<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON 29 SEPTEMBER 2000
REGISTRATION NO. 333-46216
333-46216-01
333-46216-02
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM F-1
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<CAPTION>
UBS AG UBS PREFERRED FUNDING TRUST I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<S> <C> <C> <C> <C> <C>
SWITZERLAND 6021 98-0186363 DELAWARE 6712 51-6518252
(STATE OR OTHER (PRIMARY (I.R.S. (STATE OR OTHER (PRIMARY (I.R.S. EMPLOYER
JURISDICTION OF STANDARD EMPLOYER JURISDICTION OF STANDARD IDENTIFICATION
INCORPORATION OR INDUSTRIAL IDENTIFICATION INCORPORATION OR INDUSTRIAL NUMBER)
ORGANIZATION) CLASSIFICATION NUMBER) ORGANIZATION) CLASSIFICATION
CODE NUMBER) CODE NUMBER)
<CAPTION>
UBS PREFERRED FUNDING
COMPANY LLC I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<S> <C> <C>
DELAWARE 6712 51-04802885
(STATE OR OTHER (PRIMARY (I.R.S. EMPLOYER
JURISDICTION OF STANDARD IDENTIFICATION
INCORPORATION OR INDUSTRIAL NUMBER)
ORGANIZATION) CLASSIFICATION
CODE NUMBER)
</TABLE>
<TABLE>
<S> <C> <C>
BAHNHOFSTRASSE 45, ZURICH, C/O WILMINGTON TRUST COMPANY THE CORPORATION TRUST COMPANY
SWITZERLAND, 011 41-1-234 11 11 AND 1100 NORTH MARKET STREET 1209 ORANGE STREET
AESCHENVORSTADT 1, BASEL, WILMINGTON, DELAWARE 19890 WILMINGTON, DELAWARE 19801
SWITZERLAND, 011 41-61-288 20 20 302-651-1118 302-658-7581
(ADDRESS AND TELEPHONE NUMBER OF (ADDRESS AND TELEPHONE NUMBER OF (ADDRESS AND TELEPHONE NUMBER OF
REGISTRANT'S PRINCIPAL EXECUTIVE REGISTRANT'S PRINCIPAL EXECUTIVE REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES) OFFICES) OFFICES)
</TABLE>
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ROBERT C. DINERSTEIN, ESQ.
UBS AG
299 PARK AVENUE
NEW YORK, NEW YORK 10171
TELEPHONE: 212-821-3000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES TO:
<TABLE>
<S> <C>
MARK J. WELSHIMER, ESQ. JEFFREY D. BERMAN, ESQ.
SULLIVAN & CROMWELL DAVIS POLK & WARDWELL
125 BROAD STREET 450 LEXINGTON AVENUE
NEW YORK, NY 10004-2498 NEW YORK, NY 10017
212-558-4000 212-450-4000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER UNIT(1)(2) OFFERING PRICE(1)(2) REGISTRATION FEE(2)
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<S> <C> <C> <C> <C>
--% Noncumulative Trust Preferred
Securities issued by UBS Preferred
Funding Trust I...................... 1,500,000 $1,000 $1,500,000,000 $66,000(3)
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--% Noncumulative Company Preferred
Securities issued by UBS Preferred
Funding Company LLC I................ 1,500,000 $1,000 $1,500,000,000 0
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Subordinated Guarantee of UBS AG with
respect to the Company Preferred
Securities........................... 0
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee.
(2) No separate consideration will be received for the company preferred
securities of UBS Preferred Funding Company LLC I or the subordinated
guarantee of UBS AG. Pursuant to Rule 457(n) under the Securities Act of
1933, no separate fee is payable with respect to these securities.
(3) The total amount of the registration fee is $396,000, of which $330,000 was
paid upon the initial filing of the registration statement.
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This registration statement contains a prospectus relating to both of the
following: the offering of newly issued trust preferred securities and company
preferred securities; and market-making transactions that may occur on an
ongoing basis in trust preferred securities and company preferred securities
that have been previously issued in the offering described above.
When the prospectus is delivered to an investor in the initial offering
described above, the investor will be informed of that fact in the confirmation
of sale. When the prospectus is delivered to an investor who is not so informed,
it is delivered in a market-making transaction.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PROSPECTUS Preliminary Prospectus dated 29 September 2000
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[UBS AG LOGO]
$1,500,000,000
UBS Preferred Funding Trust I
--% Noncumulative Trust Preferred Securities
representing a corresponding amount of
--% Noncumulative Company Preferred Securities
of
UBS Preferred Funding Company LLC I
guaranteed on a subordinated basis by
UBS AG
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- Each trust preferred security represents a corresponding amount of the
company preferred securities and related rights under the UBS AG subordinated
guarantee. Dividends and redemption and liquidation payments paid by UBS
Preferred Funding Company on the company preferred securities will pass
through UBS Preferred Funding Trust to you as distributions and redemption
and liquidation payments on the trust preferred securities.
- The company preferred securities will pay semi-annual distributions on April
-- and October -- of each year at a fixed rate per annum equal to --% through
the dividend payment date in October 2010, and thereafter will pay quarterly
distributions on January --, April --, July -- and October -- of each year at
a variable rate per annum equal to --% above three-month LIBOR. The company
preferred securities are perpetual securities and do not have a maturity
date. UBS Preferred Funding Company may redeem the company preferred
securities on or after the dividend payment date in October 2010.
- The company preferred securities will provide holders with rights to
distributions and redemption and liquidation payments that are similar to
those of the most senior ranking noncumulative perpetual preferred shares
issued directly by UBS AG that have financial terms equivalent to those of
the company preferred securities.
- UBS AG will guarantee, on a subordinated basis, dividend, redemption and
liquidation payment obligations under the company preferred securities.
- We have applied to list the trust preferred securities on the Luxembourg
Stock Exchange.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR RISKS RELATED TO AN INVESTMENT IN
THE TRUST PREFERRED SECURITIES.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING UBS PREFERRED
PUBLIC(1) DISCOUNT FUNDING TRUST
--------- ------------ -------------
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<S> <C> <C> <C>
Per Trust Preferred Security................................ $ -- (2) $ --
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Total....................................................... $ -- (2) $ --
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</TABLE>
(1) Plus accrued dividends, if any, from the date of original issue.
(2) UBS Preferred Funding Trust will pay the underwriters compensation of $--
per trust preferred security.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This prospectus may be used in the initial sale of the trust preferred
securities. In addition, UBS Warburg LLC or any other affiliate controlled by
UBS may use this prospectus in a market-making transaction involving the trust
preferred securities after their initial sale. Unless the purchaser is informed
otherwise in the confirmation of sale, this prospectus is being used in a
market-making transaction.
We anticipate that the trust preferred securities will be ready for delivery in
book-entry form through The Depository Trust Company on or about -- 2000.
UBS Warburg LLC PaineWebber Incorporated
Credit Suisse First Boston
Goldman, Sachs & Co.
Merrill Lynch & Co.
Morgan Stanley Dean Witter
Salomon Smith Barney
The date of this prospectus is -- September 2000
<PAGE> 3
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Certain Terms......................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 12
Cautionary Note Regarding Forward-
Looking Information................. 16
UBS................................... 17
Capitalization of UBS................. 155
UBS Preferred Funding Trust I......... 156
UBS Preferred Funding Company LLC I... 157
Use of Proceeds....................... 163
Description of Trust Preferred
Securities.......................... 164
Description of Company Preferred
Securities.......................... 171
Book-Entry Issuance of Trust Preferred
Securities.......................... 185
Description of UBS AG Subordinated
Guarantee........................... 190
Description of Subordinated Notes of
UBS AG.............................. 195
Certain U.S. Tax Considerations....... 198
Certain Tax Considerations Under the
Laws of Switzerland................. 203
Certain ERISA Considerations.......... 205
Underwriting.......................... 207
Validity of the Securities............ 210
Experts............................... 210
Limitations on Enforcement of U.S.
Laws Against UBS AG, Its Management
and Others.......................... 210
General Information................... 211
Where You Can Find More Information... 213
Presentation of Financial
Information......................... 213
Financial Statements of UBS........... F-1
</TABLE>
CERTAIN TERMS
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In this prospectus:
- when we refer to "UBS AG," we mean UBS AG on a parent only basis.
- when we refer to "UBS," we mean UBS AG and its consolidated subsidiaries.
- when we refer to "PaineWebber," we mean Paine Webber Group Inc. and its
consolidated subsidiaries.
- when we refer to the "trust preferred securities," we mean the --%
Noncumulative Trust Preferred Securities being issued by UBS Preferred
Funding Trust.
- when we refer to the "company preferred securities," we mean the --%
Noncumulative Company Preferred Securities being issued by UBS Preferred
Funding Company to UBS Preferred Funding Trust in connection with the
offering of the trust preferred securities by UBS Preferred Funding
Trust.
- when we refer to "UBS Preferred Funding Trust," we mean UBS Preferred
Funding Trust I.
- when we refer to "UBS Preferred Funding Company," we mean UBS Preferred
Funding Company LLC I.
<PAGE> 4
Prospectus summary
THE FOLLOWING SUMMARY DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT
TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE MAKING AN INVESTMENT
DECISION. YOU SHOULD PAY SPECIAL ATTENTION TO THE "RISK FACTORS" SECTION TO
DETERMINE WHETHER AN INVESTMENT IN THE TRUST PREFERRED SECURITIES IS APPROPRIATE
FOR YOU.
INTRODUCTION
The trust preferred securities will provide you with rights to distributions and
redemption and liquidation payments that are similar to those to which you would
be entitled if you had purchased the most senior ranking noncumulative perpetual
preferred shares issued directly by UBS AG that have financial terms equivalent
to those of the company preferred securities. The diagram to the right outlines
the relationship among investors in the trust preferred securities, UBS
Preferred Funding Trust, UBS Preferred Funding Company and UBS AG following the
completion of the offering.
UBS Preferred Funding Trust will pass through to you any dividends, redemption
payments or liquidation payments that it receives from UBS Preferred Funding
Company on the company preferred securities.
UBS AG will guarantee, on a subordinated basis, dividend, redemption and
liquidation payment obligations under the company preferred securities.
UBS Preferred Funding Company will receive payments under the subordinated notes
issued by the Cayman Islands branch of UBS AG and will pay dividends on the
company preferred securities that are similar to dividends that would be paid on
the most senior ranking noncumulative perpetual preferred shares issued directly
by UBS AG that have equivalent financial terms.
The capital raised in this offering will qualify as consolidated Tier 1 capital
for UBS under the relevant regulatory capital guidelines of the Swiss Federal
Banking Commission.
LOGO
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<PAGE> 5
Parties to the offering
For a more complete description of UBS AG, UBS Preferred Funding Trust and UBS
Preferred Funding Company, see "UBS," "UBS Preferred Funding Trust I," "UBS
Preferred Funding Company LLC I," "Use of Proceeds," "Capitalization of UBS AG"
and "Capital Ratios and Distributable Profits of UBS."
UBS AG
UBS AG is a global, integrated investment services firm and the leading bank in
Switzerland. UBS's business is managed through three main business groups and
its Corporate Center. The business groups are: UBS Switzerland, UBS Warburg and
UBS Asset Management. UBS's clients include international corporations, small
and medium sized businesses in Switzerland, governments and other public bodies,
financial institutions, market participants and individuals. UBS AG's ordinary
shares are listed on the New York Stock Exchange under the symbol "UBS.N," on
the Zurich Stock Exchange under the symbol "UBSNZn.S" and on the Tokyo Stock
Exchange under the symbol "UBS.T".
On 12 July 2000, UBS announced that it had entered into a definitive merger
agreement with Paine Webber Group Inc., one of the largest full-service
securities and commodities firms in the United States. UBS will purchase all
outstanding shares of PaineWebber stock for a combination of cash and stock
representing a total purchase price of $10.8 billion (based on the UBS share
price on 12 July 2000). The transaction is subject to shareholder and regulatory
approvals and other conditions and is expected to be completed in the fourth
quarter of 2000.
The principal executive offices of UBS AG are located at Bahnhofstrasse 45,
Zurich, Switzerland and Aeschenvorstadt I, Basel, Switzerland. Its telephone
numbers are 011-41-1-234-11-11 and 011-41-61-288-20-20.
UBS PREFERRED FUNDING TRUST I
UBS Preferred Funding Trust I is a Delaware statutory business trust. UBS
Preferred Funding Trust exists for the purpose of issuing the trust preferred
securities representing a corresponding amount of the company preferred
securities, together with related rights under the UBS AG subordinated
guarantee. UBS Preferred Funding Trust will pass the dividends it receives on
the company preferred securities through to you as distributions on the trust
preferred securities. UBS Preferred Funding Trust cannot engage in other
activities. The company preferred securities and the related rights under the
UBS AG subordinated guarantee will be the only assets of UBS Preferred Funding
Trust. UBS AG, Stamford branch, will pay directly all expenses and liabilities
of UBS Preferred Funding Trust.
UBS Preferred Funding Trust will be treated as a grantor trust for United States
federal income tax purposes. As a result, you will be treated as a beneficial
owner of interests in the company preferred securities and the related rights
under the UBS AG subordinated guarantee for United States federal income tax
purposes.
The principal executive offices of UBS Preferred Funding Trust are located at
c/o Wilmington Trust Company, 1100 North Market Street, Wilmington, Delaware
19890. Its telephone number is 302-651-1118.
UBS PREFERRED FUNDING COMPANY LLC I
UBS Preferred Funding Company LLC I is a Delaware limited liability company. UBS
Preferred Funding Company exists for the purposes of acquiring and holding the
subordinated notes issued by the Cayman Islands branch of UBS AG, or other
eligible investments, and issuing the company common securities and the company
preferred securities. UBS AG is purchasing all of the company common securities,
which represent 100% of the voting rights in UBS Preferred Funding Company,
subject to your limited right to elect additional directors as described below.
UBS Preferred Funding
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<PAGE> 6
Company will apply the cash generated by the subordinated notes and other
eligible investments, if any, to pay dividends to UBS Preferred Funding Trust,
as holder of the company preferred securities, and UBS AG, as holder of the
company common securities. UBS Preferred Funding Company will be treated as a
partnership for United States federal income tax purposes.
UBS Preferred Funding Company will be managed by a board of directors having not
less than three and not more than five members. If the aggregate of unpaid
dividends equals or exceeds an amount equal to three semi-annual dividend
payments, you and the other holders of trust preferred securities will have the
right to elect two additional directors.
The principal executive offices of UBS Preferred Funding Company are located at
The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801.
Its telephone number is 302-658-7581.
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<PAGE> 7
The offering
For a more complete description of the trust preferred securities, the company
preferred securities, the UBS AG subordinated guarantee and the subordinated
notes, see "Description of Trust Preferred Securities," "Description of Company
Preferred Securities," "Book-Entry Issuance of Trust Preferred Securities,"
"Description of UBS AG Subordinated Guarantee" and "Description of Subordinated
Notes of UBS AG."
SECURITIES OFFERED
Each trust preferred security represents a corresponding amount of the company
preferred securities and related rights under the UBS AG subordinated guarantee.
The trust preferred securities will be issued in denominations of $1,000
liquidation amount and whole-number multiples of $1,000, and the company
preferred securities will be issued in denominations of $1,000 liquidation
preference and whole-number multiples of $1,000. The aggregate liquidation
amount of the trust preferred securities is $1,500,000,000 and the aggregate
liquidation preference of the company preferred securities is $1,500,000,000.
DIVIDENDS
UBS Preferred Funding Trust will pass through the dividends it receives on the
company preferred securities as distributions on the trust preferred securities.
UBS Preferred Funding Company will pay dividends on the company preferred
securities from the date of their initial issuance on a noncumulative basis.
These dividends will be payable on the liquidation preference of the company
preferred securities:
- semi-annually in arrears on the first business day on or after April -- and
October -- of each year at a fixed rate per annum equal to --%, beginning
-- April 2001 and ending -- October 2010, calculated on the basis of a
360-day year consisting of twelve 30-day months, and
- thereafter quarterly in arrears on the first business day on or after
January --, April --, July -- and October -- of each year at a variable
rate per annum equal to --% above three-month LIBOR, calculated on the
basis of the actual number of days elapsed in a 360-day year.
UBS Preferred Funding Company's obligation to pay dividends is subject to
provisions that generally require UBS Preferred Funding Company to pay full or
proportional dividends on the company preferred securities when UBS AG pays
dividends on UBS AG ordinary shares or on other securities of UBS AG that rank
equally with or junior to the UBS AG subordinated guarantee of the company
preferred securities. As described below, UBS Preferred Funding Company will be
required to pay dividends on the company preferred securities in some
circumstances, will be prohibited from paying dividends on the company preferred
securities in other circumstances, and, when not required to pay or prohibited
from paying dividends, will have discretion as to whether to pay dividends on
the company preferred securities. Because UBS AG paid dividends on its ordinary
shares in 26 April 2000, dividends on the company preferred securities will be
mandatory (as described below) through the dividend payment date in April, 2001.
The following text outlines the criteria for determining whether and the extent
to which UBS Preferred Funding Company will be required to pay dividends on the
company preferred securities or will be prohibited from paying dividends on the
company preferred securities:
Is there a capital limitation on UBS AG? Unless the Swiss Federal Banking
Commission expressly permits otherwise, if on a dividend payment date UBS AG is
not in compliance with the Swiss Federal Banking Commission's minimum capital
adequacy requirements applicable to UBS AG, or would not be in compliance
because of a payment of dividends on the company preferred securities, UBS
Preferred Funding Company will not pay dividends on the company preferred
securities under any circumstances. For a discussion of UBS's capital resources
relative to applicable guidelines, see "UBS --
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<PAGE> 8
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources." We refer to this restriction as a capital
limitation.
Are dividends mandatory? Unless there is a capital limitation, the payment of
full dividends by UBS Preferred Funding Company on the company preferred
securities will be mandatory during the one-year period beginning on and
including each date on which:
- UBS AG declares or pays a dividend or makes any other payment or
distribution on any shares or other securities that, in a liquidation of
UBS AG, rank junior to the UBS AG subordinated guarantee of the company
preferred securities; or
- UBS AG or any of its subsidiaries redeems, repurchases (except for its
trading account) or otherwise acquires any shares or other securities that,
in a liquidation of UBS AG, rank equally with or junior to the UBS AG
subordinated guarantee of the company preferred securities.
The payment of proportional dividends by UBS Preferred Funding Company on the
company preferred securities will be mandatory on any date, whether or not a
regularly scheduled dividend payment date, on which UBS AG or any of its
subsidiaries pays a dividend or makes any other payment or distribution on any
shares or other securities that, in a liquidation of UBS AG, rank equally with
the UBS AG subordinated guarantee of the company preferred securities if, on the
dividend payment dates leading up to the payment or distribution on the equally
ranking securities, dividends were paid on the company preferred securities in a
lower percentage than are being paid on the equally ranking securities.
Unless there is a capital limitation, UBS Preferred Funding Company will be
required to pay dividends that are mandatory whether or not:
- UBS AG delivers a notice limiting dividends,
- UBS AG has available distributable profits, or
- interest is paid on the subordinated notes or other eligible investments.
Does UBS AG have available distributable profits? Available distributable
profits are the pro rata proportion (from among all shares and other securities
issued by UBS AG that rank equally with the UBS AG subordinated guarantee of the
company preferred securities) of profits that may be distributed in accordance
with Swiss law. Currently, distributable profits include the total of current
profit, profit brought forward and freely available reserves as reflected in the
most recent audited unconsolidated balance sheet and statement of appropriation
of retained earnings of UBS AG.
Unless required to pay mandatory dividends, UBS Preferred Funding Company will
not pay dividends on the company preferred securities in excess of UBS AG's
available distributable profits.
When are dividends discretionary? The payment of dividends by UBS Preferred
Funding Company on the company preferred securities is discretionary if the
capital limitation does not apply, dividends are not mandatory as described
above, and UBS AG has sufficient available distributable profits. In that case,
UBS Preferred Funding Company will pay dividends on the company preferred
securities at the specified rate unless, on or before the tenth business day
immediately preceding a dividend payment date, UBS AG gives notice to UBS
Preferred Funding Company that UBS Preferred Funding Company must pay no
dividends or less than full dividends, in which case dividends will be due and
payable only in the amount specified in the notice. UBS AG may deliver such a
notice in its sole discretion and for any reason, except that such a notice
shall have no effect where dividends are mandatory as described above.
When does the dividend preference shift from the company preferred securities to
the company common securities? The company preferred securities ordinarily will
rank senior to the company common securities as to the payment of dividends.
However, the dividend preference of the company preferred securities may, at UBS
AG's option, shift to the company common securities on dividend
7
<PAGE> 9
payment dates to the extent that no mandatory dividend payment amount is then
required to be paid on the company preferred securities. If UBS AG does this,
the corresponding interest payments or other income received by UBS Preferred
Funding Company on the subordinated notes or its other eligible investments may
be returned as dividends to UBS AG as holder of the company common securities
before any dividends are paid on the company preferred securities.
WITHHOLDING TAXES
Generally, UBS Preferred Funding Company will pay additional amounts on full or
proportional mandatory dividends otherwise due and payable so that the net
amount received by you will not be reduced by the withholding of certain taxes
or other government charges.
However, UBS Preferred Funding Company will not pay any additional amounts if
the taxes or governmental charges are withheld because you:
- are connected, other than as a holder of trust preferred securities, to
Switzerland or the Cayman Islands if it is the jurisdiction that requires
the withholding of the taxes or charges, or
- have not filed an appropriate declaration stating that you are not a
resident of and do not have a connection with Switzerland or the Cayman
Islands if it is the jurisdiction that requires the withholding of the
taxes or charges, or a similar claim for exemption, if we have given you
the opportunity to do so.
REDEMPTION
UBS Preferred Funding Company may redeem the company preferred securities, in
whole or in part, on any dividend payment date on or after the dividend payment
date regularly scheduled to occur in October 2010. In that case, you will
receive a redemption price equal to unpaid mandatory dividends, other unpaid
definitive dividends (for example, discretionary dividends that became due and
payable because UBS AG did not deliver a notice to pay no dividends), current
accrued dividends (whether or not declared) and the liquidation preference of
your company preferred securities.
UBS Preferred Funding Company may not redeem the company preferred securities
before the dividend payment date regularly scheduled to occur in October 2010,
unless an event occurs that results in an adverse consequence for the tax or
capital treatment of the company preferred securities, or for the investment
company status of UBS Preferred Funding Company or UBS Preferred Funding Trust.
If the circumstance giving rise to redemption arises out of a change in tax law
that results in the imposition of tax on UBS Preferred Funding Trust or UBS
Preferred Funding Company or the imposition of withholding tax on payment of
dividends on the company preferred securities, distributions on the trust
preferred securities or interest on the subordinated notes, then you will
receive a redemption price as described above. If the redemption arises from the
other special events, including adverse tax consequences not arising out of a
change in tax law, you will receive a redemption price equal to unpaid mandatory
dividends, other unpaid definitive dividends, current accrued dividends (whether
or not declared) and a make whole amount equal to the greater of the liquidation
preference and the sum of the net present value of scheduled dividends and the
liquidation preference through October 2010.
UBS Preferred Funding Trust will pass through the redemption payments it
receives on the company preferred securities to redeem a corresponding amount of
the trust preferred securities.
Any redemption of the company preferred securities must comply with applicable
regulatory requirements, including the prior approval of the Swiss Federal
Banking Commission if then required under applicable guidelines or policies of
the Swiss Federal Banking Commission. The Swiss Federal Banking Commission in
its discretion may impose conditions on its approval of any proposed redemption
of the company preferred securities.
You may not require redemption of the company preferred securities at any time.
8
<PAGE> 10
LIQUIDATION
If UBS AG is liquidated, UBS Preferred Funding Company will be liquidated. So
long as the company preferred securities are outstanding, UBS AG will not cause
UBS Preferred Funding Company to liquidate unless UBS AG is also liquidating.
If UBS Preferred Funding Company is liquidated, you will be entitled to receive
an amount equal to unpaid mandatory dividends, other unpaid definitive
dividends, current accrued dividends (whether or not declared) and the
liquidation preference of your company preferred securities. However, any
liquidating distributions that you receive will be substantially the same as,
but not greater than, those to which you would be entitled if you had purchased
the most senior ranking noncumulative perpetual preferred shares issued directly
by UBS AG that have financial terms equivalent to those of the company preferred
securities.
BOOK-ENTRY ISSUANCE OF THE TRUST PREFERRED SECURITIES
UBS Preferred Funding Trust will initially issue the trust preferred securities
only in book-entry form through The Depository Trust Company.
You may withdraw the company preferred securities represented by your trust
preferred securities from UBS Preferred Funding Trust and hold the company
preferred securities directly. If you hold the company preferred securities
directly, you must hold the company preferred securities in certificated form.
If you hold the company preferred securities directly, then you may exercise
directly the associated rights under the UBS AG subordinated guarantee, and any
rights under the limited liability company agreement of UBS Preferred Funding
Company in respect of the company preferred securities, including any rights to
elect additional directors of UBS Preferred Funding Company.
THE UBS AG SUBORDINATED GUARANTEE
UBS AG will unconditionally guarantee, on a subordinated basis, the payment by
UBS Preferred Funding Company of any mandatory dividends on the company
preferred securities or dividends that have become definitive because UBS AG has
sufficient available distributable profits to pay out dividends and has not
delivered to UBS Preferred Funding Company an instruction not to pay dividends.
