity used (avg) 0 0 0
Headcount (full time equivalents) 384 226 70 70 449
------------------------------------------------------------------------------------------
</TABLE>
INITIATIVES AND ACHIEVEMENTS
During third quarter 2000, UBS Warburg's e-services project has delivered its
pre-launch objectives in a timely and very satisfactory manner. A UK banking
licence was received from the Financial Services Authority, with a passport to
all European Union countries, two state-of-the-art data centers in London are
functioning in the production environment and the real time e-services
platform (multi-currency, multi-entity, multi-lingual) has been built and
successfully tested.
RESULTS
Following the decision to integrate the business with the Private Clients unit
and realign its strategic focus, e-services' expansion plans were put on hold,
reducing Personnel expenses to CHF 32 million in the third quarter, compared
with CHF 47 million in the previous quarter, and General and administrative
expenses from CHF 39 million in second quarter to CHF 31 million in third
quarter.
OUTLOOK
UBS Warburg intends to leverage PaineWebber's success and know-how to develop
further its global private client business model, as many of the same dynamics
that have fueled investment growth in the US begin to impact the wealth markets
in Europe.
PaineWebber provides UBS Warburg with a unique opportunity to address the
onshore high net worth and affluent private client market in Europe, extending
PaineWebber's adviser-centric business model to new markets. e-services and the
existing non-US business of UBS Warburg Private Clients will form the core of
this new venture, with the focus on premium clients rather than the mass
affluent market originally targeted by e-services.
Concentration on face-to-face relationships and supplementary online
services means that providing investment advice and selling financial products
via telephone call centers is no longer central to the distribution strategy.
Call centers will therefore not be developed as previously planned, which will
lead to significant headcount reductions.
e-services' technology will be re-deployed to support this effort, helping
to provide seamless integration of online capabilities with the financial
adviser/client relationship.
The multi-currency and multi-entity transaction processing back-end
systems developed for e-services will be integrated with front-end technology
based on PaineWebber's industry-leading on-line systems. The result will be a
pan-European processing platform with front-end systems tailored to each
country's specific needs.
As a result of this opportunity to refocus, the e-services pilot launch
planned for late autumn in Germany will not now take place.
33
<PAGE> 419
CORPORATE CENTER
28 NOVEMBER 2000
CORPORATE CENTER
BUSINESS GROUP REPORTING
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------------------ ------------------- ---------------------
CHF million, except where indicated 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income 41 50 (20) 2 (18) -- 74 (33) 2
Credit loss recovery 374 439 80 (15) 368 995 176
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 415 489 60 (15) 383 1,069 143
-----------------------------------------------------------------------------------------------------------------------------------
Personnel expenses 99 156 110 (37) (10) 389 192
General and administrative expenses 96 125 3 (43) (23) -- 274 57
Depreciation 78 62 90 26 (13) 213 213
Amortization of goodwill and
other intangible assets 10 11 10 (9) 0 33 33
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 283 354 167 (20) 69 909 495
-----------------------------------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 132 135 (107) (2) -- 160 (352)
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL INFORMATION % change from
-----------------------
<S> <C> <C> <C> <C> <C>
As of 30.9.00 30.6.00 31.12.99 30.6.00 31.12.99
---------------------------------------------------------------------------------------------------------------------------
Regulatory equity used (avg) 9,750 9,950 7,850 (2) 24
Headcount (full time equivalents) 921 931 862 (1) 7
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 Third
quarter 1999 income has been adjusted for a CHF 26 million gain from our
residual holding in Long Term Capital Management (LTCM). Year-to-date 1999
income has additionally been adjusted for the CHF 1,490 million sale of our 25%
stake in Swiss Life / Rentenanstalt and the CHF 110 million gain on the sale of
Julius Baer registered shares. 3 General and administrative expenses in the
second quarter 2000 have been adjusted for the additional CHF 200 million
provision relating to the US Global Settlement.
RESULTS DISCUSSION
Adjusted for significant financial events, Corporate Center recorded a pre-tax
profit of CHF 132 million for third quarter 2000, versus a pre-tax loss of CHF
107 million for third quarter 1999 and a pre-tax profit of CHF 135 million
during second quarter 2000.
The credit loss recovery booked in Corporate Center represents the
difference between the adjusted expected losses charged to the business units
and the actual credit loss recovery recognized in the Group financial accounts.
This quarter the continued strength of the Swiss economy has allowed UBS to make
a further write back of credit loss provisions of CHF 142 million. This
continued better than expected credit loss performance resulted in a credit loss
recovery in Corporate Center of CHF 374 million.
The results of UBS's 91.2% holding in Klinik Hirslanden AG were fully
consolidated for the first time in fourth quarter 1999. This has led to an
increase in operating income and expenses compared to third quarter 1999, when
there was no equivalent contribution in Corporate Center.
34
<PAGE> 420
FINANCIAL STATEMENTS
28 NOVEMBER 2000
FINANCIAL STATEMENTS
UBS GROUP INCOME STATEMENT
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
---------------------------------- ----------------- ---------------------
CHF million, except per share data Note 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
Interest income 3 12,480 12,682 9,353 (2) 33 36,559 25,646
Interest expense 3 (10,649) (10,445) (7,940) (2) (34) (30,402) (21,480)
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,831 2,237 1,413 (18) 30 6,157 4,166
Credit loss recovery / expense 142 208 (275) -- -- 225 (910)
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income
after credit loss recovery / expense 1,973 2,445 1,138 (19) 73 6,382 3,256
-----------------------------------------------------------------------------------------------------------------------------------
Net fee and commission income 4 3,865 3,756 3,066 3 26 11,700 9,250
Net trading income 5 2,368 2,691 2,097 (12) 13 8,037 6,557
Net gains from disposal of
associates and subsidiaries 0 21 (6) -- -- 23 1,772
Other income 6 339 287 239 18 42 960 801
-----------------------------------------------------------------------------------------------------------------------------------
Total operating income 8,545 9,200 6,534 (7) 31 27,102 21,636
====================================================================================================================================
OPERATING EXPENSES
Personnel 7 3,863 4,354 3,104 (11) 24 12,739 9,923
General and administrative 7 1,503 1,743 1,391 (14) 8 4,677 3,779
Depreciation and amortization 7 476 451 426 6 12 1,423 1,290
-----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 5,842 6,548 4,921 (11) 19 18,839 14,992
====================================================================================================================================
OPERATING PROFIT BEFORE
TAX AND MINORITY INTERESTS 2,703 2,652 1,613 2 68 8,263 6,644
====================================================================================================================================
Tax expense 621 591 374 5 66 1,878 1,525
-----------------------------------------------------------------------------------------------------------------------------------
NET PROFIT BEFORE MINORITY INTERESTS 2,082 2,061 1,239 1 68 6,385 5,119
====================================================================================================================================
Minority interests (7) (9) (14) 22 50 (42) (35)
-----------------------------------------------------------------------------------------------------------------------------------
NET PROFIT 2,075 2,052 1,225 1 69 6,343 5,084
====================================================================================================================================
Basic earnings per share (CHF) 3 8 5.15 5.24 3.07 (2) 68 16.05 12.48
Basic earnings per share
before goodwill (CHF) 2, 3 8 5.46 5.57 3.27 (2) 67 17.07 13.10
Diluted earnings per share (CHF) 3 8 5.09 5.19 3.05 (2) 67 15.88 12.38
Diluted earnings per share
before goodwill (CHF) 2, 3 8 5.40 5.51 3.26 (2) 66 16.88 13.00
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting). 2 The
amortization of goodwill and other purchased intangible assets is excluded from
this calculation. 3 1999 share figures are restated for the two-for-one share
split, effective 8 May 2000.
35
<PAGE> 421
FINANCIAL STATEMENTS
28 NOVEMBER 2000
UBS GROUP BALANCE SHEET
<TABLE>
<CAPTION>
% change from
---------------------
CHF million 30.9.00 30.6.00 31.12.99 1 30.6.00 31.12.99
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and balances with central banks 2,417 3,457 5,073 (30) (52)
Money market paper 71,978 61,504 69,717 17 3
Due from banks 25,914 25,761 29,907 1 (13)
Cash collateral on securities borrowed 152,551 146,199 113,162 4 35
Reverse repurchase agreements 174,562 164,866 132,474 6 32
Trading portfolio assets 223,486 215,649 212,440 4 5
Positive replacement values 76,344 57,758 64,698 32 18
Loans, net of allowance for credit losses 244,754 233,015 234,858 5 4
Financial investments 10,051 9,504 7,039 6 43
Accrued income and prepaid expenses 7,024 5,817 5,167 21 36
Investments in associates 862 818 1,102 5 (22)
Property and equipment 8,283 8,216 8,701 1 (5)
Intangible assets and goodwill 3,701 3,545 3,543 4 4
Other assets 8,306 10,198 11,007 (19) (25)
--------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,010,233 946,307 898,888 7 12
================================================================================================================================
Total subordinated assets 648 330 600 96 8
--------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Money market paper issued 65,527 85,409 64,655 (23) 1
Due to banks 96,417 75,172 76,365 28 26
Cash collateral on securities lent 15,894 15,334 12,832 4 24
Repurchase agreements 261,580 230,565 196,914 13 33
Trading portfolio liabilities 60,694 60,279 54,586 1 11
Negative replacement values 92,796 77,926 95,786 19 (3)
Due to customers 291,627 279,915 279,960 4 4
Accrued expenses and deferred income 17,267 14,492 12,040 19 43
Long-term debt 50,558 52,990 56,332 (5) (10)
Other liabilities 20,528 21,950 18,376 (6) 12
--------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 972,888 914,032 867,846 6 12
--------------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 417 399 434 5 (4)
--------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital 4,317 4,317 4,309 0 0
Share premium account 14,127 14,554 14,437 (3) (2)
Foreign currency translation (710) (557) (442) (27) (61)
Retained earnings 24,505 22,431 20,327 9 21
Treasury shares (5,311) (8,869) (8,023) 40 34
--------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 36,928 31,876 30,608 16 21
--------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS' EQUITY 1,010,233 946,307 898,888 7 12
================================================================================================================================
Total subordinated liabilities 14,393 14,089 14,801 2 (3)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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: Basis of Accounting).
36
<PAGE> 422
FINANCIAL STATEMENTS
28 NOVEMBER 2000
UBS GROUP STATEMENT OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
CHF million
For the nine-month period ended 30.9.00 30.9.99 1
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ISSUED AND PAID UP SHARE CAPITAL
Balance at the beginning of the period 4,309 4,300
Issue of share capital 8 6
--------------------------------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE PERIOD 2 4,317 4,306
===================================================================================================================
SHARE PREMIUM
Balance at the beginning of the period (as per prior Annual Report) 13,929 13,740
Change in accounting policy 508 (123)
Balance at the beginning of the period (restated) 14,437 13,617
Premium on shares issued and warrants exercised 3 74 9
Net premium / (discount) on treasury share and own equity derivative activity 3 (384) 481
--------------------------------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE PERIOD 14,127 14,107
===================================================================================================================
FOREIGN CURRENCY TRANSLATION
Balance at the beginning of the period (442) (456)
Movements during the period (268) (2)
--------------------------------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE PERIOD (710) (458)
===================================================================================================================
RETAINED EARNINGS
Balance at the beginning of the period (as per prior Annual Report) 20,501 16,293
Change in accounting policy (174) (69)
Balance at the beginning of the period (restated) 20,327 16,224
Net profit for the period 6,343 5,084
Dividends paid (2,165) (2,050)
--------------------------------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE PERIOD 24,505 19,258
===================================================================================================================
TREASURY SHARES, AT COST
Balance at the beginning of the period (as per prior Annual Report) (3,462) (1,482)
Change in accounting policy (4,561) (3,409)
Balance at the beginning of the period (restated) (8,023) (4,891)
Acquisitions (11,161) (5,665)
Disposals 13,873 2,904
--------------------------------------------------------------------------------------------------------------------
BALANCE AT THE END OF THE PERIOD 4 (5,311) (7,652)
===================================================================================================================
TOTAL SHAREHOLDERS' EQUITY 36,928 29,561
===================================================================================================================
</TABLE>
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: Basis of Accounting). 2
Comprising 431,697,629 ordinary shares as of 30 September 2000 and 430,578,786
ordinary shares as of 30 September 1999, 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 Comprising
25,069,074 ordinary shares as of 30 September 2000 and 35,449,010 ordinary
shares as of 30 September 1999.
In addition to treasury shares a maximum amount of 46,253,441 unissued shares
were available to be issued without further approval of the shareholders. This
amount of shares consisted of 38 million authorized shares, for use in the share
exchange for the PaineWebber merger, and 17,253,441 shares of conditional
capital of which 17 million were available to be used for PaineWebber employee
option plans. However, these two categories of shares are interrelated.
Therefore the number of shares finally issued will be less than the 55 million
aggregate of the possible authorized and conditional capital increases. Using
the maximum of one category would automatically lead to a reduction of the other
category. This means that the maximum number of shares issued under the
authorized and conditional capital in relation to the PaineWebber merger could
not exceed 46 million shares.
37
<PAGE> 423
FINANCIAL STATEMENTS
28 NOVEMBER 2000
UBS GROUP STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
CHF million
For the nine-month period ended 30.9.00 30.9.99 1
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOW FROM / (USED IN) OPERATING ACTIVITIES
Net profit 6,343 5,084
ADJUSTMENTS TO RECONCILE TO CASH FLOW FROM / (USED IN) OPERATING ACTIVITIES
Non cash items included in net profit and other adjustments:
Depreciation and amortization 1,423 1,290
Provision for credit losses (225) 910
Income from associates (70) (125)
Deferred tax expense 238 279
Net gain from investing activities (472) (2,196)
Net increase / (decrease) in operating assets:
Net due from / to banks 19,940 (1,611)
Reverse repurchase agreements, cash collateral on securities borrowed (81,477) (3,178)
Trading portfolio including net replacement values (19,574) (12,893)
Loans due to / from customers 1,996 7,995
Accrued income, prepaid expenses and other assets 844 129
Net increase / (decrease) in operating liabilities:
Repurchase agreements, cash collateral on securities lent 67,728 3,773
Accrued expenses and other liabilities 7,988 (3,028)
Income taxes paid (840) (722)
---------------------------------------------------------------------------------------------------------------------
NET CASH FLOW FROM / (USED IN) OPERATING ACTIVITIES 3,842 (4,293)
---------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM / (USED IN) INVESTING ACTIVITIES
Investments in subsidiaries and associates (603) (308)
Disposal of subsidiaries and associates 377 3,659
Purchase of property and equipment (741) (1,969)
Disposal of property and equipment 190 420
Net (investment) / divestment in financial investments (2,623) 1,004
---------------------------------------------------------------------------------------------------------------------
NET CASH FLOW FROM / (USED IN) INVESTING ACTIVITIES (3,400) 2,806
---------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Money market paper issued 872 15,890
Net movements in treasury shares and treasury share contract activity 2,402 (2,271)
Capital issuance 8 6
Dividends paid (2,165) (2,050)
Issuance of long-term debt 10,376 8,141
Repayment of long-term debt (16,150) (3,400)
Repayment of minority interests (20) (689)
---------------------------------------------------------------------------------------------------------------------
NET CASH FLOW FROM FINANCING ACTIVITIES (4,677) 15,627
Effects of exchange rate differences (266) 67
---------------------------------------------------------------------------------------------------------------------
NET INCREASE / (DECREASE) IN CASH EQUIVALENTS (4,501) 14,207
Cash and cash equivalents, beginning of period 102,277 83,678
---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 97,776 97,885
---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS COMPRISE:
Cash and balances with central banks 2,417 2,746
Money market paper 71,978 63,606
Due from banks maturing in less than three months 23,381 31,533
---------------------------------------------------------------------------------------------------------------------
TOTAL 97,776 97,885
=====================================================================================================================
</TABLE>
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: Basis of Accounting).
38
<PAGE> 424
NOTES TO THE
FINANCIAL STATEMENTS
NOTES TO THE 28 NOVEMBER 2000
FINANCIAL STATEMENTS
NOTE 1 BASIS OF ACCOUNTING
The UBS AG consolidated financial statements are prepared in accordance with
International Accounting Standards ("IAS"). These interim financial statements
are presented in accordance with IAS 34 "Interim Financial Statements".
In the first half of 2000, the Group reorganized its business divisions. The
segment reporting for the first nine months of 2000, as well as the comparative
segment reporting for the first nine months of 1999, reflect the new Group
structure.
At the Annual General Meeting of shareholders held on 18 April 2000, a
two-for-one stock split was approved to be effective 8 May 2000. Accordingly,
share and per share information have been adjusted to retroactively reflect the
stock split.
In preparing the consolidated interim financial statements, the same
accounting policies and methods of computation are followed as in the
consolidated financial statements at 31 December 1999 and for the year then
ended, with the exception of the following changes in accounting policies:
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
In July 1998, the International Accounting Standard Committee ("IASC") issued
IAS 37, Provisions, Contingent Liabilities and Contingent Assets, which has been
adopted for the Group's financial statements as of 1 January 2000. The Standard
provides recognition and measurement requirements for provisions. IAS 37 also
provides accounting and disclosure requirements for contingent liabilities and
contingent assets.
IAS 38 Intangible Assets
In July 1998, the IASC issued IAS 38 Intangible Assets, which the Group adopted
prospectively as of 1 January 2000. The standard requires the capitalization and
amortization of certain intangible assets, if it is probable that the future
economic benefits that are attributable to the assets will flow to the
enterprise and the cost can be measured reliably.
IAS 10 (revised), Events after the Balance Sheet Date
In May 1999, the IASC issued IAS 10 (revised), Events after the Balance Sheet
Date, which has been adopted for the Group's financial statements as of 1
January 2000. IAS 10 (revised) establishes requirements for the recognition and
disclosure of events after the balance sheet date. The adoption of IAS 10
(revised) had no impact on any comparative financial information.
Interpretation SIC 16, Share Capital - Reacquired Own Equity Instruments
(Treasury Shares)
In May 1999, the IASC issued Interpretation SIC 16, Share Capital - Reacquired
Own Equity Instruments (Treasury Shares), which the Group adopted as of 1
January 2000. The interpretation provides guidance for the recognition,
presentation and disclosure of treasury shares. SIC 16 applies to own shares and
derivatives on own shares held for trading and non-trading purposes. SIC 16
requires own shares and derivatives on own shares to be presented as treasury
shares and deducted from shareholders' equity. Gains and losses relating to the
sale of own shares 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 increased by CHF 11
million for the quarter ended 30 September 1999 and was decreased by CHF 127
million for the nine-month period ended 30 September 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 December 1998.
Offsetting of Amounts Related to Certain Contracts
In order to improve comparability with its main competitors, the Group has
offset positive and negative replacement values and reverse repurchase
agreements and repurchase agreements with the same counter-party for
transactions covered by legally enforceable master netting agreements. This
change became effective as of 1 January 2000 and all prior periods represented
have been restated. 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 on Trading Assets
In prior periods, interest and dividend income and expense on trading assets and
liabilities were
39
<PAGE> 425
NOTES TO THE
FINANCIAL STATEMENTS
28 NOVEMBER 2000
included in Net trading income. In order to improve comparability with its main
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 4,563 million and CHF 12,707 million
for the quarter ended 30 September 1999 and the nine-month period ended 30
September 1999 respectively. Interest expense was increased by CHF 4,622 million
and CHF 13,378 million for the quarter ended 30 September 1999 and the
nine-month period ended 30 September 1999 respectively. In addition, net trading
income was increased by CHF 59 million and CHF 671 million for the quarter ended
30 September 1999 and nine-month period ended 30 September 1999 respectively.
Tax expense
In prior periods, capital taxes were included in Tax expense. Capital taxes have
been reclassified from Tax expense to General and administrative expenses for
all prior periods presented.
40
<PAGE> 426
NOTES TO THE
FINANCIAL STATEMENTS
28 NOVEMBER 2000
NOTE 2 REPORTING BY BUSINESS GROUP
The Business Group results have been presented on a management reporting basis.
Consequently, internal charges and transfer pricing adjustments have been
reflected in the performance of each business. The basis of the reporting
reflects the management of the business within the Group. Total revenue includes
income, which is directly attributable to a Business Group whether from sales to
external customers or from transactions with other segments. Revenue sharing
agreements are used to allocate external customer revenues to a Business Group
on a reasonable basis. Transactions between Business Groups are conducted at
arms length.
FOR THE NINE-MONTH PERIOD ENDED 30 SEPTEMBER 2000
<TABLE>
<CAPTION>
UBS UBS Asset UBS Corporate UBS
CHF million Switzerland Management Warburg Center Group
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues 10,685 1,465 14,653 74 26,877
Credit loss recovery 1 (606) 0 (164) 995 225
-----------------------------------------------------------------------------------------------------------
Total operating income 10,079 1,465 14,489 1,069 27,102
-----------------------------------------------------------------------------------------------------------
Personnel expenses 3,634 646 8,070 389 12,739
General and administrative expenses 1,700 301 2,202 474 4,677
Depreciation 344 34 431 213 1,022
Amortization of goodwill and
other intangible assets 52 198 118 33 401
-----------------------------------------------------------------------------------------------------------
Total operating expenses 5,730 1,179 10,821 1,109 18,839
-----------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 4,349 286 3,668 (40) 8,263
Tax expense 1,878
-----------------------------------------------------------------------------------------------------------
NET PROFIT BEFORE MINORITY INTERESTS 6,385
Minority interests (42)
-----------------------------------------------------------------------------------------------------------
NET PROFIT 6,343
===========================================================================================================
</TABLE>
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 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 225 million for the nine-month period ended 30 September 2000 is
as follows: UBS Switzerland CHF 543 million, UBS Warburg CHF (318)
million.
FOR THE NINE-MONTH PERIOD ENDED 30 SEPTEMBER 1999 2
<TABLE>
<CAPTION>
UBS UBS Asset UBS Corporate UBS
CHF million Switzerland Management Warburg Center Group
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues 9,582 1,013 10,358 1,593 22,546
Credit loss expense 1 (846) 0 (240) 176 (910)
-----------------------------------------------------------------------------------------------------------
Total operating income 8,736 1,013 10,118 1,769 21,636
-----------------------------------------------------------------------------------------------------------
Personnel expenses 3,539 406 5,786 192 9,923
General and administrative expenses 1,687 198 1,837 57 3,779
Depreciation 315 22 488 213 1,038
Amortization of goodwill and
other intangible assets 18 83 118 33 252
-----------------------------------------------------------------------------------------------------------
Total operating expenses 5,559 709 8,229 495 14,992
-----------------------------------------------------------------------------------------------------------
BUSINESS GROUP PERFORMANCE BEFORE TAX 3,177 304 1,889 1,274 6,644
Tax expense 1,525
-----------------------------------------------------------------------------------------------------------
NET PROFIT BEFORE MINORITY INTERESTS 5,119
Minority interests (35)
-----------------------------------------------------------------------------------------------------------
NET PROFIT 5,084
===========================================================================================================
</TABLE>
1 In order to show the relevant Business Group performance over time,
adjusted expected loss figures rather than the net credit loss expense are
reported for all Business Groups. The statistically derived adjusted expected
losses reflect the inherent counterparty and country risks in the respective
portfolios. The difference between the statistically derived adjusted expected
loss figures and the net credit loss expenses recorded at Group level for
financial reporting purposes is reported in the Corporate Center. The divisional
breakdown of the net credit loss expense for financial reporting purposes of CHF
910 million for the nine-month period ended 30 September 1999 is as follows: UBS
Switzerland CHF 907 million, UBS Warburg CHF 4 million, Corporate Center CHF (1)
million. 2 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: Basis of Accounting).
41
<PAGE> 427
NOTES TO THE
FINANCIAL STATEMENTS
28 NOVEMBER 2000
NOTE 3 NET INTEREST INCOME
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------------- ---------------- -------------------
CHF million 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest earned on loans and advances to banks 1,507 987 1,692 53 (11) 3,586 4,159
Interest earned on loans and advances to customers 3,913 3,790 3,053 3 28 11,066 8,692
Interest from finance leasing 11 8 13 38 (15) 30 36
Interest earned on securities borrowed
and reverse repurchase agreements 4,396 4,929 2,984 (11) 47 13,415 8,376
Interest and dividend income from financial investments 39 60 42 (35) (7) 139 108
Interest and dividend income from trading portfolio 2,554 2,813 1,514 (9) 69 8,130 4,136
Other 60 95 55 (37) 9 193 139
------------------------------------------------------------------------------------------------------------------------------------
Total 12,480 12,682 9,353 (2) 33 36,559 25,646
------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on amounts due to banks 1,415 1,130 1,781 25 (21) 3,645 3,476
Interest on amounts due to customers 2,692 2,269 2,109 19 28 7,145 6,169
Interest on securities lent and repurchase agreements 3,533 3,638 2,158 (3) 64 10,240 6,376
Interest and dividend expense from trading portfolio 1,136 1,435 507 (21) 124 3,860 1,585
Interest on medium and long-term debt 1,873 1,973 1,385 (5) 35 5,512 3,874
------------------------------------------------------------------------------------------------------------------------------------
Total 10,649 10,445 7,940 2 34 30,402 21,480
------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 1,831 2,237 1,413 (18) 30 6,157 4,166
====================================================================================================================================
</TABLE>
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: Basis of Accounting).