UBS AG will also unconditionally guarantee, on a subordinated basis, the
redemption price payable with respect to any company preferred securities called
for redemption by UBS Preferred Funding Company and the payment by UBS Preferred
Funding Company on its liquidation of an amount sufficient to provide you with
the distributions described under "Liquidation" above.
THE SUBORDINATED NOTES
The subordinated notes are undated and will have an aggregate principal amount
of $1,500,000,000. The subordinated notes are general unsecured debt obligations
of UBS AG and the Cayman Islands branch of UBS AG and, in liquidation of UBS AG,
will rank subordinate and junior to all indebtedness of UBS AG except for
indebtedness that by its terms expressly ranks equally with the subordinated
notes. Interest payable under the subordinated notes will be calculated at the
same rate and payable on the same dates as dividends payable under the company
preferred securities. UBS AG will not pay interest on the subordinated notes if
UBS AG is not solvent.
USE OF PROCEEDS
- UBS Preferred Funding Trust will use the proceeds from the offering of the
trust preferred securities to purchase the company preferred securities
from UBS Preferred Funding Company.
9
<PAGE> 11
- UBS Preferred Funding Company will use the proceeds from the offering of
the company preferred securities to purchase the subordinated notes issued
by the Cayman Islands branch of UBS AG.
- UBS AG will use the proceeds from the issuance of the subordinated notes
for general corporate purposes, including paying certain expenses relating
to the offering, and possibly funding a portion of the purchase price of
PaineWebber.
RISK FACTORS
You should carefully consider the information under "Risk Factors," together
with the other information contained in this prospectus, before purchasing any
trust preferred securities.
RATINGS
Moody's Investors Service, Inc. has rated both the trust preferred securities
and the company preferred securities aa2 and Standard & Poor's Rating Services
has rated both the trust preferred securities and the company preferred
securities AA-. Each of these ratings reflects only the view of the applicable
rating agency at the time the rating was issued, and any explanation of the
significance of a rating may be obtained only from the rating agency. There is
no assurance that a credit rating will remain in effect for any given period of
time or that a rating will not be lowered, suspended or withdrawn entirely by
the applicable rating agency, if in that rating agency's judgment, circumstances
so warrant.
LISTING
We have applied to list the trust preferred securities on the Luxembourg Stock
Exchange.
GOVERNING LAW
The constituent documents of UBS Preferred Funding Trust and UBS Preferred
Funding Company, the trust preferred securities and the company preferred
securities will be governed by the laws of the State of Delaware, United States
of America. The subordinated notes and the UBS AG subordinated guarantee will be
governed by the laws of the State of New York, United States of America.
10
<PAGE> 12
Ratio of Earnings to Fixed Charges
The following table sets forth UBS AG's ratio of earnings to fixed charges, for
the periods indicated. Ratios of earnings to combined fixed charges and
preferred stock dividends requirements are not presented as there were no
preferred share dividends in any of the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED 31 DECEMBER ENDED 30 JUNE
1997 1998 1999 1999 2000
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
IAS(1)
Ratio of earnings to fixed charges(2)........ 0.95 1.11 1.25 1.36 1.28
US GAAP(1)
Ratio of earnings to fixed charges(3)........ 0.80 1.14 1.16
</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 U.S. GAAP
reconciliation was not required for those periods.
2. The deficiency in the coverage of fixed charges by earnings before fixed
charges at 31 December 1997 of CHF 851 million is due to restructuring
charges of CHF 7,000 million charged in that period. Without that charge the
ratio would have been 1.36.
3. The deficiency in the coverage of fixed charges by earnings before fixed
charges at 31 December 1998 of CHF 5,319 million is due to restructuring
charges of CHF 3,982 million under US GAAP, as well as CHF 1,706 million of
pre-tax losses from significant financial events (gain on sale of BSI,
provision for WWII litigation, and trading losses on LTCM and GED) charged
for that period. Without those charges the ratio would have been 1.01.
11
<PAGE> 13
--------------------------------------------------------------------------------
Risk Factors
You should carefully consider the following information, together with the other
information contained in this prospectus, before purchasing any trust preferred
securities in this offering.
YOU MAY NOT RECEIVE DIVIDENDS IF UBS AG'S FINANCIAL CONDITION WERE TO
DETERIORATE.
If UBS AG's financial condition were to deteriorate, UBS Preferred Funding
Company and the holders of trust preferred securities could suffer direct and
materially adverse consequences, including elimination or reduction of
noncumulative dividends on the company preferred securities (and consequently
elimination or reduction of the pass through of such dividends as distributions
on the trust preferred securities) and, if UBS AG were liquidated (whether
voluntarily or involuntarily), loss by the holders of trust preferred securities
of their entire investment.
YOU MAY NOT RECEIVE DIVIDENDS BECAUSE UBS PREFERRED FUNDING COMPANY WILL BE
PROHIBITED FROM PAYING DIVIDENDS ON THE COMPANY PREFERRED SECURITIES UNDER
CERTAIN CIRCUMSTANCES AND WILL HAVE DISCRETION AS TO WHETHER TO PAY DIVIDENDS ON
THE COMPANY PREFERRED SECURITIES IN OTHER CIRCUMSTANCES.
If on a dividend payment date UBS AG is not in compliance with the Swiss Federal
Banking Commission's capital adequacy requirements applicable to UBS AG, UBS
Preferred Funding Company will not pay dividends under any circumstances
(including whether or not funds subsequently become available), even if a full
or proportional dividend is otherwise mandatory. For a discussion of UBS's
capital resources relative to applicable guidelines, see "UBS--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources." UBS Preferred Funding Company will not pay
dividends exceeding UBS AG's available distributable profits, except for
mandatory dividends. Except when payment of full or proportional dividends is
mandatory or dividends are prohibited by a capital limitation or prohibited or
restricted because UBS AG does not have available distributable profits,
dividends on the company preferred securities are payable at the discretion of
UBS AG and noncumulative. If discretionary dividends on the company preferred
securities for any dividend period are not paid, UBS Preferred Funding Trust, as
holder of company preferred securities (and, accordingly, investors in the trust
preferred securities), will not be entitled to receive dividends whether or not
funds are or subsequently become available.
YOU SHOULD NOT RELY UPON RECEIVING DIVIDENDS THAT ARE NOT MANDATORY BECAUSE UBS
AG MAY ELECT TO SHIFT THE DIVIDEND PREFERENCE FROM THE COMPANY PREFERRED
SECURITIES TO THE COMPANY COMMON SECURITIES EXCEPT TO THE EXTENT OF FULL OR
PROPORTIONAL MANDATORY DIVIDENDS.
UBS Preferred Funding Company's Amended and Restated Limited Liability Company
Agreement, which we sometimes refer to as its LLC Agreement, will provide that,
except to the extent of full or proportional mandatory dividends, the dividend
preference of the company preferred securities may at UBS AG's option shift to
the company common securities on any dividend payment date. As a result, the
corresponding interest payment received by UBS Preferred Funding Company on the
subordinated notes or other eligible investments may be returned as dividends to
UBS AG, as holder of company common securities, before any dividends are paid on
the company preferred securities.
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12
<PAGE> 14
RISK FACTORS
--------------------------------------------------------------------------------
UBS AG IS NOT OBLIGATED TO MAKE PAYMENTS UNDER THE UBS AG SUBORDINATED GUARANTEE
UNLESS IT FIRST MAKES OTHER REQUIRED PAYMENTS.
UBS AG's obligations under the UBS AG subordinated guarantee are unsecured and
rank subordinate and junior in right of payment to all of UBS AG's other
liabilities, except for liabilities that rank equally with the UBS AG
subordinated guarantee. This means that if UBS AG fails to pay any liability
that is senior to the UBS AG subordinated guarantee, it may not make payments on
the UBS AG subordinated guarantee. As of 30 June 2000, UBS AG had CHF 509
billion of other debt obligations that are senior to UBS AG's obligations under
the UBS AG subordinated guarantee.
Also, if UBS AG is bankrupt or liquidates or dissolves, UBS AG or its trustee
will use assets of UBS AG to satisfy all liabilities ranking senior to the UBS
AG subordinated guarantee before making payments on the UBS AG subordinated
guarantee. Parity obligations will share equally in payment with the UBS AG
subordinated guarantee if UBS AG does not have sufficient funds to make full
payments on all of them. The entitlement of the holders of company preferred
securities under the UBS AG subordinated guarantee in a liquidation of UBS AG
will be substantially the same as, and no greater than, the claim such holders
would have been entitled to if they had purchased the most senior ranking
noncumulative perpetual preferred shares issued directly by UBS AG that have
financial terms equivalent to those of the company preferred securities.
UBS PREFERRED FUNDING TRUST MAY REDEEM THE TRUST PREFERRED SECURITIES IF CERTAIN
ADVERSE CONSEQUENCES OCCUR AS A RESULT OF THE APPLICATION OF SWISS OR U.S.
REGULATIONS OR TAX OR INVESTMENT COMPANY LAW AND CERTAIN CONDITIONS ARE
SATISFIED.
If certain consequences occur, which are more fully described below in this
prospectus, as a result of application of Swiss or U.S. regulations or tax or
investment company law and certain other conditions that are more fully
described below are satisfied, UBS Preferred Funding Company could redeem the
company preferred securities before the dividend payment date in October 2010.
If the company preferred securities are redeemed, UBS Preferred Funding Trust
will redeem the trust preferred securities. The redemption price is described
below under "Description of Company Preferred Securities--Redemption." You may
be unable to reinvest the proceeds of a redemption at a yield comparable to the
yield you are receiving on the trust preferred securities.
YOU COULD SUFFER ADVERSE TAX AND LIQUIDITY CONSEQUENCES IF UBS AG LIQUIDATES UBS
PREFERRED FUNDING TRUST AND DISTRIBUTES THE COMPANY PREFERRED SECURITIES TO YOU.
UBS AG has the right to liquidate UBS Preferred Funding Trust in some
circumstances. If UBS AG exercises this right, the company preferred securities
will be distributed to you in an amount corresponding to the amount of trust
preferred securities you hold. If the company trust preferred securities are
distributed to you:
- you will receive reports of your income in respect of the company preferred
securities on Schedule K-1,
- the company preferred securities will be in definitive certificated form and
will not be eligible for trading through DTC, Euroclear or Clearstream,
- the trading value of the company preferred securities you receive may be
lower than the trading value of the trust preferred securities, and, as a
result, you may receive a lower return upon the sale of the company preferred
securities, and
- you may incur an additional tax liability in excess of what you originally
contemplated. Under current U.S. federal income tax law, a distribution of
company preferred securities to you on the dissolution of UBS Preferred
Funding Trust should not be a taxable event to you. However, if UBS
--------------------------------------------------------------------------------
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<PAGE> 15
RISK FACTORS
--------------------------------------------------------------------------------
Preferred Funding Trust is characterized for U.S. federal income tax purposes
as an association taxable as a corporation at the time it is dissolved or if
there is a change in law, the distribution of company preferred securities
may be a taxable event to you.
YOU MAY NOT RECEIVE DISTRIBUTIONS OR REDEMPTION PAYMENTS IF THE SWISS FEDERAL
BANKING COMMISSION RESTRICTS THE OPERATIONS OF UBS PREFERRED FUNDING COMPANY.
The Swiss Federal Banking Commission could make determinations in the future
with respect to UBS AG that could adversely affect UBS Preferred Funding
Company's ability to make distributions to the holders of company preferred
securities or to redeem the company preferred securities. For example, the Swiss
Federal Banking Commission could impose regulatory capital requirements that
cause, or otherwise request or instruct UBS AG to cause, UBS Preferred Funding
Company not to pay dividends on or redeem the company preferred securities at
times when UBS Preferred Funding Company otherwise is entitled to do so.
BECAUSE YOU HAVE LIMITED VOTING RIGHTS AND UBS AG IS INVOLVED IN VIRTUALLY EVERY
ASPECT OF UBS PREFERRED FUNDING COMPANY'S EXISTENCE, YOU COULD SUFFER ADVERSE
CONSEQUENCES FROM UBS PREFERRED FUNDING COMPANY ACTING CONTRARY TO YOUR
INTERESTS.
The company preferred securities will be non-voting, expect in the limited cases
described under "Description of Company Preferred Securities--Voting Rights."
UBS AG is involved in virtually every aspect of UBS Preferred Funding Company's
existence. UBS AG will be the sole holder of the company common securities. As
holder of all outstanding company common securities, UBS AG will have the right
to elect all directors of UBS Preferred Funding Company except for the situation
where the holders of company preferred securities have the right to elect two
directors as described under "Description of Company Preferred
Securities--Voting Rights." The initial (and UBS Preferred Funding Company
anticipates that all future) directors of UBS Preferred Funding Company will
also be directors or employees of UBS AG or its affiliates. Conflicts of
interest may arise between the discharge by such individuals of their duties as
directors of UBS Preferred Funding Company, on the one hand, and as directors or
employees of UBS AG and its affiliates, on the other hand.
Decisions with respect to enforcement of the subordinated notes issued by the
Cayman Islands Branch of UBS AG and actions to be taken by UBS Preferred Funding
Company upon a default by UBS AG under them will be made by the board of
directors of UBS Preferred Funding Company by majority vote. There can be no
assurance that, under any circumstances, enforcement action will be taken by UBS
Preferred Funding Company with respect to a default under the subordinated
notes. However, UBS AG's failure to perform its obligations under the
subordinated notes will not relieve it of its obligations under the UBS AG
subordinated guarantee. See "Description of UBS AG Subordinated Guarantee."
UBS AG and its affiliates may have interests which are different from those of
UBS Preferred Funding Company. As a result, conflicts of interest may arise with
respect to transactions, including UBS Preferred Funding Company's
administration of the subordinated notes.
UBS Preferred Funding Company and UBS AG intend that any agreements and
transactions between UBS Preferred Funding Company, on the one hand, and UBS AG
or its affiliates, on the other hand, be established in good faith and, to the
extent deemed advisable by UBS AG, reflect arm's-length terms for such types of
transactions. The LLC Agreement of UBS Preferred Funding Company requires that
certain actions of UBS Preferred Funding Company be approved by the holders of
company preferred securities; this requirement is also intended to ensure fair
dealings between UBS Preferred Funding Company and UBS AG and its affiliates.
However, there can be no assurance that such agreements or
--------------------------------------------------------------------------------
14
<PAGE> 16
RISK FACTORS
--------------------------------------------------------------------------------
transactions will be on terms as favorable to UBS Preferred Funding Company as
those that could have been obtained from unaffiliated third parties.
WE CANNOT GIVE YOU ANY ASSURANCE AS TO THE MARKET PRICES FOR THE TRUST PREFERRED
SECURITIES OR THE COMPANY PREFERRED SECURITIES.
We cannot give you any assurance as to the market prices for the trust preferred
securities or the company preferred securities because there is no prior market
for these securities. In addition, because the trust preferred securities are
deeply subordinated securities and payment of dividends on the company preferred
securities may be limited by the capital limitation or by lack of sufficient
available distributable profits, the market prices of the trust preferred
securities or company preferred securities, as applicable, may be more volatile
than other securities not having such provisions.
Although the underwriters of the trust preferred securities have informed UBS
Preferred Funding Company and UBS AG that they intend to make a market in the
trust preferred securities, the underwriters are not obligated to do so, and any
such market-making activity will be subject to the limits imposed by applicable
law and may be interrupted or discontinued at any time.
YOU WILL NOT BE ENTITLED TO RECOVER CERTAIN MISSED PAYMENTS BECAUSE OF THE
NONCUMULATIVE NATURE OF DIVIDENDS ON THE COMPANY PREFERRED SECURITIES AND
RELATED DISTRIBUTIONS ON THE TRUST PREFERRED SECURITIES.
If UBS Preferred Funding Company does not make a payment or only makes a partial
payment on a dividend payment date as a result of a capital limitation, a lack
of available distributable profits or a properly delivered "no dividend
instruction," you will not be entitled to recover that missed payment.
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15
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--------------------------------------------------------------------------------
Cautionary Note Regarding Forward-looking Information
This prospectus contains forward-looking information. The Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking
information to encourage companies to provide prospective information about
themselves without fear of litigation so long as the information is identified
as forward looking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in the information. Forward-looking information
is indicated by the use of words such as "anticipates," "expects," "believes,"
"should," "could," "intends," "estimates" and "may," or other comparable
language. We identify the following important factors that could cause UBS's
actual results to differ materially from any results that might be projected by
UBS in forward-looking information. All of these factors are difficult to
predict, and many are beyond the control of UBS. Accordingly, although we
believe that the assumptions underlying the forward-looking information are
reasonable, there can be no assurance that those assumptions will approximate
actual experience.
The important factors include, among others, the following:
- general economic conditions, including prevailing interest rates and
performance of financial markets, which may affect UBS's ability to sell its
products,
- the market value of UBS's investments,
- UBS's and PaineWebber's ability to consummate their merger on the anticipated
schedule, including their ability to achieve anticipated cost savings and
efficiencies, to integrate their sales and distribution channels in a timely
manner and to retain their key employees,
- changes in federal tax laws, which could adversely affect the tax advantages
of certain of UBS's products and subject it to increased taxation,
- industry consolidation and competition,
- changes affecting the banking industry generally and UBS AG's banking
operations specifically, including asset quality,
- increasing levels of competition in emerging markets and general competitive
factors, locally, nationally, regionally and globally, and
- changes in currency exchange rates, including the exchange rate for the Swiss
franc into U.S. dollars.
You should also consider other risks and uncertainties discussed in documents
filed by UBS with the SEC, including UBS's most recent Annual Report on Form
20-F for the fiscal year ended 31 December 1999. We have no obligation to update
forward-looking information to reflect actual results.
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16
<PAGE> 18
--------------------------------------------------------------------------------
UBS
DESCRIPTION OF BUSINESS
Mission
The UBS mission is to:
- provide clients with superior value-added investment services;
- provide above average rewards to shareholders;
- be an employer of choice; and
- be a good corporate citizen.
Overview
UBS is a global, integrated investment services firm and the leading bank in
Switzerland. UBS's business is managed through three main business groups and
UBS's Corporate Center. The business groups are:
- UBS Switzerland;
- UBS Warburg; and
- UBS Asset Management.
The philosophy of UBS's business model is that each of the business groups holds
primary responsibility for managing relationships with well-defined client
segments, while ensuring appropriate access to the products and services of the
entire Group. UBS's clients include international corporations, small- and
medium-sized businesses in Switzerland, governments and other public bodies,
financial institutions, market participants and individuals. Individuals include
high net worth individuals, affluent clients and retail customers. UBS provides
its clients with a broad range of products and services. These include:
- wealth management services;
- investment funds;
- corporate advisory (mergers and acquisitions) services;
- equity and debt underwriting;
- securities and financial market research;
- securities and derivatives sales and trading;
- structured risk management;
- retail, commercial and transaction banking in Switzerland;
- asset management; and
- private equity funds.
Each of the business groups is one of the leaders in its field. UBS has the
world's largest private banking business and is a leading global asset manager,
as measured by assets under management. UBS Warburg is among the leading
corporate and institutional investment banks, and it is differentiated by its
European roots. UBS is the leading retail and commercial bank in Switzerland.
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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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UBS
--------------------------------------------------------------------------------
Each of these ratings reflects only the view of the applicable rating agency at
the time the rating was issued, and any explanation of the significance of such
rating may be obtained only from such rating agency. There is no assurance that
any such credit rating will remain in effect for any given period of time or
that such rating will not be lowered, suspended or withdrawn entirely by the
applicable rating agency, if in such rating agency's judgment, circumstances so
warrant. Moody's announced on 28 April 2000 that it had changed its outlook for
its long-term rating of UBS AG from stable to negative.
Strategy
UBS seeks to grow the profitability and enhance the efficiency of all of its
businesses, while continuously improving the provision of products and services
to its clients. UBS will build its franchise either through investments in
internal growth or, where appropriate, through selected acquisitions, such as
the merger with PaineWebber. UBS believes that its business model and its recent
history of embracing and managing change will enable flexible responses to the
rapid and unpredictable changes taking place in the financial services industry.
In order to maintain an edge in the highly competitive markets in which UBS
operates, UBS will continue to make ongoing investments in top quality staff and
technology.
In addition to the delivery of products and services through traditional
channels, UBS is strengthening its e-commerce initiatives. UBS's business groups
are well advanced in formulating and implementing their e-commerce strategies.
- UBS Switzerland will invest CHF 90-100 million annually over the next few
years to extend its electronic banking and mobile phone banking initiatives.
Since April 2000, a single unit has been responsible for handling all the
business group's e-banking activities with its primary goal being to bring
personalized service to private clients. A further goal is to expand
relationships with active online clients, strengthening cross-selling in the
process.
- UBS Warburg has launched its web-based business-to-business solution,
Investment Banking On-Line or "IBOL". From the IBOL homepage, corporate and
institutional clients can access services and content electronically and link
to execution capabilities across all product areas.
Background
On 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation merged to
form UBS. Union Bank of Switzerland was created by the merger of two Swiss
regional banks in 1912; these two Swiss regional banks can trace their history
back to 1862 and 1863. Swiss Bank Corporation was incorporated in Basel in 1872
and its history can be traced back to the creation of "Bankverein" from six
private banking houses in 1854.
Prior to the 1998 merger, Union Bank of Switzerland developed primarily through
internal growth, although it made certain significant acquisitions such as
Phillips & Drew in 1985. Swiss Bank Corporation expanded mainly through
acquisitions. These included the acquisitions of:
- O'Connor & Associates, a group of affiliated firms specializing in the trading
of options and other derivative instruments (1992);
- Brinson Partners, a leading institutional investment management firm in terms
of assets under management (1995);
- the investment banking operating subsidiaries of S.G. Warburg Group p.l.c.
(1995); and
- Dillon Read & Co., Inc., a United States-based investment bank (1997).
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UBS
--------------------------------------------------------------------------------
The integration of Union Bank of Switzerland and Swiss Bank Corporation was
largely completed within one year, despite the additional challenges presented
by preparation for the Year 2000 and the introduction of the euro.
Merger with Paine Webber
On 12 July 2000, UBS announced that it had entered into a definitive merger
agreement with Paine Webber Group Inc. UBS will offer to purchase all
outstanding shares of PaineWebber stock for a combination of cash and stock
representing a total purchase price of $10.8 billion (based on the UBS share
price on 12 July 2000). The transaction is subject to shareholder and regulatory
approvals and other conditions and is expected to be completed in the fourth
quarter of 2000.
PaineWebber is one of the largest full-service securities and commodities firms
in the United States. Founded in 1879, PaineWebber employs approximately 23,175
people in 385 offices worldwide.
PaineWebber offers a wide variety of products and services, consisting of those
of a full service broker-dealer to primarily a domestic market, through its two
operating segments: Individual and Institutional. The Individual segment offers
brokerage services and products, asset management and other investment advisory
and portfolio management products and services, and execution and clearing
services for transactions originated by individual investors. The Institutional
segment principally includes capital markets products and services such as
securities dealer activities and investment banking.
Business and Management Structure
Prior to the 1998 merger, Union Bank of Switzerland operated four strategic
business segments:
- private banking and institutional asset management;
- corporate and institutional finance;
- trading, sales and risk management services; and
- retail banking.
Swiss Bank Corporation also operated in four divisions prior to the 1998 merger:
- SBC Private Banking;
- SBC Warburg Dillon Read (investment banking);
- SBC Switzerland (corporate and retail banking); and
- SBC Brinson (investment management).
The combined entity following the 1998 merger initially had the following five
operating divisions and the Corporate Center:
- UBS Private Banking;
- Warburg Dillon Read;
- UBS Private and Corporate Clients;
- UBS Brinson, which was renamed UBS Asset Management; and
- UBS Private Equity.
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UBS
--------------------------------------------------------------------------------
On 18 February 2000, UBS regrouped its businesses into the following three main
business groups to align itself as closely as possible to client needs.
- UBS Switzerland, which is now composed of two business units:
- Private and Corporate Clients: Swiss retail and commercial banking.
- Private Banking: private banking services offered to all Swiss and
international high net worth clients who bank in Switzerland or
offshore centers.
- UBS Asset Management, which now includes:
- Institutional Asset Management: Brinson Partners and Phillips & Drew
business areas, which are now integrated to form a single global
investment platform.
- Investment Funds/GAM: The Investment Funds and Global Asset
Management, or GAM, business areas, transferred from UBS Private
Banking.
- UBS Warburg, which is now comprised of four business units:
- Corporate and Institutional Clients: securities and investment banking
products and services for institutional and corporate clients. This
includes the Corporate Finance, Equities, Fixed Income and Treasury
Products businesses.
- UBS Capital: investment of UBS and third-party funds in a diverse
range of private, and occasionally public, companies on a global
basis.
- Private Clients: UBS's onshore private banking services for high net
worth individuals worldwide, outside of Switzerland.
- e-services: personalized investment and advisory services at
competitive fees for affluent clients in Europe, delivered via a
multi-channel structure that integrates internet, call centers and
investment centers.
UBS's board of directors, which consists exclusively of non-executive directors
in accordance with Swiss Banking Law, has the ultimate responsibility for the
strategic direction of UBS's business and the supervision and control of
executive management. The Group Executive Board, which is UBS's most senior
executive body, assumes overall responsibility for the development of UBS's
strategies and its implementation and results.
The Chief Executive Officer of each business group is a member of the Group
Executive Board and is responsible and accountable for the results of the
business group as a whole. However, when the new business group structure was
introduced, UBS committed to continue to provide summary financial and
management information about the business units, in order to maintain
transparency in its affairs and allow shareholders to make meaningful
comparisons to the performance of the Group under its previous structure.
Therefore, the discussion in this section describes the business groups mainly
in terms of their constituent business units.
In the remainder of this section, the discussion will be divided into the three
business groups and their constituent business units, as they exist now, not the
five divisions as they existed on 31 December 1999.
--------------------------------------------------------------------------------
21
<PAGE> 23
UBS
--------------------------------------------------------------------------------
UBS Switzerland
The UBS Switzerland business group is made up of two business units:
- Private and Corporate Clients -- The leading retail and commercial bank in
Switzerland.
- Private Banking -- Covers all Swiss and international high net worth clients
who bank in Switzerland or offshore centers.
The onshore Private Clients business, formerly part of Private Banking, is now
managed within the UBS Warburg business group.
UBS Switzerland is the leading Swiss bank for individual and corporate clients
and a premier Swiss private banking institution. UBS Switzerland offers a
continuum of services to all Swiss-based clients. It benefits from an integrated
infrastructure and the opportunity for shared distribution via its developing
multi-channel architecture.
To drive forward its e-commerce vision and strategy, UBS Switzerland has created
a single business area called "e-Channels and Products" to lead all its
e-banking activities. The new business area will be responsible for all
electronic channels and products as well as associated service and support
centers and will oversee all e-banking functions of UBS Switzerland. Its costs
are shared between Private Banking and Private and Corporate Clients, based on
service level agreements.
Private and Corporate Clients. The Private and Corporate Clients business unit
of UBS Switzerland is the leading retail bank in Switzerland and targets
individual clients with assets of up to approximately CHF 1 million as well as
business and corporate clients in Switzerland. At 30 June 2000, this business
unit had about CHF 439 billion in assets under management and a loan portfolio
of approximately CHF 163 billion. Private and Corporate Clients employs over
22,000 people in its headquarters in Zurich and its offices throughout
Switzerland.
Set forth below is summary information, based on management accounting data,
relating to the Private and Corporate Clients business unit, which is discussed
in greater detail under "--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations by Business Unit--UBS
Switzerland--Private and Corporate Clients."
<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.
--------------------------------------------------------------------------------
22
<PAGE> 24
UBS
--------------------------------------------------------------------------------
Organizational Structure. Private and Corporate Clients operates four main
business areas:
- Individual Clients -- This business area includes over 4,000,000 client
accounts, of which over 25% are client accounts that relate to clients with
assets over CHF 50,000.
- Corporate Clients -- This business area focuses on Swiss corporate clients and
includes 160 top corporations, over 7,500 large corporate clients and 180,000
small- and medium-sized businesses.
- Operations -- In addition to providing operational support to the retail
banking business and other Swiss-based UBS units, this business area provides
payment and custodial services to approximately 1,800 banking institutions
throughout the world.
- Risk Transformation and Capital Management -- This business area has
responsibility for clients with impaired or non-performing loans and manages
the risk in Private and Corporate Clients' loan portfolio. It is also
responsible for optimizing capital utilization.
Private and Corporate Clients also includes the Resources business area, which
provides real estate, marketing, personnel and administrative services to
Private and Corporate Clients and the other UBS business units in Switzerland,
particularly Private Banking, and the Information Technology business area,
which provides information technology services to Private and Corporate Clients
and the other Swiss-based UBS offices, again with Private Banking as the main
recipient.
Profit Enhancement Initiatives. The domestic retail banking sector in
Switzerland has historically been a high-cost, low-return business. In order to
further enhance the profitability of the retail business and to exploit the
synergies after the 1998 merger, UBS has developed and commenced a number of
initiatives that are intended to reduce the costs and increase the revenues of
this business unit. These include:
- The further development and enhancement of alternative distribution channels,
including:
- UBS e-banking, on-line internet and teletext banking, and telephone
banking.
- UBS Multimat and UBS Bancomat Plus, which together offer a direct
electronic link to the customer's account and to a full range of
traditional ATM services, including accepting cash deposits, and
permits additional functions, such as the set-up and maintenance of
payment and standing orders.
- Increasing revenue principally through improvements in pricing, increased
focus on higher yielding investment products and fee-based businesses,
and improvements in the distribution of UBS's products, including
implementing risk-adjusted pricing in its new and maturing loan business
and by expanding its e-banking services.
- Reducing costs by continuing to close branches. Since the 1998 merger,
UBS has closed 200 branches, or 36%, still leaving UBS with more branches
than either predecessor institution.
- Increasing the efficiency and productivity of Private and Corporate
Clients' processes by standardizing its products and taking advantage of
automation and other technological developments.
Clients. Private and Corporate Clients has a diverse client base, ranging from
individual clients to corporate clients and international banking institutions.
Private and Corporate Clients provides a broad range of products and services to
these clients, including retail banking, investment services and lending. UBS
believes that clients choose Private and Corporate Clients primarily based on
UBS's leading position as a bank and an asset manager in Switzerland, its broad
distribution network and its ability to provide a comprehensive range of
financial products and services. Based on market surveys, over 96% of the Swiss
market readily recognizes the UBS brand, which has a long history and is well
established in Switzerland.
--------------------------------------------------------------------------------
23
<PAGE> 25
UBS
--------------------------------------------------------------------------------
The table below sets forth assets under management attributable to each of
Private and Corporate Client's main client areas at 30 June 2000 and 31 December
1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
ASSETS UNDER MANAGEMENT (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>
--------------------------------------------------------------------------------
24
<PAGE> 26
UBS
--------------------------------------------------------------------------------
Loan Portfolio. The following table shows the loan portfolio, before all
allowances, in Private and Corporate Clients, broken down by Private and
Corporate Clients' main business areas at 30 June 2000 and 31 December 1999 and
1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in billions)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Individual Clients.................. 77 76 90
Corporate Clients................... 68 68 49
Recovery Portfolio.................. 18 21 26
------------ ---------------- ----------------
Total............................. 163 165 165
============ ================ ================
</TABLE>
The following table shows the loan portfolio in Private and Corporate Clients,
broken down by loan category at 30 June 2000 and 31 December 1999 and 1998.
<TABLE>
<CAPTION>
30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
(CHF in billions)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed rate mortgages................ 79 81 80
Commercial credits.................. 40 44 44
Variable rate mortgages............. 28 30 36
Other............................... 16 10 5
---- ---- ----
Total............................. 163 165 165
---- ---- ----
---- ---- ----
</TABLE>
At 30 June 2000, about CHF 107 billion (or 66%) of the CHF 163 billion loan
portfolio in Private and Corporate Clients related to mortgages, of which
approximately 81% were secured by residential real estate. A discussion of UBS's
loan portfolio classified by industry is included under "--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Selected Statistical Information--Loans."
Private and Corporate Clients' impaired loans, which include non-performing
loans, are transferred to the Risk Transformation and Capital Management
business area to be managed by UBS's Recovery Group, which specializes in
working-out or otherwise recovering the value of those loans. At 30 June 2000,
Private and Corporate Clients' loan portfolio included approximately a CHF 18
billion recovery portfolio. Approximately CHF 16 billion of Private and
Corporate Clients' 30 June 2000 recovery portfolio was impaired and related to
provisional positions and positions stemming back to weakness in the Swiss
commercial real estate markets during the 1990s. A provision of CHF 10.4 billion
has been established against the portion of impaired loans not secured by
collateral or otherwise deemed uncollectible. Approximately CHF 2 billion of
UBS's 30 June 2000 recovery portfolio is performing and unimpaired. The
unimpaired loans included in UBS's recovery portfolio are outstanding with
counterparties for whom other loans have become impaired. No provisions have
been established against these loans. UBS's lending officers actively manage the
recovery portfolio, seeking to restructure the lending relationship with a goal
of removing the loan from the recovery portfolio. The following table describes
the development in UBS's recovery portfolio from 1 January 1998 to 30 June 2000.
--------------------------------------------------------------------------------
25
<PAGE> 27
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
--------------------------------------------------------------------------------
26
<PAGE> 28
UBS
--------------------------------------------------------------------------------
performance and allocation, quality of information and advice and extended
availability of services, such as 24-hour, remote and internet access. The
private banking industry is also experiencing an increase in the wealth that
remains in onshore markets, particularly in the form of equity and equity-linked
investments, as domestic capital markets become more developed and generate
higher returns.
To address this changing environment, Private Banking is seeking to further
penetrate its existing client base with enhanced wealth management solutions.
Private Banking's size provides it with the flexibility to offer its clients
customized and expanded service offerings tailored to their particular needs. To
further increase its assets under management in its private banking business,
UBS will also continue to consider select acquisition opportunities that may
arise, as evidenced by the acquisition in 1999 of Bank of America's
international private banking activities. Set forth below is summary
information, based on management accounting data, relating to the Private
Banking business unit of UBS Switzerland, which is discussed in greater detail
under "--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations by Business Unit--UBS Switzerland--Private
Banking."
<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
--------------------------------------------------------------------------------
27
<PAGE> 29
UBS
--------------------------------------------------------------------------------
fiduciary services while transaction-based services include trading and
brokerage and investment fund services. Private Banking also provides financial
planning and consulting and offers financial planning instruments to its
clients. These services include establishing proprietary trusts and foundations,
the execution of wills, corporate and personal tax structuring and tax efficient
investments. Private Banking has the following three core product and service
business areas:
- Financial Planning and Wealth Management -- Responsible for developing
integrated comprehensive wealth management services in the form of tax
and estate planning, liquidity and retirement lifestyle planning,
insurance products, art and real estate advisory services and a variety
of sophisticated capital enhancement and asset protection strategies.
- Portfolio Management -- Responsible for providing portfolio management
services to Private Banking clients and for the investment clients of
Private and Corporate Clients.
- Active Advisory Team -- Provides sales brokerage, investment advisory
services and products to key private banking locations worldwide. The
Active Advisory Team provides information concerning, and facilitates
investments in, primary initial public offerings and secondary
placements. This team also provides fiduciary services and the execution
of private banking orders outside Switzerland.
At 30 June 2000, slightly more than one-fifth of Private Banking's assets under
management were managed on a discretionary basis. The remaining assets under
management related to advisory engagements.
The following table shows information concerning assets under management by type
of engagement and asset class in Private Banking at 30 June 2000 and 31 December
1999 and 1998.
<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.
--------------------------------------------------------------------------------
28
<PAGE> 30
UBS
--------------------------------------------------------------------------------
UBS Asset Management
UBS Asset Management brings together UBS's asset management activities. It
consists of two business units:
- Institutional Asset Management -- One of the largest institutional asset
managers in the world.
- Investment Funds/GAM -- Investment Funds is one of the leading funds
providers in Europe and the seventh largest in the world. GAM is a
diversified asset management group with assets composed primarily of
private client accounts, institutional and mutual funds.
UBS Asset Management benefits from an integrated business model and single
management team.
Institutional Asset Management. Based on assets under management, Institutional
Asset Management is one of the largest institutional asset managers in the world
and among the industry leaders in the United States, the United Kingdom and
Switzerland. At 30 June 2000, Institutional Asset Management had over CHF 525
billion in assets under management, including CHF 326 billion of institutional
assets and CHF 199 billion of non-institutional assets, including the UBS
Investment Funds offered by the Investment Funds business area of the Investment
Funds/GAM business unit, which are managed by Institutional Asset Management.
Institutional Asset Management is headquartered in Chicago and has offices in
Dallas/Houston, Frankfurt, Geneva, Hartford, Hong Kong, London, Melbourne, New
York, Paris, Rio de Janeiro, San Francisco, Singapore, Sydney, Tokyo and Zurich.
Institutional Asset Management markets its services under the UBS Asset
Management name, with Brinson Partners and Phillips & Drew serving as sub-brands
within the Americas and the United Kingdom, respectively. Institutional Asset
Management believes that its broad geographic spread of operations and strong
brand names will help it pursue growth opportunities in Continental Europe,
Asia-Pacific and Latin America and maintain its strong positions in the mature
markets it serves in the United States, the United Kingdom and Switzerland.
Set forth below is summary information, based on management accounting data,
relating to Institutional Asset Management, which is discussed in greater detail
under "--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations by Business Unit--UBS Asset
Management--Institutional Asset Management."
<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
--------------------------------------------------------------------------------
29
<PAGE> 31
UBS
--------------------------------------------------------------------------------
accountability for results and the business group's effectiveness and
efficiency. At 30 June 2000, Institutional Asset Management's organizational
structure consisted of the following business areas:
- Brinson Partners and Phillips & Drew -- These business areas have the mandate
to optimize the contribution from the Americas and the United Kingdom,
respectively, and to further develop their investment capabilities and to
contribute to global business development efforts in Europe and the
Asia-Pacific region.
- Europe, Middle East & Africa and Asia Pacific -- These two business areas have
a mandate to capture profitable growth opportunities in their assigned
geographic markets and to optimize the contribution from existing businesses
in these regions. These mandates strengthen the regional accountability for
results and resources. At the same time, both regional business areas continue
to contribute to the UBS Asset Management global investment process as well as
ensure their adaptation to regional client needs where appropriate.
- O'Connor -- Launched at the beginning of June 2000, O'Connor is comprised of
part of the proprietary equity trading group of UBS Warburg, as well as the
Fund of Funds and Currency Funds businesses of UBS Warburg. O'Connor will
focus on alternative investments, or investment strategies designed to provide
attractive risk-adjusted returns with a low correlation to traditional
investments.
- IT and Operations -- This business area is responsible for implementing and
maintaining information technology and delivery platforms for the
Institutional Asset Management business unit.
Clients. Institutional Asset Management has a diverse institutional client base
located throughout Europe, the Middle East, Africa, the Asia-Pacific region and
the Americas. Its clients consist of:
- corporate and public pension plans;
- endowments and private foundations;
- insurance companies;
- central banks and supranationals; and
- financial advisers.
Externally managed pension assets constitute the majority of worldwide available
institutional assets. The pension market is undergoing a shift from traditional
defined benefit plans to defined contribution schemes. One of Institutional
Asset Management's strategic initiatives is to position itself to take advantage
of the opportunities created in this changing environment.
The following table shows assets under management broken down between
institutional assets and non-institutional assets at 30 June 2000 and 31
December 1999 and 1998. Non-institutional assets include the UBS Investment
Funds, which are managed by Institutional Asset Management.
<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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30
<PAGE> 32
UBS
--------------------------------------------------------------------------------
The following table shows Institutional Asset Management's institutional assets
under management by the geographic location of its clients at 30 June 2000 and
31 December 1999 and 1998.
<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>
Within each of these broad client mandate categories, Institutional Asset
Management has a diverse range of particular mandates that it provides to its
clients without a high concentration of business in
--------------------------------------------------------------------------------
31
<PAGE> 33
UBS
--------------------------------------------------------------------------------
any particular segment. For example, within the equity, asset allocation and
fixed income areas, it offers a range of mandates on global, regional, emerging
market and sector-specific bases. The private markets category includes such
mandates as direct investments, oil and gas, partnership investments, real
estate and timber.
Investment Process and Research. At the beginning of March 2000, Institutional
Asset Management announced that Brinson Partners and Phillips & Drew were being
combined to establish a common global investment management platform. This
decision reflected the shared investment philosophies of Phillips & Drew and
Brinson Partners, based on capturing price-value discrepancies identified
through fundamental research as well as similar cultures. The initial
integration was completed according to schedule at the beginning of May 2000.
The investment process is based on Institutional Asset Management efforts to
determine and quantify investment value. Senior investment professionals set
policy and oversee research activity within the units, drawing upon the
expertise of investment specialists in each asset class. These specialists
consult with external analysts, economists, consultants and academics. They
develop research and provide input into Institutional Asset Management's
quantitative valuation models. Institutional Asset Management estimates
long-term expected returns for asset classes, markets, and securities using
proprietary valuation models that consider cash flows discounted at
risk-adjusted rates and then evaluates potential strategies in the context of
forecasted returns as well as its forecasted risks and correlations.
Institutional Asset Management creates portfolios and monitors and adjusts them
based on relative price/value discrepancies. Its method is to identify periodic
discrepancies between market price and investment value and turn them to its
clients' advantage. Where no significant discrepancies exist between price and
value, Institutional Asset Management continues its research and analysis.
Institutional Asset Management believes that its approach allows it to respond
to market changes, while providing its clients with the benefit of its knowledge
and experience and maintains the flexibility to customize portfolios to meet
their requirements.
Investment Funds/GAM. As part of the re-grouping announced in February 2000,
the Global Asset Management, or GAM, and Investment Funds areas of the former
Private Banking division were transferred to UBS Asset Management, bringing
together all of UBS's asset management activities.
UBS Asset Management will benefit from an integrated business model and single
management team. Within this framework GAM will be distinctly positioned and
maintain its brand identity as well as its unique investment styles.
Set forth below is summary information, based on management accounting data,
relating to the Investment Funds/GAM business unit, which is discussed in
greater detail under "--Management's Discussion and Analysis of Financial
Condition and Results of Operations --UBS Asset Management--Investment
Funds/GAM."
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--------------------------------------------------------------------------------
<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.
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Client Mandates. Investment Funds has an extensive product range of
approximately 163 funds. The following table shows total assets under management
in these investment funds by fund category at 30 June 2000 and 31 December 1999
and 1998.
<TABLE>
<CAPTION>
FUND CATEGORY 30 JUNE 2000 31 DECEMBER 1999 31 DECEMBER 1998
<S> <C> <C> <C>
(CHF in millions)
<CAPTION>
----------------------------------------------------------------------------------
<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
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UBS
--------------------------------------------------------------------------------
distributed through multiple channels, including brokerage firms, banks,
portfolio and fund managers, financial advisors, family offices, employee
pension plans, and directly to major investors.
- Institutional -- GAM provides a full range of services to its institutional
clients through dedicated account managers. Institutions are offered the same
products developed to support GAM's private client and fund distributions
businesses. This includes traditional equity portfolio management, as well as
multi-manager funds and alternative assets classes.
Investment Process and Research. GAM was founded in 1983 to give private
clients "access to great investment talent." As a result, the investment process
is based on selecting the world's leading investment talent, whether the manager
selected for a particular fund or mandate is internal to GAM or an external
manager. Beginning in 1989, GAM extended its investment process to pioneer the
development of the multi-manager concept.
An in-house team of investment professionals is responsible for managing the
various internally managed mandates or funds. Members of this team also create
multi-manager mandates using a quantitative database of 50,000 funds, and by
carefully scrutinizing all aspects of external managers employing a qualitative
database of 6,000 investment managers. The investment objective of multi-
manager funds or mandates is diversifying risk by employing complementary
managers using different strategies.
The range of funds and mandates extends from traditional equity and bond funds
to a comprehensive range of alternative investment funds.
UBS Warburg
UBS Warburg is composed of four business units:
- Corporate and Institutional Clients -- Securities and investment banking
products and services for institutional and corporate clients.
- UBS Capital -- Investment of UBS and third-party funds in a diverse range of
private, and occasionally public, companies on a global basis.
- Private Clients -- Onshore private banking services for high net worth
individuals worldwide, outside of Switzerland.
- e-services -- Personalized investment and advisory services at competitive
fees for affluent clients in Europe, delivered via a multi-channel structure
that integrates internet, call centers and investment centers.
Corporate and Institutional Clients. The Corporate and Institutional Clients
business unit is one of the leading global investment banks. It provides
wholesale financial and investment products and advisory services globally to a
diversified client base, which includes institutional investors (including
institutional asset managers and broker-dealers), corporations, sovereign
governments and supranational organizations. Corporate and Institutional Clients
also manages cash and collateral trading and interest rate risks on behalf of
UBS and executes the vast majority of UBS's retail securities, derivatives and
foreign currency exchange transactions. Corporate and Institutional Clients's
headquarters are in London and, at 30 June 2000, it employed about 13,000 people
in over 40 countries throughout the world.
In the 1998 merger, the investment banking businesses of the two banks came
together to form what is now the Corporate and Institutional Clients business
unit. Within Union Bank of Switzerland, securities trading began in New York and
London in the 1970s and grew in the 1980s with the
--------------------------------------------------------------------------------
35
<PAGE> 37
UBS
--------------------------------------------------------------------------------
acquisition of Phillips & Drew in 1985. Within Swiss Bank Corporation, the
acquisition of O'Connor & Associates in 1992 and the investment banking
businesses of S.G. Warburg Group p.l.c. in 1995 led to the formation of SBC
Warburg as a global investment bank, which was further strengthened in the
United States with the 1997 acquisition of Dillon Read & Co., Inc.
Corporate and Institutional Clients has a large corporate client financing and
advisory business and is one of the top-ranked investment banking businesses
engaged in institutional client business. The business area has achieved
industry-wide recognition for its performance in the following areas:
- equity sales and trading (ranked number two globally in the first quarter of
2000 based on equity commission revenues based on an independent survey);
- cash and derivative fixed income sales and trading with institutional
investors (ranked number four globally in 1999 based on information compiled
and classified by the Securities Data Company and other publicly available
information);
- eurobond trading (named Best Foreign Bond Firm in the Eurozone, the United
Kingdom and Australia in July 2000 by Euromoney);
- global foreign exchange (ranked number four in May 2000 by Euromoney FX poll,
which ranks investment banks and banks on a global basis by market share);
- research, with a global research sales team that includes about 630 specialist
analysts based in over 30 countries and covering over 4,600 companies (ranked
fourth in Institutional Investor Global Research in December 1999 and third in
European Research in February 2000 as well as receiving Euromoney's award in
October 1999 for best overall Asian research);
- debt and equity capital markets (1999, ranked number five in international
equity; number three in international equity-linked issuances; number two in
eurobond origination; and number one in its target franchise segments of
international bonds by Bondware. Corporate and Institutional Clients's target
franchise markets exclude asset-backed, self-issuance and U.S. agencies); and
- privatizations (including its role as lead manager in the Swisscom
privatization, which was named privatization of the year by Institutional
Investor and International Financing Review in 1998).
Set forth below is summary information, based on management accounting data,
relating to Corporate and Institutional Clients, which is discussed in greater
detail under "--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations by Business Unit--UBS
Warburg--Corporate and Institutional Clients."
<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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<PAGE> 38
UBS
--------------------------------------------------------------------------------
Business Areas. At 30 June 2000, Corporate and Institutional Clients operated
four main business areas that have been organized by the type of products and
services offered and their risk exposure. These four business areas consist of
Equities, Fixed Income, Corporate Finance and Treasury Products. The Corporate
Finance business area works with the Equities and Fixed Income business areas
through the Equity Capital Markets Group, the Debt Capital Markets Group and
Leveraged Finance to originate new equities capital markets business, fixed
income capital markets business and leveraged finance business. Consequently,
operating income from the Equity Capital Markets Group is shared between
Equities and Corporate Finance and operating income from the Debt Capital
Markets Group and Leveraged Finance is shared between Fixed Income and Corporate
Finance. The table below sets forth the operating income before credit loss
expense attributable to each of Corporate and Institutional Clients's main
business areas for the years ended 31 December 1999 and 1998:
<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;
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<PAGE> 39
UBS
--------------------------------------------------------------------------------
- investment grade, high-yield and emerging market bonds;
- credit-structured vehicles and credit derivatives, including credit-linked
notes and total return swaps;
- various derivative products; and
- structured products to meet clients' risk management needs.
Corporate Finance. Corporate Finance manages the relationships with UBS's large
supranational, corporate and sovereign clients. It provides a variety of
advisory services in areas such as mergers and acquisitions, strategic advisory
and restructuring. Corporate Finance also provides capital markets and leveraged
financing services in conjunction with the Equity Capital Markets Group, the
Debt Capital Markets Group and Leveraged Finance, as described above. Utilizing
UBS's existing resources, Corporate Finance's strategy is to further expand its
presence in targeted global sectors in the areas of mergers and acquisitions and
primary capital markets activities, including targeted sectors in the United
States. Corporate Finance's responsibilities include:
- mergers and acquisitions;
- country and global sector coverage;
- equity and equity-linked capital offerings, initial public offerings and
other public and private equity offerings in conjunction with the Equity
Capital Markets Group;
- investment grade and high-yield debt offerings in conjunction with the Debt
Capital Markets Group;
- leveraged debt offerings in conjunction with Leveraged Finance; and
- structured finance.
Treasury Products. Treasury Products serves institutional investors, banks,
sovereigns, corporate clients, as well as other retail and wholesale clients of
UBS's other divisions. Treasury Products' primary areas of responsibility
include:
- sales and trading of foreign exchange (spot and derivatives), precious
metals, short-term interest rate cash and derivative products and
exchange-traded derivatives;
- collateral trading, securities lending and repurchase agreements;
- bank note sales and distribution;
- foreign currency research; and
- UBS's alternative asset management business.
Clients. Corporate and Institutional Clients has a diverse global client base,
including institutional investors, corporations, governments and supranational
organizations. This diversity has allowed UBS to establish itself as a leading
investment bank headquartered in Europe and the leading distributor of non-U.S.
investment products to United States investors.
The table below sets forth the percentage of operating income attributable to
each category of clients for 1999 and 1998. The total operating income used to
calculate the percentage of operating income by client type includes only
operating income generated from or attributed to clients.