42
<PAGE> 428
NOTES TO THE
FINANCIAL STATEMENTS
28 NOVEMBER 2000
NOTE 4 NET FEE AND COMMISSION INCOME
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
---------------------------- ------------- ------------
CHF million 30.9.00 30.6.00 30.9.99 2Q00 3Q99 30.9.00 30.9.99
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CREDIT-RELATED FEES AND COMMISSIONS 69 65 85 6 (19) 214 300
-----------------------------------------------------------------------------------------------------------------------------------
SECURITY TRADING AND INVESTMENT ACTIVITY FEES
Underwriting fees 1 364 371 220 (2) 65 954 598
Corporate finance fees 1 403 444 236 (9) 71 1,164 859
Brokerage fees 1,261 1,257 928 0 36 4,240 2,810
Investment fund fees 641 658 480 (3) 34 2,001 1,405
Fiduciary fees 86 86 81 0 6 261 243
Custodian fees 349 373 490 (6) (29) 1,075 1,278
Portfolio and other
management and advisory fees 1 890 809 594 10 50 2,521 1,895
Other 15 4 22 275 (32) 44 75
-----------------------------------------------------------------------------------------------------------------------------------
Total 4,009 4,002 3,051 0 31 12,260 9,163
-----------------------------------------------------------------------------------------------------------------------------------
COMMISSION INCOME FROM OTHER SERVICES 176 188 208 (6) (15) 567 575
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL FEE AND COMMISSION INCOME 4,254 4,255 3,344 0 27 13,041 10,038
-----------------------------------------------------------------------------------------------------------------------------------
FEE AND COMMISSION EXPENSE
Brokerage fees paid 244 266 208 (8) 17 826 567
Other 145 233 70 (38) 107 515 221
-----------------------------------------------------------------------------------------------------------------------------------
Total 389 499 278 (22) 40 1,341 788
-----------------------------------------------------------------------------------------------------------------------------------
NET FEE AND COMMISSION INCOME 3,865 3,756 3,066 3 26 11,700 9,250
===================================================================================================================================
</TABLE>
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 prior periods have been restated accordingly.
NOTE 5 NET TRADING INCOME
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
------------------------------- --------------- ----------------------
CHF million 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Foreign exchange 2 255 397 174 (36) 47 935 892
Fixed income 101 440 725 (77) (86) 744 2,028
Equities 2,012 1,854 1,198 9 68 6,358 3,637
------------------------------------------------------------------------------------------------------------------
NET TRADING INCOME 2,368 2,691 2,097 (12) 13 8,037 6,557
==================================================================================================================
Trading related net interest 3 2,281 2,669 1,833 (15) 24 7,445 4,551
------------------------------------------------------------------------------------------------------------------
Combined total 4,649 5,360 3,930 (13) 18 15,482 11,108
==================================================================================================================
</TABLE>
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: Basis of Accounting). 2
Includes other trading income such as banknotes, precious metals and
commodities. 3 Includes Net interest and dividend income from trading portfolio
and Net interest income on securities borrowed and lent and repurchase and
reverse repurchase agreements, which are included in Net interest income (Note
3).
43
<PAGE> 429
NOTES TO THE
FINANCIAL STATEMENTS
28 NOVEMBER 2000
NOTE 6 OTHER INCOME
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
-------------------------- --------------- ----------------
CHF million 30.9.00 30.6.00 30.9.99 2Q00 3Q99 30.9.00 30.9.99
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENTS IN FINANCIAL ASSETS (DEBT AND EQUITY)
Net income from disposal of
private equity investments 161 214 143 (25) 13 572 293
Net income from disposal of
other financial assets 13 77 60 (83) (78) 97 90
Net loss from revaluation of financial assets (33) (198) (27) 83 (22) (251) (47)
--------------------------------------------------------------------------------------------------------------------------
Total 141 93 176 52 (20) 418 336
--------------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN PROPERTY
Net income from disposal of
properties held for resale 7 14 20 (50) (65) 44 56
Net loss from revaluation of
properties held for resale (7) (60) (10) 88 30 (73) (19)
Net income from other properties 32 21 18 52 78 60 51
--------------------------------------------------------------------------------------------------------------------------
Total 32 (25) 28 228 14 31 88
--------------------------------------------------------------------------------------------------------------------------
EQUITY INCOME FROM INVESTMENTS IN ASSOCIATES 11 48 23 (77) (52) 70 125
--------------------------------------------------------------------------------------------------------------------------
OTHER 155 171 12 (9) -- 441 252
--------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 339 287 239 18 42 960 801
==========================================================================================================================
</TABLE>
NOTE 7 OPERATING EXPENSES
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
----------------------------- ----------------- ----------------
CHF million 30.9.00 30.6.00 30.9.99 2Q00 3Q99 30.9.00 30.9.99
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PERSONNEL EXPENSES
Salaries and bonuses 3,025 3,553 2,300 (15) 32 10,295 7,672
Contractors 184 166 223 11 (17) 519 609
Insurance and social contributions 217 225 190 (4) 14 707 562
Contribution to retirement benefit plans 125 118 95 6 32 363 337
Employee share plans 24 21 22 14 9 65 131
Other personnel expenses 288 271 274 6 5 790 612
-------------------------------------------------------------------------------------------------------------------------
TOTAL 3,863 4,354 3,104 (11) 24 12,739 9,923
-------------------------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
Occupancy 211 243 199 (13) 6 685 599
Rent and maintenance
of machines and equipment 100 136 93 (26) 8 356 216
Telecommunications and postage 214 218 177 (2) 21 626 548
Administration 165 175 139 (6) 19 523 476
Marketing and public relations 106 138 85 (23) 25 315 192
Travel and entertainment 144 155 132 (7) 9 436 379
Professional fees 141 155 34 (9) 315 419 331
IT and other outsourcing 293 258 506 14 (42) 857 905
Other 129 265 26 (51) 396 460 133
-------------------------------------------------------------------------------------------------------------------------
TOTAL 1,503 1,743 1,391 (14) 8 4,677 3,779
-------------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Property, equipment and software 350 324 345 8 1 1,022 1,038
Goodwill and other intangible assets 126 127 81 (1) 56 401 252
-------------------------------------------------------------------------------------------------------------------------
TOTAL 476 451 426 6 12 1,423 1,290
-------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 5,842 6,548 4,921 (11) 19 18,839 14,992
=========================================================================================================================
</TABLE>
44
<PAGE> 430
NOTES TO THE
FINANCIAL STATEMENTS
28 NOVEMBER 2000
NOTE 8 EARNINGS PER SHARE
<TABLE>
<CAPTION>
Quarter ended % change from Year-to-date
--------------------------------------- ------------- ----------------------
CHF million 30.9.00 30.6.00 30.9.99 1 2Q00 3Q99 30.9.00 30.9.99 1
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE CALCULATION
Net profit for the period (CHF million) 2,075 2,052 1,225 1 69 6,343 5,084
Net profit for the period before
goodwill amortization (CHF million) 2 2,201 2,179 1,306 1 69 6,744 5,336
Weighted average shares outstanding:
Registered ordinary shares 431,697,293 431,328,220 430,578,326 0 0 431,330,568 430,434,800
Treasury shares (28,873,507) (40,080,525) (31,738,941) 28 9 (36,248,750) (23,077,197) 3
----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES
FOR BASIC EARNINGS PER SHARE 402,823,786 391,247,695 398,839,385 3 1 395,081,818 407,357,603
==================================================================================================================================
BASIC EARNINGS PER SHARE (CHF) 5.15 5.24 3.07 (2) 68 16.05 12.48
BASIC EARNINGS PER SHARE BEFORE
GOODWILL AMORTIZATION (CHF)2 5.46 5.57 3.27 (2) 67 17.07 13.10
==================================================================================================================================
DILUTED EARNINGS PER SHARE CALCULATION
Net profit for the period (CHF million) 2,075 2,052 1,225 1 69 6,343 5,084
Net profit for the period before
goodwill amortization (CHF million) 2 2,201 2,179 1,306 1 69 6,744 5,336
Weighted average shares for
Basic Earnings per share 402,823,786 391,247,695 398,839,385 3 1 395,081,818 407,357,603
Potential dilutive ordinary shares
resulting from outstanding options,
warrants and convertible debt securities 4,613,913 4,405,372 2,174,302 5 112 4,338,966 3,184,624 4
----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES FOR
DILUTED EARNINGS PER SHARE 407,437,699 395,653,067 401,013,687 3 2 399,420,784 410,542,227
==================================================================================================================================
DILUTED EARNINGS PER SHARE (CHF) 5.09 5.19 3.05 (2) 67 15.88 12.38
DILUTED EARNINGS PER SHARE BEFORE
GOODWILL AMORTIZATION (CHF) 2 5.40 5.51 3.26 (2) 66 16.88 13.00
==================================================================================================================================
</TABLE>
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: Basis of Accounting). 2 The
amortization of goodwill and other purchased intangible assets is excluded from
this calculation. 3 Treasury shares have increased by 9,290,451 for the period
ended 30 September 1999, due to a change in accounting policy (see Note 1: Basis
of Accounting). 4 Share amount has been adjusted by 907,360 representing other
potentially dilutive instruments for the period ended 30 September 1999, due to
a change in accounting policy (see Note 1: Basis of Accounting).
1999 share figures are restated for the two-for-one share split, effective 8 May
2000.
45
<PAGE> 431
NOTES TO THE
FINANCIAL STATEMENTS
28 NOVEMBER 2000
NOTE 9 SIGNIFICANT CURRENCY TRANSLATION RATES
The following table shows the significant rates used to translate the financial
statements of foreign entities into Swiss francs.
<TABLE>
<CAPTION>
SPOT RATE AVERAGE RATE
As of Year-to-date
----------------------------------------- ---------------------------------
30.9.00 30.6.00 31.12.99 30.9.00 30.6.00 30.9.99
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 USD 1.73 1.63 1.59 1.67 1.66 1.48
1 EUR 1.52 1.56 1.61 1.57 1.59 1.60
1 GBP 2.53 2.48 2.58 2.58 2.61 2.40
100 JPY 1.60 1.55 1.56 1.57 1.56 1.28
==========================================================================================================
</TABLE>
NOTE 10 POST BALANCE SHEET DATE EVENTS
On 3 November 2000, the previously announced merger with PaineWebber Group Inc.
was completed for a total consideration of CHF 20.8 billion.
46
<PAGE> 432
[UBS AG LOGO]
<PAGE> 433
EXPLANATORY NOTE
The following substitute pages relate to the prospectus covering the preferred
trust securities. These pages will replace the corresponding pages of the first
prospectus contained in this registration statement.
<PAGE> 434
PROSPECTUS Prospectus dated 27 December 2000
--------------------------------------------------------------------------------
[UBS AG LOGO]
$195,000,000 of 8.30% Preferred Trust Securities
PWG Capital Trust I
$198,750,000 of 8.08% Preferred Trust Securities
PWG Capital Trust II
FULLY AND UNCONDITIONALLY GUARANTEED, TO THE EXTENT DESCRIBED IN THIS
PROSPECTUS, BY
UBS Americas Inc.
UBS AG
--------------------------------------------------------------------------------
This prospectus relates to outstanding preferred trust securities that were
issued in 1996 and 1997 by two trusts, PWG Capital Trust I and PWG Capital Trust
II. The preferred trust securities issued by PWG Capital Trust I are the 8.30%
Preferred Trust Securities. The preferred trust securities issued by PWG Capital
Trust II are the 8.08% Preferred Trust Securities. Each series of preferred
trust securities represents preferred undivided beneficial interests in the
assets of its issuer. Each trust exists for the sole purpose of issuing its
preferred trust securities and the related common trust securities, and
investing the proceeds of those securities in junior subordinated debentures of
Paine Webber Group Inc. Paine Webber Group Inc. provided a full and
unconditional guarantee, to the extent described in this prospectus, of the
obligations of each trust under its preferred trust securities.
Both series of preferred trust securities are listed on the New York Stock
Exchange. The 8.30% Preferred Trust Securities of PWG Capital Trust I are listed
under the symbol "PWJ PrA." The 8.08% Preferred Trust Securities of PWG Capital
Trust II are listed under the symbol "PWJ PrB."
Both of the trusts were subsidiaries of Paine Webber Group Inc. On 3 November
2000, Paine Webber Group Inc. merged with UBS Americas Inc., and UBS Americas
survived that merger. As a result, the two trusts are now subsidiaries of UBS
Americas. In addition, UBS Americas became the guarantor of the preferred trust
securities.
UBS Americas is a wholly owned subsidiary of UBS AG. Following the merger of UBS
Americas and Paine Webber Group, UBS AG issued its guarantee of the payment
obligations of UBS Americas under the agreements that make up UBS Americas'
guarantee of the preferred trust securities. Under this guarantee, UBS AG has
fully and unconditionally guaranteed these obligations of UBS Americas. However,
the obligations of UBS AG under its guarantee are subordinated as well, as
described in this prospectus.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF SOME OF THE RISKS
THAT SHOULD BE CONSIDERED BEFORE PURCHASING PREFERRED TRUST 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.
The securities are not deposit liabilities of UBS AG and are not insured by the
Federal Deposit Insurance Corporation or any other governmental agency of the
United States, Switzerland or any other jurisdiction.
This prospectus is to be used by UBS AG, UBS Warburg LLC, PaineWebber
Incorporated and other affiliates of UBS AG in connection with offers and sales
of the securities when UBS and those affiliates engage in market-making
transactions. These transactions may be executed at negotiated prices that are
related to market prices at the time of purchase or sale, or at other prices.
UBS AG and its affiliates may act as principal or agent in these transactions.
No new securities are offered.
UBS WARBURG LLC PAINEWEBBER INCORPORATED
<PAGE> 435
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary....................
Risk Factors..........................
Use of Proceeds.......................
Cautionary Note Regarding Forward-
Looking Information.................
Capitalization of UBS.................
Recent Developments...................
UBS...................................
UBS Americas..........................
Unaudited Pro Forma Condensed
Consolidated Financial
Information.........................
PWG Capital Trust I and PWG Capital
Trust II............................
Description of Securities.............
Description of the UBS AG Guarantee...
Taxation..............................
Tax Considerations Under The Laws of
Switzerland.........................
ERISA Matters.........................
Plan of Distribution..................
Validity of the Securities............
Experts...............................
Limitations on Enforcement of U.S.
Laws Against UBS AG, Its Management
and Others..........................
Where You Can Find More Information...
Presentation of Financial
Information.........................
Financial Statements of UBS...........
Third Quarter Report 2000.............
</TABLE>
<PAGE> 436
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.
UBS AG
UBS AG is a global, integrated investment services firm and the leading bank in
Switzerland. UBS's business is managed through three main business groups and
its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and
UBS Asset Management. UBS's clients include international corporations, small-
and medium-sized businesses in Switzerland, governments and other public bodies,
financial institutions, market participants and individuals. UBS AG's ordinary
shares are listed on the New York Stock Exchange under the symbol "UBS.N," on
the Zurich Stock Exchange under the symbol "USBNZn.S" and on the Tokyo Stock
Exchange under the symbol "UBS.T."
On 3 November 2000, UBS acquired Paine Webber Group Inc., one of the largest
full-service securities and commodities firms in the United States. UBS
purchased all outstanding shares of PaineWebber stock for a combination of cash
and stock representing a total purchase price of $11.8 billion (based on the UBS
share price on 3 November 2000).
The principal executive offices of UBS AG are located at Bahnhofstrasse 45,
Zurich, Switzerland and Aeschenvorstadt 1, Basel, Switzerland. Its telephone
numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20.
UBS AMERICAS
UBS Americas Inc. is the successor by merger to Paine Webber Group Inc. Paine
Webber Group Inc. was the holding company for the PaineWebber group of
companies. USB Americas is a direct, wholly owned subsidiary of UBS AG.
THE TRUSTS
Each trust is a business trust formed under the Delaware Business Trust Act
under a declaration of trust among the trustees of that trust and UBS Americas.
Each trust's primary governing document is its declaration of trust, which was
completely amended and restated on the date its preferred trust securities were
initially issued. The amended and restated declaration of trust of each trust is
called the trust's "declaration." Each declaration is qualified under the Trust
Indenture Act of 1939. The rights of the Holders of the trust securities,
including economic rights, rights to information and voting rights, are as set
forth in the applicable declaration, the Business Trust Act and the Trust
Indenture Act. UBS Americas holds all the issued and outstanding common trust
securities of each trust.
Each trust exists solely for the purpose of:
- issuing its trust securities for cash,
- investing the proceeds in an equivalent amount of junior subordinated
debentures, and
- engaging in such other activities as are necessary, convenient or incidental
to these activities.
3
<PAGE> 437
THE OFFERING
The Securities................ 7,000,000 8.30% Preferred Trust Securities of
PWG Capital Trust I.
7,000,000 8.08% Preferred Trust Securities of
PWG Capital Trust II.
The terms of each series of preferred trust
securities correspond to the terms of the
junior subordinated debentures held by the
relevant trust. Each trust's ability to make
distributions and other payments on its
preferred trust securities is solely
dependent upon UBS Americas' making payments
on the junior subordinated debentures held by
the trust as and when required.
Liquidation Amount............ The liquidation amount of the 8.30% Preferred
Trust Securities of PWG Capital Trust I is
$25 per security.
The liquidation amount of the 8.08% Preferred
Trust Securities of PWG Capital Trust II is
$25 per security.
Offering Price................ Negotiated prices that are related to market
prices at the time of purchase or sale, or at
other prices.
Distributions................. Holders of the 8.30% Preferred Trust
Securities of PWG Capital Trust I will be
entitled to receive cumulative cash
distributions at an annual rate of 8.30% of
the stated liquidation amount of $25 per
preferred trust security. These distributions
are payable monthly, in arrears, on the first
day of each month.
Holders of the 8.08% Preferred Trust
Securities of PWG Capital Trust II will be
entitled to receive cumulative cash
distributions at an annual rate of 8.08% of
the stated liquidation amount of $25 per
preferred trust security. These distributions
are payable monthly, in arrears, on the first
day of each month.
Extension Periods............. UBS Americas has the right to defer payments
of interest on either series of the junior
subordinated debentures for a period of not
more than five years. No interest will be due
and payable on the junior subordinated
debentures during an extension period and, as
a result, distributions on the trust
securities will also be deferred.
At the end of the extension period, UBS
Americas will be required to pay all accrued
interest on the affected series of junior
subordinated debentures, together with
interest on that accrued interest at the rate
applicable to those junior subordinated
debentures to the extent permitted by
applicable law, compounded monthly.
UBS Americas has the right to select an
extension period as many times as it wishes
during the life of the junior subordinated
debentures. There could be multiple extension
periods of varying lengths throughout the
term of either series of junior subordinated
debentures.
4
<PAGE> 438
See "Risk Factors--Option to Extend Interest
Payment Period," "--Tax Impact of Extension,"
"Description of Securities--Description of
the Junior Subordinated Debentures--General"
and "--Description of the Junior Subordinated
Debentures--Option to Extend Interest Payment
Period."
Ranking....................... The preferred trust securities and the common
trust securities of each trust rank equally
with each other and have equivalent terms.
However,
- If an event of default (as defined below)
under the declaration of trust of the
issuing trust occurs and continues, the
Holders of the preferred trust securities
of that trust will have a priority over the
Holders of the common trust securities of
that trust with respect to payments on
those preferred trust securities.
- Holders of the common securities of each
trust have the exclusive right (subject to
the terms of the trust's declaration of
trust) to appoint, replace or remove
trustees for the issuing trust and to
increase or decrease the number of
trustees.
Redemption.................... The preferred trust securities of each trust
will be redeemed when the junior subordinated
debentures of that trust mature or are
redeemed.
The junior subordinated debentures held by
PWG Capital Trust I will mature on 1 December
2036. UBS Americas may redeem the junior
subordinated debentures held by PWG Capital
Trust I, either as a whole or in part, at any
time after 30 November 2001.
The junior subordinated debentures held by
PWG Capital Trust II will mature on 1 March
2037. UBS Americas may redeem the junior
subordinated debentures held by PWG Capital
Trust II, either as a whole or in part, at
any time after 28 February 2002.
In addition, UBS Americas can redeem the
junior subordinated debentures of either
trust at any time if a "Tax Event," as
described below, occurs.
If UBS Americas redeems any junior
subordinated debentures, the trust that holds
those junior subordinated debentures must
redeem a corresponding amount of its trust
securities. The redemption price will be
equal to the liquidation amount of the trust
security plus any accrued and unpaid
distributions to the date fixed for
redemption. See "Description of
Securities--Description of the Preferred
Trust Securities--Redemption of Trust
Securities."
Distribution of Junior
Subordinated Debentures..... If a trust is dissolved, the junior
subordinated debentures held by that trust
will be distributed to the holders of that
trust's trust securities, pro rata. UBS
Americas Inc. will have
5
<PAGE> 439
the right to liquidate each trust if there is
a "Special Event," as described below, as a
result of a change in law or a change in
legal interpretation.
However, if the Special Event is a Tax Event,
UBS Americas may have the right to redeem the
junior subordinated debentures, which would
result in the redemption of the trust
securities as described above.
If the junior subordinated debentures are
distributed to the Holders of the preferred
trust securities, UBS Americas will use its
best efforts to have the junior subordinated
debentures listed on the New York Stock
Exchange, or on whatever exchange that then
lists the preferred trust securities. See
"Description of Securities--Description of
the Preferred Trust Securities--Special Event
Redemption or Distribution" and
"--Description of the Junior Subordinated
Debentures."
The UBS Americas Guarantee.... UBS Americas has guaranteed the payment of
distributions by each trust out of the moneys
held by the property trustee of that trust,
as well as payments upon liquidation of the
trust and on redemption of the preferred
trust securities. We call these guarantees by
UBS Americas the "preferred trust securities
guarantees."
The preferred trust securities guarantees
cover payments of distributions and other
payments on the preferred trust securities
only to the extent that the issuing trust has
funds available for the payment. As a result,
UBS Americas Inc. will only be required to
make payments under the preferred trust
securities guarantees if it has already made
interest, principal or other payments to the
issuing trust on the junior subordinated
debentures held by that trust.
The preferred trust securities guarantees,
when taken together with UBS Americas'
obligations under the junior subordinated
debentures, the indenture relating to the
junior subordinated debentures and each
trust's declaration of trust, provide a full
and unconditional guarantee of the amounts
due on the preferred trust securities.
However, the obligations of UBS Americas
under the junior subordinated debentures are
subordinate to all of UBS Americas' Senior
Indebtedness. Similarly, the obligations of
UBS Americas under the preferred trust
securities guarantee are subordinate to all
other indebtedness, liabilities and
obligations of UBS Americas and any
guarantees or other contingent obligations of
UBS Americas, including the junior
subordinated debentures. Because UBS Americas
is a holding company, its obligations under
the junior subordinated debentures and the
preferred trust securities guarantee are also
effectively subordinated to all existing and
future liabilities, including trade payables,
of UBS Americas' subsidiaries, except to the
extent that UBS Americas is a creditor of the
subsidiaries and its claims are recognized.
6
<PAGE> 440
The UBS AG Guarantee.......... UBS AG has issued its full and unconditional
guarantee of the obligations of UBS Americas
under the junior subordinated debentures, the
preferred trust securities guarantees, and
the obligations of UBS Americas under the
declarations of trust. However, UBS AG's
obligations under this guarantee are
subordinate to all other indebtedness,
liabilities and obligations of UBS AG and any
guarantees or other contingent obligations of
UBS AG.
Market for the Preferred Trust
Securities.................. Both series of preferred trust securities are
listed on the New York Stock Exchange. The
8.30% Preferred Trust Securities of PWG
Capital Trust I are listed under the symbol
"PWJ PrA." The 8.08% Preferred Trust
Securities of PWG Capital Trust II are listed
under the symbol "PWJ PrB."
UBS Warburg LLC and PaineWebber Incorporated
currently make a market in the preferred
trust securities. However, they are not
required to, and they can stop doing so at
any time without notice. As a result, there
is no assurance as to the liquidity of any
market for the preferred trust securities.
Use of Proceeds............... All of the sales of preferred trust
securities under this prospectus will be
market-making transactions--that is,
transactions in which UBS AG, UBS Warburg
LLC, PaineWebber Incorporated, or one of UBS
AG's other affiliates, resells securities
that the seller, or one of its affiliates,
has previously bought from another party.
Neither UBS Americas nor the issuing trust
will receive any proceeds from these resales
of the preferred trust securities. In
general, we expect that the entity that
resells any particular preferred trust
securities will retain the proceeds of their
market-making resales and will not pay the
proceeds to UBS Americas, the issuing trust
or, if the resales are not made by UBS AG, to
UBS AG.
Plan of Distribution.......... This prospectus relates to market-making
transactions in the preferred trust
securities by UBS AG and its affiliates. The
affiliates that may engage in these
transactions include, but are not limited to,
UBS AG itself, UBS Warburg LLC and
PaineWebber Incorporated. These transactions
may be executed at negotiated prices that are
related to market prices at the time of
purchase or sale, or at other prices. UBS AG
and its affiliates may act as principal or
agent in these transactions. No new
securities are offered.
7
<PAGE> 441
--------------------------------------------------------------------------------
Risk Factors
As used in this prospectus, "trust securities" means the common trust securities
and the preferred trust securities of the relevant PWG Capital Trust. "The
trust" refers to the relevant PWG Capital Trust.
If you are considering purchasing preferred trust securities, you should
carefully review the information contained in this prospectus. You should pay
special attention to the following matters:
UBS AMERICAS' OBLIGATIONS UNDER THE PREFERRED TRUST SECURITIES GUARANTEES AND
JUNIOR SUBORDINATED DEBENTURES, AND UBS AG'S OBLIGATIONS UNDER ITS GUARANTEE,
ARE DEEPLY SUBORDINATED
UBS Americas' obligations under the junior subordinated debentures are unsecured
obligations and are subordinate to all Senior Indebtedness of UBS Americas.
"Senior Indebtedness" generally consists of any indebtedness, liabilities or
obligations of UBS Americas, contingent or otherwise, other than the preferred
trust securities guarantee and any other guarantees. Similarly, UBS Americas'
obligations under the preferred trust securities guarantees are also unsecured
and are subordinate to all other indebtedness, liabilities and obligations of
UBS Americas and any guarantees, endorsements or other contingent obligations of
UBS Americas in respect of any indebtedness, liabilities or obligations,
including the junior subordinated debentures and any other series of junior
subordinated debentures, except those made pari passu or subordinate by their
terms. Because UBS Americas is a holding company, the junior subordinated
debentures and UBS Americas' obligations under the preferred trust securities
guarantee are also effectively subordinated to all existing and future
liabilities, including trade payables, of UBS Americas' subsidiaries, except to
the extent that UBS Americas is a creditor of the subsidiaries and its claims
are recognized.
UBS AG's obligations under its guarantee are also subordinate to all of UBS AG's
other indebtedness, liabilities and obligations and any guarantees or other
contingent obligations of UBS AG.
There are no terms in the preferred trust securities that limit UBS Americas' or
UBS AG's ability to incur additional indebtedness, including indebtedness that
ranks senior to or equally with the junior subordinated debentures and the
guarantees of UBS Americas and UBS AG, or the ability of their subsidiaries to
incur additional indebtedness. As of 30 November 2000, the amount of senior
liabilities of UBS AG to which the Holders of the trust preferred securities
would be subordinated under the UBS guarantee would be approximately CHF 590
billion. The Holders would also be structurally subordinated to all liabilities
of UBS AG's subsidiaries.
DEPENDENCE ON UBS AMERICAS
The trust's ability to make distributions and other payments on the preferred
trust securities is solely dependent upon UBS Americas making interest and other
payments on the junior subordinated debentures deposited in the trust as trust
assets as and when required, or UBS AG doing so on its behalf under the relevant
UBS AG guarantee. If UBS Americas does not make distributions or other payments
on the junior subordinated debentures for any reason, including as a result of
UBS Americas' election to defer the payment of interest on the junior
subordinate debentures by extending the interest payment period for the junior
subordinated debentures, the trust will not make payments on the trust
securities. In such an event, Holders of the preferred trust securities cannot
rely on the relevant preferred trust securities guarantee, since distributions
and other payments on the preferred trust securities are subject to the
preferred trust securities guarantee only to the extent that UBS Americas (or
UBS AG under the relevant UBS AG guarantee) has made a payment to the property
trustee on the junior subordinated debentures deposited in the trust as trust
assets. Instead, Holders of preferred trust securities would rely on the
enforcement (i) by the property trustee of its rights as registered Holder of
--------------------------------------------------------------------------------
8
<PAGE> 442
RISK FACTORS
--------------------------------------------------------------------------------
the junior subordinated debentures against UBS Americas under the terms of the
indenture (or UBS AG under the relevant UBS AG guarantee) or (ii) by such Holder
of preferred trust securities of its right against UBS Americas to directly
enforce payments of principal and interest on certain junior subordinated
debentures (or UBS AG under the relevant UBS AG guarantee). However, if the
trust's failure to make distributions on the preferred trust securities is a
consequence of UBS Americas' exercise of its right to extend the interest
payment period for the junior subordinated debentures, neither the property
trustee nor any Holder of preferred trust securities has any right to enforce
the payment of distributions on the preferred trust securities until an event of
default under the declaration occurs. UBS Americas' obligations under the
preferred trust securities guarantees are subordinate to all other indebtedness,
liabilities and obligations of UBS Americas and any guarantee or other
contingent obligations of UBS Americas, including the junior subordinated
debentures, except those made pari passu or subordinate by their terms to the
preferred trust securities guarantee relating to the junior subordinated
debentures. The declaration of each trust provides that each Holder of preferred
trust securities of that trust, by accepting the security, agrees to the
provisions of the related preferred trust securities guarantee, including its
subordination provision, and of the indenture relating to the junior
subordinated debentures.
Each declaration provides that UBS Americas will pay for all debts and
obligations (other than with respect to the trust securities) and all costs and
expenses of the relevant trust, including any taxes and all costs and expenses,
to which the trust may become subject, except for United States withholding
taxes. UBS AG has guaranteed UBS Americas' obligation to make these payments. We
cannot assure you that UBS Americas or UBS AG will have sufficient resources to
enable it to pay such debts, obligations, costs and expenses on behalf of the
trust.
If an event of default occurs and is continuing with respect to a trust, then
the Holders of the trust's preferred trust securities would rely on the property
trustee to enforce its rights as a Holder of the junior subordinated debentures
against UBS Americas. In addition, the Holders of a majority in liquidation
amount of the preferred trust securities have the right to direct the time,
method, and place of conducting any proceeding for any remedy available to the
property trustee or to direct the exercise of any trust or power conferred upon
the property trustee under the declaration, including the right to direct the
property trustee to exercise the remedies available to it as a Holder of the
junior subordinated debentures. If the property trustee fails to enforce its
rights under the junior subordinated debentures, any Holder of preferred trust
securities may, to the extent permitted by applicable law, after a period of 30
days has elapsed from such Holder's written request, directly institute a legal
proceeding against UBS Americas to enforce the property trustee's rights under
the junior subordinated debentures without first instituting any legal
proceeding against the property trustee or any other person or entity. If an
event of default occurs and is continuing and the event is attributable to the
failure of UBS Americas to pay interest or principal on the junior subordinated
debentures on the date such interest or principal is otherwise payable (or in
the case of redemption, on the redemption date), then a Holder of preferred
trust securities may also directly institute a proceeding for enforcement of
payment to such Holder of the principal of or interest on junior subordinated
debentures having a principal amount equal to the aggregate liquidation amount
of the preferred trust securities held by such Holder on or after the respective
due date specified in the junior subordinated debentures without first (i)
directing the property trustee to enforce the terms of the junior subordinated
debentures or (ii) instituting a legal proceeding against UBS Americas to
enforce the property trustee's rights under the junior subordinated debentures.
In connection with such direct action, UBS Americas will be subrogated to the
rights of such Holder of preferred trust securities under the declaration to the
extent of any payment made by UBS Americas to such Holder of preferred trust
securities in such direct action. The Holders of preferred trust securities
cannot exercise directly any other remedy available to the Holders of the junior
subordinated debentures unless the property trustee first fails to do so.
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OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as UBS Americas is not in default in the payment of interest on the
junior subordinated debentures, UBS Americas can defer payments of interest on
the junior subordinated debentures by extending the interest payment period on
the junior subordinated debentures. No extension may exceed five years. During
the extension period, no interest is due and payable. If this occurs, monthly
distributions on the preferred trust securities will not be made by the trust
during the extension period, but distributions would continue to accrue with
interest at the relevant rate of interest per annum, compounded monthly. If UBS
Americas exercises the right to extend an interest payment period, UBS Americas
generally may not declare or pay dividends on, or redeem, purchase, acquire or
make a distribution or liquidation payment with respect to any of its common
stock or preferred stock or make any payments on guarantee with respect thereto
during the extension period. However, the foregoing restrictions do not apply to
(i) dividends, redemptions, purchases, acquisitions, distributions or payments
made by UBS Americas by way of issuance of shares of its capital stock, (ii)
payments of accrued dividends by UBS Americas upon the redemption, exchange or
conversion of any preferred stock of UBS Americas, or (iii) cash payments made
by UBS Americas in lieu of delivering fractional shares upon the redemption,
exchange or conversion of any preferred stock of UBS Americas. See "Description
of Securities--Description of the Junior Subordinated Debentures--Option to
Extend Interest Payment Period" for a description of certain related terms of
the outstanding preferred stock of UBS Americas.
UBS Americas may further extend an extension period before the end of extension
period, so long as the total of all extension periods does not exceed five
years. Upon the termination of any extension period and the payment of all
amounts then due, UBS Americas may commence a new extension period, subject to
the above requirements. UBS Americas may also prepay at any time all or any
portion of the interest accrued during an extension period. Consequently, there
could be multiple extension periods of varying lengths throughout the term of
the junior subordinated debentures. See "Description of Securities--Description
of the Preferred Trust Securities--Distributions" and "Description of
Securities--Description of the Junior Subordinated Debentures--Option to Extend
Interest Payment Period."
TAX IMPACT OF EXTENSION
If an extension period occurs, the junior subordinated debentures would be
considered to have original issue discount for U.S. Federal income tax purposes
at all times after the beginning of the first extension period, including after
the termination of the extension period. During such times, each Holder, whether
on the cash or accrual method of accounting, would be required to include its
pro rata share of original issue discount into income as it accrues, even though
no cash would be distributed during the extension period. Even before the
beginning of the first extension period, while UBS Americas will take the
position that original issue discount does not arise, it is possible that all
income on the junior subordinated debentures would be accounted for as original
issue discount, and stated interest would not separately be reported as taxable
income. UBS Americas has no current intention of exercising its option to defer
payments of interest. See "Taxation--Interest and Original Issue Discount."
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
If a Tax Event or Investment Company Event (each as defined under "Description
of Securities--Description of the Preferred Trust Securities--Special Event
Redemption or Distribution" below) occurs and is continuing, the trust will be
dissolved, unless the junior subordinated debentures are redeemed instead. As a
result, junior subordinated debentures having an aggregate principal amount
equal to the aggregate stated liquidation amount of the preferred trust
securities and the common trust securities
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would be distributed pro rata to the Holders of the preferred trust securities
and the common trust securities in liquidation of the trust. This process is
described in "Description of Securities--Description of the Preferred Trust
Securities--Liquidation Distribution Upon Dissolution."
There can be no assurance as to the market prices for preferred trust securities
or the junior subordinated debentures that may be distributed in exchange for
preferred trust securities if a dissolution and liquidation of the trust occurs.
Accordingly, the preferred trust securities that you may purchase, or the junior
subordinated debentures that you may receive on dissolution and liquidation of
the trust, may trade at a discount to the price that you paid to purchase the
preferred trust securities. Because Holders of preferred trust securities may
receive junior subordinated debentures upon the occurrence of a Special Event,
if you are considering purchasing preferred trust securities you are also making
an investment decision with regard to the junior subordinated debentures and
should review carefully all the information regarding the junior subordinated
debentures contained below. See "Description of Securities--Description of the
Preferred Trust Securities--Special Event Redemption or Distribution" and
"Description of Securities--Description of the Junior Subordinated
Debentures--General."
Under current United States Federal income tax law, a distribution of the junior
subordinated debentures upon a Tax Event under certain circumstances may be a
taxable event to Holders of the preferred trust securities. See
"Taxation--Distribution of Junior Subordinated Debentures to Holders of
Preferred Trust Securities." An Investment Company Event would not be a taxable
event to Holding of the preferred trust securities under current United States
Federal income tax law.
LIMITED VOTING RIGHTS
Holders of preferred trust securities have limited voting rights, but are not
able to appoint, remove or replace, or to increase or decrease the number of,
trustees. These rights are held exclusively by the Holder of the common trust
securities.
LISTING OF PREFERRED TRUST SECURITIES
The preferred trust securities are listed on the NYSE. However, there can be no
assurance that an active market for the preferred trust securities will be
sustained in the future on the NYSE. Although UBS Warburg LLC and PaineWebber
Incorporated have indicated to UBS Americas and the trusts that they intend to
make a market in the preferred trust securities as permitted by applicable laws
and regulations, they are not obligated to do so and may discontinue any such
market-making at any time without notice. Accordingly, no assurance can be given
as to the liquidity of, or trading markets for, the preferred trust securities.
TRADING PRICES
The preferred trust securities may trade at a price that does not fully reflect
the value of accrued but unpaid interest with respect to the underlying junior
subordinated debentures. If you dispose of your preferred trust securities
between record dates for payments of distributions, you will be required to
include accrued but unpaid interest on the junior subordinated debentures
through the date of disposition in income as ordinary income, and to add such
amount to your adjusted tax basis in your pro rata share of the underlying
junior subordinated debentures deemed disposed of. Accordingly, you will
recognize a capital loss to the extent the selling price (which may not fully
reflect the value of accrued but unpaid interest) is less than your adjusted tax
basis (which will include accrued but unpaid interest). Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States Federal income tax purposes. See "Taxation--Interest and
Original Issue Discount" and "--Disposition of the Preferred Trust Securities."
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POTENTIAL MARKET VOLATILITY DURING EXTENSION PERIOD
As described above, UBS Americas has the right to extend an interest payment
period on the junior subordinated debentures from time to time for a period not
exceeding five years. If UBS Americas extends an interest payment period, or if
UBS Americas further extends an extension period or prepays interest accrued
during an extension period as described above, the market price of the preferred
trust securities is likely to be affected. In addition, as a result of such
rights, the market price of the preferred trust securities (which represent an
undivided interest in junior subordinated debentures) may be more volatile than
other securities that do not have such rights. If you dispose of your preferred
trust securities during an extension period, you may not receive the same return
on your investment as a Holder that continues to hold its preferred trust
securities. See "Description of Securities--Description of the Junior
Subordinated Debentures--Option to Extend Interest Payment Period."
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USE OF PROCEEDS
All of the sales of preferred trust securities under this prospectus will be
market-making transactions--that is, transactions in which UBS AG, UBS Warburg
LLC, PaineWebber Incorporated, or one of UBS AG's other affiliates, resells
securities that the seller, or one of its affiliates, has previously bought from
another party. Neither UBS Americas nor the issuing trust will receive any
proceeds from these resales of the preferred trust securities. In general, we
expect that the entity that resells any particular preferred trust securities
will retain the proceeds of its market-making resales and will not pay the
proceeds to UBS Americas, the issuing trust or, if the resales are not made by
UBS AG, to UBS AG.
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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, at the rate of CHF 1 = $0.5532, the exchange rate as of 31 October
2000.
<TABLE>
<CAPTION>
AS OF 31 OCTOBER 2000
----------------------
CHF U.S.$
(in millions)
------------------------------------------------------------------------------------
<S> <C> <C>
Debt
Money market paper issued................................. 66,811 36,960
Due to banks.............................................. 103,370 57,184
Cash collateral on securities lent........................ 21,416 11,847
Due to customers.......................................... 298,839 165,318
Long-term debt............................................ 50,670 28,031
------- -------
Total Debt................................................ 541,106 299,340
Minority Interest........................................... 3,134 1,734
Shareholders' Equity........................................ 35,325 19,542
------- -------
Total Capitalization........................................ 579,565 320,616
======= =======
</TABLE>
None of the indebtedness listed above is secured.
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PWG CAPITAL TRUST I AND PWG CAPITAL TRUST II
STRUCTURE AND PURPOSE OF THE TRUSTS
Each trust is a business trust formed under the Delaware Business Trust Act
under a declaration of trust among the trustees of that trust and UBS Americas.
PWG Capital Trust I was formed on 7 October 1996 when a certificate of trust was
filed with the Secretary of State of the State of Delaware; PWG Capital Trust II
was formed on 14 March 1997 in the same manner. Each trust's declaration of
trust was completely amended and restated on the date its preferred trust
securities were initially issued. The amended and restated declaration of trust
of each trust is called the trust's "declaration," and each trust's declaration
is filed as an exhibit to the registration statement of which this prospectus is
a part. Each declaration is qualified under the Trust Indenture Act of 1939. The
rights of the holders of the trust securities, including economic rights, rights
to information and voting rights, are as set forth in the applicable
declaration, the Business Trust Act and the Trust Indenture Act.
UBS Americas holds all the issued and outstanding common trust securities of
each trust. The common trust securities of each trust are equal to at least 3%
of the total capital of the trust.
Each trust exists solely for the purpose of:
- issuing its preferred trust securities and common trust securities for cash,
- investing the proceeds in an equivalent amount of junior subordinated
debentures, and
- engaging in such other activities as are necessary, convenient or incidental
to these activities.
Neither declaration permits the relevant trust to incur any indebtedness or to
make any investment other than in the junior subordinated debentures. In each
declaration, UBS Americas has agreed to pay for all debts and obligations (other
than obligations with respect to the trust securities) and all costs and
expenses of the trust, including the fees and expenses of the trustees and any
taxes and all costs and expenses, to which the trust may become subject, except
for withholding taxes.
POWERS AND DUTIES OF TRUSTEES
The number of trustees of each trust is currently five. Three of these trustees
are individuals who are employees or officers of UBS Americas. The fourth
trustee is The Chase Manhattan Bank, which is unaffiliated with UBS Americas and
which will serve as the property trustee and act as the indenture trustee for
purposes of the Trust Indenture Act. The fifth trustee is Chase Manhattan Bank
Delaware, an affiliate of The Chase Manhattan Bank that has its principal place
of business in the State of Delaware (referred to in this prospectus as "the
Delaware trustee"). Under each declaration, the property trustee holds legal
title to the junior subordinated debentures purchased by the trust for the
benefit of the Holders of the trust securities of the trust. The property
trustee has the power to exercise all rights, powers and privileges under the
indenture with respect to the junior subordinated debentures. This is described
in detail under "Description of Securities--Description of the Junior
Subordinated Debentures." In addition, the property trustee maintains exclusive
control of a segregated non-interest-bearing bank account to hold all payments
in respect of the junior subordinated debentures purchased by a trust for the
benefit of the Holders of trust securities. The property trustee makes
distributions to the Holders of the trust securities of a trust out of funds
from the property account of trust.
UBS Americas, as the direct or indirect owner of all the common trust securities
of each trust, has the exclusive right to appoint, remove or replace trustees
and to increase or decrease the number of
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trustees, subject to certain limited conditions. Each trust has a term of forty
years, but may terminate earlier as provided in the declaration of the trust.
The duties and obligations of the trustees of a trust are governed by the
declaration of the trust. Among other things, each declaration provides that the
trust will not, and the trustees of the trust must cause the trust not to,
engage in any activity other than in connection with the purposes of the trust
or as required or authorized by the declaration. In particular, each trust may
not, and the trustees of each trust must cause the trust not to,
- Invest any proceeds received by the trust from holding the junior subordinated
debentures purchased by the trust. Instead, the trust must promptly distribute
all the proceeds to the Holders of its trust securities under the terms of the
declaration of the trust and of the trust securities.
- Acquire any assets other than as expressly provided in the declaration.
- Possess trust property for other than a trust purpose.
- Make any loans, other than loans represented by the junior subordinated
debentures.
- Possess any power or otherwise act in such a way as to vary the assets of the
trust or the terms of its trust securities in any way whatsoever.
- Issue any securities or other evidences of beneficial ownership of, or
beneficial interests in, the trust other than its trust securities.
- Incur any indebtedness for borrowed money.
- Direct the time, method and place of exercising any trust or power conferred
upon the indenture trustee (as defined under "--Description of the Junior
Subordinated Debentures") with respect to the junior subordinated debentures
deposited in the trust.
- Waive any past default that is waivable under the applicable indenture.
- Exercise any right to rescind or annul any declaration that the principal of
all of the junior subordinated debentures deposited in the trust as trust
assets is due and payable.
- Consent to any amendment, modification or termination of the indenture or the
junior subordinated debentures where such consent is required, unless the
property trustee has received an unqualified opinion of nationally recognized
independent tax counsel recognized as expert in such matters to the effect
that such action will not cause the trust to be classified for United States
Federal income tax purposes as an association taxable as a corporation or a
partnership and that the trust will continue to be classified as a grantor
trust for United States Federal income tax purposes.
BOOKS AND RECORDS
The books and records of each trust are maintained at the principal office of
the trust and are open for inspection by a Holder of preferred trust securities
of the trust or the Holder's representative for any purpose reasonably related
to the Holder's interest in the trust during normal business hours. Each Holder
of preferred trust securities is furnished annually with unaudited financial
statements of the applicable trust as soon as available after the end of the
trust's fiscal year.
VOTING
Except as provided under the Business Trust Act, the applicable declaration and
the Trust Indenture Act, Holders of preferred trust securities have no voting
rights.
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THE PROPERTY TRUSTEE
Each declaration authorizes the property trustee, for the benefit of the Holders
of the trust securities of a trust, to exercise all rights under the indenture
with respect to the junior subordinated debentures held by the trust. This
includes its rights to enforce UBS Americas' obligations under the junior
subordinated debentures if an event of default under the indenture occurs. The
property trustee is also authorized to enforce the rights of Holders of
preferred trust securities of the trust under the related preferred trust
securities guarantee. If any trust's failure to make distributions on the
preferred trust securities of the trust is a consequence of UBS Americas'
exercise of any right under the terms of the junior subordinated debentures
deposited in the trust as trust assets to extend the interest payment period for
the junior subordinated debentures, the property trustee has no right to enforce
the payment of distributions on the preferred trust securities until an event of
default under the declaration occurs.
Holders of at least a majority in liquidation amount of the preferred trust
securities of a trust have the right to direct the property trustee for the
trust with respect to certain matters under the declaration for the trust and
the related preferred trust securities guarantee. If the property trustee fails
to enforce its rights under the indenture or fails to enforce the applicable
preferred trust securities guarantee, a Holder of preferred trust securities of
the trust may institute a legal proceeding against UBS Americas to enforce such
rights or the preferred trust securities guarantee, as the case may be, as
described under "Description of Securities--Description of the Preferred Trust
Securities" and "--Description of the Preferred Trust Securities
Guarantees--Status of the Preferred Trust Securities Guarantees."
DEBTS AND OBLIGATIONS
In each declaration, UBS Americas has agreed to pay for all debts and
obligations (other than with respect to the trust securities of the applicable
trust) and all costs and expenses of the applicable trust, including the fees
and expenses of its trustees and any taxes and all costs and expenses with
respect thereto, to which the trust may become subject, except for United States
withholding taxes. These obligations of UBS Americas are for the benefit of, and
can be enforced by, any person to whom any such debts, obligations, costs,
expenses and taxes are owed, whether or not the creditor has received notice of
UBS Americas' undertaking. Any such creditor may enforce these obligations of
UBS Americas directly against UBS Americas. UBS Americas has irrevocably waived
any right or remedy to require that any such creditor take any action against
any trust or any other person before proceeding against UBS Americas. UBS
Americas has agreed in each declaration to execute such additional agreements as
may be necessary or desirable in order to give full effect to the foregoing.
The business address of each trust is c/o UBS Americas Inc., 677 Washington
Boulevard, Stamford, CT 06901, telephone number (203) 719-3000.