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UBS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
31 DECEMBER
1999 1998
(% of total)
--------------------------------------------------------------------------
<S> <C> <C>
Corporations................................................ 26% 39%
Institutional investors..................................... 70% 55%
Governments and supranational organizations................. 4% 6%
--- ---
Total............................................. 100% 100%
=== ===
</TABLE>
e-commerce/Product Initiatives. The institutional client business worldwide is
rapidly moving to an electronic basis. UBS believes Corporate and Institutional
Clients is well positioned to capitalize on this trend. Recent e-commerce
initiatives include:
- Investment Banking On-Line (IBOL). IBOL provides extensive client
desktop capability from a single home page with direct access to prices,
research, trade ideas and analytical tools for Corporate and
Institutional Clients' equities, fixed income and treasury products
businesses. Corporate and Institutional Clients delivers electronic
research to over 5,000 clients and has signed up over 10,000 users. UBS
intends to expand IBOL to include wireless and video links.
- Electronic Transactions for Securities (ETS) and Electronic Transactions
for OTC Products (ETOP). ETS and ETOP provide a further rollout of
on-line order routing and trading capabilities for all securities,
foreign exchange and derivatives products. 30% of all institutional
orders are sent via the internet and 90% of all retail orders are
executed using straight through processing, or "STP."
- Corporate Finance On-Line (CFOL). The CFOL initiative is intended to
establish a secure connection for the exchange of transactional and
pricing information with corporate clients to support the execution and
origination of advisory mandates, as well as to create on-line
connectivity for capital markets participants.
- Debtweb. Using Debtweb, about 25% of all new bond issue volume in the
first quarter of 2000 volume was delivered on-line.
- DealKey. Designed for primary equity investors, it uses the web as an
additional channel for the distribution of value-added information
relating to current equity and equity-linked offerings.
- Transactional Websites. UBS has established transactional websites for
euro commercial paper and euro medium-term notes, including consolidated
site information links to euro credit markets, credit indices and bond
analytics.
- New Web Services. Other new web services include:
- KeyLink Web, which provides secure international electronic banking
for cash, foreign exchange and securities;
- Adviser Web, which relates to Australian equities; and
- Global eHelp Service Desk, which provides support for clients 24
hours a day, 6 days a week.
Providing superior advice and maintaining contacts with clients will be key to
Corporate and Institutional Clients' future success. UBS believes its e-commerce
initiatives will enhance its ability to add value to clients, as well as allow
it to extract value from the processing power and scale of its core business
processes and development standards, in order to maximize the benefits it can
achieve from
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UBS
--------------------------------------------------------------------------------
technological innovations. Corporate and Institutional Clients already processes
100,000 domestic and cross-border securities trades per day automatically, and
has the capacity to increase this amount five-fold within the existing
infrastructure.
Loan Portfolio. In 1998, UBS decided that Corporate and Institutional Clients'
loans and commitments that were (1) not part of the loan trading portfolio, (2)
not issued in conjunction with leveraged finance transactions or (3) not
directly supporting its core client relationships, would be separated from the
core activities of Corporate and Institutional Clients and wound down. As a
result of this initiative, Corporate and Institutional Clients' total loans and
committed and undrawn lines of credit have been reduced.
The following table sets forth information regarding the Corporate and
Institutional Clients loan portfolio before allowance for loan loss at 31
December 1999 and 1998.
<TABLE>
<CAPTION>
AS OF 31 DECEMBER
1999 1998
(CHF in millions)
-------------------------------------------------------------------------------
<S> <C> <C>
Due from banks.............................................. 25,891 62,272
Loans to customers.......................................... 56,374 72,425
------ -------
Total loans............................................... 82,265 134,697
====== =======
</TABLE>
See "--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Analysis of Risks--Credit Risk" for a more in-depth review of
UBS's credit portfolio and business, including a discussion of its impaired and
non-performing loans.
UBS Capital. The UBS Capital business unit of UBS Warburg is the private equity
business of UBS.
UBS Capital has increased the value of its investments substantially in recent
years with the book value of its investments increasing from about CHF 400
million at 31 December 1994 to about CHF 3.8 billion at 30 June 2000.
Until earlier this year, UBS Capital was managed as an independent division
within UBS. Following UBS's realignment, UBS Capital now operates within the UBS
Warburg business group. This is expected to further strengthen the business
synergies between the investment banking and private equity businesses, while
maintaining strong links between UBS Capital and UBS Switzerland.
UBS Capital has a local presence throughout major industrialized regions in
Europe, North America, Latin America and the Asia-Pacific region, with about 113
employees as of 30 June 2000. UBS Capital has offices in London, Zurich, New
York, Sao Paolo, Buenos Aires, Paris, The Hague, Munich, Milan, Singapore, Hong
Kong, Seoul, Sydney and Tokyo.
As a private equity group, UBS Capital's business involves investing in unlisted
companies, managing these investments over a medium-term time horizon to
increase their value, and "exiting" the investment in a manner that will
maximize the capital gain. UBS Capital seeks to make both majority and minority
equity investments in established and emerging unlisted companies, either with
UBS's own capital or through sponsored investment funds. Although the main focus
of UBS's investments is late-stage financing, such as management buyouts,
expansion or replacement capital, a minority of the portfolio targets early
stage investments in the technology and telecommunications sectors. UBS Capital
generally targets medium-sized businesses with enterprise values in the range of
CHF 75 million to CHF 1.5 billion.
In addition to its international specialization, UBS Capital endeavors to
differentiate itself from its competitors by creating and adding value by
working together with an investee company's
--------------------------------------------------------------------------------
40
<PAGE> 42
UBS
--------------------------------------------------------------------------------
management over a three- to six-year period to develop the business and optimize
the company's performance.
Set forth below is summary information, based on management accounting data,
relating to UBS Capital, which is discussed in greater detail under
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations by Business Unit--UBS Warburg--UBS Capital."
<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.
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.
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--------------------------------------------------------------------------------
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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<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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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
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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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UBS
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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> 48
UBS
--------------------------------------------------------------------------------
some jurisdictions, many of UBS's competitors are not subject to the same
regulatory restrictions that apply to UBS.
Employees
At 30 June 2000, UBS had 47,744 employees. Set forth below are the number of
employees of UBS broken down by its eight business units and Corporate Center at
30 June 2000 and 31 December 1999 and 1998.
<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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UBS
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- 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> 50
UBS
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- additional (or Tier 3) capital.
Tier 1 capital primarily includes paid-in share capital, reserves (defined to
include retained earnings) and capital participations of minority shareholders
in fully consolidated subsidiaries, and is reduced by, among other items, the
bank's holdings of its own shares. Tier 1 capital is supplemented, for capital
adequacy purposes, by Tier 2 capital, which consists of, among other things, two
categories of subordinated debt instruments that may be issued by a bank, and by
Tier 3 capital, which consists of certain subordinated debt obligations. The use
of Tier 2 and Tier 3 capital in complying with capital ratio requirements is,
however, subject to limitations.
Under Swiss law, a bank must maintain a minimum capital ratio of 8%, calculated
by dividing adjusted core and supplementary capital by aggregate risk-weighted
assets. This standard must be met on both a consolidated and an unconsolidated
basis. UBS is required to file a statement of its required and existing capital
resources, together with its annual statement of condition and interim balance
sheet, with both the FBC and the Swiss National Bank.
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> 51
UBS
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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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- 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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lawsuits were initially filed in October 1996. Credit Suisse Group has been
designated as a defendant alongside UBS. On 12 August 1998, a settlement was
reached between the parties. This settlement provides for a payment by the
defendant banks to the plaintiffs, under certain terms and conditions, of an
aggregate amount of $1.25 billion. UBS agreed to contribute up to two-thirds of
this amount.
To the extent that other Swiss companies agreed to participate in this fund, and
to the extent of applicable payments to beneficiaries of eligible dormant
accounts, UBS's share was to be reduced. For these purposes, dormant accounts
are defined as accounts with banks and other financial institutions prior to 9
May 1945 which are part of the settlement agreement. In Switzerland, dormant or
abandoned accounts remain on the books of the bank in perpetuity, until claimed
or settled. Therefore, if such dormant or abandoned accounts are identified as
balances that should be used to fund the settlement, the payment of cash to
claimants causes the account to be liquidated from the company's records,
thereby reducing cash and reducing the dormant account liability, as well as the
remaining settlement amount liability. Accordingly, to the extent that such
accounts are identified at institutions other than UBS, UBS's exposure to this
matter will be reduced. Based on UBS's estimate of such expected contributions,
UBS provided a reserve of $610 million (CHF 842 million) in 1998 and an
additional $95 million (CHF 154 million) in 1999.
During the second quarter of 2000, as part of the continuing review of this
matter, UBS recognized that the amounts in dormant accounts attributable to
Holocaust victims at UBS as well as at other Swiss banks are vastly below the
initially expected level, and that UBS needed to adjust its reserve. In
addition, on 26 July 2000, Judge Korman, the presiding judge in this matter,
approved the settlement agreement. The final settlement approved by the judge
describes a new mechanism to include Holocaust-related insurance claims for
insurance companies. As a consequence, contributions by insurance companies will
not serve to offset the banks' liabilities, contrary to UBS's previous
understanding. As a result, in the second quarter of 2000, UBS provided an
additional reserve of $122 million (CHF 200 million), bringing the total
provision to $827 million (CHF 1,196 million). The difference between the amount
accrued and the maximum potential liability of $833 million represents amounts
specifically identified in UBS's customer accounts that are eligible for offset.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no restrictions under UBS's Articles of Association or Swiss law,
presently in force, that limit the right of non-resident or foreign owners to
hold UBS's securities freely or, when entitled, as described under "Description
of UBS Ordinary Shares--Voting Rights," to vote UBS's securities freely. There
are currently no Swiss foreign exchange controls or laws restricting the import
or export of capital. In addition, there are currently no restrictions under
Swiss law affecting the remittance of dividends, interest or other payments to
non-resident holders of UBS securities.
CONTROL OF UBS
As far as UBS is aware, UBS is neither directly nor indirectly owned nor
controlled by another corporation or any government and there are no
arrangements in place the operation of which may result in a change in control.
As of 31 August 2000, UBS's directors and executive officers as a group
beneficially held 2,368,412 of UBS's issued and outstanding ordinary shares. For
the purposes of this analysis, UBS's executive officers are the members of the
UBS Group Managing Board. The Group Managing Board consists of the seven members
of the Group Executive Board, and 26 members who hold senior positions at the
top level of UBS's organization in the Business Groups and Corporate Center. See
also "-- Options to Purchase Securities from UBS" on page 126 for a discussion
of options and warrants issued by UBS.
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UBS
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NATURE OF TRADING MARKET
The company preferred securities are not listed on any national exchange or
traded in any established market. We have applied to list the trust preferred
securities on the Luxembourg Stock Exchange which is not a trading market.
DIRECTORS AND OFFICERS OF UBS
The UBS Board of Directors has ultimate responsibility for the strategic
direction of UBS's business and the supervision and control of UBS's executive
management. The Board of Directors consists exclusively of non-executive
directors in accordance with the Swiss Banking Law. Each member of the Board is
elected at the annual general meeting of shareholders for a four-year term.
However, at the initial annual general meeting, the terms varied between one and
four years to provide for staggered terms for Board members. In order to ensure
its independence, the Chief Executive Officer of UBS is not permitted to be a
member of the Board of Directors. The UBS Articles of Association and the UBS
Organizational Regulations prescribe the presentation of information on UBS's
affairs to the members of the Board of Directors.
The UBS Group Executive Board is UBS's most senior executive body. It assumes
overall responsibility for the development of UBS's strategies, and the
implementation of the results of these strategies. The UBS Group Executive Board
is comprised of seven members, namely the UBS Chief Executive Officer, the Chief
Executive Officer of the three Business Groups, the Private Banking business
unit and of UBS Capital, and the UBS Chief Financial Officer. The UBS Group
Executive Board normally convenes bi-weekly. Information concerning the members
of the Board of Directors is set forth in the table below.
<TABLE>
<CAPTION>
EXPIRATION OF
YEAR OF INITIAL CURRENT TERM
NAME POSITION HELD APPOINTMENT OF OFFICE
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alex Krauer Chairman
Member of the Audit Supervisory Board 1998 2002
Alberto Togni Vice Chairman
Chairman of the Audit Supervisory Board 1998 2001
Markus Kundig Vice Chairman
Member of the Audit Supervisory Board 1998 2002
Peter Bockli Chairman of the Audit Committee 1998 2003
Rolf A. Meyer Member of the Audit Committee 1998 2003
Hans Peter Ming Board Member 1998 2004
Andreas Reinhart Member of the Audit Committee 1998 2004
Eric Honegger Board Member 1999 2003
</TABLE>
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UBS
--------------------------------------------------------------------------------
Information concerning the members of the Group Executive Board is set forth
below:
<TABLE>
<CAPTION>
YEAR OF INITIAL
NAME POSITION HELD APPOINTMENT
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Marcel Ospel President and Group Chief Executive Officer 1998
Luqman Arnold Chief Financial Officer 1999
Georges Gagnebin Chief Executive Officer of Private Banking Business 2000
Unit
Markus Granziol Chairman and Chief Executive of UBS Warburg 1999
Stephan Haeringer Chief Executive Officer of UBS Switzerland and of 1998
Private and Corporate Clients Business Unit
Pierre De Weck Chief Executive Officer of UBS Capital 1998
Peter A. Wuffli Chief Executive Officer of UBS Asset Management 1998
</TABLE>
COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate compensation paid by UBS to its directors and officers as a group
in 1998 was approximately CHF 102.8 million, including bonus compensation and
approximately CHF 10.3 million in accrued pension benefits. The aggregate
compensation paid by UBS to its directors and officers as a group in 1999 was
approximately CHF 193.1 million, including bonus compensation and approximately
CHF 2.7 million in accrued pension benefits. For the purposes of this analysis,
UBS's executive officers are the members of the UBS Group Managing Board, as
described above under "-- Control of Registrant."
OPTIONS TO PURCHASE SECURITIES FROM UBS
UBS offers employees options on UBS ordinary shares under five plans, as
described below:
Under the UBS Employee Ownership Plan and Senior Management Compensation
Program, key personnel are awarded that portion of their performance-related
compensation in excess of a predetermined amount in UBS ordinary shares,
warrants or options, which are restricted for a specified number of years.
Under the UBS Employee Investment Plan, employees have the option to invest part
or all of their annual bonus in UBS ordinary shares, warrants or other
derivatives on UBS ordinary shares. A certain holding period applies during
which the instruments cannot be sold or exercised.
Under the UBS Long Term Incentive and Key Award plans, long-term stock options
are granted to key employees. UBS considers the key employee's performance,
potential, years of service and the performance of the division in which the
employee works in determining the amount of the award. The options are blocked
for a certain period of time during which they cannot be exercised. For the 1997
options and certain of the 1998 options, one half of each grant is subject to an
acceleration clause after which certain forfeiture provisions lapse. One option
gives the right to purchase one registered share at the option's strike price.
The following table provides information concerning options to purchase UBS
ordinary shares at 31 August 2000.
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE PRICE WEIGHTED-AVERAGE
INSTRUMENT TYPE NUMBER ISSUED (IN CHF) EXPIRATION (IN YEARS)
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options.................. 14,004,159 199 4.4
Warrants................. 6,257,804 227 2.3
Total............... 21,251,398 208 3.7
</TABLE>
The total number of UBS ordinary shares subject to issuance under such options
and warrants held by officers and directors of UBS as of 31 August 2000 is
3,230,612.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Mortgages receivable from members of the UBS Board of Directors, the UBS Group
Executive Board, the UBS Group Managing Board, close family members of these
individuals and enterprises controlled by these individuals were as follows:
<TABLE>
<CAPTION>
CHF MILLION 1999
-------------------------------------------------------------------
<S> <C>
Mortgages at 1 January...................................... 27
Additions................................................... 6
Reductions.................................................. 5
Mortgages at 31 December.................................... 28
</TABLE>
Members of the UBS Board of Directors, UBS Group Executive Board and UBS Group
Managing Board are granted mortgages at the same terms and conditions as other
employees. Terms and conditions are based on third party terms, excluding the
credit margin. In addition, fully secured personal loans totalling approximately
CHF 3.6 million have been extended to members of this group, all of which are
due and payable within 24 months.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with UBS's
consolidated financial statements and the related notes included elsewhere in
this document. UBS's consolidated financial statements have been prepared in
accordance with International Accounting Standards, or "IAS," which differ in
certain significant respects from U.S. GAAP. Please refer to Note 42 of UBS's
consolidated financial statements for a description of the significant
differences between IAS and U.S. GAAP and the reconciliation of shareholders'
equity and net profit (loss) to U.S. GAAP. Unless otherwise stated, all of UBS's
financial information presented in this document is presented on a consolidated
basis under IAS.
All references to 1999, 1998 and 1997 refer to UBS's fiscal years ended 31
December 1999, 1998 and 1997, respectively. The financial statements for each of
these periods have been audited by ATAG Ernst & Young, as described in the
"Report of Independent Auditors" on page F-1.
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<PAGE> 57
UBS
--------------------------------------------------------------------------------
For comparative purposes, 1999 and 1998 figures have been restated to conform to
the 2000 presentation, which gives effect to certain accounting changes,
including:
- the removal from net trading income of profit on UBS ordinary shares held for
trading purposes;
- the treatment of these shares as treasury shares, reducing both the number of
shares and the shareholders' equity used in ratio calculations;
- the reclassification of trading-related interest revenues from net trading
income to net interest income;
- the removal of the credit to net interest income and matching debit to net
trading income for the cost of funding trading positions; and
- the capitalization of costs relating to the in-house development of software.
Note 1(t) of UBS's consolidated financial statements includes a complete
explanation of these accounting changes.
Additional Disclosure
This section identifies, for easy reference, some of the new information about
UBS that is disclosed in this document and that has not previously been
disclosed in UBS's reported financial data.
The information in this section is intended as a guide to the new disclosure
items, but is not intended to indicate which items may be most significant to
you or to a decision about purchasing the trust preferred securities or company
preferred securities. We strongly urge that you read this document in its
entirety.
Financial Statements. Information about the financial performance of UBS has
been restated to reflect retroactive changes in accounting policy arising from
newly applicable International Accounting Standards and changes in presentation.
While some of these restated financial statements have appeared in previous
quarterly reports to shareholders, the full year results for 1998 have been
restated for the first time. See Note 1 to UBS's consolidated financial
statements, beginning on page F-7.
In addition, the results for UBS's constituent business units are presented
according to the new business group structure introduced in 2000. Again, this
regrouping has been presented for some periods previously, but results for 1998
have been regrouped for the first time. See "--Description of Business" and this
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The reconciliation of UBS's financial statements to U.S. GAAP as of 30 June 2000
is provided for the first time, see pages 191 to 212.
Other Additional Disclosure. In general, the other additional disclosure
contained in this document is the same type of information that was disclosed in
UBS's Annual Report on Form 20-F for the year ended 31 December 1999, but has
been updated to show values at 30 June 2000.
<TABLE>
<CAPTION>
ITEM PAGE(S)
----------------------------------------------------------------------------
<S> <C>
Private and Corporate Clients Loan Portfolio, percentage of
original recovery portfolio worked out at 30 June 2000.... 25
Additional breakdown of the Private and Corporate Clients
Loan Portfolio at 30 June 2000............................ 25
UBS Capital Investment Portfolio -- Investments by Sector at
30 June 2000 and Investment Portfolio aging at 30 June
2000...................................................... 42 - 43
</TABLE>
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UBS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ITEM PAGE(S)
----------------------------------------------------------------------------
<S> <C>
Additional detail on property at 30 June 2000............... 51
Additional information on country risk exposure at 30 June
2000...................................................... 42
More detailed information on non-performing loans and credit
loss allowance and provisions at 30 June 2000............. 105 - 108,
124 - 125,
and F-75
</TABLE>
Introduction
UBS is a global, integrated investment services firm and operates through three
business groups, which are divided into eight operating business units, and its
Corporate Center. The business units within each of the three business groups,
share senior management, infrastructure and other resources. The three business
groups are:
- UBS Switzerland, which is made up of two business units: Private and Corporate
Clients and Private Banking;
- UBS Asset Management, which consists of two business units: Institutional
Asset Management and Investment Funds/GAM; and
- UBS Warburg, which is composed of four business units: Corporate &
Institutional Clients, UBS Capital, Private Clients and e-services.
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
</TABLE>
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UBS
--------------------------------------------------------------------------------
<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 WARBURG:
Corporate and Institutional Clients.............. 2,865 1,430 2,346 (1,102)
UBS Capital...................................... 71 57 157 428
Private Clients.................................. (246) (141) (327) (133)
e-services....................................... (158) 0 (39) 0
----- ----- ----- ------
UBS Warburg.................................... 2,532 1,346 2,137 (807)
CORPORATE CENTER................................. (172) 1,355 1,111 (1,147)
----- ----- ----- ------
Total....................................... 5,560 5,031 7,893 3,871
===== ===== ===== ======
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
The 1998 merger of Swiss Bank Corporation and Union Bank of Switzerland, which
was completed on 29 June 1998, was accounted for under the
"pooling-of-interests" method of accounting. Under the pooling-of-interests
method, a single uniform set of accounting policies was adopted and applied
retrospectively for the restatement of comparative information. After the 1998
merger was effected, UBS began the process of integrating the operations of the
two banks. This process involved streamlining operations, eliminating duplicate
information technology infrastructure, consolidating banking premises and
various other measures to bring the two banks together. At the time of the 1998
merger, UBS established a restructuring provision of CHF 7 billion to cover its
expected restructuring costs associated with the 1998 merger. An additional
pre-tax restructuring charge of CHF 300 million in respect of the 1998 merger,
representing about 4% of the original CHF 7 billion provision, was recognized in
December 1999. The majority of the extra provision was due to revised estimates
of the cost of lease breaks and property disposals. UBS has now largely
completed the integration and restructuring process relating to the 1998 merger
and, at 30 June 2000, has used approximately CHF 6.1 billion of the CHF 7.3
billion restructuring provision.
In addition, during the last three and a half years, a number of other events
occurred that also had a significant effect on UBS's results of operations
during these periods. These events included:
- During 1999, UBS recognized pre-tax gains of CHF 1,490 million on the sale of
its 25% stake in Swiss Life/Rentenanstalt; CHF 110 million on Julius Baer
registered shares; CHF 200 million on the sale of its international Global
Trade Finance business; and CHF 38 million on Long Term Capital Management,
L.P.
- During the first half of 1998, UBS divested Banca della Svizzera Italiana, or
"BSI," and Adler & Co. Ltd. to satisfy a condition of the Swiss Competition
Commission in connection with the 1998 merger. UBS recognized pre-tax gains
of CHF 1,058 million on these sales.
- 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.
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UBS
--------------------------------------------------------------------------------
As a global financial services firm, UBS's businesses are affected by the
external environment in the markets in which it operates. In particular, the
results of UBS's business in Switzerland, and notably the results of its
credit-related activities, would be adversely affected by any deterioration in
the state of the Swiss economy because of the impact this would have on UBS's
customers' creditworthiness. More generally, economic and political conditions
in different countries can also impact UBS's results of operations and financial
position by affecting the demand for UBS's products and services and the credit
quality of UBS's borrowers and counterparties. Similarly, any prolonged weakness
in international securities markets would affect UBS's business revenues through
its effect on UBS's clients' investment decisions and the value of portfolios
under management, which would in turn reduce UBS's revenues from its private
banking and asset management businesses.
Competitive Forces. UBS faces intense competition in all aspects of its
business. UBS competes with asset management entities, retail and commercial
banks, investment banking firms, merchant banks, broker-dealers and other
investment services firms. In addition, the trend toward consolidation in the
global financial services industry is enhancing the competitive position of some
of UBS's competitors by broadening the range of their product and service
offerings and increasing their access to capital. These competitive pressures
could result in increased pricing pressure on a number of UBS's products and
services, particularly as competitors seek to win market share.
Fluctuations in Currency Exchange Rates and Interest Rates. Because UBS
prepares its accounts in Swiss francs, changes in currency exchange rates,
particularly between the Swiss franc and the U.S. dollar and the Swiss franc and
the British pound, may have an effect on the earnings that it reports. UBS's
approach to managing the risk is explained below under "--Asset and Liability
Management--Currency Management." In addition, changes in exchange rates can
affect UBS's business earnings. For example, the establishment of the euro
during 1999 has started to have an effect on the foreign exchange markets in
Europe by reducing the extent of foreign exchange dealings among member
countries and generating more harmonized financial products. Movements in
interest rates can also affect UBS's results. As interest rates decline, UBS's
interest rate margins generally come under pressure and mortgage borrowers may
seek to repay their borrowings early, which can affect UBS's net interest
income. Interest rate movements can also affect UBS's fixed income trading
portfolio and the investment performance of its asset management businesses.
Operational Risks. UBS's businesses are dependent on its ability to process a
large number of complex transactions across numerous and diverse markets in
different currencies and subject to many different legal and regulatory regimes.
UBS's systems and processes are designed to ensure that the risks associated
with UBS's activities are appropriately controlled, but UBS recognizes that any
weaknesses in these systems could have a negative impact on its results of
operations during the affected period.
As a result of these and other factors beyond its control, UBS's revenues and
operating profit have been and are likely to continue to be subject to a measure
of variability from period to period. Therefore UBS's revenues and operating
profit for any particular fiscal period may not be indicative of sustainable
results, may vary from year to year and may impact UBS's ability to achieve its
strategic objectives. Nevertheless, UBS's risk management and control procedures
have been designed to keep the risk of such variability at an acceptably low
level. For further discussion of UBS's risk management and control see
"--Analysis of Risks--Consequential Risks."