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DESCRIPTION OF SECURITIES
Please note that in this section entitled "Description of Securities,"
references to UBS Americas refer only to UBS Americas Inc. and not to its
consolidated subsidiaries. Similarly, references to UBS refer only to UBS AG and
not to its consolidated subsidiaries. Also, in this section, references to
Holders mean those who own securities registered in their own names on the books
that we or the trustee maintain for this purpose, and not those who own
beneficial interests in securities registered in street name or in securities
issued in book-entry form through one or more depositaries. Owners of beneficial
interests in the securities should read the subsection entitled "--Description
of the Preferred Trust Securities--Book-Entry Only Issuance, The Depositary
Trust Company."
THIS SECTION IS ONLY A SUMMARY
The indenture, declaration and associated documents, including your preferred
trust security, contain the full legal text governing the matters described in
this section. The preferred trust securities guarantee, indenture and junior
subordinated debentures are governed by New York law. The declaration and the
preferred trust securities are governed by Delaware law. A copy of the indenture
and the declaration have been filed with the SEC as part of our registration
statement. See "Where You Can Find More Information" below for information on
how to obtain a copy.
This section summarizes the most important terms of the indenture, declaration,
guarantees and your security. It does not, however, describe every aspect of the
indenture, declaration, guarantees or your security. For example, in this
section, we use terms that have been given special meaning in the indenture,
declaration or guarantees, but we describe the meaning of only the more
important of those terms.
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES
The preferred trust securities and the common trust securities of each trust
rank pari passu with each other and have equivalent terms. However:
- if an event of default under the declaration of a trust occurs and is
continuing, the Holders of preferred trust securities of the trust have a
priority over Holders of the common trust securities of the trust with respect
to payments in respect of distributions and payments upon liquidation,
redemption and maturity, and
- Holders of common trust securities have the exclusive right (subject to the
terms of the declaration) to appoint, remove or replace the trustees and to
increase or decrease the number of trustees.
Neither trust can issue securities or other evidences of beneficial ownership
of, or beneficial interests in, the trust other than the trust's preferred trust
securities and its common trust securities. The trusts also may not incur any
indebtedness for borrowed money. In addition, neither trust may make any
investment other than in the junior subordinated debentures. The property
trustee of each trust has legal title to, and holds, the junior subordinated
debentures as trust assets for the benefit of the Holders of the preferred trust
securities and the common trust securities of the trust.
UBS Americas guarantees the payment of distributions out of moneys held by the
property trustee and payments on redemption of the preferred trust securities or
liquidation of the trust on a subordinated basis. The extent of this guarantee
is described below under "--Description of the Preferred Trust Securities
Guarantees." The Chase Manhattan Bank, as guarantee trustee, holds the preferred
trust securities guarantee for the benefit of the preferred trust securities
Holders. The preferred trust securities guarantee is a full and unconditional
guarantee from the time the preferred trust securities are issued, but the
preferred trust securities guarantee covers distributions and other payments on
the preferred trust securities only if and to the extent that UBS Americas has
made a payment to the property trustee of interest or principal on the junior
subordinated debentures deposited in the trust as trust assets.
DISTRIBUTIONS
Under each declaration, the property trustee must make distributions on the
preferred trust securities on the dates payable to the extent that the property
trustee has cash in the property account to permit the payment. The funds
available for distribution to the preferred trust securities Holders are limited
to payments received by the property trustee in respect of the junior
subordinated debentures. If UBS Americas does not make interest payments on the
junior subordinated debentures held by a trust, and UBS AG does not make the
payment under the relevant UBS AG guarantee, the property trustee will not make
distributions on the preferred trust securities of the trust. Under the
declaration, if and to the extent UBS Americas does make interest payments on
the junior subordinated debentures, the property trustee is obligated to make
distributions on the trust securities of the trust on a pro rata basis (as
defined below).
Distributions on the preferred trust securities are fixed at a yearly rate of a
certain percentage of the stated liquidation amount of $25 per preferred
security. The distribution rate for the 8.30% Preferred Trust Securities of PWG
Capital Trust I is 8.30%; the rate for the 8.08% Preferred Trust Securities of
PWG Capital Trust II is 8.08%. Distributions in arrears for more than one month
will bear interest at the same yearly rate (to the extent permitted by law),
compounded monthly. The term "distributions," as used in this prospectus,
includes any interest payable on deferred distributions unless otherwise stated.
The amount of distributions payable for any period is computed on the basis of a
360-day year of twelve 30-day months, and for any period shorter than a 30-day
period on the basis of the actual
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES
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number of days elapsed. Distributions on the preferred trust securities are
cumulative, accrue from the original date of issuance and, except as otherwise
described below, are payable monthly in arrears on the first day of each month,
but only if, and to the extent that, interest payments are made in respect of
junior subordinated debentures held by the property trustee.
So long as UBS Americas is not in default in the payment of interest on the
junior subordinated debentures, UBS Americas has the right under the indenture
to defer payments of interest on the junior subordinated debentures by extending
the interest payment period on the junior subordinated debentures for a period
not exceeding five years. If UBS Americas elects to do this, the trust would
defer monthly distributions on the preferred trust securities (though the
distributions would continue to accrue with interest at the relevant rate per
annum, compounded monthly) during any extension period. If UBS Americas
exercises the right to extend an interest payment period, UBS Americas may not
declare or pay dividends on, or redeem, purchase, acquire or make a distribution
or liquidation payment with respect to, any of its common stock or preferred
stock during the extension period or make any guarantee payments with respect
thereto. However, the foregoing restrictions do not apply to
- dividends, redemptions, purchases, acquisitions, distributions or payments
made by UBS Americas by way of issuance of shares of its capital stock,
- payments of accrued dividends by UBS Americas upon the redemption, exchange or
conversion of any preferred stock of UBS Americas in accordance with the terms
of the preferred stock, or
- cash payments made by UBS Americas in lieu of delivering fractional shares
upon the redemption, exchange or conversion of any preferred stock of UBS
Americas in accordance with the terms of the preferred stock.
Before the termination of any extension period, UBS Americas may further extend
the extension period. The extension period together with all such previous and
further extensions may not exceed five years and may not extend beyond the
maturity of the junior subordinated debentures. Upon the termination of any
extension period and the payment of all amounts then due, UBS Americas may
commence a new extension period, subject to the above requirements. UBS Americas
may also prepay at any time all or any portion of the interest accrued during an
extension period. Consequently, there could be multiple extension periods of
varying lengths throughout the term of the junior subordinated debentures, each
not to exceed five years or to cause any extension beyond the maturity of the
junior subordinated debentures. See "Risk Factors--Option to Extend Interest
Payment Period--Tax Impact of Extension;" "Description of
Securities--Description of the Junior Subordinated Debentures--Interest" and
"--Option to Extend Interest Payment Period." Subject to prepayments as
described above, accrued distributions will be payable to the Holders of
preferred trust securities as they appear on the books and records of the trust
on the first record date after the end of the extension period.
The property trustee makes distributions on the preferred trust securities to
the Holders as they appear on the books and records of the trust on the relevant
record dates, as long as the preferred trust securities remain in book-entry
only form. The relevant record dates are one business day (as defined below)
prior to the relevant distribution payment date. Distributions payable on any
preferred trust securities that are not punctually paid on any distribution
payment date because UBS Americas failed to make the corresponding interest
payment on the junior subordinated debentures cease to be payable to the person
in whose name such preferred trust security is registered on the relevant record
date. The defaulted distribution will instead be payable to the person in whose
name such preferred trust security is registered on the special record date
established by the regular trustees. The record date will correspond to the
special record date or other specified date determined in accordance with the
indenture. However, distributions will not be considered payable on any
distribution payment date
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES
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falling within an extension period unless UBS Americas has elected to make a
full or partial payment of interest accrued on the junior subordinated
debentures on such distribution payment date. Distributions on the preferred
trust securities will be paid through the property trustee who will hold amounts
received in respect of the junior subordinated debentures in the property
account for the benefit of the Holders of the preferred trust securities and the
common trust securities.
Each payment will be made as described under "--Book-Entry Only Issuance; The
Depository Trust Company" below. If the preferred trust securities do not
continue to remain in book-entry only form, the relevant record date will be the
fifteenth day of the month immediately preceding the month in which the relevant
payment date occurs. The declaration provides that the payment dates or record
dates for the preferred trust securities are the same as the payment dates and
record dates for the junior subordinated debentures. All distributions paid with
respect to the trust securities will be paid on a pro rata basis to the Holders
entitled to receive payment. If any date on which distributions are to be made
on the preferred trust securities is not a business day, then payment of the
distribution to be made on such date will be made on the next succeeding day
that is a business day (and without any interest or other payment in respect of
the delay) except that, if such business day is in the next succeeding calendar
year, such payment will be made on the immediately preceding business day, in
each case with the same force and effect as if made on such date. As used in
this prospectus, "business day" means any day other than Saturday, Sunday or any
other day on which banking institutions in New York City are authorized or
required by law to close.
The term "pro rata basis" means pro rata to each Holder of trust securities of a
trust according to the aggregate liquidation amount of the trust securities of
the trust held by the relevant Holder in relation to the aggregate liquidation
amount of all trust securities of the trust outstanding unless, in relation to a
payment, an event of default under the declaration has occurred and is
continuing. In that case, any funds available to make such payment will be paid
first to each Holder of the preferred trust securities of the trust pro rata
according to the aggregate liquidation amount of the preferred trust securities
held by the relevant Holder in relation to the aggregate liquidation amount of
all the preferred trust securities of the trust outstanding, and only after
satisfaction of all amounts owed to the Holders of such preferred trust
securities, to each Holder of common trust securities of the trust pro rata
according to the aggregate liquidation amount of such common trust securities
held by the relevant Holder in relation to the aggregate liquidation amount of
all common trust securities of the trust outstanding.
REGISTRAR, TRANSFER AGENT AND PAYING AGENT
If the preferred trust securities do not remain in book-entry only form, the
following provisions will apply:
At the principal corporate trust office of the property trustee in The City of
New York: (1) payment of distributions and payments on redemption of the
preferred trust securities will be payable, (2) the transfer of the preferred
trust securities will be registrable and (3) preferred trust securities will be
exchangeable for preferred trust securities of other denominations of a like
aggregate liquidation amount. Payment of distributions may be made at the option
of the regular trustees on behalf of the trust by check mailed to the address of
the persons entitled to the payment. Payment on redemption of any preferred
trust security will be made only upon surrender of the preferred trust security
to the property trustee.
The Chase Manhattan Bank or one of its affiliates will act as registrar and
transfer agent for the preferred trust securities. The Chase Manhattan Bank will
also act as paying agent and, with the consent of the regular trustees, may
designate additional paying agents. The Chase Manhattan Bank's address is 270
Park Avenue, New York, NY 10017.
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Registration of transfers of preferred trust securities will be made without
charge by or on behalf of the trust, but the Holder is responsible for paying
(with the giving of an indemnity as the trust or UBS Americas may require) any
tax or other governmental charges that may be imposed in relation to it.
The trust will not be required to register or cause to be registered the
transfer of preferred trust securities after the preferred trust securities have
been called for redemption.
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
If certain events occur and are continuing, the trust will, unless the junior
subordinated debentures are redeemed in the limited circumstances described
below, be dissolved with the result that, after creditors of the trust are paid,
junior subordinated debentures with an aggregate principal amount equal to the
aggregate stated liquidation amount of the preferred trust securities and the
common trust securities would be distributed on a pro rata basis to the Holders
of the preferred trust securities and the common trust securities in liquidation
of the Holders' interests in the trust, within 90 days following the occurrence
of such an event. There are two types of events that will cause such a
dissolution. The first is a Tax Event. The second is an Investment Company
Event. Both are described below.
If a Tax Event occurs, before the trust can be dissolved and distributed, the
regular trustees must obtain an opinion of nationally recognized independent tax
counsel experienced in such matters to the effect that the Holders of the
preferred trust securities will not recognize any gain or loss for United States
Federal income tax purposes as a result of such dissolution and distribution of
junior subordinated debentures. The opinion may rely on any then applicable
published revenue rulings of the Internal Revenue Service. Additionally, if at
the time there is available to UBS Americas or the regular trustees, on behalf
of the trust, the opportunity to eliminate, within a 90-day period, the Tax
Event by taking some ministerial action, such as filing a form or making an
election, or pursuing some other similar reasonable measure, which has no
adverse effect on the trust or UBS Americas or the Holders of the preferred
trust securities, UBS Americas or the regular trustees, on behalf of the trust,
will pursue such measure in lieu of dissolution.
Furthermore, if in the case of the occurrence of a Tax Event,
- the regular trustees have received an opinion of nationally recognized
independent tax counsel experienced in such matters that, as a result of the
Tax Event, there is more than an insubstantial risk that UBS Americas would be
precluded from deducting the interest on the junior subordinated debentures
for United States Federal income tax purposes even if the junior subordinated
debentures were distributed to the Holders of trust securities in liquidation
of the Holders' interests in the trust as described above or
- the regular trustees shall have been informed by such tax counsel that such an
opinion cannot be delivered to the trust,
then UBS Americas will have the right at any time, upon not less than 30 nor
more than 60 days' notice, to redeem the junior subordinated debentures in whole
or in part for cash within 90 days following the occurrence of the Tax Event.
The redemption of the junior subordinated debentures would give rise to a
redemption of a corresponding portion of the relevant trust's preferred trust
securities and common trust securities, as described below under "--Redemption
of Trust Securities." However, if at the time there is available to UBS Americas
or the regular trustees, on behalf of the trust, the opportunity to eliminate,
within such 90-day period, the Tax Event by taking some ministerial action, such
as filing a form or making an election, or pursuing some other similar
reasonable measure, which has no adverse effect on the trust, UBS Americas or
the Holders of the preferred trust securities, UBS Americas or the regular
trustees, on behalf of the trust, will pursue that
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measure in lieu of redemption. UBS Americas has no right to redeem the junior
subordinated debentures while the regular trustees, on behalf of the trust, are
pursuing any such ministerial action.
"Tax Event" means that the regular trustees have obtained an opinion of
nationally recognized independent tax counsel experienced in such matters to the
effect that on or after the date of this prospectus as a result of
- any amendment to, or change in, the laws (or any regulations thereunder) of
the United States or any political subdivision or taxing authority of or in
the United States,
- any amendment to, or change (including any announced prospective change) in,
an interpretation or application of any such laws or regulations by any
legislative body, court, governmental agency or regulatory authority
(including the enactment of any legislation and the publication of any
judicial decision or regulatory determination),
- any interpretation or pronouncement that provides for a position with respect
to such laws or regulations that differs from the position generally accepted
up to that time or
- any action taken by any governmental agency or regulatory authority,
which amendment or change is enacted, promulgated, issued or effective or which
interpretation or pronouncement is issued or announced or which action is taken,
in each case on or after the date of this prospectus, there is more than an
insubstantial risk that (i) the trust is, or will be within 90 days of the date
thereof, subject to United States Federal income tax with respect to income
accrued or received on the junior subordinated debentures, (ii) the trust is, or
will be within 90 days of the date thereof, subject to more than a de minimis
amount of other taxes, duties or other governmental charges or (iii) interest
payable by UBS Americas to the trust on the junior subordinated debentures is
not, or within 90 days of the date thereof will not be, deductible by UBS
Americas for United States Federal income tax purposes.
"Investment Company Event" means that the regular trustees have received an
opinion of nationally recognized independent counsel experienced in practice
under the Investment Company Act of 1940 that, as a result of the occurrence of
a change in law or regulation or a change in interpretation or application of
law or regulation by any legislative body, court, governmental agency or
regulatory authority, there is more than an insubstantial risk that the trust is
or will be considered an "investment company" which is required to be registered
under the Investment Company Act, which change in Investment Company Act law
becomes effective on or after the date of this prospectus.
REDEMPTION OF TRUST SECURITIES
When the junior subordinated debentures are repaid, whether at maturity, upon
redemption or otherwise, including as a result of a Special Event, the proceeds
will be promptly applied to redeem preferred trust securities and common trust
securities having an aggregate liquidation amount equal to the junior
subordinated debentures repaid, upon not less than 30 nor more than 60 days'
notice, at the redemption price. The common trust securities will be redeemed on
a pro rata basis with the preferred trust securities, unless an event of default
under the declaration has occurred and is continuing. In that case, the
preferred trust securities will have a priority over the common trust securities
with respect to payment of the redemption price. Subject to the foregoing, if
fewer than all outstanding preferred trust securities and common trust
securities are to be redeemed, the preferred trust securities and common trust
securities will be redeemed on a pro rata basis. If fewer than all outstanding
preferred trust securities are to be redeemed, preferred trust securities
registered in the name of and held by DTC or its nominee will be redeemed as
described under "--Book-Entry Only Issuance; The Depository Trust Company"
below.
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REDEMPTION PROCEDURES
The trust may not redeem fewer than all the outstanding preferred trust
securities unless all accrued and unpaid distributions have been paid on all
preferred trust securities for all monthly distribution periods terminating on
or prior to the date of redemption.
If the trust gives a notice of redemption of preferred trust securities (which
notice is irrevocable) then, by 12:00 noon, New York City time, on the
redemption date and provided that UBS Americas has paid to the property trustee
a sufficient amount of cash in connection with the related redemption or
maturity of the junior subordinated debentures, the trust will irrevocably
deposit with DTC funds sufficient to pay the applicable redemption price and
will give DTC irrevocable instructions and authority to pay the redemption price
to the Holders of the preferred trust securities. See "--Book-Entry Only
Issuance; The Depository Trust Company" below. If notice of redemption is given
and funds are deposited as required, then, immediately prior to the close of
business on the redemption date, (1) distributions will cease to accrue on the
preferred trust securities called for redemption, (2) such preferred trust
securities will no longer be deemed to be outstanding and (3) all rights of
Holders of such preferred trust securities so called for redemption will cease
except the right of the Holders of such preferred trust securities to receive
the redemption price, but without interest on such redemption price. Neither the
trustees nor the trust will be required to register or cause to be registered
the transfer of any preferred trust securities that have been so called for
redemption. If any date fixed for redemption of preferred trust securities is
not a business day, then payment of the redemption price payable on such date
will be made on the next succeeding day that is a business day (and without any
interest or other payment in respect of any such delay) except that, if such
business day falls in the next calendar year, such payment will be made on the
immediately preceding business day, in each case with the same force and effect
as if made on such date fixed for redemption. If UBS Americas fails to repay
junior subordinated debentures on maturity or on the date fixed for redemption
or if payment of the redemption price in respect of preferred trust securities
is improperly withheld or refused and not paid by the property trustee or by UBS
Americas under the preferred trust securities guarantee described under
"--Description of the Preferred Trust Securities Guarantees," distributions on
the preferred trust securities will continue to accrue from the original
redemption date of the preferred trust securities to the date of payment, in
which case the actual payment date will be considered the date fixed for
redemption for purposes of calculating the redemption price.
If fewer than all the outstanding preferred trust securities are to be redeemed,
the preferred trust securities will be redeemed pro rata as described below
under "--Book-Entry Only Issuance; The Depository Trust Company."
If a partial redemption of the preferred trust securities would result in the
delisting of the preferred trust securities by any national securities exchange
or other organization on which the preferred trust securities are then listed,
UBS Americas under the indenture will only redeem junior subordinated debentures
in whole and, as a result, the trust may only redeem the preferred trust
securities in whole.
Subject to the foregoing and applicable law (including, without limitation,
United States Federal securities laws), UBS Americas or any of its subsidiaries
may at any time and from time to time purchase outstanding preferred trust
securities by tender, in the open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
If there is a voluntary or involuntary dissolution, winding up or termination of
the trust, including as a result of a Special Event, the Holders of the
preferred trust securities and the common trust securities will be entitled to
receive either (i) a payment equal to their interests in the trust, or (ii)
junior subordinated debentures in an amount equal to their interest in the trust
securities.
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES
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Upon the dissolution of the trust, the following events will occur:
- the preferred trust securities and the common trust securities will no longer
be deemed to be outstanding,
- DTC or its nominee, as the Holder of the preferred trust securities, will
receive a registered global certificate or certificates representing the
junior subordinated debentures to be delivered upon such distribution, and
- any certificates representing preferred trust securities not held by DTC or
its nominee will be deemed to represent junior subordinated debentures having
an aggregate principal amount equal to the aggregate stated liquidation amount
of, and accrued and unpaid interest equal to accrued and unpaid distributions
on, transfer or preferred trust securities, until such certificates are
presented to UBS Americas or its agent for transfer or reissuance.
If, upon any such dissolution, the liquidation distribution can be paid only in
part because the trust has insufficient assets available to pay in full the
aggregate liquidation distribution, then the amounts payable directly by the
trust on the preferred trust securities and the common trust securities will be
paid on a pro rata basis unless an event of default under the declaration has
occurred and is continuing. In that case, the preferred trust securities will
have a priority over the common trust securities with respect to payment of the
liquidation distribution.
Under the declaration, the trust will terminate: (i) on the fortieth anniversary
of the issuance of its preferred trust securities, (ii) when all the trust
securities have been called for redemption and the amounts necessary for
redemption have been paid to the Holders of trust securities in accordance with
the terms of the trust securities; or (iii) when all the junior subordinated
debentures have been distributed to the Holders of trust securities in exchange
for all the trust securities in accordance with the terms of the trust
securities.
We cannot provide assurances as to the market price for the junior subordinated
debentures which may be distributed in exchange for preferred trust securities
if a dissolution and liquidation of the trust were to occur. Accordingly, the
junior subordinated debentures which a Holder of preferred trust securities may
subsequently receive upon the dissolution of the trust may trade at a discount
to the price of the preferred trust securities exchanged. If junior subordinated
debentures are distributed to the Holders of preferred trust securities upon the
dissolution of the trust, UBS Americas will use its best efforts to list the
junior subordinated debentures on the NYSE or on such other exchange on which
the preferred trust securities are then listed.
BOOK-ENTRY ONLY ISSUANCE; THE DEPOSITORY TRUST COMPANY
All of the preferred trust securities were issued in the form of one or more
global securities that were deposited with, or on behalf of, The Depository
Trust Company. Each global security was issued in registered form.
Each global security is registered in the name of DTC or its nominee. When a
global security was issued, DTC credited, on its book-entry registration and
transfer system, the number of preferred trust securities represented by the
preferred security global certificate to the accounts of institutions that have
accounts with DTC or its nominee ("participants"). Ownership of beneficial
interests in a global security are limited to participants or persons that may
hold interests through participants in DTC. Ownership of a beneficial interest
in a global security is shown on, and ownership can only be transferred through,
records maintained by DTC or its nominee (with respect to participants'
interests) for such global security or by participants or persons that hold
through participants. The laws of some jurisdictions require that certain
purchasers of securities take physical delivery of such securities in
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES
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definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a global security.
So long as DTC, or its nominee, is the owner of a global security, DTC or the
relevant nominee, as the case may be, will be considered the sole owner or
Holder of the global securities represented by the global security for all
purposes under the indenture governing the global securities. Except as
described below, owners of beneficial interests in a global security will not be
entitled to have global securities of the series represented by the global
security registered in their names, will not receive or be entitled to receive
physical delivery of global securities of the relevant series in definitive form
and will not be considered the owners or Holders of the global securities under
the applicable indenture. Accordingly, each person owning a beneficial interests
in a global security must rely on the procedures of DTC and, if such person is
not a participant, on the procedures of the participant and, if applicable, the
indirect participant, through which such person owns its interests, to exercise
any rights of a Holder under such indenture.
Payment of liquidation amount of and any distributions on global securities
registered in the name of or held by DTC or its nominee will be made to DTC or
its nominee, as the case may be, as the Holder of the global security
representing such global securities. None of UBS Americas, the trustee for the
relevant global securities, any paying agent, any authenticating agent or the
security registrar for the relevant global securities will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a global security
representing such global securities or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
UBS Americas expects that DTC, upon receipt of any payment of liquidation amount
of or any distributions on a definitive global security representing such global
securities, will credit immediately participants' accounts with payments in
amounts proportionate to their respective holdings in principal amount of
beneficial interests in such global security as shown on the records of DTC. UBS
Americas also expects that payments by participants to owners of beneficial
interests in the relevant global security held through such participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or registered
in "street name." These payments will be the responsibility of the participants.