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<PAGE> 61
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--------------------------------------------------------------------------------
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.
As a result of the significant recovery of the Swiss economy in the first half
of 2000 and especially its effect on the real estate and real estate
construction markets, UBS was able to write back CHF 237 million of domestic
credit loss provisions in the first half of 2000. These writebacks were offset
by additional provisions on the international portfolio of CHF 154 million,
leading to a net credit of CHF 83 million in the credit loss expense line for
the first half of 2000, compared to an expense of CHF 635 million in the first
half of 1999.
--------------------------------------------------------------------------------
60
<PAGE> 62
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--------------------------------------------------------------------------------
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, 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
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
income and through increased client activity, particularly in the first quarter
of 2000. The following table sets forth UBS's net trading income by major
business area for the first half of 2000 and 1999.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
30 JUNE
2000 1999(1)
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
Foreign exchange(2)......................................... 680 718
Fixed income................................................ 643 1,303
Equities.................................................... 4,346 2,439
----- ---------
Total............................................. 5,669 4,460
===== =========
</TABLE>
------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
(2) Includes other trading income such as banknotes, precious metals and
commodities.
Net trading income from foreign exchange decreased CHF 38 million, or 5.3%, from
the first half of 1999 to the first half of 2000 in difficult trading
conditions, with lower levels of market activity and narrowing margins on
derivative products.
Net trading income from fixed income decreased CHF 660 million, or 50.7%, from
the first half of 1999 to CHF 643 million in the first half of 2000. The fixed
income component of net trading income does not represent the full revenue
picture of the Fixed Income business area within the Corporate and Institutional
Clients business unit. In particular, coupon income is managed as an integral
part of the trading portfolio. The relative revenue contributions of
mark-to-market gains, coupon income and other factors are somewhat volatile,
because they depend on trading strategies and the instrument composition. In the
first half of 2000, while fixed income trading income fell, coupon income, which
is reported in net interest income, rose substantially. The sum of the two
results suggests significantly more stable revenue development than either
component standing alone. In total, in the first half of 2000, revenues in the
Fixed Income business area of Corporate and Institutional Clients rose 13.8%
over the first half of 1999.
Net trading income from equities increased CHF 1,907 million, or 78.2%, from the
first half of 1999 to the first half of 2000. Positive markets led to an
exceptionally good first quarter of 2000, with record client volumes and strong
performances in European, U.S., U.K. and Japanese equities. Performance in the
second quarter fell slightly in more mixed market conditions, but was still well
ahead of second quarter of 1999.
Other income, including income from disposal of associates and subsidiaries,
decreased CHF 1,696 million, or 72.5%, from CHF 2,340 million in the first half
of 1999 to CHF 644 million in the first half of 2000. Total disposal-related
pre-tax gains were CHF 1,778 million in the first half of 1999 compared to CHF
23 million in the first half of 2000. The first half of 1999 included pre-tax
gains of CHF 1,490 from the sale of UBS's stake in Swiss Life/Rentenanstalt, CHF
200 million from the disposal of the Global Trade Finance business and CHF 110
million from the sale of Julius Baer registered shares. Excluding income from
disposal of associates and subsidiaries, other income increased CHF 59 million
due to increased income from the disposal of private equity investments and the
consolidation of Klinik Hirslanden AG's results in the first half of 2000 but
not in the first half of 1999, offset by a reduction of income from investments
in associates and losses from the revaluation of properties held for resale.
Personnel expense increased CHF 2,057 million, or 30.2%, from CHF 6,819 million
in the first half of 1999 to CHF 8,876 million in the first half of 2000,
despite an almost unchanged headcount of
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<PAGE> 64
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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
relates to information technology outsourcing charges for work that was
previously carried out in-house.
Depreciation and amortization increased CHF 83 million, or 9.6%, from CHF 864
million in the first half of 1999 to CHF 947 million in the first half of 2000,
mainly as a result of the acquisition of GAM and Allegis in the fourth quarter
of 1999.
Tax expense increased CHF 106 million, or 9.2%, from CHF 1,151 million in the
first half of 1999 to CHF 1,257 million in the first half of 2000, principally
due to increased operating profit. The effective tax rate of 22.6% in the first
half of 2000 is very slightly lower than the 22.9% rate in the first half of
1999.
Year to 31 December 1999 Compared to Year to 31 December 1998. Net interest
income increased by CHF 891 million, or 17.8%, from CHF 5,018 million in 1998 to
CHF 5,909 million in 1999. Increased trading-related interest income and higher
interest margins in the domestic loan portfolio in 1999 from more consistent
application of UBS's risk-adjusted pricing model were partially offset by the
sale of business activities which had contributed to net interest income in
1998, as well as the impact of lower returns on invested equity and the
reduction of the international loan portfolio.
Credit loss expense had a slight increase of CHF 5 million from CHF 951 million
in 1998 to CHF 956 million in 1999. During 1999, UBS experienced general
improvements in the economy and in the credit performance of its loan portfolio,
and a reduction in impaired loans in the aggregate. Although impaired loans
decreased, additional provisions were required for some of the impaired domestic
loans remaining in the portfolio.
Net fee and commission income decreased by CHF 19 million from CHF 12,626
million in 1998 to CHF 12,607 million in 1999. Excluding the effect of
divestments in 1998, the decrease was roughly 1%.
The following table sets forth UBS's net fee and commission income for each of
the years ended 31 December 1999 and 1998.
<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
</TABLE>
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED
31 DECEMBER(1)
1999 1998
(CHF in millions)
-----------------------------------------------------------------------------------
<S> <C> <C>
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.
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,"
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--------------------------------------------------------------------------------
and approximately CHF 690 million in losses in UBS's emerging markets trading
portfolios. Excluding those write downs from the 1998 results, net trading
income from fixed income increased approximately 58% in 1999 over 1998. Fixed
income trading revenues were strong across all major products during 1999, led
by swaps and options and investment grade debt.
Net trading income from equities increased CHF 2,849 million from 1998 to 1999.
During 1998, net trading income was negatively impacted by pre-tax CHF 762
million in losses from the Global Equities Derivatives positions. In 1999, net
trading income benefited from very strong customer volumes in equity products
globally.
Other income, including income from disposal of associates and subsidiaries,
increased CHF 905 million, or 40.4%, from CHF 2,241 million in 1998 to CHF 3,146
million in 1999. Total disposal-related pre-tax gains were CHF 1,821 million in
1999 compared to disposal-related pre-tax gains of CHF 1,119 million in 1998.
The first-time consolidation of Klinik Hirslanden in 1999 resulting in other
income of CHF 395 million was partially offset by less income from investments
in associates as a result of the divestments as well as lower income from other
properties. The approximately CHF 370 million portion of the LTCM write-down
negatively impacted other income in 1998.
Personnel expense increased CHF 2,761 million, or 28.1%, from CHF 9,816 million
in 1998 to CHF 12,577 million in 1999, despite only a minor increase in
headcount from 48,011 at 31 December 1998 to 49,058 at 31 December 1999. At the
end of 1997, UBS foresaw the probability of a shortfall in profit in its
investment banking business as a result of the then-pending 1998 merger. In
order to protect its investment banking franchise, UBS realized it would
probably need to make payments to personnel in excess of amounts determined by
normal compensation methodologies. An amount of approximately CHF 1 billion was
recorded as part of the merger-related restructuring reserve for this purpose.
By the end of 1998, this shortfall had materialized, and CHF 1,007 million of
accrued payments to personnel were charged against the restructuring reserve in
1998 as planned. The shortfall in profits noted above was aggravated by losses
associated with LTCM and the Global Equity Derivatives, or "GED," portfolio.
Adjusting the prior year for the CHF 1,007 million, personnel expenses in 1999
increased by 16%, which was primarily attributable to higher performance-related
compensation based on the good investment banking result in 1999. Personnel
expense in 1999 was reduced by the recognition of CHF 456 million in pre-paid
employer pension contributions.
General and administrative expenses decreased CHF 637 million, or 9.5%, from CHF
6,735 million in 1998 to CHF 6,098 million in 1999. General and administrative
expenses in 1998 includes the provision of CHF 842 million for the settlement
related to the Holocaust litigation. In 1999, the following were included:
- the additional restructuring provision of CHF 300 million;
- an additional provision of CHF 154 million for the U.S. global settlement
of Holocaust-related claims; and
- CHF 130 million from the first-time consolidation of Klinik Hirslanden.
Excluding the impact of these items in 1998 and 1999, general and administrative
expenses decreased 6.4% year-on-year reflecting stringent cost reduction
programs.
Depreciation and amortization increased CHF 32 million, or 1.8%, from CHF 1,825
million 1998 to CHF 1,857 million in 1999. Excluding the impact of the
first-time consolidation of Klinik Hirslanden in 1999, depreciation and
amortization remained flat.
Tax expense increased CHF 782 million, or 86.5%, from CHF 904 million in 1998 to
CHF 1,686 million in 1999, principally due to increased operating profit. The
effective tax rate of 21.4% is lower than 23.4%, the rate in 1998, primarily due
to the utilization of tax loss carry forwards.
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Year Ended 31 December 1998 Compared to Year Ended 31 December 1997. The
following figures have not been restated for the changes in accounting policy
and restructuring of the UBS business groups that have been introduced during
2000, as such a restatement of the 1997 data was not practicable. As a result of
the differences in the reporting by the predecessor banks' accounting and
reporting policies, the unavailability of certain data, and the shut down and
modification of significant computer systems as a result of the 1998 merger and
to address Year 2000 issues, there is insufficient information to permit UBS to
restate the 1997 results for the changes in accounting policy.
<TABLE>
<CAPTION>
31 DECEMBER
1998 1997
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
OPERATING INCOME:
Interest income........................................... 22,835 23,669
Interest expense.......................................... 16,173 16,733
------ ------
Net interest income.................................. 6,662 6,936
Credit loss expense....................................... 951 1,278
------ ------
Total................................................ 5,711 5,658
Net fee and commission income............................. 12,626 12,234
Net trading income........................................ 1,750 5,491
Other income, including income from disposal of associates
and subsidiaries....................................... 2,241 1,497
------ ------
Operating income..................................... 22,328 24,880
------ ------
OPERATING EXPENSES:
Personnel................................................. 9,816 11,559
General and administrative................................ 6,617 5,315
Depreciation and amortization............................. 1,825 1,762
------ ------
Operating expenses..................................... 18,258 18,636
------ ------
Operating profit before tax.......................... 4,070 6,244
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
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counterparty allowances. The largest provisions in the emerging markets
economies were as follows at 31 December 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
(CHF in millions)
--------------------------------------------------------------------------------
<S> <C> <C>
Brazil...................................................... 276 55
Indonesia................................................... 168 29
South Korea................................................. 186 19
</TABLE>
Net fee and commission income increased CHF 392 million, or 3.2%, from CHF
12,234 million in 1997 to CHF 12,626 million in 1998. Increases in underwriting
and corporate finance fees, custodian fees, portfolio and other management and
advisory fees, and fees from investment funds resulting from strong markets,
growth in assets under management and the acquisition of Dillon Read & Co., Inc.
in late 1997 all contributed to this net increase. These increases were
partially offset by a decrease in credit-related fees and commissions and
brokerage fees.
Net trading income decreased CHF 3,741 million, or 68.1%, from CHF 5,491 million
in 1997 to CHF 1,750 million in 1998. The decrease primarily resulted from the
CHF 790 million write-down of UBS's trading position in LTCM, the CHF 762
million loss on UBS's Global Equities Derivatives portfolio and approximately
CHF 810 million of losses on UBS's emerging markets trading portfolios. Net
trading income from foreign exchange and bank notes decreased by CHF 541 million
primarily reflecting losses in foreign exchange trading that were partially
offset by unusually strong results in UBS's cash and collateral trading
business. In addition, net trading income from precious metals and commodities
decreased by CHF 216 million, or 89%, from CHF 244 million in 1997 to CHF 28
million in 1998 due primarily to the wind-down of some of these businesses and
difficult trading conditions.
Other income, including income from disposal of associates and subsidiaries,
increased CHF 744 million, or 49.7%, from CHF 1,497 million in 1997 to CHF 2,241
million in 1998. The increase primarily reflected CHF 1,058 million gains on the
sales of BSI and Adler and gains in UBS's real estate and private equity
activities, partially offset by the CHF 370 million write-down of UBS's
investment in LTCM attributable to other income.
Personnel expense decreased CHF 1,743 million, or 15.1%, from CHF 11,559 million
in 1997 to CHF 9,816 million in 1998, reflecting reduced headcount of 13.0% from
55,176 people as of 31 December 1997 to 48,011 people as of 31 December 1998.
The headcount reduction primarily resulted from efficiencies 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.
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Tax expense increased CHF 1,150 million, from a tax benefit in 1997 of CHF 105
million to a tax expense in 1998 of CHF 1,045 million. In 1997, UBS recognized a
total current and deferred tax benefit of approximately CHF 1,600 million
related to the CHF 7,000 million restructuring provision. Excluding the
restructuring reserve, operating profit before tax would have been CHF 6,244
million in 1997 and UBS would have accrued tax expenses of CHF 1,395 million.
Operational Reserves. UBS maintains operational reserves to provide for losses
associated with existing transaction errors in processing and other operational
losses. The reserves cover probable losses that exist in the portfolio as of the
balance sheet date, and are subject to senior management review and approval
within the specific business unit, functional operations and financial control
management and at the Group Executive Board.
UBS experienced an overall increase in the level of these reserves during 1999,
primarily related to UBS's continuing program of integrating the two predecessor
banks' domestic operations. As planned, this integration is taking longer than
the integration of operations outside Switzerland. There has been no significant
change in the level of these reserves in the first half of 2000.
Restructuring Provision. At the announcement of the 1998 merger in 1997, UBS
estimated the costs it believed would result from integrating and restructuring
the operations of the two pre-existing banks and recorded a charge of CHF 7
billion. The charge included estimates for personnel-related costs, costs for
the elimination of duplicate infrastructures and the merging of bank premises,
and other 1998 merger-related restructuring costs. An additional pre-tax
restructuring charge of CHF 300 million in respect of the 1998 merger,
representing about 4% of the original CHF 7 billion provision, was recognized in
December 1999. The majority of the extra charge was taken to provide for revised
estimates of the cost of lease breaks and property disposals. UBS has now
largely completed the integration and restructuring process and, at 30 June
2000, has used approximately CHF 6.1 billion of the CHF 7.3 billion
restructuring provision.
During 1998, CHF 4,027 million of the restructuring provision was utilized
including:
- CHF 2 billion for personnel-related expenses,
- CHF 797 million for information technology integration projects and
write-offs of equipment that management had committed to dispose of,
- CHF 267 million for merging premises, and
- CHF 939 million for costs associated with the exit of specific
businesses, as well as merger administration costs.
Included in the CHF 2 billion of personnel-related expenses are severance
payments and payments required to maintain stability in the workforce during the
1998 merger-related integration period, as well as some performance-related
compensation as discussed above.
During 1999, CHF 1,844 million of the restructuring provision was utilized,
bringing the total utilization to CHF 5,871 million at 31 December 1999. The
transition to one common technology platform and parallel operation of the
systems in UBS Switzerland's Private and Corporate Clients business unit and the
merger of bank premises, including related moving, outfitting and vacancy costs,
recognized in Corporate Center, were the primary uses of the provision in 1999.
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During the first half of 2000, the main use of the restructuring provision
related to premises costs in Corporate Center, including moving, outfitting and
vacancy costs that were charged against the provision, and also to costs
relating to the early retirement plan in Private and Corporate Clients. The
following table analyzes the use of the restructuring provision through the
first half of 2000.
<TABLE>
<CAPTION>
USAGE IN 2000 30 JUNE 31 DECEMBER
PERSONNEL IT PREMISES OTHER 2000 1999 1998
(CHF in millions)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Private and Corporate Clients............ 53 14 1 20 88 794 717
Private Banking.......................... 0 5 0 0 5 122 104
--------- --- -------- ----- ------- ----- -----
UBS Switzerland........................ 53 19 1 20 93 916 821
Institutional Asset Management........... 1 0 0 0 1 9 18
Investment Funds/GAM..................... 0 0 0 0 0 6 4
--------- --- -------- ----- ------- ----- -----
UBS Asset Management................... 1 0 0 0 1 15 22
Corporate and Institutional Clients...... 0 0 0 0 0 316 2,382
UBS Capital.............................. 0 0 0 0 0 3 2
Private Clients.......................... 0 0 0 0 0 29 39
e-Services............................... 0 0 0 0 0 0 0
--------- --- -------- ----- ------- ----- -----
UBS Warburg............................ 0 0 0 0 0 348 2,423
Corporate Center......................... 3 0 91 3 97 565 761
--------- --- -------- ----- ------- ----- -----
Total.......................... 57 19 92 23 191 1,844 4,027
========= === ======== ===== ======= ===== =====
</TABLE>
The substantial majority of the remaining restructuring reserve balance is also
attributed to employees and real estate located in Switzerland. UBS estimates
that the balance of the reserve will be used in the second half of 2000 and in
2001.
UBS has achieved 1998 merger-related cost savings of CHF 2 billion per year,
including savings related to headcount reductions of CHF 1.6 billion and savings
for other costs estimated to be around CHF 0.4 billion per year, including
approximately CHF 75 million in eliminated depreciation expenses and other costs
related to real estate.
Since the 1998 merger was announced, UBS Warburg has essentially completed its
integration including the reduction of personnel and the integration of
information technology platforms. As expected, most of the cost savings over the
past two years have been attributable to UBS Warburg.
UBS Asset Management has also essentially completed its integration, while in
the Corporate Center UBS expects the write-off or sale of the remaining
redundant real estate to proceed in 2000 and 2001.
Within UBS Switzerland, Private Banking's integration is essentially complete.
Private and Corporate Clients, meanwhile, has been rapidly integrating its
business in line with a detailed timetable and project schedule. For example,
the branch network has been reduced by 36%, or 200 branches. In addition, now
that the integration of the technology platforms has been completed and in line
with employee association agreements made in 1998, redundancy plans will gain
momentum during 2000 and 2001.
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.
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For example, UBS Warburg's Private Clients business unit has invested heavily
over the past two years in building up its onshore private banking business
outside Switzerland. Additionally, in 1999, UBS formed the e-services business
area, which will experience further significant investment. More information on
various divisional initiatives can be found in the respective business
descriptions.
UBS is also implementing general cost control initiatives across all divisions,
which extend well beyond merger-related savings. These initiatives are already
well-structured at UBS Warburg's Corporate and Institutional Clients business
unit and UBS Switzerland's Private and Corporate Clients business unit.
Corporate and Institutional Clients is continuing to focus on cost management
with emphasis on improving overall efficiency such that revenue growth exceeds
any growth in non-personnel costs.
In addition, the Corporate and Institutional Clients Investment Committee has
carried out a rigorous review process to ensure that investments in the business
unit's infrastructure are fully aligned with the strategy of the business.
Within the UBS Switzerland Private and Corporate Clients business unit, the
Strategic Projects Portfolio is expected to enhance revenues and reduce costs,
including the ongoing realization of the remaining merger-related cost savings.
This portfolio is well on track and is expected to yield a significant
improvement in net profit by 2002.
In the third quarter of 1998, UBS realized a post-tax loss of CHF 984 million as
a result of a write-down of its investment in Long Term Capital Management,
L.P., or LTCM, and a post-tax loss of CHF 919 million as a result of unrealized
losses in the value of its Global Equity Derivatives, or GED, portfolio.
Long Term Capital Management. In the case of LTCM, the loss arose from a
structured transaction in which UBS sold an option that gave the optionholder
the right to purchase shares in LTCM at a predetermined price over a seven-year
period. In order to hedge the risk of this option, UBS held $800 million of LTCM
shares to create an incrementally risk neutral position. Separate from the
structured transaction, UBS also made a further direct equity investment of $266
million in LTCM. In normal market conditions, the structured transaction would
have behaved in a controlled manner. However, the structured transaction could
not be effectively hedged, particularly in the event of extreme market
movements. As a result of the structured transaction, UBS was exposed to a
sudden and severe downward movement in the value of LTCM equity, and had very
limited scope to hedge this exposure. LTCM's equity was not traded and was
valued only periodically based on the underlying instruments held by LTCM.
Moreover, LTCM did not provide detailed information about its investment
results. Consequently, UBS could not hedge with any precision against adverse
moves in the value of LTCM's equity. In particular, when LTCM was faced by a
sharp adverse move in market prices relating to certain specific investment
strategies, UBS was unable to hedge this risk itself as it had no knowledge of
the details of these strategies.
At the time of the recapitalization of LTCM in 1998, UBS wrote down its initial
investment in LTCM and also agreed to provide a further $300 million (out of
$3.6 billion provided by a group of financial institutions) of "consortium"
equity in order to avoid a forced liquidation of LTCM and to enable LTCM's
portfolio to be managed under the oversight of a management board that would
oversee the orderly winding down of LTCM's portfolio.
On 24 November 1999, at the release of its nine month 1999 results, UBS reported
that its initial investment, which was written down to $106 million, had been
bought back by LTCM, with an immaterial impact on UBS's income statement. That
position is now closed. In addition, as part of UBS's "consortium" investment,
four cash payments totaling $296 million were received by UBS by 31 December
1999. Of these cash repayments, $271 million were treated as a return of its
$300
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--------------------------------------------------------------------------------
million investment, to leave a remaining balance of $29 million, and $25 million
was recorded as income.
Global Equity Derivatives (GED) Portfolio. The other major contributory factor
to the third-quarter 1998 losses related to the GED portfolio. This portfolio
consists of a number of structured equity derivative transactions. This
portfolio was analyzed at the time of the merger and it was recognized that it
contained a number of positions that possessed the potential for significant
short-term variance. Consequently, when equity market volatilities increased
significantly as a result of the market turmoil in the third quarter of 1998, an
unrealized loss of about CHF 728 million on the value of the portfolio arose.
Over the next 12 months, as volatilities fell and positions were reduced, income
from the portfolio of approximately CHF 306 million was recognized.
UBS continues to manage the exposure associated with this portfolio in order to
minimize the risk of further adverse effects on earnings. The positions have now
been included in UBS's standard equity risk management platform and are subject
to its normal risk control and stress loss processes. UBS has been reducing the
market risk associated with the portfolio and will continue to do so through
specific hedges, close-outs and the passage of time. These positions, including
the associated hedges, are all carried at fair value. However, given that the
average maturity of the transactions in the portfolio is about two years, it
will take some time to wind down this exposure, and during this time the
portfolio will continue to be exposed to adverse moves in equity markets.
Reconciliation of IAS to U.S. GAAP. UBS's consolidated results of operations
are prepared in accordance with IAS, which differs in certain respects from U.S.
GAAP. A reconciliation of the effects on shareholders' equity and net
profit/(loss) to U.S. GAAP for the years ended 31 December 1999 and 1998 is
included in Note 42 of UBS's consolidated financial statements.
Results of Operations by Business Unit
UBS's management reporting system and policies were used to determine the
revenues and expenses directly attributable to each business unit. Internal
charges and transfer pricing adjustments have been reflected in the performance
of each business unit. The basis of the reporting reflects UBS's current
management structure (UBS Warburg, UBS Asset Management, UBS Switzerland and
Corporate Center), rather than the management structure that existed during 1999
and during 1998, following the 1998 merger (UBS Asset Management, UBS Private
Banking, UBS Capital, UBS Private and Corporate Clients, UBS Warburg and
Corporate Center).
Inter-business unit revenues and expenses include transfers between business
units and between geographical locations. Inter-business unit expense charges
are recorded as a reduction to expenses in the business unit providing the
service. Corporate Center expenses are allocated to the operating business
units, to the extent possible, whereby the business unit controlling the process
that is driving the expense bears the expense.
The credit loss expense included in the business unit results is a statistically
derived adjusted annual expected loan loss that reflects the inherent
counterparty and country risks in the respective portfolios. The expected loss
is based on assumptions about developments covering a full economic cycle and on
cumulative loss probabilities over the entire life of the loan portfolio. In
determining the inherent counterparty and country risk in the portfolio, UBS
takes into consideration the statistical probability of default by the customer
and the severity of loss.
As each business unit is ultimately responsible for its credit decisions, the
difference between actual credit losses and annual expected loan loss will
eventually be charged or credited back to the business unit in order to ensure
that the risks and rewards of credit decisions are fully reflected in its
results. The difference between the statistically adjusted expected loss that is
charged to the management
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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 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;
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- transaction fees; and
- investment income from deposits.
As a result, Private and Corporate Clients' operating income is affected by
movements in interest rates, fluctuations in assets under management, client
activity, investment performance and changes in market conditions.
Private Banking. Private Banking derives its operating income from:
- fees for financial planning and wealth management services;
- fees for discretionary services; and
- transaction-related fees.
Private Banking's fees are based on the market value of assets under management
and the level of transaction-related activity. As a result, Private Banking's
operating income is affected by such factors as fluctuations in assets under
management, changes in market conditions, investment performance and inflows and
outflows of client funds.
UBS Asset Management.
Prior to the reorganization of UBS in February 2000, UBS Asset Management
generated most of its revenue from the asset management services it provides to
institutional clients. In 2000 this has become more evenly divided between
institutional and non-institutional sources due to the addition of GAM and the
Investment Funds business area. Fees charged to institutional clients and on
investment funds are based on the market value of assets under management. As a
result, UBS Asset Management's revenues are affected by changes in market
conditions as well as new and lost business.
UBS WARBURG.
Corporate and Institutional Clients. Corporate and Institutional Clients
generates operating income from:
- commissions on agency transactions and spreads or markups on principal
transactions,
- fees from debt and equity capital markets transactions, leverage finance and
structuring derivatives and complex transactions;
- mergers and acquisitions advisory fees;
- interest income on principal transactions and from the loan portfolio; and
- gains and losses on market making, proprietary and arbitrage positions.
As a result, Corporate and Institutional Clients's operating income is affected
by movements in market conditions, interest rate swings, the level of trading
activity in primary and secondary markets and the extent of merger and
acquisition activity. These and other factors outside the control of Corporate
and Institutional Clients have had and may in the future have a significant
impact on its results of operations from year to year.
UBS Capital. UBS Capital's primary source of operating income is capital gains
from the disposition or sale of its investments, which are recorded at the time
of ultimate divestment. As a result, appreciation in fair market value is
recognized as operating income only at the time of sale. The level of annual
operating income from UBS Capital is directly affected by the level of
investment dispositions that take place during the course of a year. With the
formation of regional funds, UBS Capital has begun to receive management fees
from funds UBS manages and sponsors, which are recorded as operating income.
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Private Clients. Private Clients derives its operating income from:
- fees for financial planning and wealth management services;
- fees for discretionary services; and
- transaction-related fees.
Private Clients' fees are based on the market value of assets under management
and the level of transaction-related activity. As a result, Private Clients'
operating income is affected by such factors as fluctuations in assets under
management, changes in market conditions, investment performance and inflows and
outflows of client funds.
e-services. The e-services business unit has not yet generated revenues, but
expects to generate revenues from fees for financial planning and wealth
management services, fees for discretionary services and transaction related
fees. It is expected that these fees will be based on the market value of assets
under management and the level of transaction-related activity. As a result,
e-services' operating income will be affected by such factors as fluctuations in
assets under management, changes in market conditions, investment performance
and inflows and outflows of client funds. In addition, e-services is a new
business with no existing clients and an as yet unproven business model.
e-services' possible future income will be affected by its ability to attract
clients and by the success or failure of its business model.
UBS Switzerland. The business group UBS Switzerland is made up of two business
units:
- Private and Corporate Clients, the leading retail and commercial bank in
Switzerland; and
- Private Banking, which covers all Swiss and international high net worth
clients who bank in Switzerland or offshore centers.
Private and Corporate Clients. The following table sets forth the results of
Private and Corporate Clients for the half years ended 30 June 2000 and 30 June
1999 and the years ended 31 December 1999 and 1998.
<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
------- ------- ------- -------
</TABLE>
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<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 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.
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.
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- 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
------ ------ ------ ------
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
before credit loss expense income increased CHF 743 million, or 27.2%, from CHF
2,728 million in the first half of 1999 to CHF 3,471 million in the first half
of 2000. This increase principally reflected higher transaction-based revenues
due to higher levels of client transaction activity and asset growth since 30
June 1999.
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Assets under management increased CHF 53.0 billion, or 8.4%, from 30 June 1999
to 30 June 2000, with most of the increase due to positive performance trends,
partially offset by a net decline of CHF 3 billion in new money.
Operating expenses increased 24.8%, or CHF 295 million, to CHF 1,480 million
from the first half of 1999 to the first half of 2000, mainly due to increased
general and administrative expense.
Personnel, general and administrative expenses increased CHF 278 million, or
24.2%, from CHF 1,147 million in the first half of 1999 to CHF 1,425 million in
the first half of 2000. Personnel costs increased 16.5%, or CHF 109 million, to
CHF 769 million in the first half of 2000, due to increased performance-related
compensation in line with strong first half 2000 results and an increase in
headcount. Headcount went up by 750 from 6,697 at 30 June 1999 to 7,447 at 30
June 2000 as Private Banking expanded its front line staff and strengthened its
logistics. General and administrative expenses increased 34.7%, or CHF 169
million, from the first half of 1999 to the first half of 2000 due to increases
in IT and marketing expenses and higher intra-Group cost recoveries, driven by
higher transaction levels.
Goodwill amortization increased CHF 9 million, or 112.5%, to CHF 17 million in
the first half of 2000 as a result of the acquisition of Bank of America's
international private banking business, which took place in the second quarter
of 1999. Depreciation increased CHF 8 million, or 26.6%, from CHF 30 million in
the first half of 1999 to CHF 38 million in the first half of 2000.
Year to 31 December 1999 Compared to Year to 31 December 1998. In March 1999,
UBS acquired Bank of America's international private banking operations in
Europe and Asia, thereby increasing the assets under management in UBS Private
Banking by approximately CHF 5 billion as of 31 December 1999. The remainder of
the increase was principally performance related.
Operating income before credit loss expense decreased CHF 1,365 million, or
19.7%, from CHF 6,933 million in 1998 to CHF 5,568 million in 1999. This
significant decrease principally reflected lower transaction-based revenues due
to lower levels of client transaction activity. CHF 1,058 million gains from the
divestitures of BSI and Adler, as well as CHF 268 million of operating income
relating to BSI's operations, are included in operating income for 1998 and did
not recur in 1999. Excluding the disposal related income, operating income from
UBS Private Banking increased 2.3% from 1998 to 1999.
Notwithstanding the decrease in operating income, assets under management
increased during 1999 by CHF 92 billion, or 15.9%. Strong markets, especially in
Europe, the United States and in the technology sector, as well as the stronger
U.S. dollar, led to a performance increase of CHF 80 billion for 1999. In
addition, the acquisition of the international private banking operations of
Bank of America accounted for an additional CHF 5 billion while interdivisional
transfers resulted in another CHF 6 billion. This increase was partially offset,
however, by decreased volumes from existing clients during the second half of
1999.
Operating expenses, adjusting for CHF 125 million in divestiture-related
operating expenses, increased 4.3%, or CHF 108 million, to CHF 2,610 million in
1999, to a large extent as a result of UBS's expansion in the front-line staff
as well as infrastructure related investments.
Personnel, general and administrative expenses increased CHF 102 million, or
4.2%, from CHF 2,411 million in 1998 to CHF 2,513 million 1999. Personnel costs
increased 9.7%, or CHF 118 million, to CHF 1,328 million, in 1999 due to an
increase in headcount of 710 from 6,546 at 31 December 1998 to 7,256 at 31
December 1999. Headcount growth resulted from the acquisition in 1999 of Bank of
America's international private banking operations, enhancement of UBS's
logistics capabilities and support for the introduction of new portfolio
monitoring and advisory capabilities. Operating expenses in 1998 also included
CHF 125 million related to BSI that did not occur in 1999.
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As a result of the acquisition of the international private banking operations
of Bank of America, goodwill amortization increased to CHF 21 million in 1999.
Depreciation decreased CHF 15 million, or 16.5%, from CHF 91 million in 1998 to
CHF 76 million in 1999.
UBS Asset Management.
Institutional Asset Management. The following table sets forth the results of
Institutional Asset Management for the half years ended 30 June 2000 and 30 June
1999 and the years ended 31 December 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE 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 million at 30 June
1999 to CHF 525 billion at 30 June 2000, with increases in non-institutional
assets under management more than offset by losses in institutional assets under
management. Non-institutional assets under management increased primarily
because of market performance, while institutional assets under management
declined mainly due to client losses, as a result of performance issues in
equity related mandates, offset by the effect of currency movements and the
acquisition of Allegis Realty Investors LLC in December 1999.
Operating income increased CHF 96 million, or 17.5%, from CHF 542 million in the
first half of 1999 to CHF 638 million in the first half of 2000. Despite the
decrease in assets under management, operating income increased as a result of
the acquisition of Allegis, the addition of the O'Connor alternative asset
management business formed in June 2000 and positive currency movements,
partially offset by lost revenue from client losses.
Personnel, general and administrative expenses increased CHF 71 million, or
21.5%, from CHF 331 million in the first half of 1999 to CHF 402 million in the
first half of 2000. Headcount increased 13.6% from 1,507 as of 30 June 1999 to
1,712 as of 30 June 2000, primarily as a result of the acquisition of Allegis in
December 1999 and the creation of the O'Connor business in June 2000. Personnel
expenses increased 18.7% from CHF 252 million in the first half of 1999 to CHF
299 million in the first half of 2000 due to the acquisition of Allegis, the
addition of the O'Connor business and currency movements. General and
administrative expenses increased 30.4% to CHF 103 million in the period as a
result of the acquisition of Allegis and currency movements.
Depreciation and amortization expense increased CHF 35 million, or 56%, from CHF
63 million in the first half of 1999 to CHF 98 million in the first half of
2000, reflecting the acquisition of Allegis.
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Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income
decreased CHF 64 million, or 5.5%, from CHF 1,163 million in 1998 to CHF 1,099
million in 1999. Assets under management increased 8.1%, or CHF 43 billion, to
CHF 574 billion at 31 December 1999, with increases in both institutional and
non-institutional categories year-on-year. Despite the 4.4% increase in
institutional assets under management, which primarily resulted from investment
performance, the acquisition of Allegis and growth in private client mandates,
institutional revenues decreased. This decrease from CHF 968 million in 1998 to
CHF 903 million in 1999 reflects a slight decline in average institutional
assets under management from 1998 to 1999, as gains from performance and
currency were offset by loss of clients and performance issues in certain
mandate types. Average non-institutional assets increased by 18% during 1999;
however, non-institutional revenues declined slightly to CHF 193 million as a
result of new interdivisional fee arrangements with UBS Private Banking.
Personnel, general and administrative expenses increased CHF 17 million, or
2.7%, from CHF 619 million in 1998 to CHF 636 million in 1999. Headcount
increased from 1,497 as of 31 December 1998 to 1,653 as of 31 December 1999,
primarily as a result of the acquisition of Allegis in December 1999. Personnel
expenses decreased slightly from CHF 465 million in 1998 to CHF 458 million in
1999 reflecting decreased incentive compensation. General and administrative
expenses increased 15.6% to CHF 178 million in 1999 as a result of revisions in
cost-sharing arrangements between Institutional Asset Management and other
divisions of UBS.
Depreciation and amortization expense increased CHF 31 million, or 29%, from CHF
107 million in 1998 to CHF 138 million in 1999, reflecting increased goodwill
amortization related to the buy-out of UBS's joint venture with the Long-Term
Credit Bank of Japan.
Investment Funds/GAM. The following table sets forth the results of Investment
Funds/GAM for the half years ended 30 June 2000 and 1999 and the years ended 31
December 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME........................................... 334 102 270 195
OPERATING EXPENSES:
Personnel, general and administrative expenses............. 215 75 151 124
Depreciation and amortization.............................. 55 3 7 6
--- --- --- ---
Operating expenses....................................... 270 78 158 130
--- --- --- ---
Operating profit before tax.............................. 64 24 112 65
=== === === ===
(at period end)
Assets under management (CHF in billions).................. 225 190 225 175
</TABLE>
------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Assets under
management increased 18.4%, or CHF 35 billion, from CHF 190 million at 30 June
1999 to CHF 225 billion at 30 June 2000, as a result of the acquisition of GAM,
which had CHF 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.
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Personnel, general and administrative expenses increased CHF 140 million, or
187%, from CHF 75 million in the first half of 1999 to CHF 215 million in the
first half of 2000. Headcount increased 165% from 392 as of 30 June 1999 to
1,038 as of 30 June 2000, primarily as a result of the acquisition of GAM and an
increase of about 100 people to support increased marketing and distribution
initiatives in Investment Funds. Personnel expenses increased 321% from CHF 29
million in the first half of 1999 to CHF 122 million in the first half of 2000
due to the acquisition of GAM. General and administrative expenses increased
102.2% from 30 June 1999 to CHF 93 million at 30 June 2000 as a result of the
acquisition of GAM and marketing and distribution initiatives in Investment
Funds.
Depreciation and amortization expense increased CHF 52 million, or 1,733% from
CHF 3 million in the first half of 1999 to CHF 55 million in the first half of
2000, reflecting goodwill amortization following the acquisition of GAM.
Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income
increased CHF 75 million, or 38.5%, from CHF 195 million in 1998 to CHF 270
million in 1999. This was principally due to higher Investment Funds assets and
the transfer from Private Banking of some client responsibility and related
income. The acquisition of GAM did not impact income or expenses in 1999.
Assets under management increased 28.1%, or CHF 50 billion, to CHF 225 billion
at 31 December 1999. CHF 24 billion of this increase was due to the acquisition
of GAM in December 1999. The remainder was mainly due to positive investment
performance.
Personnel, general and administrative expenses increased CHF 27 million, or
21.7%, from CHF 124 million in 1998 to CHF 151 million in 1999. Headcount
increased from 366 as of 31 December 1998 to 923 as of 31 December 1999,
primarily as a result of the acquisition of GAM in December 1999. Excluding GAM,
headcount increased by 69, as a result of efforts to build the Investment Funds
business, including the launching of new funds and expansion of distribution
efforts. Personnel expenses increased 16% from CHF 50 million in 1998 to CHF 58
million in 1999 in line with the increase in headcount. General and
administrative expenses increased 25.7% to CHF 93 million in 1999 reflecting
increased investment in international distribution and the costs of launching
new funds, offset by synergies from the 1998 merger, including reduced fees for
market data systems and the combination of fund valuation and management
systems.
Depreciation and amortization expense increased CHF 1 million, or 16.7%, from
CHF 6 million in 1998 to CHF 7 million in 1999, as a result of changes in the
holding structure of some of the business unit's real estate funds.
UBS Warburg.
Corporate and Institutional Clients. The Corporate Finance business area within
Corporate and Institutional Clients provides both advisory services and
financing services. The financing services include both equity and fixed-income
offerings undertaken in cooperation with the Equity Capital Markets, Debt
Capital Markets and Leveraged Finance groups. Accordingly, a portion of
operating income associated with these equity and fixed-income financing
services is allocated to Corporate Finance and the remaining operating income is
allocated to the Equities business area or Fixed Income business area as
appropriate.
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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.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating
income increased CHF 3,001, or 44.2% from CHF 6,795 in the first half of 1999 to
CHF 9,796 in the first half of 2000. Corporate Finance revenues increased in the
first half of 2000 with a strong performance in mergers and acquisitions, and
both Equities and Fixed Income produced record revenues reflecting active
markets and record levels of client commissions, offset by slightly weaker
performances by Treasury Products.
Credit loss expense decreased CHF 58 million, or 33.9%, from CHF 171 million in
the first half of 1999 to CHF 113 million in the first half of 2000. This
reflected a decrease in expected credit losses due primarily to the continued
wind-down of the non-core loan portfolio and the sale of the international
Global Trade Finance business in mid-1999.
Personnel, general and administrative expenses increased CHF 1,629 million, or
32.8%, from CHF 4,972 million in the first half of 1999 to CHF 6,601 million in
the first half of 2000. Despite a slight reduction in headcount of 418 from
13,148 at 30 June 1999 to 12,730 at 30 June 2000, personnel expenses increased
CHF 1,464 million, or 37.6%, to CHF 5,362 in the first half of 2000, due
primarily to performance-related compensation tied directly to the strong
results for the half. General and administrative expenses increased by CHF 165
million, or 15.4%, from the first half of 1999 to the first half of 2000, mainly
driven by increased investments in e-commerce and technology.
Depreciation and amortization decreased CHF 63 million, or 16%, from CHF 393
million in the first half of 1999 to CHF 330 million in the first half of 2000,
as the depreciation impact of 1998 merger-related IT and premises projects
diminished.
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Year to 31 December 1999 Compared to Year to 31 December 1998. In October and
November 1998, UBS's Board of Directors mandated and undertook a review of UBS's
risk profile and risk management as well as UBS's control processes and
procedures. The review placed particular emphasis on the Fixed Income business
area, which had experienced losses on credit exposures in certain emerging
market assets. Each of the business areas selected for review was assessed as to
whether it supported the UBS and UBS Warburg franchises and, if so, whether the
expected return as compared to the estimated risk justified a continuation of
the business. Corporate and Institutional Clients used the review to define its
core and non-core business areas, and decided to wind down over time the
identified non-core businesses.
The businesses identified as non-core in late 1998 are:
- Lease Finance;
- Commodities Trading (energy, base metals, electricity);
- Non-structured Asset-Backed Finance;
- Distressed Debt Trading;
- Global Trade Finance, with the exception of the Swiss corporate
business;
- Conduit Finance;
- Non-core loans -- loans and commitments that are not part of UBS's
tradeable asset portfolio, that are not issued in conjunction with UBS's
Leveraged Finance business or that are credit exposures UBS wishes to
reduce; and
- Project Finance.
The identified non-core businesses are being wound down over time and will be
disposed of as appropriate. While UBS considers all of its non-core businesses
to be held for sale (including those listed above), none of these businesses
constitutes a segment to be treated as a discontinued operation, as defined by
U.S. GAAP. Businesses designated as non-core businesses remain consolidated for
purposes of both IAS and U.S. GAAP unless and until such businesses are actually
sold or otherwise disposed of. Most of UBS's international Global Trade Finance
business was sold during the first quarter of 1999 and its Conduit Finance
business was sold during the third quarter of 1999. UBS's non-core loan
portfolio decreased approximately CHF 46 billion, or 54.1%, from approximately
CHF 85 billion as of 31 December 1998 to CHF 39 billion as of 31 December 1999.
Negotiations for the sale of the Project Finance portfolio and residual Global
Trade Finance positions were completed in December 1999 for proceeds
approximating their carrying values. As a result, no material losses were
realized. Certain aspects of UBS's Global Equities Derivatives portfolio
previously identified at the time of the 1998 merger as inconsistent with UBS's
risk profile were also designated as a non-core business during late 1998 in
order to segregate this activity from the rest of its Equities business. UBS
accrued CHF 154 million as a restructuring reserve for this portion of the
portfolio.
In 1999, Corporate and Institutional Clients' operating income before credit
loss expense from core businesses amounted to CHF 12,047 million and its
operating income before credit loss expense from non-core businesses was CHF 682
million.
Operating income from Equities increased CHF 2,471 million, or 76%, from CHF
3,253 million in 1998 to CHF 5,724 million in 1999. This increase was primarily
due to continued strong growth throughout 1999 compared to weaker results and
losses in 1998 that did not recur. Equities performed well during the six months
ended 30 June 1998, but experienced a more difficult trading environment in the
second half of 1998 as a result of higher volatility levels in equity markets.
In 1999, Equities
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--------------------------------------------------------------------------------
performed strongly in all major markets. Continuing strong secondary cash and
derivatives business with institutional and corporate clients contributed
significantly to the positive results.
Operating income from Fixed Income increased CHF 2,731 million from CHF (267)
million in 1998 to CHF 2,464 million in 1999. The improvement in Fixed Income
largely reflected particularly strong performance in swaps and options and
investment grade corporate debt products during 1999. Strong client flows drove
both investor and issuer activities, resulting in increased revenues. Weaker
than expected results in Fixed Income in 1998 were due primarily to significant
losses in the Group's emerging market portfolio, which were largely attributable
to Corporate and Institutional Clients and a write-down of CHF 790 million in
the division's LTCM trading position.
Operating income from Corporate Finance increased CHF 389 million, or 23.4%,
from CHF 1,665 million in 1998 to CHF 2,054 million in 1999. Strong performance
in mergers and acquisitions, resulting in higher advisory fees, and
contributions from UBS's Equity and Debt Capital Markets Groups were the primary
drivers of the increase.
Operating income from Treasury Products decreased CHF 546 million, or 23.2%,
from CHF 2,351 million in 1998 to CHF 1,805 million in 1999. Foreign exchange
trading, while continuing to be profitable, was adversely affected by diminished
volumes in key markets in 1999. The reduced levels of activity resulted from the
introduction of the euro and narrowing margins from increased competition in the
global markets. Corporate and Institutional Clients' precious metals business
was adversely impacted by the dramatic volatility in the gold market in the
fourth quarter of 1999.
Operating income from the non-core business as identified above increased CHF
778 million from CHF (96) million in 1998 to CHF 682 million in 1999. In 1998,
Equities recognized losses of CHF 762 million from the Global Equity Derivatives
portfolio as compared to 1999, during which this portfolio generated CHF 99
million in positive revenues. The losses recognized in 1998 were partially
offset by CHF 498 million in revenues generated by Global Trade Finance. In
addition, during 1999 the Global Trade Finance business was sold for a CHF 200
gain after generating approximately CHF 160 million in revenues in 1999.
Credit loss expense decreased CHF 170 million, or 34.0%, from CHF 500 million in
1998 to CHF 330 million in 1999. This reflected a decrease in expected credit
losses due primarily to the continued wind-down of the non-core loan portfolio
and the sale of the international Global Trade Finance business in mid-1999. See
"--UBS Switzerland--Private and Corporate Clients" for a discussion of the
impact of the transfer of UBS's Swiss Global Trade Finance business to Private
and Corporate Clients. The non-core loan portfolio will continue to be
wound-down.
Personnel, general and administrative expenses increased CHF 2,474 million, or
36.3%, from CHF 6,816 million in 1998 to CHF 9,290 million in 1999. Despite a
reduction in headcount of 1,100, or 8%, from 13,794 at 31 December 1998 to
12,694 at 31 December 1999, personnel expenses increased CHF 2,528 million, or
58.3%, to CHF 6,861 in 1999, due primarily to performance-related compensation
tied directly to the strong divisional results for the year. In addition, in
1998, CHF 1,007 million of accrued payments to personnel was charged against the
restructuring reserve. At the end of 1997, UBS foresaw the probability of a
shortfall in profit in its investment banking business as a result of the
merger. In order to protect its investment banking franchise, UBS realized it
would probably need to make payments to personnel in excess of amounts
determined by normal compensation methodologies. An amount of approximately CHF
1 billion was recorded as part of the merger-related restructuring reserve for
this purpose. By the third quarter of 1998, this shortfall had materialized, and
the CHF 1,007 million of accrued payments to personnel were charged against the
restructuring reserve as planned. The shortfall in profits noted above was
aggravated by losses associated with LTCM and the Global Equity Derivatives
portfolio. After adjusting 1998 for the
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
amount charged to the restructuring reserve, personnel expenses in 1999
increased 28.5% against the comparative prior period.
General and administrative expenses remained relatively flat from 1998 to 1999.
Depreciation and amortization increased CHF 71 million, or 10.3%, from CHF 692
million in 1998 to CHF 763 million in 1999, primarily reflecting accelerated
amortization of the goodwill on a Latin American subsidiary.
UBS Capital. The following table sets forth the results of UBS Capital for the
half years ended 30 June 2000 and 1999 and the years ended 31 December 1999 and
1998.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999(1) 1999 1998
(CHF in millions)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME.................................... 151 120 315 585
OPERATING EXPENSES:
Personnel, general and administrative............... 76 60 151 156
Depreciation and amortization....................... 4 3 7 1
--- --- --- ---
Operating expenses.................................. 80 63 158 157
--- --- --- ---
Operating profit before tax......................... 71 57 157 428
=== === === ===
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating
income increased CHF 31 million, or 25.8% from CHF 120 million in the first half
of 1999 to CHF 151 million in the first half of 2000. This reflects an increase
in realized gains resulting from an increased number of sales of investments in
the first half of 2000 as compared to 1999, partially offset by write-downs of
the value of some under-performing companies in the portfolio.
Personnel, general and administrative expenses increased by CHF 16 million, or
26.7%, from CHF 60 million in the first half of 1999 to CHF 76 million in the
first half of 2000. This was mainly driven by bonus expenses. Bonuses are
accrued when an investment is successfully exited, so personnel expenses
increase when divestments occur.
UBS Capital made approximately CHF 0.8 billion of new investments and add-ons
between 31 December 1999 and 30 June 2000, compared to CHF 0.6 billion in the
equivalent period in 1999. UBS Capital is gradually increasing its annual
investment rate, as demonstrated by the higher investment rate in the first half
of 2000 as compared to the first half of 1999. UBS Capital has a target
portfolio book value of approximately CHF 5 billion from its own investments and
CHF 5 billion from third-party funds.
Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income
decreased CHF 270 million, or 46.2%, from CHF 585 million in 1998 to CHF 315
million in 1999. This reflects a decrease in realized gains resulting from a
reduced number of sales of investments in 1999 as compared to 1998. In 1999,
operating income included CHF 13 million of management fees paid by funds that
UBS manages and sponsors.
Personnel, general and administrative expenses decreased slightly by CHF 5
million, or 3.2%, from CHF 156 million in 1998 to CHF 151 million 1999. These
expenses remained stable despite the business unit's expansion into new regions
and sectors, the recruitment of new professionals, the high level of investment
activity during 1999 and the associated investment costs. As part of the
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
restructuring related to the 1998 merger, one team from UBS Capital moved to
another business unit effective 1 January 1999. This resulted in a lower
headcount during most of 1999 when compared to 1998, and therefore personnel
costs decreased 13.2% from CHF 121 million in 1998 to CHF 105 million in 1999.
General and administrative expenses increased CHF 11 million, or 31.4%, to CHF
46 million in 1999 mainly due to deal-related expenses.
UBS Capital made approximately CHF 1.4 billion of new investments and add-ons
during 1999.