Unless and until it is exchanged in whole for global securities in definitive
form, a global security may not be transferred except as a whole by DTC for such
global security to a nominee of DTC or by a nominee of DTC to DTC or another
nominee of DTC or by DTC or any such nominee to a successor of DTC or a nominee
of such successor. If a depositary for global securities of any series is at any
time unwilling or unable to continue as depositary and a successor depositary is
not appointed by UBS Americas within ninety days, UBS Americas will issue global
securities of such series in like tenor and terms in definitive registered form
in exchange for the global security or global securities representing all
relevant global securities. Further, an owner of a beneficial interests in a
global security representing global securities of a series may, on terms
acceptable to UBS Americas and DTC for that global security, receive global
securities of that series in definitive registered form. In addition, UBS
Americas may at any time and in its sole discretion determine not to have any
global securities of a series represented by global securities and, in such
event, will issue global securities of that series in like tenor and terms in
definitive registered form in exchange for the global security or global
securities representing all such global securities. In any such instance, an
owner of a beneficial interests in a global security will be entitled to
physical delivery in definitive form of global securities of the series
represented by the global security equal in aggregate principal amount to such
beneficial interests and to have such global securities registered in the name
of the owner of such beneficial interests.
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES
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Redemption notices must be sent to Cede & Co. If less than all the preferred
trust securities are being redeemed, DTC will reduce pro rata (with adjustments
to eliminate fractional preferred trust securities) the amount of interests of
each direct participant in the preferred trust securities to be redeemed.
Although voting with respect to the preferred trust securities is limited, in
those instances in which a vote is required, neither DTC nor Cede & Co. itself
will consent to vote with respect to the preferred trust securities. Under its
usual procedures, DTC would mail an omnibus proxy to the trust as soon as
possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those direct participants to whose accounts the
preferred trust securities are credited on the record date (identified in a
listing attached to the omnibus proxy).
DTC has advised UBS Americas and the agents as follows: 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 under the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds
securities that its participants ("Participants") deposit with DTC. DTC also
facilitates the settlement among Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to DTC's system 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 Direct Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Securities and Exchange Commission.
NO MERGER, CONSOLIDATION OR SALE OF ASSETS OF THE TRUST
The trust may not merge or consolidate with or into, or be replaced by, or sell,
transfer or lease all or substantially all its properties and assets to, any
corporation or other entity or, except as expressly permitted hereby, sell or
transfer any junior subordinated debentures to any corporation or other entity.
DECLARATION EVENTS OF DEFAULT
An event of default under the indenture will also be an event of default under
the declaration with respect to the trust securities. However, common trust
securities Holders will be deemed to have waived any such event of default with
respect to the common trust securities until all events of default with respect
to the preferred trust securities have been cured or waived. Until all events of
default with respect to the preferred trust securities have been cured or
waived, the property trustee will be deemed to be acting solely on behalf of the
preferred trust securities Holders, and only the Holders of the preferred trust
securities will have the right to direct the property trustee with respect to
certain matters under the declaration and consequently under the indenture. If
any event of default with respect to the preferred trust securities is waived by
the Holders of the preferred trust securities as provided in the declaration,
the Holders of common trust securities under the declaration have agreed that
such waiver also constitutes a waiver of the event of default with respect to
the common trust securities for all purposes under the declaration without any
further act, vote or consent of the Holders of the common trust securities.
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES
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When an event of default occurs, the property trustee as the Holder of all the
junior subordinated debentures will have the right under the indenture to
declare the principal of, and interest on, the junior subordinated debentures to
be immediately due and payable. In addition, the property trustee will have the
power to exercise all rights, powers and privileges under the indenture. If the
property trustee fails to enforce its rights under the declaration (including,
without limitation, its rights, powers and privileges as a Holder of the junior
subordinated debentures under the indenture), any Holder of preferred trust
securities may, to the extent permitted by applicable law, after a period of 30
days has elapsed from such Holder's written request to the property trustee to
enforce such rights, institute a legal proceeding against UBS Americas to
enforce the property trustee's rights under the declaration, without first
instituting a legal proceeding against the property trustee or any other person.
Notwithstanding the foregoing, if an event of default has occurred and is
continuing and such event is attributable to the failure of UBS Americas to pay
interest or principal on the junior subordinated debentures on the date such
interest or principal is otherwise payable (or in the case of redemption, the
redemption date), then a Holder of preferred trust securities may directly
institute suit against UBS Americas for enforcement of payment to such Holder of
the principal of or interest on junior subordinated debentures having a
principal amount equal to the aggregate liquidation amount of the preferred
trust securities held by such Holder on or after the respective due date
specified in the junior subordinated debentures. The Holders of preferred trust
securities will not be able to exercise directly against UBS Americas any other
remedy available to the Holders of the junior subordinated debentures unless the
property trustee first fails to do so. See "-- Description of the Junior
Subordinated Debentures."
VOTING RIGHTS
Except as provided below, under "--Modification and Amendment of the
Declaration" and "--Description of the Preferred Trust Securities
Guarantees--Amendments and Assignment" and as otherwise required by the Business
Trust Act, the Trust Indenture Act or the declaration, the Holders of the
preferred trust securities have no voting rights.
Subject to the requirements of the last sentence of this paragraph, the Holders
of a majority in aggregate liquidation amount of the preferred trust securities
have the right (i) on behalf of all Holders of preferred trust securities, to
waive any past default that is waivable under the declaration and (ii) to direct
the time, method and place of conducting any proceeding for any remedy available
to the property trustee, or exercising any trust or power conferred upon the
property trustee under the declaration, including the right to direct the
property trustee, as the Holder of the junior subordinated debentures, to (A)
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee, or executing any trust or power conferred on
the indenture trustee with respect to the junior subordinated debentures, (B)
waive any past default that is waivable under Section 6.06 of the indenture, or
(C) exercise any right to rescind or annul a declaration that the principal of
all the junior subordinated debentures shall be due and payable. However, where
the taking of any action under the indenture would require the consent or vote
of (a) Holders of junior subordinated debentures representing a specified
percentage greater than a majority in principal amount of the junior
subordinated debentures or (b) each Holder of junior subordinated debentures
affected thereby, no such consent or vote will be given by the property trustee
without the prior consent or vote of, in the case of clause (a) above, Holders
of preferred trust securities representing such specified percentage of the
aggregate liquidation amount of the preferred trust securities or, in the case
of clause (b) above, each Holder of preferred trust securities affected thereby.
The property trustee will not revoke any action previously authorized or
approved by a vote of the Holders of preferred trust securities. The property
trustee will notify all Holders of record of preferred trust securities of any
notice of default received from the indenture trustee with respect to the junior
subordinated debentures. Other than with respect to directing the time, method
and place of conducting any
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proceeding for any remedy available to the property trustee or the indenture
trustee as set forth above, the property trustee will be under no obligation to
take any of the foregoing actions at the direction of the Holders of the
preferred trust securities unless the property trustee has obtained an opinion
of nationally recognized independent tax counsel recognized as expert in such
matters to the effect that the trust will not be classified for United States
Federal income tax purposes as an association taxable as a corporation or a
partnership on account of such action and will be treated as a grantor trust for
United States Federal income tax purposes following such action.
A waiver of an event of default under the indenture by the property trustee at
the direction of Holders of the preferred trust securities constitutes a waiver
of the corresponding event of default under the declaration in respect of the
trust securities.
If the consent of the property trustee as the Holder of the junior subordinated
debentures is required under the indenture with respect to any amendment,
modification or termination of the indenture or the junior subordinated
debentures, the property trustee shall request the direction of the Holders of
the trust securities with respect to such amendment, modification or termination
and will vote with respect to such amendment, modification or termination as
directed by a majority in liquidation amount of the trust securities voting
together as a single class. However, where any such amendment, modification or
termination under the indenture would require the consent or vote of (1) Holders
of junior subordinated debentures representing a specified percentage greater
than a majority in principal amount of the junior subordinated debentures or (2)
each Holder of junior subordinated debentures affected thereby, the property
trustee may only give such consent or vote, in the case of clause (1), at the
direction of the Holders of trust securities representing such specified
percentage of the aggregate liquidation amount of the trust securities or, in
the case of clause (2), as directed by each Holder of trust securities affected
thereby. In addition, the property trustee will be under no obligation to take
any such action in accordance with the directions of the Holders of the trust
securities unless the property trustee has obtained an opinion of nationally
recognized independent tax counsel recognized as expert in such matters to the
effect that the trust will not be classified for United States Federal income
tax purposes as an association taxable as a corporation or a partnership on
account of such action and will be treated as a grantor trust for United States
Federal income tax purposes following such action.
Any required approval or direction of Holders of preferred trust securities may
be given at a separate meeting of Holders of preferred trust securities convened
for that purpose, at a meeting of all the Holders of trust securities or under
written consent. The regular trustees will cause a notice of any meeting at
which Holders of preferred trust securities are entitled to vote, or of any
matter upon which action by written consent of such Holders is to be taken, to
be mailed to each Holder of record of preferred trust securities. Each notice
will include a statement setting forth (i) the date of the relevant meeting or
the date by which the action is to be taken; (ii) a description of any
resolution proposed for adoption at the meeting on which the Holders are
entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents.
No vote or consent of the Holders of preferred trust securities will be required
for the trust to redeem and cancel preferred trust securities or distribute
junior subordinated debentures in accordance with the declaration.
Notwithstanding that Holders of preferred trust securities are entitled to vote
or consent under any of the circumstances described above, any of the preferred
trust securities at such time that are owned by UBS Americas or by any entity
directly or indirectly controlling or controlled by or under direct or indirect
common control with UBS Americas will not be entitled to vote or consent and
will, for purposes of such vote or consent, be treated as if they were not
outstanding.
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The procedures by which persons owning preferred trust securities registered in
the name of and held by DTC or its nominee may exercise their voting rights are
described under "-- Book-Entry Only Issuance; The Depository Trust Company"
below.
Holders of the preferred trust securities have no rights to increase or decrease
the number of trustees or to appoint, remove or replace a trustee. These rights
are vested exclusively in the Holders of the common trust securities.
MODIFICATION AND AMENDMENT OF THE DECLARATION
The declaration may be modified and amended with the approval of a majority of
the regular trustees, provided that, if any proposed modification or amendment
provides for, or the regular trustees otherwise propose to effect, (a) any
action that would adversely affect the powers, preferences or special rights of
the trust securities, whether by way of amendment to the declaration or
otherwise, or (b) the dissolution, winding-up or termination of the trust other
than under the terms of the declaration, then the Holders of the outstanding
trust securities as a class will be entitled to vote on such amendment or
proposal and such amendment or proposal will not be effective except with the
approval of at least 66 2/3% in liquidation amount of the trust securities. If
any amendment or proposal referred to above would adversely affect only the
preferred trust securities or the common trust securities, then only the
affected class will be entitled to vote on that amendment or proposal and the
amendment or proposal will not be effective except with the approval of 66 2/3%
in liquidation amount of the relevant class of trust securities. Notwithstanding
the foregoing,
- no amendment or modification may be made to the declaration unless the regular
trustees have obtained (a) either a ruling from the Internal Revenue Service
or a written unqualified opinion of nationally recognized independent tax
counsel experienced in such matters to the effect that the amendment will not
cause the trust to be classified for United States Federal income tax purposes
as an association taxable as a corporation or a partnership and to the effect
that the trust will continue to be treated as a grantor trust for purposes of
United States Federal income taxation and (b) a written unqualified opinion of
nationally recognized independent counsel experienced in such matters to the
effect that the amendment will not cause the trust to be an "investment
company" which is required to be registered under the Investment Company Act;
- certain specified provisions of the declaration may not be amended without the
consent of all the Holders of the trust securities;
- no amendment which adversely affects the rights, powers and privileges of the
property trustee or the Delaware trustee may be made without the consent of
the property trustee or the Delaware trustee, as the case may be;
- Article IV of the declaration relating to the obligation of UBS Americas to
purchase the common trust securities and to pay certain obligations and
expenses of the trust as described under "PWG Capital Trust I and PWG Capital
Trust II" in this prospectus may not be amended without the consent of UBS
Americas; and
- the rights of Holders of common trust securities under Article V of the
declaration to increase or decrease the number of, and to appoint, replace or
remove, trustees may not be amended without the consent of each Holder of
common trust securities.
The declaration further provides that it may be amended without the consent of
the Holders of the trust securities to
- cure any ambiguity;
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES
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- correct or supplement any provision in the declaration that may be defective
or inconsistent with any other provision of the declaration;
- to add to the covenants, restrictions or obligations of UBS Americas; and
- to conform to changes in, or a change in interpretation or application of,
certain Investment Company Act requirements by the SEC, as long as the
amendment does not adversely affect the rights, preferences or privileges of
the Holders.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee, prior to an event of default, undertakes to perform only
such duties as are specifically set forth in the declaration and, during an
event of default, exercises and uses the same degree of care and skill as a
prudent individual would exercise or use under the circumstances in the conduct
of his or her own affairs. Subject to such provision, the property trustee is
under no obligation to exercise any of the powers vested in it by the
declaration at the request of any Holder of preferred trust securities, unless
offered reasonable indemnity by the Holder against the costs, expenses and
liabilities which it might incur. The property trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the property trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
The property trustee is a depositary for funds and performs other services for,
and transacts other banking business with, UBS Americas in the normal course of
business.
GOVERNING LAW
The declaration and the preferred trust securities will be governed by, and
construed in accordance with, the laws of the State of Delaware.
MISCELLANEOUS
The regular trustees are authorized and directed to take such action as they
deem reasonable in order that the trust will not be deemed to be an "investment
company" required to be registered under the Investment Company Act or that the
trust will not be classified for United States Federal income tax purposes as an
association taxable as a corporation or a partnership and will be treated as a
grantor trust for United States Federal income tax purposes. In this connection,
the regular trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust of the trust or the declaration, that
the regular trustees determine in their discretion to be reasonable and
necessary or desirable for such purposes, as long as such action does not
adversely affect the interests of Holders of the trust securities.
UBS Americas and the regular trustees on behalf of the trust are required to
provide to the property trustee annually a certificate as to whether or not UBS
Americas and the trust, respectively, is in compliance with all the conditions
and covenants under the declaration.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
There are two series of junior subordinated debentures. Both series were issued
under an indenture between UBS Americas and The Chase Manhattan Bank, as
indenture trustee, dated as of 9 December 1996, as amended by a supplemental
indenture dated as of 9 December 1996 (regarding the 8.30% Junior Subordinated
Debentures due 2036), and a supplemental indenture dated as of 14 March 1997
(regarding the 8.08% Junior Subordinated Debentures due 2037), and as further
amended by a supplemental indenture dated as of 3 November 2000 (regarding the
merger of PaineWebber and UBS Americas and a supplemental indenture dated as of
22 December 2000). The following table sets forth the important terms of the
debentures.
<TABLE>
<CAPTION>
INTEREST REDEEMABLE BY
PAYMENT UBS AMERICAS
TITLE MATURITY DATE DATES RECORD DATES ON OR AFTER:
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8.30% Junior Subordinated Debentures
due 2036.......................... 1 December 2036 Monthly on the Close of 1 December 2001
first day of business the day
each month before the
interest payment
date
8.08% Junior Subordinated Debentures
due 2037.......................... 1 March 2037 Monthly on the Close of 1 March 2002
first day of business the day
each month before the
interest payment
date
</TABLE>
The following description summarizes the material terms of the indenture, and is
qualified by reference to the indenture and the Trust Indenture Act. Whenever
particular provisions or defined terms in the indenture are referred to in this
prospectus, those provisions or defined terms are incorporated by reference.
GENERAL
The junior subordinated debentures are unsecured, subordinated obligations of
UBS Americas. Each series is limited in aggregate principal amount to an amount
equal to the sum of (i) the stated liquidation amount of the preferred trust
securities issued by the relevant trust and (ii) the proceeds received by the
relevant trust upon issuance of the common trust securities held by UBS
Americas. The indenture does not limit the amount of additional indebtedness UBS
Americas or any of its subsidiaries may incur. Since UBS Americas is a holding
company, UBS Americas' rights and the rights of its creditors, including the
Holders of junior subordinated debentures, to participate in the assets of any
subsidiary upon the latter's liquidation or recapitalization will be subject to
the prior claims of the subsidiary's creditors, except to the extent that UBS
Americas may itself be a creditor with recognized claims against the subsidiary.
The entire principal amount of each series of junior subordinated debentures
will become due and payable, together with any accrued and unpaid interest
thereon, on the maturity date listed for that series in the table above. The
junior subordinated debentures are not subject to any sinking fund.
If junior subordinated debentures are distributed to Holders of preferred trust
securities upon dissolution of the trust, such junior subordinated debentures
will initially be issued as a global security. Payments on junior subordinated
debentures issued as a global security will be made to DTC, a successor
depositary or, in the event that no depositary is used, to a paying agent for
the junior subordinated debentures. Under certain limited circumstances, junior
subordinated debentures may be issued in certificated form in exchange for a
global security. See "--Book-Entry and Settlement" below.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
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If junior subordinated debentures are issued in certificated form, such junior
subordinated debentures will be in denominations of $25 and integral multiples
of $25 and may be transferred or exchanged at the offices described below. If
junior subordinated debentures are issued in certificated form, payments of
principal and interest will be payable, the transfer of the junior subordinated
debentures will be registrable and junior subordinated debentures will be
exchangeable for junior subordinated debentures of other denominations of a like
aggregate principal amount of the same series at the corporate trust office of
the indenture trustee in The City of New York. Payment of interest may be made
at the option of UBS Americas by check mailed to the address of the persons
entitled to the payments. The payment of principal with respect to any junior
subordinated debenture will be made only upon surrender of the junior
subordinated debenture to the indenture trustee.
The junior subordinated debentures of each series bear interest at the rate
specified in the above table. Interest is payable on each series monthly in
arrears on the first day of each month to the person in whose name such junior
subordinated debenture is registered, subject to certain exceptions, at the
close of business on the business day next preceding such interest payment date.
If (i) the preferred trust securities do not remain in book-entry only form or
(ii) following distribution of the junior subordinated debentures to Holders of
trust securities upon dissolution of the trust as described under "--Description
of the Preferred Trust Securities," the junior subordinated debentures do not
remain in book-entry only form, the relevant record date will be the fifteenth
day of the month immediately preceding the month in which the relevant interest
payment date occurs. Interest payable on any junior subordinated debenture that
is not punctually paid or duly provided for on any interest payment date will
cease to be payable to the person in whose name such junior subordinated
debenture is registered on the relevant record date. Defaulted interest will
instead be payable to the person in whose name the junior subordinated debenture
is registered on the special record date or other specified date determined in
accordance with the indenture. However, that interest will not be considered
payable by UBS Americas on any interest payment date falling within an extension
period unless UBS Americas has elected to make a full or partial payment of
interest accrued on the junior subordinated debentures on such interest payment
date.
The amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months and for any period shorter than a 30-day
period for which interest is computed, the amount of interest payable will be
computed on the basis of the actual number of days elapsed. If any date on which
interest is payable on the junior subordinated debentures is not a business day,
then payment of the interest payable on such date will be made on the next
succeeding day that is a business day (and without any interest or other payment
in respect of any such delay), except that, if such business day is in the next
succeeding calendar year, such payment will be made on the immediately preceding
business day, in each case with the same force and effect as if made on such
date.
The junior subordinated debentures mature on the maturity date listed in the
table above.
If the junior subordinated debentures are distributed to the Holders of
preferred trust securities upon dissolution of the trust, UBS Americas will use
its best efforts to list the junior subordinated debentures on the NYSE or on
such other exchange on which the preferred trust securities are then listed.
OPTIONAL REDEMPTION
Except as provided below, the junior subordinated debentures may not be redeemed
prior to the date listed in the table above. UBS Americas has the right to
redeem the junior subordinated debentures, in whole or in part, from time to
time, on or after the relevant date, upon not less than 30 nor more than 60 days
notice, at a redemption price equal to 100% of the principal amount to be
redeemed,
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
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plus any accrued and unpaid interest to the redemption date, including interest
accrued during an extension period. UBS Americas will also have the right to
redeem the junior subordinated debentures at any time upon the occurrence of a
Tax Event if certain conditions are met as described under "--Description of the
Preferred Trust Securities--Special Event Redemption or Distribution."
If UBS Americas gives a notice of redemption in respect of junior subordinated
debentures (which notice will be irrevocable) then, by 12:00 noon, New York City
time, on the redemption date, UBS Americas will deposit irrevocably with the
indenture trustee funds sufficient to pay the applicable redemption price and
will give irrevocable instructions and authority to pay such redemption price to
the Holders of the junior subordinated debentures. If notice of redemption has
been given and funds deposited as required, then, upon the date of such deposit,
interest will cease to accrue on the junior subordinated debentures called for
redemption, such junior subordinated debentures will no longer be deemed to be
outstanding and all rights of Holders of such junior subordinated debentures so
called for redemption will cease, except the right of the Holders of such junior
subordinated debentures to receive the applicable redemption price, but without
interest on such redemption price. If any date fixed for redemption of junior
subordinated debentures is not a business day, then payment of the redemption
price payable on such date will be made on the next succeeding day that is a
business day (and without any interest or other payment in respect of any such
delay) except that, if such business day falls in the next calendar year, such
payment will be made on the immediately preceding business day, in each case
with the same force and effect as if made on such date fixed for redemption. If
the redemption price in respect of junior subordinated debentures is not paid by
UBS Americas, interest on such junior subordinated debentures will continue to
accrue, from the original redemption date to the date of payment, in which case
the actual payment date will be considered the date fixed for redemption for
purposes of calculating the applicable redemption price. If fewer than all the
junior subordinated debentures are to be redeemed, the junior subordinated
debentures to be redeemed shall be selected by lot or pro rata or in some other
equitable manner determined by the indenture trustee.
UBS Americas will not be required to (i) issue, register the transfer of or
exchange any junior subordinated debentures during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of all or less than all of the junior subordinated debentures and
ending at the close of business on the day of such mailing and (ii) register the
transfer of or exchange any junior subordinated debentures so selected for
redemption, in whole or in part, except the unredeemed portion of any junior
subordinated debentures being redeemed in part.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as UBS Americas is not in default in the payment of interest on the
junior subordinated debentures, UBS Americas has the right to extend the
interest payment period from time to time for a period not exceeding five years.
UBS Americas has no current intention of exercising its right to extend an
interest payment period. No interest shall be due and payable during an
extension period, except at the end of the extension period. During any
extension period, UBS Americas may not declare or pay any dividends on, or
redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any of its common stock or preferred stock or make any guarantee
payments with respect to any such stock. However, these restrictions do not
apply to
- dividends, redemptions, purchases, acquisitions, distributions or payments
made by UBS Americas by way of issuance of shares of its capital stock,
- payments of accrued dividends by UBS Americas upon the redemption, exchange or
conversion of any preferred stock of UBS Americas as may be in accordance with
the terms of such preferred stock, or
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
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- cash payments made by UBS Americas in lieu of delivering fractional shares
upon the redemption, exchange or conversion of any preferred stock of UBS
Americas in accordance with the terms of such preferred stock.
UBS Americas' outstanding preferred stock consists of $100 million stated value
of 6% Cumulative Convertible Redeemable Preferred Stock, Series A (the
"Convertible Preferred Stock") and $250 million stated value of 9% Cumulative
Redeemable Preferred Stock, Series C (the "Redeemable Preferred Stock"). The
Convertible Preferred Stock is redeemable at any time, in whole or in part, at
the option of UBS Americas at redemption prices declining to $100 per share,
plus accrued and unpaid dividends, by 16 December 2004 and is subject to
mandatory redemption on 15 December 2014. The Convertible Preferred Stock is
convertible, at the option of the Holder, into shares of common stock, at any
time, in whole or in part, at a conversion price of $18.13 per share of common
stock, subject to adjustment. The Redeemable Preferred Stock is redeemable, at
the option of UBS Americas, at any time after 15 December 1999, in whole or in
part, at a price of $100 per share, together with accrued but unpaid dividends.
The Redeemable Preferred Stock is subject to mandatory redemption on 15 December
2014.
Prior to the termination of any such extension period, UBS Americas may further
extend the interest payment period. The extension period together with all
previous and further extensions thereof may not exceed five years and may not
extend beyond the maturity of the junior subordinated debentures. On the first
interest payment date occurring at or after the end of each extension period,
UBS Americas will pay to the Holders of junior subordinated debentures of record
on the record date for such interest payment date (regardless of who the Holders
of record may have been on other dates during the extension period) all accrued
and unpaid interest on the junior subordinated debentures, together with
interest at the rate specified for the junior subordinated debentures to the
extent permitted by applicable law, compounded monthly. Upon the termination of
any extension period and the payment of all amounts then due, UBS Americas may
commence a new extension period, subject to the above requirements. UBS Americas
may also prepay at any time all or any portion of the interest accrued during an
extension period. Consequently, there could be multiple extension periods of
varying lengths throughout the term of the junior subordinated debentures, each
not to exceed five years or to cause any extension beyond maturity of the junior
subordinated debentures. The failure by UBS Americas to make interest payments
during an extension period would not constitute a default or an event of default
under the indenture or UBS Americas' currently outstanding indebtedness.
If the property trustee is the sole Holder of the junior subordinated
debentures, UBS Americas will give the property trustee notice of its selection
of an extension period one business day before the earlier of (i) the next
succeeding date on which the distributions on the preferred trust securities are
payable or (ii) the date the trust is required to give notice to the NYSE (if
the preferred trust securities are then listed on it) or other applicable
self-regulatory organization or to Holders of the preferred trust securities of
the record date or payment date for such distribution. The trust will give
notice of UBS Americas' selection of an extension period to the Holders of the
preferred trust securities.
If junior subordinated debentures have been distributed to Holders of trust
securities, UBS Americas will give the Holders of the junior subordinated
debentures notice of its selection of an extension period ten business days
before the earlier of (i) the next succeeding interest payment date or (ii) the
date UBS Americas is required to give notice to the NYSE (if the junior
subordinated debentures are then listed on it) or other applicable
self-regulatory organization or to Holders of the junior subordinated debentures
of the record or payment date for such related interest payment.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
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COMPOUNDED INTEREST
Payments of compounded interest on the junior subordinated debentures held by
the trust will make funds available to pay any interest on distributions in
arrears in respect of the preferred trust securities under the terms thereof.
SUBORDINATION
The junior subordinated debentures are subordinate and junior in right of
payment to all Senior Indebtedness of UBS Americas. No payment by UBS Americas
on account of principal of or premium, if any, or any interest on the junior
subordinated debentures may be made if any default or event of default with
respect to any Senior Indebtedness has occurred and is continuing and written
notice of the default or event of default has been given to the indenture
trustee by UBS Americas or to UBS Americas and the indenture trustee by the
Holders of at least 10% in principal amount of any kind or category of any
Senior Indebtedness (or a representative or trustee on their behalf). Upon any
acceleration of the principal due on the junior subordinated debentures or any
payment or distribution of assets of UBS Americas to creditors upon any
dissolution, winding up, liquidation or reorganization, whether voluntary or
involuntary or in bankruptcy, insolvency, receivership or other proceedings, all
principal of and premium, if any, and interest due or to become due on all
Senior Indebtedness must be paid in full before the Holders of junior
subordinated debentures will be entitled to receive or retain any payment (other
than shares of stock or subordinated indebtedness provided by a plan of
reorganization or adjustment which does not alter the rights of Holders of
Senior Indebtedness). Subject to the payment in full of all Senior Indebtedness,
the Holders of the junior subordinated debentures are subrogated to the rights
of the Holders of Senior Indebtedness to receive payments or distributions of
assets of UBS Americas applicable to Senior Indebtedness until the junior
subordinated debentures are paid in full. By reason of such subordination, in
the event of insolvency, creditors of UBS Americas who are Holders of Senior
Indebtedness, as well as general creditors of UBS Americas, may recover more,
ratably, than the Holders of the junior subordinated debentures.
Senior Indebtedness is defined as:
- the principal of, premium, if any, and accrued and unpaid interest on (a)
indebtedness of UBS Americas for money borrowed, whether outstanding on the
date of execution of the subordinated indenture or later created, incurred or
assumed, (b) guarantees by UBS Americas of indebtedness for money borrowed by
any other person, whether outstanding on the date of execution of the
subordinated indenture or later created, incurred or assumed, (c) indebtedness
evidenced by notes, debentures, bonds or other instruments of indebtedness for
the payment of which UBS Americas is responsible or liable, by guarantees or
otherwise, whether outstanding on the date of execution of the subordinated
indenture or later created, incurred or assumed, and (d) obligations of UBS
Americas under any agreement to lease, or any lease of, any real or personal
property, whether outstanding on the date of execution of the subordinated
indenture or later created, incurred or assumed,
- any other indebtedness, liability or obligation, contingent or otherwise, of
UBS Americas and any guarantee, endorsement or other contingent obligation of
UBS Americas in respect of any indebtedness, liability or obligation, whether
outstanding on the date of execution of the subordinated indenture or later
created, incurred or assumed, and
- modifications, renewals, extensions and refundings of any such indebtedness,
liabilities, obligations or guarantees, unless, in the instrument creating or
evidencing the same or under which the same is outstanding, it is provided
that such indebtedness, liabilities, obligations or guarantees, or such
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
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modification, renewal, extension or refunding thereof, are not superior in
right of payment to the subordinated debentures.
However, Senior Indebtedness does not include any obligation of UBS Americas to
any subsidiary. The junior subordinated debentures of any series are not
superior in right of payment to the securities of any series issued under the
indenture dated as of 15 March 1988, between UBS Americas (as successor by
merger to PaineWebber) and Chase Manhattan Bank USA, National Association
(formerly known as Chemical Bank (Delaware)), as amended or supplemented from
time to time, or any securities ranking pari passu in right of payment with any
such securities, all of which constitute Senior Indebtedness. Notwithstanding
anything to the contrary in the indenture or the junior subordinated debentures,
Senior Indebtedness does not include any indebtedness of UBS Americas which, by
its terms or the terms of the instrument creating or evidencing it, is
subordinate in right of payment to, or pari passu with, the junior subordinated
debentures. The indenture does not contain any limitation on the amount of
Senior Indebtedness that UBS Americas can incur.
UBS Americas rights and the rights of its creditors (including Holders of Senior
Indebtedness and junior subordinated debentures) to participate in any
distribution of assets of any subsidiary of UBS Americas upon its liquidation or
reorganization or otherwise is necessarily subject to the prior claims of
creditors of the subsidiary, except to the extent that claims of UBS Americas
itself as a creditor of the subsidiary may be recognized. Also, dividend
payments and advances to UBS Americas by PaineWebber are restricted by the
provisions of the net capital rules of the SEC and the New York Stock Exchange
and covenants in various loan agreements. The operations of UBS Americas are
conducted through its subsidiaries and, therefore, UBS Americas is dependent
upon the earnings and cash flow of its subsidiaries to meet its obligations,
including obligations under the Senior Indebtedness and junior subordinated
debentures. The Senior Indebtedness and junior subordinated debentures are
effectively subordinated to all indebtedness of UBS Americas' subsidiaries.
CERTAIN COVENANTS OF UBS AMERICAS APPLICABLE TO THE JUNIOR SUBORDINATED
DEBENTURES
UBS Americas has covenanted in the indenture that, so long as the preferred
trust securities of either trust remain outstanding, UBS Americas will not
declare or pay any dividends on, or redeem, purchase, acquire or make a
distribution or liquidation payment with respect to, any of its common stock or
preferred stock or make any guarantee payments with respect thereto if at such
time (i) UBS Americas is in default with respect to its guarantee payments or
other payment obligations under the related preferred trust securities guarantee
or (ii) there has occurred and is continuing any event of default under the
indenture with respect to such junior subordinated debentures. However, the
foregoing restrictions will not apply to:
- dividends, redemptions, purchases, acquisitions, distributions or payments
made by UBS Americas by way of issuance of shares of its capital stock,
- payments of accrued dividends by UBS Americas upon the redemption, exchange or
conversion of any preferred stock of UBS Americas as may be outstanding from
time to time in accordance with the terms of such preferred stock or
- cash payments made by UBS Americas in lieu of delivering fractional shares
upon the redemption, exchange or conversion of any preferred stock of UBS
Americas as may be outstanding from time to time in accordance with the terms
of such preferred stock.
In addition, for so long as the preferred trust securities of either trust
remain outstanding, UBS Americas has agreed:
- to remain the sole direct or indirect owner of all the outstanding common
trust securities issued by the trust and not to cause or permit such common
trust securities to be transferred except to the
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
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extent permitted by the declaration of the trust; provided that any permitted
successor of UBS Americas under the indenture may succeed to UBS Americas's
ownership of such common trust securities,
- to comply fully with all its obligations and agreements under such declaration
and
- not to take any action which would cause the trust to cease to be treated as a
grantor trust for United States Federal income tax purposes, except in
connection with a distribution of junior subordinated debentures.
BOOK-ENTRY AND SETTLEMENT
If any junior subordinated debentures are distributed to preferred trust
securities Holders as described above under "--Description of the Preferred
Trust Securities," the junior subordinated debentures will be issued in the form
of one or more global securities. Each global security would be registered in
the name of the depositary or its nominee. The terms and conditions of the
arrangements with respect to these global securities will depend on the
procedures of the depositary at the relevant time, but are currently expected to
be substantially similar to those described above under "--Description of
Preferred Trust Securities--Book-Entry Only Issuance; The Depositary Trust
Company."
Except as provided below, owners of beneficial interests in a global security
will not be entitled to receive physical delivery of junior subordinated
debentures in definitive form and will not be considered the Holders of the
junior subordinated debentures for any purpose under the indenture. Also, no
global security representing junior subordinated debentures will be exchangeable
except for another global security of like denomination and tenor to be
registered in the name of the depositary or its nominee or of a successor
depositary or nominee. Accordingly, each beneficial owner must rely on the
procedures of the depositary or if the beneficial owner is not a participant, on
the procedures of the participant through which the beneficial owner owns its
interest to exercise any rights of a Holder under the indenture. If junior
subordinated debentures are distributed to Holders of preferred trust
securities, DTC will act as securities depositary for the junior subordinated
debentures.
MODIFICATION OF THE INDENTURE
The indenture provides that UBS Americas and the indenture trustee may, without
the consent of any Holders of junior subordinated debentures, enter into
supplemental indentures for the purposes, among other things, of adding to UBS
Americas' covenants, adding additional events of default, establishing the form
or terms of any series of junior subordinated debentures, or provided such
action does not adversely affect the interests of the Holders of any series of
junior subordinated debentures in any material respect, curing ambiguities or
inconsistencies in such indenture or making other provisions.
The indenture contains provisions permitting UBS Americas and the indenture
trustee, with the consent of the Holders of at least a majority in principal
amount of the outstanding junior subordinated debentures of each series affected
by the action, to modify the indenture or any supplemental indenture affecting
the rights of the Holders of such junior subordinated debentures. However, no
modification may, without the consent of the Holder of each outstanding junior
subordinated debenture affected by the action, (i) extend the fixed maturity of
any junior subordinated debentures of any series, reduce the principal amount
thereof, reduce the rate or extend the time of payment of interest thereon, or
reduce any premium payable upon the redemption thereof, without the consent of
the Holder of each junior subordinated debenture affected by the action, or (ii)
reduce the percentage of junior subordinated debentures, the Holders of which
are required to consent to any such modification, without the consent of the
Holders of each junior subordinated debenture then outstanding and affected by
the action.
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INDENTURE EVENTS OF DEFAULT
The indenture provides that any one or more of the following described events,
which has occurred and is continuing, constitutes an "event of default under the
indenture" with respect to a series of junior subordinated debentures:
(a) failure for 30 days to pay interest on the junior subordinated debentures of
a series when due, provided that a valid extension of the interest payment
period by UBS Americas will not constitute a default in the payment of
interest for this purpose;
(b) failure to pay principal of or premium, if any, on the junior subordinated
debentures of a series when due whether at maturity, upon redemption, by
declaration or otherwise, or to make any sinking fund or analogous payment
with respect to junior subordinated debentures of that series;
(c) failure to observe or perform any other covenant contained in the indenture
with respect to a series for 90 days after written notice to UBS Americas
from the indenture trustee or the Holders of at least 25% in principal
amount of the outstanding junior subordinated debentures of that series; or
(d) certain events in bankruptcy, insolvency or reorganization of UBS Americas.
In each case, unless the principal of all the junior subordinated debentures of
such series has already become due and payable, either the indenture trustee or
the Holders of not less than 25% in aggregate principal amount of the junior
subordinated debentures of such series then outstanding, by notice in writing to
UBS Americas (and to the indenture trustee if given by such Holders), may
declare the principal of all the junior subordinated debentures of such series
to be due and payable immediately.
The Holders of a majority in aggregate outstanding principal amount of the
junior subordinated debentures of the applicable series have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the indenture trustee. The indenture trustee or the Holders of not less than
25% in aggregate outstanding principal amount of the junior subordinated
debentures of that series may declare the principal due and payable immediately
upon an event of default under the indenture with respect to that series.
However, the Holders of a majority in aggregate outstanding principal amount of
junior subordinated debentures of that series may annul such declaration and
waive the default if the default has been cured and a sum sufficient to pay all
matured installments or interest and principal otherwise than by acceleration
and any premium has been deposited with the indenture trustee.
The Holders of a majority in aggregate outstanding principal amount of the
junior subordinated debentures of a series may, on behalf of the Holders of all
the junior subordinated debentures of that series, waive any past default,
except a default in the payment of principal, premium, if any, or interest on
junior subordinated debentures of that series (unless such default has been
cured and a sum sufficient to pay all matured installments of interest and
principal otherwise than by acceleration and any premium has been deposited with
the indenture trustee) or a call for redemption of junior subordinated
debentures of that series. UBS Americas is required to file annually with the
indenture trustee a certificate as to whether or not UBS Americas is in
compliance with all the conditions and covenants under the indenture.
If a series of junior subordinated debentures is issued to a trust in connection
with the issuance of trust securities of the trust, then, under the applicable
declaration, an event of default under the indenture with respect to that series
of junior subordinated debentures will constitute an event of default under the
declaration.
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
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CONSOLIDATION, MERGER AND SALE
Each indenture provides that UBS Americas, without the consent of any Holders of
the junior subordinated debentures, may consolidate with or merge into any other
corporation or transfer or lease its assets substantially as an entirety to any
person or may acquire or lease the assets of any person substantially as an
entirety or may permit any corporation to merge into UBS Americas so long as:
- The successor is a corporation organized under the laws of any domestic
jurisdiction.
- The successor corporation, if other than UBS Americas, assumes UBS Americas'
obligations under such indenture and all the debentures issued under it.
- Immediately after giving effect to the transaction, no event of default and no
event that, after notice or lapse of time, or both, would become an event of
default, has occurred and is continuing.
- Certain other conditions are also met.
DEFEASANCE AND DISCHARGE
Under the terms of the indenture, UBS Americas will be discharged from any and
all obligations in respect of the junior subordinated debentures of a series
(except in each case for certain obligations to register the transfer or
exchange of such junior subordinated debentures, replace stolen, lost or
mutilated junior subordinated debentures of such series, maintain paying
agencies and hold moneys for payment in trust) if:
- UBS Americas irrevocably deposits with the indenture trustee cash or U.S.
government obligations, as trust funds, in an amount certified to be
sufficient to pay at maturity (or upon redemption) the principal of, premium,
if any, and interest on all outstanding junior subordinated debentures of that
series;
- such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which UBS Americas is a party or
by which it is bound;
- UBS Americas delivers to the indenture trustee an opinion of counsel to the
effect that the Holders of the junior subordinated debentures of that series
will not recognize income, gain or loss for United States Federal income tax
purposes as a result of such defeasance and that such defeasance will not
otherwise alter Holders' United States Federal income tax treatment of
principal, premium and interest payments on the junior subordinated debentures
of that series (such opinion must be based on a ruling of the Internal Revenue
Service or a change in United States Federal income tax law occurring after
the date of the indenture, since such a result would not occur under current
tax law);
- UBS Americas delivers to the indenture trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to the defeasance contemplated by such provision have been complied
with; and
- no event or condition shall exist that, under the subordination provisions
applicable to the junior subordinated debentures of such series, would prevent
UBS Americas from making payments of principal of, premium, if any, and
interest on the junior subordinated debentures of that series at the date of
the irrevocable deposit referred to above.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The indenture trustee, prior to an event of default under the indenture,
undertakes to perform only such duties as are specifically set forth in the
indenture and, during an event of default under the
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DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
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indenture, shall exercise and use the same degree of care and skill as a prudent
individual would exercise or use under the circumstances in the conduct of his
or her own affairs. Subject to such provision, the indenture trustee is under no
obligation to exercise any of the powers vested in it by the indenture at the
request of any Holder of junior subordinated debentures, unless offered
reasonable indemnity by the Holder against the costs, expenses and liabilities
that might be incurred thereby. The indenture trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the indenture trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
The indenture trustee, The Chase Manhattan Bank, is a depositary for funds and
performs other services for, and transacts other banking business with, UBS
Americas in the normal course of business.
GOVERNING LAW
The indenture and the junior subordinated debentures will be governed by, and
construed in accordance with, the laws of the State of New York.
MISCELLANEOUS
UBS Americas has the right at all times to assign any of its rights or
obligations under the indenture to a direct or indirect wholly owned subsidiary
of UBS Americas. In the event of any such assignment, UBS Americas remains
jointly and severally liable for all such obligations. The indenture will be
binding upon and inure to the benefit of the parties to the indenture and their
respective successors and assigns. The indenture provides that it may not
otherwise be assigned by the parties to the indenture other than by UBS Americas
to a successor or purchaser under a consolidation, merger or sale permitted by
the indenture.
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES GUARANTEES
Set forth below is a summary of information concerning the preferred trust
securities guarantees that have been executed and delivered by UBS Americas for
the benefit of the Holders of the preferred trust securities of each trust. Each
preferred trust security guarantee is separately qualified under the Trust
Indenture Act and is held by The Chase Manhattan Bank (acting as the guarantee
trustee) for the benefit of Holders of the preferred trust securities of the
applicable trust. The terms of each preferred trust securities guarantee are
those set forth in the preferred trust securities guarantee and those made part
of the preferred trust securities guarantee by the Trust Indenture Act. This
description summarizes the most important terms of the preferred trust
securities guarantee and is qualified by reference to the form of preferred
trust securities guarantee, which is filed as an exhibit to the registration
statement of which this prospectus forms a part, and the Trust Indenture Act.
GENERAL
Under each preferred trust securities guarantee, UBS Americas has irrevocably
and unconditionally agreed, to the extent described below, to pay in full to the
Holders of the preferred trust securities issued by the applicable trust, the
guarantee payments, to the extent not paid by such the trust, regardless of any
defense, right of set-off or counterclaim that the trust may have or assert. The
following distributions and other payments with respect to preferred trust
securities issued by a trust to the extent not made or paid by the trust will be
subject to the preferred trust securities guarantee (without duplication):
- any accrued and unpaid distributions on the preferred trust securities, but
only if and to the extent that in each case UBS Americas has made a payment to
the property trustee of interest on the junior subordinated debentures
deposited in the trust as trust assets,
- the redemption price, including all accrued and unpaid distributions to the
date of redemption, with respect to any preferred trust securities called for
redemption by the trust, but only if and to the extent that in each case UBS
Americas has made a payment to the property trustee of interest or principal
on the junior subordinated debentures, and
- upon a voluntary or involuntary dissolution, winding-up or termination of the
trust (other than in connection with the distribution of junior subordinated
debentures to the Holders of preferred trust securities or the redemption of
all relevant preferred trust securities upon the maturity or redemption of
such junior subordinated debentures) the lesser of (a) the aggregate of the
liquidation amount and all accrued and unpaid distributions on the preferred
trust securities to the date of payment, to the extent the trust has funds
available for the payment, and (b) the amount of assets of the trust remaining
available for distribution to Holders of such preferred trust securities upon
liquidation of the trust. UBS Americas' obligation to make a guarantee payment
may be satisfied by direct payment of the required amounts by UBS Americas to
the preferred trust securities Holders or by causing the trust to pay such
amounts to such Holders.
The preferred trust securities guarantee is a full and unconditional guarantee
from the time of issuance of the applicable preferred trust securities, but the
preferred trust securities guarantee covers distributions and other payments on
such preferred trust securities only if and to the extent that UBS Americas has
made a payment to the property trustee of interest or principal on the junior
subordinated debentures deposited in the trust as trust assets. If UBS Americas
does not make interest or principal payments on the junior subordinated
debentures held by the trust, and UBS AG does not pay those amounts under the
UBS AG guarantees, the property trustee will not make distributions on the
preferred trust securities of the trust and the trust will not have funds
available to make those distributions.
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES GUARANTEES
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UBS Americas' obligations under the declaration for each trust, the preferred
trust securities guarantee issued with respect to preferred trust securities
issued by the trust, the junior subordinated debentures purchased by the trust
and the indenture in the aggregate provide a full and unconditional guarantee on
a subordinated basis by UBS Americas of payments due on the preferred trust
securities issued by the trust.
CERTAIN COVENANTS OF UBS AMERICAS
In each preferred trust securities guarantee, UBS Americas has covenanted that,
so long as any preferred trust securities issued by the trust remain
outstanding, UBS Americas will not declare or pay any dividends on, or redeem,
purchase, acquire or make a distribution or liquidation payment with respect to,
any of its common stock or preferred stock or make any guarantee payment with
respect to its stock, if at such time
- UBS Americas is in default with respect to its guarantee payments or other
payment obligations under the preferred trust securities guarantee,
- there has occurred any declaration event of default under the related
declaration or
- UBS Americas has given notice of its election to defer payments of interest on
the related junior subordinated debentures by extending the interest payment
period as provided in the terms of the junior subordinated debentures and the
period, or any extension, is continuing. However, the foregoing restrictions
will not apply to
- dividends, redemptions, purchases, acquisitions, distributions or
payments made by UBS Americas by way of issuance of shares of its capital
stock,
- payments of accrued dividends by UBS Americas upon the redemption,
exchange or conversion of any preferred stock of UBS Americas in
accordance with the terms of the preferred stock, or
- cash payments made by UBS Americas in lieu of delivering fractional
shares upon the redemption, exchange or conversion of any preferred stock
of UBS Americas in accordance with the terms of the preferred stock.
In addition, so long as any preferred trust securities of a trust remain
outstanding, UBS Americas has agreed (i) to remain the sole direct or indirect
owner of all the outstanding common trust securities issued by the trust and not
to cause or permit such common trust securities to be transferred except to the
extent permitted by the declaration of the trust, provided that any permitted
successor of UBS Americas under the indenture may succeed to UBS Americas'
ownership of the common trust securities, and (ii) to use reasonable efforts to
cause the trust to continue to be treated as a grantor trust for United States
Federal income tax purposes, except in connection with a distribution of junior
subordinated debentures.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights of
Holders of the applicable preferred trust securities (in which case no consent
will be required), each preferred trust securities guarantee may be amended only
with the prior approval of the Holders at least 66 2/3% in liquidation amount of
the outstanding preferred trust securities issued by the trust. The manner of
obtaining this approval is described above under "--Description of the Preferred
Trust Securities--Voting Rights." All guarantees and agreements contained in a
preferred trust securities guarantee will bind the successors, assignees,
receivers, trustees and representatives of UBS Americas and will inure to the
benefit of the Holders of the preferred trust securities of the trust then
outstanding. Except in connection with a consolidation, merger, conveyance,
transfer or lease of assets involving UBS Americas that is permitted
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES GUARANTEES
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under the indenture, UBS Americas may not assign its obligations under any
preferred trust securities guarantee.
TERMINATION OF THE PREFERRED TRUST SECURITIES GUARANTEES
Each preferred trust securities guarantee will terminate and be of no further
force and effect as to the preferred trust securities issued by the trust upon
full payment of the redemption price of all preferred trust securities of the
trust, or upon distribution of the junior subordinated debentures to the Holders
of the preferred trust securities of the trust in exchange for all the preferred
trust securities issued by the trust, or upon full payment of the amounts
payable upon liquidation of the trust. Notwithstanding the foregoing, each
preferred trust securities guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any Holder of preferred trust
securities issued by the trust must restore payment of any sums paid under such
preferred trust securities or such preferred trust securities guarantee.
STATUS OF THE PREFERRED TRUST SECURITIES GUARANTEES
UBS Americas' obligations under each preferred trust securities guarantee to
make the guarantee payments will constitute an unsecured obligation of UBS
Americas and will rank
- subordinate and junior in right of payment to all other indebtedness,
liabilities and obligations of UBS Americas and any guarantees, endorsements
or other contingent obligations of UBS Americas in respect of these
indebtedness, liabilities or obligations, including the junior subordinated
debentures, except those made pari passu or subordinate by their terms, and
- senior to all capital stock now or hereafter issued by UBS Americas and to any
guarantee now or hereafter entered into by UBS Americas in respect of any of
its capital stock.
UBS Americas' obligations under each preferred trust securities guarantee will
rank pari passu with each other preferred trust securities guarantee.