Private Clients. The following table sets forth the results of Private Clients
for the half years ended 30 June 2000 and 1999 and the years ended 31 December
1999 and 1998.
<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
--------------------------------------------------------------------------------
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UBS
--------------------------------------------------------------------------------
expenses increased CHF 33 million, or 40%, from the first half of 1999 to the
first half of 2000, due to the restructuring provision explained above.
Excluding this provision, general and administrative expenses were unchanged,
reflecting continued close management of non-personnel costs in the context of a
growing business.
Year to 31 December 1999 Compared to Year to 31 December 1998. Results for the
year ended 31 December 1998 are driven by a business consisting primarily of the
private banking operations of Schroder Munchmeyer Hengst, a German private bank
acquired by the former Union Bank of Switzerland in August 1997, domestic
private banking activities in Australia, and limited onshore private banking
activities conducted in the United States and Italy, established by the former
Union Bank of Switzerland.
Operating income increased CHF 4 million, or 2%, from CHF 190 million in 1998 to
CHF 194 million in 1999.
Assets under management increased during 1999 by CHF 9 billion, or 33%.
Operating expenses increased 61%, or CHF 198 million, to CHF 521 million in
1999, as a result of expansion in front-line and support staff, office
locations, and infrastructure related investments.
Personnel, general and administrative expenses increased CHF 187 million, or
64%, from CHF 294 million in 1998 to CHF 481 million in 1999. Personnel costs
increased 57%, or CHF 107 million, to CHF 294 million in 1999 due to an increase
in headcount of 664, or 92%, from 722 at 31 December 1998 to 1,386 at 31
December 1999. General and administrative expenses increased CHF 80 million, or
75%, from 1998 to CHF 187 million in 1999, due to increases in information
technology, property and other infrastructure costs to support the new offices
and increased headcount.
e-services. UBS Group established the e-services project in the third quarter
of 1999.
The following table sets forth the results of e-services for the half year ended
30 June 2000 and the year ended 31 December 1999.
<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,
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
of which CHF 84 million and CHF 18 million were personnel costs. These expenses
are primarily related to
- the hiring of the management team across a broad range of functions,
- the establishment of the operations infrastructure, including new call
centers in Maastricht and Edinburgh,
- the installation and testing of systems platforms, and
- the testing of the marketing concept.
Corporate Center. The following table sets forth the results of Corporate
Center for the half years ended 30 June 2000 and 1999 and the years ended 31
December 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
30 JUNE 31 DECEMBER(1)
2000 1999 1999 1998
(CHF in millions)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME:
Operating income before credit loss expense......... 33 1,587 2,010 191
Credit loss expense................................. (621) (96) (448) (745)
---- ----- ----- ------
Operating income.................................. 654 1,683 2,458 936
---- ----- ----- ------
OPERATING EXPENSES:
Personnel general and administrative expenses....... 668 182 931 1,868
Depreciation and amortization....................... 158 146 416 215
---- ----- ----- ------
Operating expenses................................ 826 328 1,347 2,083
---- ----- ----- ------
Operating profit (loss) before tax............. (172) 1,355 1,111 (1,147)
==== ===== ===== ======
</TABLE>
---------------
(1) Certain amounts have been restated to conform to the 2000 presentation.
Half Year to 30 June 2000 Compared to Half Year to 30 June 1999. Operating
income before credit loss expense decreased CHF 1,554 million from CHF 1,587
million in the first half of 1999 to CHF 33 million in the first half of 2000,
primarily due to one-time gains on the divestitures of the stake in Swiss
Life/Rentenanstalt of CHF 1,490 million and of Julius Baer registered shares of
CHF 110 million included in the first half of 1999. Operating income before
credit loss expense included CHF 214 million in the first half of 2000, due to
the consolidation of Klinik Hirslanden AG. Other gains and losses attributable
to Corporate Center arise from funding, capital and balance sheet management,
the management of corporate real estate and the management of foreign currency
earnings activities undertaken by Group Treasury.
Credit loss expense in Corporate Center reconciles the difference between
management accounting and financial accounting, that is between the adjusted
expected losses charged to the divisions and the actual credit loss expense
recognized in the Group financial accounts. The Swiss economy has been strong in
the first half of 2000 and has led to lower than expected credit losses, and a
write back of credit loss provisions of CHF 208 million, resulting in a credit
of CHF 621 million in this line.
Personnel, general and administrative expenses increased CHF 486 million, or
267%, from CHF 182 million in the first half of 1999 to CHF 668 million in the
first half of 2000.
Personnel costs increased CHF 208 million, or 254%, in the first half of 2000
from CHF 82 million in the first half of 1999 to CHF 290 in the first half of
2000. This increase is largely attributable to the first-time consolidation of
Klinik Hirslanden AG beginning in the second half of 1999.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
General and administrative expenses increased 278%, or CHF 278 million, to CHF
378 million in the first half of 2000 from CHF 100 million in the first half of
1999, primarily as a result of the following items, which were included in
general and administrative expenses for the first half of 2000:
- an additional charge of CHF 200 million for the U.S. global settlement of
Holocaust-related claims; and
- expenses of Klinik Hirslanden AG as a result of the consolidation of this
entity in the first half of 2000, but not in the first half of 1999.
Depreciation and amortization increased CHF 12 million, or 8.2%, from CHF 146
million in the first half of 1999 to CHF 158 million in 1999, principally
reflecting the inclusion of Klinik Hirslanden AG in the first half of 2000. The
remaining portion of depreciation and amortization includes depreciation of
workstations and information technology equipment, goodwill and other intangible
assets as well as depreciation of other fixed assets.
Year to 31 December 1999 Compared to Year to 31 December 1998. Operating income
before credit loss expense increased CHF 1,819 million, or 952%, from CHF 191
million in 1998 to CHF 2,010 million in 1999, primarily due to the following:
- gains on the divestments of Swiss Life/Rentenanstalt of CHF 1,490 million and
of UBS's interest in Julius Baer registered shares of CHF 110 million
included in 1999;
- approximately CHF 380 million due to the first time consolidation of Klinik
Hirslanden AG included in 1999; and
- negative impact on 1998 operating income due to the loss of CHF 370 million
from LTCM.
In addition, revenues attributable to Corporate Center arise from the funding,
capital and balance sheet management, and the management of foreign currency
earnings activities undertaken by Group Treasury.
Personnel, general and administrative expenses decreased CHF 937 million, or
50.2%, from CHF 1,868 million in 1998 to CHF 931 million in 1999.
Personnel costs decreased 56.6% to CHF 92 million in 1999 from CHF 212 million
in 1998 primarily as a result of the recognition in 1999 of pre-paid employer
pension contributions of CHF 456 million. This represents the difference between
previously recorded and actuarially determined pension expenses and was
recognized in 1999 after the resolution of certain legal and regulatory issues.
Excluding the recognition of this benefit, personnel expenses increased from
1998 to 1999 despite a slight decrease in headcount from 921 in 1998 to 862 in
1999. This increase year-on-year is largely attributable to the first-time
consolidation of Klinik Hirslanden AG in 1999.
General and administrative expenses decreased CHF 817 million, or 49.3%, to CHF
839 million in 1999 from CHF 1,656 million in 1998, primarily as a result of a
charge for the U.S. global settlement of Holocaust-related claims of CHF 842
million in 1998. In addition, the following items were included in general and
administrative expenses for 1999:
- an additional charge of CHF 154 million related to the settlement of
Holocaust-related claims in the United States;
- an additional pre-tax restructuring charge of CHF 300 million in respect of
the 1998 merger; and
- expenses of Klinik Hirslanden AG as a result of the first-time consolidation
of this entity in 1999.
In addition, total operating expenses in Corporate Center were reduced from 1998
to 1999 mainly due to a further refinement of service level agreements with the
business groups.
--------------------------------------------------------------------------------
88
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--------------------------------------------------------------------------------
Depreciation and amortization increased CHF 201 million, or 93.5%, from CHF 215
million in 1998 to CHF 416 million in 1999, principally as a result of a
reclassification of certain items which appeared in general and administrative
expenses in 1998.
Divisional Results for Year Ended 31 December 1998 Compared to Year Ended 31
December 1997
Results for the year ended 31 December 1998 compared to year ended 31 December
1997 are shown in terms of the old divisional structure which existed at that
time, and without taking account of the accounting changes implemented during
2000.
The principal differences from the current structure were that the UBS Asset
Management Investment Funds business unit and the UBS Warburg Private Clients
business unit were part of the Private Banking Division, and their results are
included within that division. In addition, UBS Warburg's UBS Capital business
unit was an autonomous division, and UBS Warburg itself consisted only of what
is now the UBS Warburg Corporate and Institutional Clients business unit. The
e-services business did not exist in 1998 or 1997.
Private and Corporate Clients. The following table sets forth the results of
Private and Corporate Clients for the years ended 31 December 1998 and 1997.
<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 sales of Boss Lab
SA, a technology company, and Bank Prokredit AG, a leasing and consumer credit
company, of CHF 50 million. The small increase in operating income before credit
loss expense from
--------------------------------------------------------------------------------
89
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--------------------------------------------------------------------------------
1997 to 1998 excluding the gains from the divestitures was primarily
attributable to improved margins resulting from risk-adjusted pricing.
Private and Corporate Clients' credit loss expenses increased CHF 78 million, or
7.1%, from CHF 1,092 million in 1997 to CHF 1,170 million in 1998, reflecting
increased loss expectations.
Personnel, general and administrative expense decreased CHF 234 million, or
5.2%, from CHF 4,497 million in 1997 to CHF 4,263 million in 1998. This decrease
primarily reflected reduced costs due to a reduction in headcount from 25,641 in
1997 to 24,043 in 1998 resulting from the sales of Boss Lab SA and Bank
Prokredit AG and additional reductions from the closing of redundant branches.
Private Banking. The following table sets forth the results of Private Banking
for the years ended 31 December 1998 and 1997.
<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.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
Depreciation and amortization increased slightly, from CHF 122 million in 1997
to CHF 126 million in 1998.
UBS Asset Management. The following table sets forth the results of UBS Asset
Management for the years ended 31 December 1998 and 1997:
<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 6.4%.
Depreciation and amortization increased CHF 24 million, or 3.6%, from CHF 668
million in 1997 to CHF 692 million in 1998. This reflected increased goodwill
amortization in 1998 due to the acquisition of Dillon Read & Co., Inc. in
September 1997 and the accelerated amortization of
--------------------------------------------------------------------------------
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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 98% over the
first six months of 1999, adjusted for divestments and one-off provisions,
reaching UBS's target of double-digit growth. UBS's cost/income ratio is well
below that of the first half of 1999. After a positive start to the year, net
new money in the private client businesses was slightly negative in the second
quarter of 2000, against a more muted market background for asset growth than
the first quarter.
UBS's performance against its performance targets for the six months ended 30
June 2000 and the year ended 31 December 1999 are as follows:
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
investments. Net cash inflow from financing activities of CHF 14,507 million was
principally generated by the issuance of CHF 20,754 million in money market
paper and CHF 7,452 million in long-term debt, offset by the repayment of CHF
10,794 million of long-term debt, dividend payments of CHF 2,164 million and
treasury share transactions.
UBS generated significant positive cash flow during the year ended 31 December
1999 resulting in a net increase in cash equivalents of CHF 18,599 million.
Operating activities provided a net cash flow of CHF 3,338 million during the
year ended 31 December 1999. The strong positive results and reduction in UBS's
customers' loan exposures at UBS Warburg during the year, offset in part by a
net cash outflow from trading-related balances, generated the net positive cash
flow from operating activities. Net cash from investing activities included cash
outflows due to the purchase of property and equipment and investments in
subsidiaries and associates, which were more than offset by positive cash flows
generated from the sale of subsidiaries and associates, property and equipment
and financial investments. The net cash inflow from financing activities was
principally due to the issuance of CHF 13,128 million in money market paper and
CHF 12,661 million in long-term debt which was partially offset by the payment
of dividends, treasury share transactions, the repayment of CHF 7,801 million in
long-term debt and minority interests.
During the year ended 31 December 1998, UBS's net cash outflows from operating
and financing activities more than offset its net cash inflow from investing
activities resulting in a decrease in UBS's cash equivalents of CHF 8,675
million. The main contributor to the net decrease in cash equivalents was the
negative cash flow from financing activities of CHF 12,335 million. This
negative cash flow was primarily due to the repayment of long-term debt, the
reduction in money market paper outstanding, the payment of dividends and
treasury share transactions, partially offset by the issuance of long-term debt.
Positive net cash flow from investing activities resulted primarily from the
sale and maturity of financial investments.
During the year ended 31 December 1997, UBS's net cash outflows of CHF 35,895
million from operating and investing activities more than offset UBS's net cash
inflow from financing activities of CHF 29,015 million resulting in a decrease
in cash equivalents of CHF 7,451 million. UBS's operating activities generated
negative net cash flow principally due to a net increase in its trading related
balances which was only partially offset by strong operating results before the
restructuring reserve. Investing activities generated a net cash outflow of CHF
1,671 million during the period primarily due to the purchase of property and
equipment and financial investments. Net cash inflow from financing activities
resulted principally from the issuance of long-term debt and money market paper.
Capital Resources. Capital management is undertaken at UBS by Group Treasury as
an integral asset and liability management function. UBS does not have any
material commitments for capital expenditures as of 30 June 2000. UBS's overall
capital needs are continually reviewed to ensure that its capital base can
appropriately support the anticipated needs of the divisions as well as the
regulatory capital requirements. See "--Asset and Liability Management."
The Bank for International Settlements, or "BIS," is an international
organization fostering the cooperation of central banks and international
financial institutions. Among other activities, it provides guideline formulas
for evaluating capital adequacy.
As the following table shows, UBS's BIS Tier 1 Ratio increased from 9.3% at 31
December 1998 to 10.6% at 31 December 1999 primarily resulting from a
significant increase in retained earnings coupled with a reduction in risk
weighted assets. The decrease in risk weighted assets is principally a result of
reduced positive replacement values, off balance sheet contingent liabilities
and the reduction in the size of the international loan book.
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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 the 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.
Balance Sheet. UBS maintains a significant percentage of liquid assets,
including collateralized receivables and trading portfolios that can be
converted into cash on relatively short notice and with a limited impact on
UBS's results in order to meet short-term funding needs. Collateralized
receivables include reverse repurchase agreements and cash collateral on
securities borrowed which are secured by U.S. government and agency securities,
and marketable corporate debt and equity securities and a portion of UBS's loans
and due from banks which are secured primarily by real estate. The value of
UBS's collateralized receivables and trading portfolio will fluctuate depending
on market conditions and client business. The individual components of UBS's
total assets may vary significantly from period to period due to changing client
needs, economic and market conditions and trading strategies.
Total assets increased CHF 47,419 million, or 5.3%, at 30 June 2000 compared to
total assets at 31 December 1999. This was principally a result of an increase
in cash collateral on securities borrowed, reverse repurchase and trading
portfolio assets, which was partially offset by significant decreases in cash
and balances with central banks and money market paper as liquidity levels were
adjusted following Y2K, a reduction in positive replacement values resulting
from decreases in derivative products, and decreases in amounts due from banks.
Total liabilities increased CHF 46,151 million, or 5.3%, at 30 June 2000,
compared to total liabilities at 31 December 1999, principally due to a
significant increase in amounts due under repurchase agreements, cash collateral
on securities lent and trading portfolio liabilities and an increase in money
market paper issued, offset in part by a decrease in negative replacement values
resulting from decreases in derivative products.
In the course of the first half of 2000, UBS's long-term debt portfolio
decreased from CHF 56.3 billion at 31 December 1999 to CHF 53.0 billion at 30
June 2000. During this half year CHF 7,452 billion of long-term securities were
issued while CHF 10,794 billion matured. UBS believes the maturity profile of
the long-term debt portfolio is well balanced with slight bias towards
shorter-term maturities to match the maturity profile of UBS's assets.
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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. Moody's announced on 28 April 2000 that it had changed its outlook for
its long-term rating of UBS AG from stable to negative.
Recent Accounting Developments
For a discussion of recent accounting developments, including those that have
not yet been adopted, see Note 1 to UBS's consolidated financial statements,
which are included elsewhere in this document.
Risk Management
The risk management process is an integral part of UBS's commitment to providing
consistent high quality returns for its shareholders. UBS believes that the
delivery of superior shareholder returns depends on achieving an appropriate
balance between risk and return. This requires a management process that gives
appropriate focus to risk as well as returns and which integrates this approach
with the management of UBS's balance sheet and capital. For this reason, UBS
restructured the Corporate Center in the course of 1999 to establish an
integrated group-wide function under the Chief Financial Officer, or "CFO," to
address all aspects of finance, strategic planning, risk control and balance
sheet and capital management.
--------------------------------------------------------------------------------
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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 "PLE," which will
allow an even more precise valuation of the credit equivalents.
Settlement Risk. Due to UBS's international business, UBS is also exposed to
settlement risk. Settlement risk arises in transactions involving the exchange
of values where a counterparty fails to honor its obligation to deliver cash or
securities. This risk is particularly significant in relation to foreign
exchange and precious metals transactions. UBS limits its exposure to settlement
risk by tolerance levels assigned to each counterparty in relation to its
rating. In addition, UBS monitors this risk on a permanent basis and seeks to
shorten, as much as practicable, the period during which UBS is exposed. UBS has
also been an active participant in an industry initiative to establish a new
organization, called CLS Bank, which is being established in order to
substantially reduce settlement risk between major international financial
institutions. Participation in regulated payment and securities clearing systems
also reduces settlement exposure.
Country Risk Exposure. UBS's definition of country risk comprises all
cross-border exposures from loans, derivative products and trading products.
This definition includes its own intracompany cross-border positions, which
amounted to CHF 419 billion at 30 June 2000, about 49% of the total non-
emerging market country risk exposure of CHF 851 billion. At 30 June 2000, 98.0%
of UBS's country risk exposure was included in its three highest internal
ratings classes. This portion of UBS's country risk exposure was with OECD
countries where the risk of default is judged to be negligible. The following
table summarizes UBS's country transfer risk exposure grouped by rating classes
as of30 June 2000 compared to 31 December 1999 and 31 December 1999 compared to
31 December 1998.
<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
</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 country
risk...................................... 802 908 961
Allowances for contingent liabilities....... 36 19 435
------------ ---------------- ----------------
Total allowances and provisions for credit
losses.................................... 12,390 13,398 14,978
============ ================ ================
Allowances and provisions for credit losses
as a percentage of gross loans............ 4.6% 4.8% 4.5%
Allowances and provisions for credit losses
as a percentage of impaired loans......... 58.9% 59.7% 56.6%
</TABLE>
The following analysis provides an overview of UBS's credit loss experience for
30 June 2000 and 31 December 1999 and 1998:
<TABLE>
<CAPTION>
FOR THE 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
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--------------------------------------------------------------------------------
severities that have been attributed to each exposure type. Total provisions and
allowances for emerging market-related exposures stood at CHF 1,317 million at
30 June 2000, CHF 1,376 million at 31 December 1999 and CHF 1,450 million at 31
December 1998, reflecting both the reduction in the overall size of UBS's
emerging market exposure and reallocation of provisions from Asia to Latin
America during 1999.
See "--Selected Statistical Information -- Summary of Movements in Allowances
and Provisions for Credit Losses" and "--Selected Statistical
Information -- Allocation of the Allowances and Provisions for Credit Losses"
for further analyses of the allowances and provisions for credit risk and
related credit losses.
Market Risk. Market risk is the risk UBS faces as a result of adverse movements
in the value of foreign exchange, commodities, equity market and interest rates
positions. UBS incurs market risk mainly through its trading activities, which
are centered in UBS Warburg, although market risk also arises -- to a
substantially lesser extent -- in relation to other activities, notably in the
context of balance sheet management activities. UBS Warburg's primary market
risk exposure relates to its business activities in equities, fixed income
products and foreign exchange. The risk that UBS Warburg assumes is primarily
related to the need to facilitate its customers' activities in the major OECD
markets.
UBS measures its exposure to market risk using the framework of expected loss,
statistical loss and stress loss, as follows:
- In the context of market risk, expected losses are the value adjustments made
to the portfolio to adjust for price uncertainties resulting from a lack of
market liquidity or the absence of a reliable market price for a particular
instrument.
- One-day loss is measured based on a value at risk, or "VaR," methodology. VaR
is a forward-looking estimate of potential loss. One-day VaR looks forward one
trading day, while 10-day VaR looks forward ten days. UBS calculates VaR using
a 99% confidence level. In other words, under normal market conditions, UBS
would expect over the course of a day a loss of more than its 1-day VaR to
occur 1 in 100 times.
- Stress scenario loss is defined as the risk of an extreme market move
affecting particular predefined market variables.
In order to keep its exposure to market risk within acceptable boundaries, the
UBS Board of Directors has set limits on UBS's exposure to both statistical loss
by reference to the VaR exposures as well as to stress scenario loss by placing
limits in relation to particular stress scenarios.
UBS calculates the VaR associated with its exposure to market risk and
consequently also its regulatory market risk capital requirement using the
historical simulation technique, based on five years of data. VaR is calculated
both on a 1-day 99% confidence interval and a 10-day 99% confidence interval,
and the latter is used both for internal limits setting and for calculating
regulatory market risk capital. The calculation incorporates both the risk from
general market moves, such as moves in foreign exchange rates, equity indices
and market interest rates, as well as the risk from price movements that are
specific to an individual issuer. During 1999 and in the first six months of
2000, UBS Warburg operated within a CHF 450 million 10-day VaR limit.
The Swiss Federal Banking Commission, or "FBC," approved the use of UBS's VaR
model to compute regulatory capital requirements for market risks in 1999.
While a VaR measure is the principal measure of UBS's exposure to day-to-day
movements in market prices, UBS's risk control process is specifically focused
on tail risks (or the risk of a loss on UBS's portfolios significantly larger
than the VaR number as a result of large movements in the risk factors,
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--------------------------------------------------------------------------------
such as equity indices, foreign exchange rates and interest rates). UBS has a
consistent set of predefined large price movements, or shocks, and risk limits,
which apply to all the major risk factors to which UBS is exposed as a basis to
prevent risk concentration. This is the primary protection against any extreme
event. In addition to this first level protection, a stress loss limit has been
introduced as a portfolio control for all the trading activities that are
concentrated within UBS Warburg. The potential stress loss is calculated with
respect to eight base scenarios which are supplemented by ad hoc analyses
depending on external developments or specific portfolio concentrations such as
Year 2000, which UBS added to its stress test analysis in the third quarter of
1999. This ensures that both historical crises as well as forward-looking
extreme scenarios are incorporated in the analysis. Implementing this stress
loss limit is a way of protecting UBS's earnings during periods of extreme
market stress.
UBS Warburg Market Risk Developments. Market risk exposure as measured by the
10-day 99% confidence VaR was generally higher over 1999 and the first half of
2000. However, utilization remained well within the limits. The main market risk
drivers continued to be Equity and Interest Rate risk.
SUMMARY OF 10-DAY 99% CONFIDENCE VAR UTILIZATION FOR UBS WARBURG
<TABLE>
<CAPTION>
SIX MONTHS ENDED 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.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
[UBS Warburg Backtesting Results Graph]
Market Risk in the Other Business Groups. Although UBS assumes almost all of
its active market risk in UBS Warburg, the Group-wide VaR utilization includes
all sources of market risk. This includes a small amount of risk that is assumed
in order to facilitate customer business by UBS Private Banking in Switzerland
as well as the risk associated with the structural foreign exchange and interest
rate hedge positions managed by Corporate Center, which are discussed below
under "-- Asset and Liability Management." However, market risk exposure at the
UBS group level continues to be dominated by the UBS Warburg positions.
SUMMARY OF 10-DAY 99% CONFIDENCE VAR UTILIZATION FOR YEAR ENDED 31 DECEMBER UBS
GROUP
<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.
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--------------------------------------------------------------------------------
UBS is addressing the measurement of its consequential risks through the
introduction of a generic operational risk-modeling framework. This framework
groups risks into predetermined risk categories and identifies the factors
behind the risk exposure. Operational risk scenarios are developed to stress
UBS's processes and procedures underlying the exposure. This helps UBS to
measure the risk of loss from the identified exposure in a similar manner to the
statistical loss measurements of its credit and/or market risk exposures. This
framework is relatively new and is periodically reviewed and enhanced so that
risks are accurately assessed and are in accordance with UBS's risk appetite and
risk-bearing capacity.
Year 2000 Issue. An important element of UBS's operational risks over the past
two years has been the need to address the Year 2000 issue. UBS recognized early
the potential problems that could arise from computer systems failing to
properly recognize the change of date from 1999 to 2000. To combat this problem,
starting in 1996, UBS and each of its operating divisions established and
implemented a program responsible for addressing the Year 2000 issue.
UBS has not experienced any material problems related to the Year 2000 date
change. The total cost to UBS of the Year 2000 program was CHF 493 million in
1998 and CHF 279 million in 1999.
Asset and Liability Management
UBS's asset and liability management processes are designed to manage all
balance sheet related risks on a coordinated Group-wide basis. The procedures
and policies cover Group liquidity, Group funding and capital management, and
the management of non-trading foreign exchange and interest rate risk.
UBS recognizes that the market and credit risk framework that is set out above
cannot be fully applied to its asset and liability management activities.
Consequently, specific processes and policies have been established for managing
these risks. UBS's asset and liability management function is undertaken at the
Corporate Center by the Group Treasury department, which reports directly to the
CFO. Group Treasury is responsible for establishing and effectively managing the
processes in relation to these risks in accordance with policies that have been
approved by the Board of Directors.