Because UBS Americas is a holding company, UBS Americas' obligations under each
preferred trust securities guarantee are also effectively subordinated to all
existing and future liabilities, including trade payables, of UBS Americas'
subsidiaries, except to the extent that UBS Americas is a creditor of the
subsidiaries recognized as such. Each declaration provides that each Holder of
preferred trust securities issued by the trust, by acceptance of the preferred
trust securities, agrees to the subordination provisions and other terms of the
related preferred trust securities guarantee.
Each preferred trust securities guarantee will constitute a guarantee of payment
and not of collection (that is, the guaranteed party may institute a legal
proceeding directly against UBS Americas to enforce its rights under the
preferred trust securities guarantee without first instituting a legal
proceeding against any other person or entity). Each preferred trust securities
guarantee will be deposited with the guarantee trustee, to be held for the
benefit of the Holders of the preferred trust securities issued by the trust.
The guarantee trustee will enforce such preferred trust securities guarantee on
behalf of the Holders of the preferred trust securities. The Holders of at least
a majority in aggregate liquidation amount of the preferred trust securities
issued by the trust have the right to direct the time, method and place of
conducting any proceeding for any remedy available in respect of the related
preferred trust securities guarantee, including giving directions to the
guarantee trustee. If the guarantee trustee fails to enforce a preferred trust
securities guarantee as above provided, any Holder of preferred trust securities
issued by the trust may institute a legal proceeding directly against UBS
Americas to enforce its rights under the preferred trust securities guarantee,
without first instituting a legal proceeding against the trust, or any other
person or entity. Notwithstanding the foregoing, if UBS Americas has failed to
make a guarantee payment, a Holder of preferred trust securities may directly
institute a
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DESCRIPTION OF THE PREFERRED TRUST SECURITIES GUARANTEES
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proceeding against UBS Americas for enforcement of the Holder's right to receive
payment under the preferred trust securities guarantee. UBS Americas has waived
any right or remedy to require that any action be brought first against a trust
or any other person or entity before proceeding directly against UBS Americas.
MISCELLANEOUS
UBS Americas is required to provide annually to the guarantee trustee a
statement as to the performance by UBS Americas of certain of its obligations
under each preferred trust securities guarantee and as to any default in such
performance. UBS Americas is required to file annually with the guarantee
trustee an officer's certificate as to UBS Americas' compliance with all
conditions to be complied with by it under each preferred trust securities
guarantee.
The guarantee trustee, prior to the occurrence of a default, undertakes to
perform only such duties as are specifically set forth in the applicable
preferred trust securities guarantee and, after default with respect to a
preferred trust securities guarantee, will exercise the same degree of care as a
prudent individual would exercise under the circumstances in the conduct of his
or her own affairs. Subject to such provision, the guarantee trustee is under no
obligation to exercise any of the powers vested in it by a preferred trust
securities guarantee at the request of any Holder of preferred trust securities
unless it is offered reasonable security and indemnity against the costs,
expenses and liabilities that might be incurred thereby.
GOVERNING LAW
The preferred trust securities guarantee will be governed by, and construed in
accordance with, the laws of the State of New York.
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DESCRIPTION OF THE UBS AG GUARANTEE
UBS AG has unconditionally and irrevocably guaranteed the following:
(i) the junior subordinated debentures of UBS Americas Inc. described in this
prospectus,
(ii) the Guarantee Agreement of PWG Capital Trust I dated as of 9 December
1996, between UBS Americas and The Chase Manhattan Bank, a New York
banking corporation, as guarantee trustee,
(iii) the Amended and Restated Declaration of Trust of PWG Capital Trust I dated
and effective as of 9 December 1996 by the trustees named therein, UBS
Americas and the holders from time to time of undivided beneficial
interests in the assets of PWG Capital Trust I issued pursuant to the PWG
I Declaration of Trust,
(iv) the Guarantee Agreement of PWG Capital Trust II dated as of 14 March 1997
between UBS Americas and The Chase Manhattan Bank, a New York banking
corporation, as guarantee trustee, and
(v) the Amended and Restated Declaration of Trust of PWG Capital Trust II,
dated and effective as of 14 March 1997, by the trustees named therein,
UBS Americas and the holders from time to time of undivided beneficial
interests in the assets of PWG Capital Trust II issued under the
Declaration of Trust, including the payment of the principal of and
premium, if any, and interest on the outstanding junior subordinated
debentures (including any additional interest or other amounts payable in
accordance with the terms of the outstanding junior subordinated
debentures) together with any other amount as UBS Americas owes under each
of the Junior Subordinated Indenture, the Preferred Securities Guarantees
and the Declarations of Trust, when they become due and payable, whether
at maturity, upon acceleration, redemption or otherwise in accordance with
the terms of the outstanding junior subordinated debentures, the Preferred
Securities Guarantees and the Declarations, respectively.
If UBS Americas fails to make any timely payment under the junior subordinated
debentures, either of the Preferred Securities Guarantees or either of the
Declarations of Trust, legal proceedings may be instituted directly against UBS
without first proceeding against UBS Americas.
UBS has agreed that the junior subordinated debentures guarantee is an absolute,
present and continuing guarantee of payment and not of collectability and that
its obligations hereunder shall be unconditional, irrespective of:
- the validity, legality or enforceability of the junior subordinated
debentures, the Junior Subordinated Indenture, the Preferred Securities
Guarantee or either of the Declarations,
- the absence of any action to enforce the junior subordinated debentures or to
collect from UBS Americas,
- any waiver or consent by the Holder of the junior subordinated debentures with
respect to the provisions of the junior subordinated debentures, and
- the recovery of any judgment against UBS Americas or any action to enforce the
same or any other circumstance that might otherwise result in a legal or
equitable discharge or defense of a guarantor.
The junior subordinated debentures guarantee is a direct, unconditional and
unsecured obligation of UBS. UBS's obligations under the guarantee are
subordinated in right of payment to the prior payment
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DESCRIPTION OF THE UBS AG GUARANTEE
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in full of UBS's deposit liabilities and all other liabilities of UBS (including
all deposit liabilities and other liabilities of the head office and all offices
of UBS wherever located), except
(i) any liabilities that by their terms rank pari passu with or are
subordinated to the obligations of UBS under this guarantee;
(ii) any liabilities that by their terms rank pari passu with or are
subordinated to liabilities which by their terms rank pari passu with or
are subordinated to the obligations of UBS under this guarantee; and
(iii) any existing junior subordinated obligations.
UBS's obligations under this guarantee are senior to any existing junior
subordinated obligations and any liabilities that by their terms are
subordinated to the obligations of UBS under this guarantee. Payments under this
guarantee (other than payments upon a winding-up or dissolution, by bankruptcy
or otherwise, in Switzerland of UBS) are conditional upon UBS not being in
default in the payment of any liabilities that rank senior to the obligations of
UBS under the guarantee and being solvent at the time of payment. As of 30
November 2000, the amount of senior liabilities of UBS AG to which the Holders
of the preferred trust securities would be subordinated under the UBS guarantee
would be approximately CHF 590 billion. The Holders would also be structurally
subordinated to all liabilities of UBS AG's subsidiaries.
For purposes of this guarantee, the term "existing junior subordinated
obligations" means the obligations of UBS under (x) the Amended and Restated
Limited Liability Company Agreement of UBS Preferred Funding Company LLC I dated
as of 3 October 2000, (y) the Subordinated Guarantee Agreement dated as of 3
October 2000 by UBS, Wilmington Trust Company, as trustee, and Wilmington Trust
Company, as trustee, for the benefit of holders from time to time of Company
Preferred Securities (as defined therein) of UBS Preferred Funding Company LLC
I, and (z) the 8.622% Perpetual Subordinated Notes issued by UBS.
This guarantee is intended to constitute a full and unconditional guarantee of
the obligations of UBS Americas under the outstanding junior subordinated
debentures, the Junior Subordinated Indenture, the Preferred Securities
Guarantee and the Declarations, that together constitute the full and
unconditional guarantee of UBS Americas of each of the 8.30% Preferred Trust
Securities (Liquidation Amount $25 per Preferred Security) issued by PWG Capital
Trust I and the 8.08% Preferred Trust Securities (Liquidation Amount $25 per
Preferred Security) issued by PWG Capital Trust II.
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TAXATION
In the opinion of Cravath, Swaine & Moore, special tax counsel to UBS AG ("Tax
Counsel"), the following are the material United States Federal income tax
consequences of the ownership and disposition of preferred trust securities.
Unless otherwise stated, this summary deals only with preferred trust securities
held as capital assets by Holders who acquire the preferred trust securities
upon original issuance ("Initial Holders"). It does not deal with special
classes of Holders, such as dealers in securities or currencies, life insurance
companies, persons holding preferred trust securities as part of a straddle or
as part of a hedging or conversion transaction, or persons whose functional
currency is not the United States dollar. This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations thereunder
and administrative and judicial interpretations thereof as of the date hereof,
all of which are subject to change (possibly on a retroactive basis).
INVESTORS ARE ADVISED TO CONSULT THEIR TAX ADVISORS AS TO THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF PREFERRED
TRUST SECURITIES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, AS WELL AS THE
EFFECT OF ANY STATE, LOCAL OR OTHER TAX LAWS.
CLASSIFICATION OF THE TRUST
In the opinion of Tax Counsel, under current law and assuming full compliance
with the terms of the declaration, the trust will be classified for United
States Federal income tax purposes as a grantor trust and not as an association
taxable as a corporation. Accordingly, each Holder of preferred trust securities
(a "SecurityHolder") will be considered the owner of a pro rata portion of the
junior subordinated debentures held by the trust. Accordingly, each
SecurityHolder will be required to include in gross income the pro rata share of
income accrued on the junior subordinated debentures.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
In the opinion of Tax Counsel, under current law and assuming full compliance
with the indenture, the junior subordinated debentures will be classified for
United States Federal income tax purposes as indebtedness of UBS Americas.
INTEREST AND ORIGINAL ISSUE DISCOUNT
If an extension period occurs, the junior subordinated debentures would be
considered to have original issue discount at all times after the beginning of
the first extension period, including after the termination of the extension
period. In addition, UBS Americas' option to defer the payment of interest on
the junior subordinated debentures during an extension period might cause the
junior subordinated debentures to be considered initially to be issued with
original issue discount. UBS Americas believes, and will take the position that
this latter result will not arise because of an exception in the Treasury
Regulations that applies when there is only a "remote" likelihood that an
extension period will occur. Assuming that the likelihood of an extension period
is in fact remote, Tax Counsel believes that this position is correct although
there is no authority directly on point and the Internal Revenue Service could
take a contrary position.
If the original issue discount rules apply to the junior subordinated debentures
(either following the occurrence of an extension period or initially), each
SecurityHolder, whether on the cash or accrual method of accounting, will be
required to accrue its pro rata share of original issue discount into income in
accordance with a constant yield method based on the compounding of interest. As
a result, income will be required to be reported by SecurityHolders before the
receipt of cash attributable to such income, and, in particular, income will be
reported during an extension period even though no
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TAXATION
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cash distributions are being made. If the original issue discount rules apply
for a period during which cash distributions are currently being made, the sum
of the daily accruals of income for a monthly period for a SecurityHolder that
purchased the preferred trust securities for their liquidation value will equal
the cash distribution received by the SecurityHolder for such month, assuming no
disposition prior to the record date for such distribution.
If the original issue discount rules apply, actual distributions of stated
interest will not separately be reported as income. In that case, a
SecurityHolder's tax basis for the junior subordinated debentures will be
increased by original issue discount accrued into income, and decreased by cash
distributions of interest. If the original issue discount rules do not apply,
stated interest will be includible in a SecurityHolder's gross income as
ordinary interest income in accordance with such Holder's regular method of tax
accounting.
Whether or not the original issue discount rules apply, no portion of the
amounts received on the preferred trust securities will be eligible for the
corporate dividends received deduction.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF PREFERRED TRUST
SECURITIES
Under current law, a distribution by the trust of the junior subordinated
debentures as described under the caption "Description of the Preferred Trust
Securities--Special Event Redemption or Distribution" will be nontaxable and
will result in the SecurityHolder receiving directly such SecurityHolder's pro
rata share of the junior subordinated debentures previously held indirectly
through the trust, with a holding period and tax basis equal to the holding
period and adjusted tax basis such SecurityHolder was considered to have had in
such SecurityHolder's pro rata share of the underlying junior subordinated
debentures immediately prior to such distribution. If, however, the Special
Event giving rise to the distribution is a Tax Event which results in the trust
being treated as an association taxable as a corporation, the distribution would
constitute a taxable event to SecurityHolders.
MARKET DISCOUNT AND BOND PREMIUM
SecurityHolders other than Initial Holders may be considered to have acquired
their pro rata interest in the junior subordinated debentures with market
discount, acquisition premium or amortizable bond premium. Such Holders are
advised to consult their tax advisors as to the income tax consequences of the
acquisition, ownership and disposition of the preferred trust securities.
DISPOSITION OF THE PREFERRED TRUST SECURITIES
Upon a sale, exchange or other disposition of the preferred trust securities
(including a distribution of cash in redemption of a SecurityHolder's preferred
trust securities upon redemption or repayment of the underlying junior
subordinated debentures, but excluding the distribution of junior subordinated
debentures), a SecurityHolder will be considered to have disposed of all or
part of such SecurityHolder's pro rata share of the junior subordinated
debentures, and will recognize gain or loss equal to the difference between the
amount realized (other than amounts attributable to accrued but unpaid interest
that is not treated as original issue discount) and the SecurityHolder's
adjusted tax basis in such SecurityHolder's pro rata share of the underlying
junior subordinated debentures deemed disposed of. A SecurityHolder's adjusted
tax basis in the preferred trust securities generally will be its initial
purchase price increased by original issue discount previously includible in
such SecurityHolder's gross income to the date of disposition and decreased by
payments (other than payments of stated interest that are not treated as
original issue discount) received on the preferred trust securities. Gain or
loss will be capital gain or loss (except to the extent of any accrued interest
or market discount not previously included in income). See "Market Discount and
Bond Premium"
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TAXATION
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above. Such gain or loss will be long-term capital gain or loss if the
preferred trust securities have been held for more than one year.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
individual, corporation, partnership, estate or trust that is, as to the United
States, a non-resident alien individual or a foreign corporation, partnership,
estate or trust.
Under present United States Federal income tax law:
(i) payments by the trust or any of its paying agents to any Holder of a
preferred trust security who or which is a United States Alien Holder will
not be subject to United States Federal income or withholding tax, provided
that (a) the beneficial owner of the preferred trust security does not
actually or constructively own 10% or more of the total combined voting
power of all classes of stock of UBS Americas entitled to vote; (b) the
beneficial owner of the preferred trust security is not a controlled
foreign corporation that is related to UBS Americas through stock
ownership; (c) either (A) the beneficial owner of the preferred trust
security certifies to the trust or its agent, under penalties of perjury,
that it is not a United States Holder and provides its name and address or
(B) a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business (a "Financial Institution") and holds the preferred trust security
certifies to the trust or its agent under penalties of perjury that such
statement has been received from the beneficial owner by it or by a
Financial Institution between it and the beneficial owner and furnishes the
trust or its agent with a copy thereof and (d) such payments are not
effectively connected with the conduct by the United States Alien Holder of
a trade or business in the United States; and
(ii) A United States Alien Holder of a preferred trust security will not be
subject to United States Federal income or withholding tax on any gain
realized upon the sale or other disposition of a preferred trust security
unless (i) the United States Alien Holder is an individual who is present
in the United States for 183 days or more in the taxable year of
disposition, and certain other conditions apply, or (ii) the gain is
effectively connected with the conduct by the United States Alien Holder of
a trade or business in the United States.
If you receive a payment after 31 December 2000, recently finalized Treasury
regulations will apply. Under these final withholding regulations, after 31
December 2000, you may use an alternative method to satisfy the certification
requirement described above. Additionally, if you are a partner in a foreign
partnership, after 31 December 2000, you, in addition to the foreign
partnership, must provide the certification described above and the partnership
must provide certain information. The Internal Revenue Service will apply a
look-through rule in the case of tiered partnerships.
INFORMATION REPORTING TO HOLDERS
The trust will report the interest paid or the original issue discount that
accrued during the year with respect to the junior subordinated debentures, and
any gross proceeds received by the trust from the retirement or redemption of
the junior subordinated debentures, annually to the Holders of record of the
preferred trust securities and the Internal Revenue Service. The trust currently
intends to deliver such reports to Holders of record prior to January 31
following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, preferred trust securities may
be subject to a "backup" withholding tax of 31% unless the SecurityHolder
complies with certain identification requirements. Any withheld amounts will
generally be allowed as a credit against the SecurityHolder's United States
Federal income tax, provided the required information is timely filed with the
Internal Revenue Service.
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TAX CONSIDERATIONS UNDER THE LAWS OF SWITZERLAND
The tax information set forth below is based on the opinion of Ernst & Young AG,
dated 21 December 2000, and has been approved by them for its accuracy. In this
section, we summarize the principal tax consequences under the laws of
Switzerland of owning debt securities fully and unconditionally guaranteed by
UBS AG, Switzerland.
Under the scope of Swiss withholding tax legislation, debt securities issued by
an entity domiciled outside of Switzerland (the issuer) are not subject to the
Swiss withholding tax of 35% on any interest payments on those securities. If
the issuer is a permanent establishment outside of Switzerland or a subsidiary
that is not a resident of Switzerland, and that entity is vested with a
guarantee by the parent company that is a resident of Switzerland, Swiss
withholding tax does not apply if the proceeds of such securities are not used
in Switzerland. If the proceeds from the sale of debt instruments by these
issuers are not used in Switzerland, both (1) interest payments by the issuer
and (2) any guarantee payment or comparable payment by the Swiss parent company
in connection with such debt securities are free from Swiss withholding tax.
The guarantees relate to debt securities, which were issued by Paine Webber Inc.
before the merger with UBS Americas Inc. UBS AG and UBS Americas Inc. will
ensure that the proceeds from the sale of these debt securities are not used in
Switzerland. Consequently, current and future interest payments on the debt
securities should not be subject to Swiss withholding tax.
Neither the present Swiss withholding tax law nor the current practice of the
Federal Tax Administration of Switzerland indicate that a guarantee payment
related to interest could be re-characterized as an interest payment itself,
which would be subject to withholding tax. For this reason, we believe that a
possible guarantee payment will not be subject to Swiss withholding tax,
irrespective of whether it is made for the principal, interest or other amounts
payable in accordance with the terms of the debt securities.
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ERISA Matters
A fiduciary of a pension, profit-sharing or other employee benefit plan subject
to the Employment Retirement Income Security Act of 1974, as amended ("ERISA"),
should consider the fiduciary standards of ERISA in the context of the plan's
particular circumstances before authorizing an investment in the preferred trust
securities. Among other factors, the fiduciary should consider whether the
investment would satisfy the prudence and diversification requirements of ERISA
and would be consistent with the documents and instruments governing the plan.
Section 406 of ERISA and Section 4975 of the Code prohibit an employee benefit
plan, as well as individual retirement accounts and Keogh plans subject to
Section 4975 of the Code, from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the plan. A violation of these
"prohibited transaction" rules may result in excise tax or other liabilities
under ERISA and Section 4975 of the Code for such persons, unless exemptive
relief is available under an applicable statutory or administrative exemption.
Therefore, a fiduciary of an employee benefit plan should also consider whether
an investment in the preferred trust securities might constitute or give rise to
a prohibited transaction under ERISA and the Internal Revenue Code. Employee
benefit plans which are governmental plans (as defined in Section 3(32) of
ERISA), certain church plans (as defined in Section 3(33) of ERISA), and foreign
plans (as described in Section 4(b)(4) of ERISA) generally are not subject to
the requirements of ERISA or Section 4975 of the Code.
UBS AG, UBS Americas and certain of their affiliates (including companies in the
Paine Webber Group) could be parties in interest or disqualified persons with
respect to an employee benefit plan. This could be the case, for example, if one
of these companies is a service provider to the plan. Prohibited transactions
within the meaning of ERISA or the Code could arise if preferred trust
securities are acquired by or with the assets of an employee benefit plan as to
which UBS AG, UBS Americas or an affiliate is a party in interest or
disqualified person. Special caution should be exercised in that event, before
preferred trust securities are purchased by the plan. In particular, the
fiduciary of the plan should consider whether exemptive relief is available
under an applicable administrative exemption. The Department of Labor has issued
five prohibited transaction class exemptions that could apply to exempt the
purchase, sale and holding of preferred trust securities from the prohibited
transaction provisions of ERISA and the Code. Those class exemptions are
Prohibited Transaction Exemption 96-23 (for transactions determined by in-house
asset managers), Prohibited Transaction Exemption 95-60 (for certain
transactions involving insurance company general accounts), Prohibited
Transaction Exemption 91-38 (for certain transactions involving bank investment
funds), Prohibited Transaction Exemption 90-1 (for certain transactions
involving insurance company separate accounts), and Prohibited Transaction
Exemption 84-14 (for certain transactions determined by independent qualified
asset managers).
A purchaser or holder of preferred trust securities or any interest therein will
be deemed to have represented by its purchase and holding thereof that it either
(a) is not an employee benefit plan and is not purchasing such securities on
behalf of or with "plan assets" of any employee benefit plan or (b) is eligible
for the exemptive relief available under Prohibited Transaction Exemption 96-23,
95-60, 91-38, 90-1 or 84-14 with respect to such purchase and holding.
Due to the complexity of these rules and the penalties that may be imposed upon
persons involved in non-exempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering the purchase of
preferred trust securities on behalf of or with "plan assets" of any employee
benefit plan consult with their counsel regarding the consequences under ERISA
and the Code of the acquisition of preferred trust securities and the
availability of exemptive relief under Prohibited Transaction Exemption 96-23,
95-60, 91-38, 90-1 or 84-14.
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PLAN OF DISTRIBUTION
This prospectus is to be used by USB AG, UBS Warburg LLC, PaineWebber
Incorporated and other affiliates of UBS AG in connection with offers and sales
related to market-making transactions in the debentures by and through UBS AG,
UBS Warburg LLC, PaineWebber Incorporated and such other affiliates at
negotiated prices that are related to prevailing market prices at the time of
sale, or at other prices. UBS AG, UBS Warburg LLC, PaineWebber Incorporated and
such other affiliates may act as principal or agent in these transactions. No
new securities are offered. These market-making transactions will settle in
accordance with customary market practices, or as otherwise agreed by the
parties. None of the affiliates will receive any compensation from UBS Americas
or UBS AG for engaging in those transactions.
Both series of preferred trust securities are listed on the New York Stock
Exchange. The 8.30% Preferred Trust Securities of PWG Capital Trust I are listed
under the symbol "PWJ PrA." The 8.08% Preferred Trust Securities of PWG Capital
Trust II are listed under the symbol "PWJ PrB."
UBS Warburg LLC and PaineWebber Incorporated currently make a market in the
preferred trust securities. However, they are not required to, and they can stop
doing so at any time without notice. As a result, there is no assurance as to
the liquidity of any market for the preferred trust securities.
VALIDITY OF THE SECURITIES
The validity of the preferred trust securities guarantee and the junior
subordinated debentures was passed on, at the time of their initial issuance, by
Cravath, Swaine and Moore, New York, New York. The validity of the preferred
trust securities was passed on, at the time of their initial issuance, by
Richards, Layton & Finger, Wilmington, Delaware. Both at that time and at the
date of this prospectus, Cravath, Swaine & Moore and Richards, Layton & Finger
acted and act from time to time as legal counsel to UBS Americas and its
affiliates on various matters.
The validity of UBS AG's guarantee was passed upon for UBS by Sullivan &
Cromwell, New York, New York in reliance upon the opinion of internal counsel
for UBS AG as to certain matters under Swiss law. Sullivan & Cromwell has in the
past represented and continues to represent UBS on a regular basis and in a
variety of matters.
EXPERTS
The consolidated financial statements of UBS AG 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 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.
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LIMITATION ON ENFORCEMENT OF U.S. LAWS AGAINST UBS,
ITS MANAGEMENT AND OTHERS
UBS is a Swiss bank. Many of its directors and executive officers, including
some 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 UBS's 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 or its management or
have any of them appear in a U.S. court. We have been advised by UBS internal
counsel that there is doubt as to enforceability in Switzerland, in original
actions or in actions for enforcement of judgment of U.S. courts, of liabilities
based solely on the federal securities laws of the United States.
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WHERE YOU CAN FIND MORE INFORMATION
UBS files periodic reports and other information with the Securities and
Exchange Commission. You may read and copy any document that UBS files with the
SEC at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of its public reference room. You may also inspect UBS's SEC reports
and other information at the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005.
We have filed an amendment on Form F-1 to PaineWebber's registration statements
on Form S-3 under the Securities Act with the SEC covering the debt securities
and UBS's guarantees. For further information on the debt securities, the
guarantees, the PWG Trusts, UBS Americas and UBS, you should review our
registration statement and its exhibits. This prospectus summarizes material
provisions of the contracts and other documents that we refer you to. Since this
prospectus may not contain all the information that you may find important, you
should review the full text of these documents. We have included copies of these
documents as exhibits to our registration statement.
PRESENTATION OF FINANCIAL INFORMATION
UBS's financial statements have been prepared in accordance with International
Accounting Standards and are denominated in Swiss francs, or "CHF," the legal
tender of Switzerland. For convenience, 31 December 1999 CHF amounts have been
translated into United States dollars, or "$," at the rate of CHF 1=$0.6277,
which was the noon buying rate on 31 December 1999, and 30 June 2000 CHF amounts
have been translated into United States dollars at the rate of CHF 1=$0.6129,
which was the noon buying rate on 30 June 2000. This translation should not be
construed as a representation that the Swiss franc amounts actually denote such
United States dollar amounts or have been, could have been or could be,
converted into United States dollars at the rate indicated.
The table below sets forth, for the periods and dates indicated, information
concerning the noon buying rate for the Swiss franc, expressed in United States
dollars per one Swiss franc. The "noon buying rate" is the rate in New York City
for cable transfers in foreign currencies as certified for customs purposes by
the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
HIGH LOW AVERAGE RATE(1)
YEAR ENDED 31 DECEMBER ($ per 1 CHF) AT PERIOD END
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995....................................... 0.8951 0.7616 0.8466 0.8666
1996....................................... 0.8641 0.7399 0.8090 0.7468
1997....................................... 0.7446 0.6510 0.6890 0.6845
1998....................................... 0.7731 0.6485 0.6894 0.7281
1999....................................... 0.7361 0.6244 0.6605 0.6277
2000 (through 30 September)................ 0.6441 0.5596 0.5941 0.5792
</TABLE>
------------
(1) The average of the noon buying rates on the last business day of each full
month during the relevant period.
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PRESENTATION OF FINANCIAL INFORMATION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONTH HIGH LOW
---------------------------------------------------------------------------
<S> <C> <C>
June 2000................................................ 0.6181 0.5925
July 2000................................................ 0.6165 0.5959
August 2000.............................................. 0.5967 0.5739
September 2000........................................... 0.5804 0.5596
October 2000............................................. 0.5773 0.5479
November 2000............................................ 0.5759 0.5529
</TABLE>
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Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses, other than any underwriting discounts
and commission and expenses reimbursed by the Registrants, to be incurred in
connection with the issuance and distribution of the securities registered under
this Registration Statement:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fees........ $ 0
Printing and engraving expenses............................. 250,000.00
Legal fees and expenses..................................... 75,000.00
Accountants' fees and expenses.............................. 50,000.00
Trustee and Transfer Agent fees and expenses................ 85,000.00
-----------
TOTAL..................................................... $400,000.00
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
UBS AG
Under Swiss law, directors and senior officers acting in violation of their
statutory duties -- whether dealing with bona fide third parties or performing
any other acts on behalf of the corporation -- may become liable to the
corporation, its shareholders and (in bankruptcy) its creditors for damages. The
directors' liability is joint and several but only to the extent the damage is
attributable to each director based on willful or negligent violation of duty.
If the board of directors lawfully delegated the power to carry out day-to-day
management to a different corporate body, e.g., the executive board, the board
of directors is not vicariously liable for the acts of the members of the
executive board. Instead, the directors can be held liable for their failure to
properly select, instruct or supervise the executive board members. If directors
and officers enter into a transaction on behalf of the corporation with bona
fide third parties in violation of their statutory duties, the transaction is
nevertheless valid as long as it is not excluded by the corporation's business
purpose.
Under Swiss law, a corporation may indemnify a director or officer of the
corporation against losses and expenses (unless arising from his gross
negligence or willful misconduct), including attorney's fees, judgments, fines
and settlement amounts actually and reasonably incurred in a civil or criminal
action, suit or proceeding by reason 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
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- 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 AMERICAS INC.
Under the authority conferred by Section 102 of the Delaware General Corporation
Law (the DGCL), Article Nine of UBS Americas' Amended Certificate of
Incorporation eliminates the personal liability of UBS Americas' directors to
UBS Americas or its stockholders for monetary damages for breach of fiduciary
duty. Directors remain liable for (i) any breach of the duty of loyalty to UBS
Americas or its stockholders, (ii) any act or omission not in good faith or
which involves intentional misconduct or a knowing violation of law, (iii) any
violation of Section 174 of the DGCL, which proscribes the payment of dividends
and stock purchases or redemptions under certain circumstances, and (iv) any
transaction from which directors derive an improper personal benefit.
Article Nine further provides that any future amendment, modification or repeal
of its terms will not adversely affect any rights of directors that exist at the
time of the amendment, modification or repeal with respect to acts or omissions
occurring prior to such amendment, modification or repeal. Article Nine also
incorporates any future amendments to Delaware law which further eliminate or
limit the liability of directors.
PWG CAPITAL TRUST I AND II
The Amended and Restated Declaration of Trust for each of PWG Capital Trust I
and PWG Capital Trust II (each a "PWG Trust") provides that no Trustee, any of
its Affiliates, or any officer, director, shareholder, member, partner,
employee, representative, or agent of any Trustee, or any employee or agent of
any PWG Trust or any of its Affiliates (each an "Indemnified Person"), shall be
liable, responsible or accountable in damages or otherwise to (i) any PWG Trust
or any officer, director, shareholder, partner, member, representative, employee
or agent of any PWG Trust or its Affiliates, (ii) any officer, director,
shareholder, employee, representative or agent of UBS Americas (as successor by
merger to) or any of its Affiliates, or (iii) any holder of Preferred Securities
(each a "Covered Person"), for any loss, damage or claim incurred by reason of
any act or omission performed or omitted by such Indemnified Person in good
faith on behalf of any of PWG Trust and in a manner such Indemnified Person
reasonably believed to be within the scope of the authority conferred on such
Indemnified Person by such Declaration or by law, except that an Indemnified
Person shall be liable for any such loss, damage or claim incurred by reason of
such Indemnified Person's gross negligence or willful misconduct with respect to
such acts or omissions.
The Amended and Restated Declaration of Trust for each PWG Trust also provides
that to the full extent permitted by law, UBS Americas Inc. shall indemnify and
hold harmless each Indemnified Person from and against any loss, damage or claim
incurred by such Indemnified Person by reason of any act or omission performed
or omitted by such Indemnified Person in good faith on behalf of any PWG Trust
and in a manner such Indemnified Person reasonably believed to be within the
scope of
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authority conferred on such Indemnified Person by such Declaration, except that
no Indemnified Person shall be entitled by to indemnified in respect of any
loss, damage or claim incurred by such Indemnified Person by reason of gross
negligence (or, in the case of the Property Trustee, negligence) or willful
misconduct with respect to such acts or omissions.
The Amended and Restated Declaration of Trust for each PWG Trust also provides
that to the full extent permitted by law, that expenses (including legal fees)
incurred by an Indemnified Person in defending any claim, demand, action, suit
or proceeding shall, from time to time, be advanced by UBS Americas Inc. prior
to the final disposition of such claim, demand, action, suit or proceeding upon
receipt by UBS Americas Inc. of an undertaking by or on behalf of the
Indemnified Person to repay such amount if it shall be determined that the
Indemnified Person is not entitled to be indemnified as authorized in such
Declaration.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES BY UBS AG
In the three years preceding the filing of this Registration Statement, UBS AG
has sold the following securities that were not registered under the Securities
Act. UBS Warburg LLC or another affiliate thereof was the principal underwriter
for each of the following issuances and, except as otherwise described below,
the securities were offered to, and purchased by, institutional investors. The
following issuances were not subject to the registration requirements of the
Securities Act of 1933 because the securities were offered and sold either
outside the United States in a manner not requiring registration under the
Securities Act or within the United States in reliance upon the exemption
provided by Section 4(2) of the Securities Act of 1933 and/or Regulation D
thereunder.
1998
February, 1998: XEU 110,000,000 1.00% convertible debt on FTSI Index.
March, 1998: USD 250,000,000 5.75% debt.
March-December, 1998: convertible debt and reverse convertible debt that
combines a bond and a put option on a stock or stock index issued under the
"cash or share delivery" ("Geld-Oder-Aktien-Lieferung" or "GOAL") plan
through 14 separate GOALs, offered on various dates, at various interest rates,
with maturities at the time of initial issuance ranging from 2 to 10 years, and
denominated in CHF, DEM, USD, ITL and NLG. The aggregate amount issued over this
period was CHF 3,357,000,000, USD 275,000,000, DEM 300,000,000,
ITL 350,000,000,000 and NLG 275,000,000. One of the issuances was offered to,
and purchased by, retail clients and institutional investors, the other 13
issuances were offered to, and purchased by, only institutional investors.
July-December, 1998: 20,614 ordinary shares of UBS AG in accordance with the
management stock plan (management aktien programm).
July-December, 1998: 1,729 ordinary shares of UBS AG pursuant to exercise of
17,290 outstanding options (with 5,434,600 options remaining unexercised) in
accordance with the management stock option plan (optionen wahldividende).
1999
January-December, 1999: convertible debt and reverse convertible debt that
combines a bond and a put option on a stock or stock index issued under the GOAL
plan through 26 separate GOALs, offered on various dates, at various interest
rates, with maturities at the time of initial issuance ranging from 1 to 7
years, and denominated in CHF, EUR, USD and GBP. The aggregate amount issued
over this period was CHF 1,210,000,000, EUR 492,000,000, USD 451,000,000 and
GBP 95,000,000.
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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).
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------------------------------------------------------
<C> <S>
3.1 Articles of Association of UBS AG
3.2 By-laws of UBS AG
3.3a Certificate of Incorporation of UBS Americas Inc. (formerly
known as Neptune Merger Subsidiary Inc.)
3.3b Certificate of Amendment of Certificate of Incorporation of
UBS Americas Inc. (formerly known as Neptune Merger
Subsidiary Inc.)
3.3c Certificate of Merger of Paine Webber Group Inc. with and
into UBS Americas Inc.
3.4 By-laws of UBS Americas Inc. (formerly known as Neptune
Merger Subsidiary Inc.)
4.1a Indenture, dated as of 15 March 1988, between UBS Americas
Inc. (as successor by merger to Paine Webber Group Inc.) and
The Chase Manhattan Bank (formerly known as Chemical Bank),
as Trustee
4.1b Supplemental indenture, dated as of 22 September 1989,
between UBS Americas Inc. (as successor by merger to Paine
Webber Group Inc.) and The Chase Manhattan Bank (formerly
known as Chemical Bank), as Trustee*
4.1c Supplemental indenture, dated as of 22 March 1991, between
UBS Americas Inc. (as successor by merger to Paine Webber
Group Inc.) and The Chase Manhattan Bank (formerly known as
Chemical Bank), as Trustee*
4.1d Supplemental indenture, dated as of 3 November 2000, between
UBS Americas Inc. (as successor by merger to Paine Webber
Group Inc.) and The Chase Manhattan Bank (formerly known as
Chemical Bank), as Trustee+
4.1e Form of Supplemental Indenture, dated as of 22 December
2000, among UBS Americas Inc., UBS AG and The Chase
Manhattan Bank
4.2a Indenture, dated as of 15 March 1988, between UBS Americas
Inc. (as successor by merger to Paine Webber Group Inc.) and
Chase Manhattan Bank USA, National Association (formerly
known as Chemical Bank (Delaware)), as Trustee
4.2b Supplemental indenture, dated as of 22 September 1989,
between UBS Americas Inc. (as successor by merger to Paine
Webber Group Inc.) and Chase Manhattan Bank USA, National
Association (formerly known as Chemical Bank (Delaware)), as
Trustee*
4.2c Supplemental indenture, dated as of 22 November 1991,
between UBS Americas Inc. (as successor by merger to Paine
Webber Group Inc.) and Chase Manhattan Bank USA, National
Association (formerly known as Chemical Bank (Delaware)), as
Trustee*
4.2d Supplemental indenture, dated as of 30 November 1993,
between UBS Americas Inc. (as successor by merger to Paine
Webber Group Inc.) and Chase Manhattan Bank USA, National
Association (formerly known as Chemical Bank (Delaware)), as
Trustee*
4.2e Supplemental indenture, dated as of 3 November 2000, between
UBS Americas Inc. (as successor by merger to Paine Webber
Group Inc.) and Chase Manhattan Bank USA, National
Association, as Trustee+
4.2f Form of Supplemental Indenture, dated as of 22 December
2000, among UBS Americas Inc., UBS AG and Chase Manhattan
Bank USA, National Association
4.3a Indenture, dated as of 9 December 1996, between UBS Americas
Inc. (as successor by merger to Paine Webber Group Inc.) and
The Chase Manhattan Bank, as Trustee
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------------------------------------------------------
<C> <S>
4.3b Supplemental indenture dated as of 9 December 1996, between
UBS Americas Inc. (as successor by merger to Paine Webber
Group Inc.) and The Chase Manhattan Bank, as Trustee
4.3c Supplemental indenture, dated as of 14 March 1997, between
UBS Americas Inc. (as successor by merger to Paine Webber
Group Inc.) and The Chase Manhattan Bank, as Trustee
4.3d Supplemental Indenture, dated as of 3 November 2000, between
UBS Americas Inc. (as successor by merger to Paine Webber
Group Inc.) and The Chase Manhattan Bank, as Trustee+
4.3e Form of Supplemental Indenture, dated as of 22 December
2000, among UBS Americas Inc., UBS AG and The Chase
Manhattan Bank
4.4a Form of Debt Securities (Medium-Term Senior Note, Series C,
Fixed Rate)
4.4b Form of Debt Securities (Medium-Term Subordinated Note,
Series D, Fixed Rate)
4.4c Form of Debt Securities (Medium-Term Senior Note, Series C,
Floating Rate)
4.4d Form of Debt Securities (Medium-Term Subordinated Note,
Series D, Floating Rate)
4.5 Declaration of Trust of PWG Capital Trust I**
4.6 Certificate of Trust of PWG Capital Trust I**
4.7 Declaration of Trust of PWG Capital Trust II**
4.8 Certificate of Trust of PWG Capital Trust II**
4.9 Amended and Restated Declaration of Trust for PWG Capital
Trust I
4.10 Amended and Restated Declaration of Trust for PWG Capital
Trust II
4.11a Certificate Evidencing PWG Capital Trust I 8.30% Preferred
Trust Securities (liquidation amount $25 per Preferred
Security)
4.11b Certificate Evidencing PWG Capital Trust II 8.08% Preferred
Trust Securities (liquidation amount $25 per Preferred
Security)
4.12a Certificate Evidencing PWG Capital Trust I 8.30% Common
Trust Securities (liquidation amount $25 per Common
Security)
4.12b Certificate Evidencing PWG Capital Trust II 8.08% Common
Trust Securities (liquidation amount $25 per Common
Security)
4.13 Form of Guarantee, dated as of 22 December 2000, by UBS AG
of the obligations of UBS Americas Inc. (as successor by
merger to Paine Webber Group Inc.) under the Declaration of
Trust of PWG Capital Trust I, dated as of 9 December 1996
4.14 Form of Guarantee dated as of 22 December 2000, by UBS AG of
the obligations of UBS Americas Inc. (as successor by merger
to Paine Webber Group Inc.) under the Declaration of Trust
of PWG Capital Trust II, dated as of 14 March 1997
4.15 8.30% Junior Subordinated Debenture due 2036
4.16 8.08% Junior Subordinated Debenture due 2037
4.17 Guarantee Agreement of PWG Capital Trust I, dated as of 9
December 1996, between UBS Americas Inc. (as successor by
merger to Paine Webber Group Inc.) and The Chase Manhattan
Bank, as Guarantee Trustee
4.18 Form of Amendment, dated as of 22 December 2000, to
Guarantee Agreement of PWG Capital Trust I
</TABLE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------------------------------------------------------
<C> <S>
4.19 Guarantee Agreement of PWG Capital Trust II, dated as of
14 March 1997, between UBS Americas Inc. (as successor by
merger to Paine Webber Group Inc.) and The Chase Manhattan
Bank, as Guarantee Trustee
4.20 Form of Amendment, dated as of 22 December 2000, to
Guarantee Agreement of PWG Capital Trust II
4.21 8 7/8% Notes Due 2005++
4.22 8 1/4% Notes Due 2002++
4.23 6 3/4% Notes Due 2006++
4.24 6 1/2% Notes Due 2005+++
4.25 7 5/8% Notes Due 2014+++
4.26 7 3/4% Subordinated Notes Due 2002+++
4.27 9 1/4% Notes Due 2001
4.28 7 7/8% Notes Due 2003
4.29 7 5/8% Notes Due 2008
4.30 6.55% Notes Due 2008
4.31 6.45% Notes Due 2003
4.32 6 3/8% Notes Due 2004
4.33 7 5/8% Notes Due 2009
5.1 Opinion of Sullivan & Cromwell as to the validity of the
guarantees of UBS AG (New York law)
5.2 Opinion of Cravath, Swaine & Moore as to the validity of the
junior subordinated debentures and preferred trust
securities guarantees*****
5.3 Opinion of UBS AG internal counsel as to the validity of the
guarantees of UBS AG (Swiss law)
5.4 Opinions of Theodore Levine as to the validity of the debt
securities***
5.5 Opinion of Richards, Layton & Finger as to the validity of
the preferred trust securities****
8.1 Opinion of Sullivan & Cromwell as to certain United States
tax matters
8.2 Opinion of Cravath, Swaine & Moore as to certain United
States tax matters
8.3 Opinion of Ernst & Young AG as to certain Swiss tax matters
10.1 Agreement and Plan of Merger, dated as of July 12, 2000, by
and among Paine Webber Group Inc., UBS AG and Neptune Merger
Subsidiary, Inc.*
12 Statement regarding ratio of fixed charges to earnings
21 Subsidiaries of UBS AG
23.1 Consent of Sullivan & Cromwell (included in Exhibit 5.1)
23.2 Consent of Cravath, Swaine & Moore
23.3 Consent of UBS AG internal counsel (included in Exhibit 5.3)
23.4 Consent of Sullivan & Cromwell (included in Exhibit 8.1)
23.5 Consent of Ernst & Young Ltd. as independent auditors of UBS
AG
23.6 Consent of Cravath, Swaine & Moore (included in Exhibit 8.2)
23.7 Consent of Ernst & Young Ltd. relating to the opinion in
Exhibit 8.3
</TABLE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------------------------------------------------------
<C> <S>
23.8 Consent of Ernst & Young LLP as independent auditors of UBS
Americas Inc. (as successor by merger to Paine Webber Group
Inc.)
23.9 Consent of Theodore Levine
23.10 Consent of Richards, Layton & Finger
24.1 Power of Attorney
25.1 Statement of Eligibility of Trustee under senior debt
securities
25.2 Statement of Eligibility of Trustee under subordinated debt
securities
25.3a Statement of Eligibility of Trustee under 8.30% Junior
Subordinated Debentures Due 2036
25.3b Statement of Eligibility of Trustee under 8.08% Junior
Subordinated Debentures Due 2037
25.3c Statement of Eligibility of Trustee under 8.08% Trust
Preferred Securities
25.3d Statement of Eligibility of Trustee under 8.30% Trust
Preferred Securities
25.3e Statement of Eligibility of Trustee under Trust Preferred
Securities Guarantee PWG Capital Trust I
25.3f Statement of Eligibility of Trustee under Trust Preferred
Securities Guarantee PWG Capital Trust II
</TABLE>
------------
*Incorporated by reference to exhibit to Pre-Effective Amendment No. 1 of
Paine Webber Group Inc. on 18 October 1995.
+Incorporated by reference to exhibit to Form 8-K of UBS Americas Inc. on 21
November 2000.
++Incorporated by reference to exhibit to Form 10-K of Paine Webber Group
Inc. on 29 March 1996.
+++Incorporated by reference to exhibit to Form 10-K of Paine Webber Group
Inc. on 30 March 1995.
***Incorporated by reference to exhibit 5 to each of Paine Webber Group Inc.'s
Registration Statement Nos. 333-6307, 333-17913, 333-58124, 333-47267,
333-29253, 333-7738 and 2-99979.
****Incorporated by reference to exhibit 5 to Registration Statements Nos.
333-13831, 333-13831-01 to -04 and 333-67187, 333-67187-01 to -04.
*****Incorporated by reference to exhibit 5.1 to Registration Statement Nos.
333-13831, 333-13831-01 to -04.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
--------------------------------------------------------------------------------
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PART II
--------------------------------------------------------------------------------
UBS AG hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering;
(4) 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; and
(5) 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.
(6)To file a post-effective amendment to the registration statement to
include any financial statements required by Item 8.A. of Form 20-F at
the start of any delayed offering or throughout a continuous offering.
Financial statements and information otherwise required by Section
10(a)(3) of the Act need not be furnished, provided, that the registrant
includes in the prospectus, by means of a post-effective amendment,
financial statements required pursuant to this paragraph (6) and other
information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial
statements.
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Signatures
Pursuant to the requirements of the Securities Act of 1933, UBS AG certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form F-1 and has duly caused this 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 22 December, 2000.
UBS AG
By: /s/ ROBERT B. MILLS
------------------------------------
Name: Robert B. Mills
Title: Managing Director
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement or amendment has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
-------------------------------------------------------------------------------------------------------
<C> <S> <C>
* President and Group Chief 22 December, 2000
--------------------------------------------------- Executive Officer
Marcel Ospel
* Chief Financial Officer 22 December, 2000
---------------------------------------------------
Luqman Arnold
* Group Controller and Member of 22 December, 2000
--------------------------------------------------- Board of Directors
Hugo Schaub
* Chairman and Member of Board of 22 December, 2000
--------------------------------------------------- Directors
Alex Krauer
* First Vice Chairman and Member 22 December, 2000
--------------------------------------------------- of Board of Directors
Alberto Togni
* Second Vice Chairman and Member 22 December, 2000
--------------------------------------------------- of Board of Directors
Markus Kundig
* Member of Board of Directors 22 December, 2000
---------------------------------------------------
Peter Bockli
* Member of Board of Directors 22 December, 2000
---------------------------------------------------
Rolf A. Meyer
* Member of Board of Directors 22 December, 2000
---------------------------------------------------
Hans Peter Ming
Member of Board of Directors 22 December, 2000
---------------------------------------------------
Andreas Reinhart
* Member of Board of Directors 22 December, 2000
---------------------------------------------------
Eric Honnegger
</TABLE>
*By: /s/ ROBERT B. MILLS
------------------------------
Robert B. Mills,
as attorney-in-fact under
Power of Attorney
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Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the
Authorized Representative has duly caused this Amendment to 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 22 December 2000.
By: /s/ ROBERT C. DINERSTEIN
------------------------------------
Name: Robert C. Dinerstein
Title: Senior -- Managing
Director
Pursuant to the requirements of the Securities Act of 1933, UBS Americas Inc.
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 22 December
2000.
UBS AMERICAS INC.
By: /s/ ROBERT B. MILLS
------------------------------------
Name: Robert B. Mills
Title:Managing Director, Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------------------------------------------------------------------------
<C> <S> <C>
/s/ JOHN P. COSTAS President December 22, 2000
--------------------------------------------------- (principal executive officer)
(John P. Costas)
/s/ ROBERT B. MILLS Managing Director, Treasurer December 22, 2000
--------------------------------------------------- and Chief Financial Officer
(Robert B. Mills) (principal financial and
accounting officer)
/s/ JOHN P. COSTAS Director December 22, 2000
---------------------------------------------------
(John P. Costas)
/s/ MARKUS GRANZIOL Director December 22, 2000
---------------------------------------------------
(Markus Granziol)
</TABLE>
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Signatures
Pursuant to the requirements of the Securities Act of 1933, PWG Capital Trust I
and PWG Capital Trust II each 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 22 December 2000.
PWG CAPITAL TRUST I,
by UBS Americas Inc., as Sponsor,
/s/ ROBERT B. MILLS
--------------------------------------
Name: Robert B. Mills
Title:Managing Director, Treasurer and
Chief Financial Officer
PWG CAPITAL TRUST II,
by UBS Americas Inc., as Sponsor,
/s/ ROBERT B. MILLS
--------------------------------------
Name: Robert B. Mills
Title:Managing Director, Treasurer and
Chief Financial Officer
--------------------------------------------------------------------------------
II- 12