The overriding goals of all processes within the asset and liability management
activities are:
- efficient management of the bank's non-trading interest rate and foreign
exchange exposures;
- sustainable and cost-efficient funding of the bank's balance sheet;
- optimal liquidity management in order to generate cash when required; and
- compliance with legal and regulatory requirements.
Interest Rate Management. Interest rate risk is inherent to most of UBS's
businesses. Interest rate risks arise from a variety of factors, including
differences in the timing between the contractual maturity or repricing of
assets, liabilities and derivative instruments. Net interest income is affected
by changes in market interest rates, given that the repricing characteristics of
loans and other interest earning assets do not necessarily match those of
deposits, other borrowings and capital. In the case of floating rate assets and
liabilities, UBS is also exposed to basis risk, which is the difference in
repricing characteristics of two floating rate indices, such as the savings rate
and six-month LIBOR. In addition, certain products have embedded options that
affect their pricing and principal.
UBS adopts a comprehensive Group-wide approach to managing interest rate risk,
and allocates the responsibility for managing this risk to a limited number of
business areas. Under this approach, interest rate risk is clearly segregated
into trading and non-trading risk. All interest rate risks arising from
non-trading business activities are captured at the point of business
origination and transferred either to UBS Warburg's Cash and Collateral Trading
book -- or "CCT" -- or to the Corporate
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--------------------------------------------------------------------------------
Center's Bank Book through a Group-wide transfer pricing mechanism. The risk is
then managed centrally in accordance with the relevant risk policy.
In the case of transactions with a fixed maturity, the interest rate risk is
transferred from the relevant business area to CCT on a transaction by
transaction basis. This means that products with fixed maturities immediately
become part of the trading book in UBS Warburg and the business locks in an
interest-rate-risk-free margin on such products, thereby relieving them of any
residual interest rate risk. As a result of this process, UBS benefits fully
from the netting potential between its balance sheet and trading products.
In the case of client business, such as savings accounts or current accounts,
which have no contractual maturity date or directly market-linked customer rate,
the interest rate risk is transferred from the business areas by pooled
transactions to the Bank Book. Since these products effectively contain various
embedded options in respect of withdrawal/prepayment and rate-setting, they
cannot be hedged by single back-to-back transactions. Consequently, Group
Treasury manages the inherent interest rate risk in these products in the Bank
Book through the establishment of replicating portfolios of revolving fixed-rate
transactions of predefined maturities, which approximate the average cash flow
behavior of these positions. Group Treasury then hedges the overall risk in the
Bank Book by means of internal transactions with CCT. As a result of this
process, all interest rate risks arising from client business are transferred
either directly or indirectly via the Bank Book to CCT.
In addition to the interest rate risk associated with client business, a
significant amount of interest rate risk arises in relation to non-business
balance sheet items, such as in the refinancing of the bank's real estate
portfolio, equity investments in associated companies and the investment of
UBS's own equity. The refinancing of real estate and equity investments and the
investment of equity are all strategic decisions that implicitly create
non-trading interest rate exposures. The interest rate risks inherent in these
balance sheet items are managed in the Bank Book by representing them as
replicating portfolios, on the basis of decisions taken by the Group Executive
Board as to the appropriate effective maturities. Here, too, the risk is hedged
by means of internal transactions with CCT.
All the replicating portfolios that are contained in the Bank Book are updated
monthly by replacing maturing tranches with new aggregate tranches that reflect
the changes in the balance sheet over the period. By their nature, the staggered
tranches that constitute each replicating portfolio reduce the volume that must
be hedged by the Bank Book at each monthly rollover. However, due to the extent
of the underlying portfolio volumes, the new aggregate tranches are nevertheless
of such a size that they cannot be hedged instantly. The Bank Book therefore
assumes intramonth interest rate exposure until it can execute all the necessary
offsetting hedges with CCT. The exposure of the Bank Book, which thus tends to
fluctuate between monthly rollovers and the profits or losses arising out of the
Bank Book, are reported on an accrual basis in the financial statements and
constitute an integral part of the Group's net interest income.
The Board of Directors has approved risk management policies, risk limits and
the control framework for the entire interest rate risk management process
including the establishment of a VaR limit for the interest rate exposure of the
Bank Book. Market Risk Control monitors the risk in both CCT and in the Bank
Book on a daily basis as part of the Group's overall market risk in order to
ensure the integrity of the interest rate risk management process and UBS's
compliance with the defined risk limits.
UBS's approach to managing the interest rate risks inherent in the Bank Book
complies with the regulatory framework recently introduced by the FBC. In the
course of the year 2000, it will become mandatory for all Swiss banks to report
to the Swiss National Bank the interest rate sensitivity of the Bank Book on a
quarterly basis. Additionally, the specific composition of the underlying
replicating
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--------------------------------------------------------------------------------
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
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.
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--------------------------------------------------------------------------------
- The economic value sensitivity, which is defined as the potential change in
market value of the Bank Book resulting from changes in interest rates. This
estimates the effect of an immediate interest rate shock on the net position
in the Bank Book.
The net interest income at risk measure on the Bank Book considers such
variables as:
- repricing characteristics of assets and liabilities;
- rate barrier effects, such as caps and floors, on assets and liabilities;
- maturity effects of replicating portfolios; and
- behavior of competitors.
Both measures are based on the Bank Book's interest rate position excluding the
liability position relating to the "equity replication portfolio." The
methodology is designed to highlight the effects of market changes in interest
rates on existing balance sheet positions; it ignores future changes in the
asset and liability mix and therefore it is not by itself a measure of future
net interest income.
The two methodologies provide different measures of the level of interest rate
risk. The economic value sensitivity measure provides a longer term view, since
this considers the present value of all future cash flows generated from the
existing balance sheet positions. The net interest income at risk measure
provides a shorter term view, as it considers the repricing effect of all
maturing positions over the next twelve months. The table below shows the change
in risk under both measures at 30 June 2000, 31 December 1999 and 1998.
<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
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--------------------------------------------------------------------------------
the Group Executive Board and monitored by the Group Treasury Committee, or
"GTC," which is chaired by the Group Treasurer and meets on a monthly basis in
order to assess the bank's liquidity exposure. A second set of principles
concentrates on liquidity crisis management for which detailed contingency plans
have been worked out. Regional committees constantly monitor the markets in
which UBS operates for potential threats and regularly report their findings to
the GTC. If a liquidity crisis occurs, regional crisis task forces will perform
all necessary contingency actions under the command of senior management.
The liquidity management process is undertaken jointly by Group Treasury and
CCT. Group Treasury's function is to establish a comprehensive framework of
directives and risk limits, while CCT undertakes the operational cash and
collateral management transactions within the established parameters. UBS's
centralized cash and collateral business management structure facilitates a
tight control on both the global cash position and the stock of highly liquid
and rediscountable securities.
UBS's funding strategy seeks to ensure that business activities are funded at
the lowest possible costs. With a broad diversification (by market, product and
currency) of funding sources UBS maintains a well balanced portfolio of
liabilities which generate a stable flow of financing and additionally provides
protection in the event of market disruptions. In this context UBS's strong
domestic retail business is a very valuable, cost efficient and reliable source
of funding. Through the establishment of short-, medium- and long-term funding
programs in Europe, in the US and in Asia, UBS can raise funds globally in a
very efficient manner and minimize its dependence on any particular source of
funding.
See "--Liquidity and Capital Resources" for additional information.
Currency Management. UBS's corporate currency management activities are
designed to protect UBS's equity and the expected future foreign currency
cash-flows from adverse currency movements against the Swiss franc while
preserving the option of exploiting any market opportunities which may arise.
The following principles guide the approach to managing this risk:
- UBS's equity must be invested in Swiss francs (translation risk management);
and
- Recognized foreign currency exposures must be hedged proactively for the
whole financial year, which represents the cycle of financial accounting
(transaction risk management).
Translation (Balance Sheet) Currency Risk. UBS aims to maintain the flexibility
to allow foreign assets (a business unit or a non-financial asset) to be
divested at any time without adverse currency impacts. To limit these undesired
foreign exchange impacts on investments and divestments of these assets, foreign
currency assets are match funded in the relevant currency. The match-funding
principle is also applied to the financing of foreign investments, including
foreign equity investments. This strategy, together with the repatriation into
Swiss francs of foreign currency dividends and capital, ensures that UBS's
equity is always fully invested in Swiss francs.
Transaction (Revenues/Costs) Currency Risk. UBS's transaction risk currency
management process is designed to protect the budgeted annual foreign currency
net profits against adverse currency movements during the relevant reporting
period. Foreign currency net profits are actively managed by Group Treasury on
behalf of UBS in accordance with the instructions of the Group Executive Board
and subject to the VaR limit that has been established for this risk. The
budgeted net profits are treated as long forward foreign exchange exposures in
the local reporting currency against the Swiss franc.
The non-trading foreign currency exposures are hedged mainly with foreign
exchange forward contracts, although foreign exchange options are also used
particularly where there is a measure of uncertainty about the magnitude of the
underlying income. The net position of the budgeted net profits and the
corresponding hedges is the basis for the VaR calculation on Group Treasury's
non-trading
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--------------------------------------------------------------------------------
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>
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>
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."
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
<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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--------------------------------------------------------------------------------
<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>
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
<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.
--------------------------------------------------------------------------------
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--------------------------------------------------------------------------------
<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>
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--------------------------------------------------------------------------------
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>
--------------------------------------------------------------------------------
129
<PAGE> 131
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."
--------------------------------------------------------------------------------
130
<PAGE> 132
UBS
--------------------------------------------------------------------------------
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma financial statements on pages 135 to 154
present the condensed consolidated balance sheet of UBS and PaineWebber as of 30
June 2000 and the related condensed consolidated income statements for the
six-month period ended 30 June 2000 and the year ended 31 December 1999, as if
the merger had occurred on 1 January 1999. The presentation is made both on the
basis of IAS and U.S. GAAP. In order to present this information and show the
reader the source of the information, several schedules are required.
The first set of schedules included present the unaudited pro forma financial
statements on the basis of IAS, in Swiss francs (CHF). This is achieved by
presenting in the first two columns the financial statements of PaineWebber in
accordance with IAS in U.S. Dollars (USD), and then showing the translation into
CHF. The third column presents the IAS financial statements of UBS in CHF. We
then present accounting entries to reflect the results of the merger, each of
which is explained in a footnote, and the final resulting column presents the
unaudited pro forma condensed consolidated financial statements. Since IAS will
be the primary accounting framework of the consolidated company, we present this
information first.
PaineWebber presents its financial statements on the basis of U.S. GAAP rather
than IAS. The second set of schedules shows the restatement of the U.S. GAAP
financial statements of PaineWebber into IAS. The first column presents the U.S.
GAAP financial statements of PaineWebber, after reflecting certain
reclassification entries required to conform to the UBS presentation. These
reclassification entries do not affect net income or shareholders' equity, and
are therefore not presented separately in this document. The next column
presents the accounting entries required to restate the financial statements on
the basis of IAS, and each entry is explained in a footnote. The final resulting
column presents the PaineWebber financial statements in accordance with IAS, and
is the same as the first column in the first set of schedules described in the
preceding paragraph.
The third set of schedules presents the unaudited pro forma condensed
consolidated financial statements in accordance with U.S. GAAP. In much the same
way that UBS is required to present a reconciliation of its primary financial
statements from IAS to U.S. GAAP, we have also presented this reconciliation.
The first column presents the IAS unaudited pro forma condensed consolidated
financial statements and is the same as the next to last column in the first set
of schedules described two paragraphs above. The next two columns present the
accounting entries required to restate the unaudited pro forma financial
statements for UBS and PaineWebber, respectively, in accordance with U.S. GAAP.
Each of the entries is described in a footnote. The final column presents the
unaudited pro forma condensed consolidated financial statements in accordance
with U.S. GAAP.
--------------------------------------------------------------------------------
131
<PAGE> 133
UBS
--------------------------------------------------------------------------------
UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AND INCOME STATEMENT
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000
The following unaudited pro forma condensed consolidated balance sheet and
income statement as of and for the six months ended 30 June 2000 is derived from
the unaudited consolidated financial statements of UBS as of and for the six
month period then ended and PaineWebber's unaudited condensed consolidated
financial statements as of and for the same period, as adjusted to IAS and
translated into Swiss francs, after giving effect to the pro forma adjustments
described in the notes to the UBS and PaineWebber unaudited pro forma condensed
consolidated balance sheet and income statement below. These adjustments have
been made as if the merger took place on 1 January 1999, the first day of the
earliest period presented in the UBS and PaineWebber unaudited pro forma
condensed consolidated financial information. This information has been prepared
from, and should be read together with, the respective unaudited consolidated
financial statements and related notes of UBS and the unaudited condensed
consolidated financial statements of PaineWebber, which are included in this
document and publicly available, respectively. These statements have been
prepared in accordance with IAS.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2000
<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.
--------------------------------------------------------------------------------
132
<PAGE> 134
UBS
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
133
<PAGE> 135
UBS
--------------------------------------------------------------------------------
UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 1999
The following unaudited pro forma condensed consolidated income statement for
the year ended 31 December 1999 is derived from the audited consolidated
financial statements of UBS for the year then ended and from the audited
consolidated financial statements of PaineWebber for the year then ended as
adjusted to IAS and translated into Swiss francs, after giving effect to the pro
forma adjustments described in the notes to the UBS and PaineWebber unaudited
pro forma condensed consolidated balance sheet and income statement. These
adjustments have been determined as if the merger took place on 1 January 1999,
the first day of the earliest financial period presented in the UBS and
PaineWebber unaudited pro forma condensed consolidated financial information.
This information has been prepared from, and should be read together with, the
respective historical consolidated financial statements of UBS and PaineWebber,
which are included in this document and publicly available, respectively. These
statements have been prepared in accordance with IAS.
FOR THE YEAR ENDED 31 DECEMBER 1999
<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.
--------------------------------------------------------------------------------
134
<PAGE> 136
UBS
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000 AND FOR THE YEAR ENDED 31
DECEMBER 1999
1. TRANSLATION OF PAINEWEBBER FINANCIAL STATEMENTS
PaineWebber presents its financial statements on a U.S. GAAP basis and in U.S.
dollars. These financial statements have been restated into IAS. The restated
income statement of PaineWebber has been translated into Swiss francs at the
average rate of CHF 1.66 per U.S. $1.00 for the six months ended 30 June 2000
and CHF 1.50 per U.S. $1.00 for the year ended 31 December 1999.
The restated PaineWebber balance sheet has been translated into Swiss francs at
the spot rate of CHF 1.63 per U.S. $1.00 at 30 June 2000 and CHF 1.59 per U.S.
$1.00 at 31 December 1999.
These translations should not be taken as assurances that the CHF amounts
currently represent U.S. dollar amounts or could be converted into U.S. dollars
at the rate indicated or at any other rate, at any time.
2. PRO FORMA ACQUISITION ADJUSTMENTS
The unaudited pro forma condensed consolidated financial information records the
merger as being accounted for as an acquisition with the excess of the fair
value of the consideration over the fair value of net assets acquired being
allocated to goodwill. See the discussion below for information related to
recording the issuance of UBS ordinary shares, trust preferred securities and
debt to effect the purchase, the related retirement of shares of PaineWebber
common stock, the adjustment of PaineWebber's assets and liabilities to fair
value, and the recording of the resulting goodwill.
Issuance of UBS Securities and the Retirement of PaineWebber Securities
The unaudited pro forma condensed consolidated financial information assumes a
total purchase price of $12,696 million (CHF 20,970 million). Pursuant to the
terms of the merger agreement, UBS will issue approximately 42.7 million UBS
ordinary shares, equivalent to $6,348 million (CHF 10,485 million), and pay
$6,348 million (CHF 10,485 million) in cash in exchange for 172.8 million shares
of PaineWebber common stock at an exchange ratio of 0.4954. The total purchase
price assumed is based on the closing price of UBS ordinary shares on the New
York Stock Exchange on 11 July 2000, which was $148.75 (CHF 245.70). Additional
costs relevant to the merger include estimated professional fees of $90 million
(CHF 149 million) (primarily legal, investment bankers' and accountants' fees)
to be accounted for as acquisition costs.
For purposes of determining the number of PaineWebber shares to be canceled, it
is assumed that, in addition to the 146.8 million shares outstanding as of 11
July 2000, PaineWebber employee stock options and convertible debt representing
approximately 33.6 million shares will be exercised or converted at an aggregate
strike price of $908 million (CHF 1,500 million), at a range of $6.69 to $48.56,
or CHF 11.05 to CHF 80.21, per share, and reduced by approximately 7.6 million
shares of PaineWebber common stock that may be repurchased from employees at
$73.50 (CHF 121.42) per share for a total price of $562 million (CHF 928
million) to satisfy their individual tax withholding requirements.
a. This entry records the cash consideration of $6,348 million (CHF 10,485
million) to be paid in the merger, on the basis of the assumptions noted in this
footnote. We have assumed, for purposes of these pro forma financial statements,
that UBS will issue, directly or indirectly through subsidiaries, $1,500 million
(CHF 2,478 million) in trust preferred securities during the third and fourth
quarters of 2000. Although it has not yet been determined how the proceeds of
these trust preferred securities will
--------------------------------------------------------------------------------
135
<PAGE> 137
UBS
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
be applied by UBS, we have assumed, solely for the purposes of these pro forma
financial statements, that the cash consideration in the merger will be financed
from the proceeds of those trust preferred securities and through the issuance
of short-term debt instruments. UBS will also enter into certain interest rate
swap transactions in order to produce the effect of issuing medium- to long-term
debt.
--------------------------------------------------------------------------------
136
<PAGE> 138
UBS
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
The pro forma net cash requirement relating to the merger, including additional
cost considerations and sources of funding, are shown below.
<TABLE>
<CAPTION>
US$ 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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UBS
--------------------------------------------------------------------------------
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 $1,845
--------------------------------------------------------------------------------
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UBS
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
million. (CHF 3,048 million). This would change the pro forma information
presented in this document as follows:
<TABLE>
<CAPTION>
US$ CHF
(IN MILLIONS (IN MILLIONS
EXCEPT FOR EXCEPT FOR
EARNINGS PER EARNINGS PER %
SHARE) SHARE) CHANGE
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease in purchase price............................... (184) (305) (1.5%)
Decrease in cash consideration........................... (1,014) (1,675) (16.0%)
Decrease in net assets acquired.......................... (1,096) (1,810) (27.7%)
Increase in goodwill..................................... 911 1,505 10.3%
Change in pro forma net profit and EPS:
6 months ended 30 June 2000
Net profit.......................................... (9.56) (15.67) (0.4%)
Basic EPS........................................... 0.07 0.11 1.2%
Diluted EPS......................................... (0.08) (0.14) (1.5%)
Year ended 31 December 1999
Net profit.......................................... (19.12) (35.48) (0.7%)
Basic EPS........................................... 0.08 0.11 0.9%
Diluted EPS......................................... (0.21) (0.33) (2.8%)
</TABLE>
d. This entry records the amortization of goodwill of $221 million (CHF 364
million) in the six months ended 30 June 2000, and $441 million (CHF 729
million) in the year ended 31 December 1999.
Other Merger-Related Adjustments
e. This entry records interest expense accrued on $4,677 million (CHF 7,724
million) of merger-related short-term debt. The interest expense assumes a
weighted average rate of 6.85% on the short-term debt and a 0.50% rate on swaps
used to hedge the short-term debt, for a total interest rate of 7.35%. The
resulting adjustment to interest expense is $172 million (CHF 285 million) for
the six months ended 30 June 2000, and $344 million (CHF 517 million) for the
year ended 31 December 1999. The effect of a 1/8% increase in interest rates
would be to increase interest expense by $3 million (CHF 5 million) for the six
months ended 30 June 2000 and by $6 million (CHF 9 million) for the year ended
31 December 1999.
f. This entry records the distributions accrued on $1,500 million (CHF 2,478
million) of trust preferred securities issued, assuming a distribution rate of
9%. The distributions accrued are $68 million (CHF 111 million) for the six
months ended 30 June 2000, and $135 million (CHF 223 million) for the year ended
31 December 1999. The effect of a 1/8% increase in rates would be to increase
distributions by $1 million (CHF 2 million) for the six months ended 30 June
2000 and by $2 million (CHF 3 million) for the year ended 31 December 1999.
g. This entry records amortization of net discount resulting from fair market
valuation of PaineWebber long-term debt and associated hedging swaps. The
amortization period is a straight line period of 5 years (the average maturity
of the long-term debt). The amounts amortized are $9 million (CHF 14 million)
for the six months ended 30 June 2000 and $17 million (CHF 28 million) for the
year ended 31 December 1999.
h. This entry records the establishment of an employee retention bonus program.
For purposes of this pro forma presentation, it is assumed that approximately 5
million restricted UBS ordinary shares, 2 million UBS stock options and $37.5
million (CHF 62 million) cash, with an aggregate value of
--------------------------------------------------------------------------------
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UBS
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINE WEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT -- (CONTINUED)
$875 million (CHF 1,446 million), subject to vesting restrictions of 2 to 4
years, will be awarded to certain employees of PaineWebber. It is further
assumed that the options will be issued with strike prices equivalent to the
current market value of UBS ordinary shares. No compensation expense is recorded
for the options. The assumed issuance of restricted UBS ordinary shares results
in incremental compensation expense of $94 million (CHF 156 million) for the six
months ended 30 June 2000 and $188 million (CHF 310 million) for the year ended
31 December 1999. The related deferred compensation expense at the end of such
periods is $470 million (CHF 776 million) and $564 million (CHF 931 million),
respectively. The cash component of the award results in compensation expense of
$6 million (CHF 10 million) for the six months ended 30 June 2000 and $13
million (CHF 21 million) for the year ended 31 December 1999. For purposes of
computing the cash requirements in a. above, initial funding of the cash awards
includes the total amount expensed through the periods ending 30 June 2000, $19
million (CHF 31 million).
i. This entry records PaineWebber's recognition of $908 million (CHF 1,500
million) in proceeds from the exercise of existing PaineWebber employee stock
options as a reduction in short term borrowings used to fund the merger.
j. This entry records the payment of $66 million (CHF 109 million) in Swiss
assessments required upon the issuance of new UBS ordinary shares in the merger.
For purposes of this entry, we have assumed the entire stock component of the
purchase consideration will be newly issued shares. The actual amount of newly
issued shares may differ if UBS issues shares from treasury stock or enters into
stock borrow transactions as a funding source.
k. This entry records the amortization of the fair market valuation of lease
obligations. The amortization period is a straight line period of 14 years (the
average economic life of existing lease obligations, to be fair valued). The
amortization expense is $5 million (CHF 8 million) for the six months ended 30
June 2000 and $10 million (CHF 17 million) for 31 December 1999.
l. This entry records the tax effects of the relevant pro forma adjustments
arising from the acquisition at the assumed effective rate of 35%, for both
balance sheet and income statement purposes, resulting in a net tax benefit of
$102 million (CHF 169 million) for the six months ended 30 June 2000 and $203
million (CHF 306 million) for the year ended 31 December 1999.
3. CONVENIENCE TRANSLATION
30 June 2000 and 31 December 1999 CHF amounts have been translated into U.S.
dollars at the exchange rate of one US$=CHF 1.63, the exchange rate on 30 June
2000.
4. PAINEWEBBER EARNINGS PER SHARE
The EPS amounts presented for PaineWebber reflect pro forma IAS adjustments to
income and effects of currency translation and will thus differ from those
presented in PaineWebber's historical audited and unaudited consolidated
financial statements.
5. PROPOSED DIVIDEND
At the extraordinary general meeting of UBS AG, held on 7 September 2000, the
UBS shareholders approved the UBS Board of Directors proposal that a partial
dividend be paid to UBS shareholders on record as of 2 October 2000. The
payment, which is to be made on 5 October 2000, relates to the first nine months
of the year 2000. The payment of $2.75 (CHF 4.50) per share will total
approximately $1.1 billion (CHF 1.8 billion). This proposed dividend has not
been reflected in the assumptions made for purposes of presenting pro forma
financial information.
--------------------------------------------------------------------------------
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UBS
--------------------------------------------------------------------------------
PAINEWEBBER UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000
The following unaudited condensed consolidated statement of financial condition
and income statement as of and for the six months ended 30 June 2000 is derived
from the historical unaudited condensed consolidated statement of financial
condition and income statement of PaineWebber as of and for the six months then
ended, after giving effect to the unaudited IAS adjustments described in the
notes to the PaineWebber unaudited pro forma condensed consolidated statement of
financial condition and income statement: conversion from U.S. GAAP to IAS. This
information has been prepared from, and should be read together with, the
unaudited condensed consolidated financial statements and related notes from
PaineWebber's 10-Q for the six months ended 30 June 2000, which are publicly
available.
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2000
<TABLE>
<CAPTION>
PAINE WEBBER
(IN US$ 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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UBS
--------------------------------------------------------------------------------
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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UBS
--------------------------------------------------------------------------------
PAINEWEBBER UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS
FOR THE YEAR ENDED 31 DECEMBER 1999
The following unaudited condensed consolidated income statement for the year
ended 31 December 1999 is derived from the historical audited consolidated
income statement of PaineWebber for the year then ended, after giving effect to
the unaudited IAS adjustments described in the notes to the PaineWebber
unaudited pro forma condensed consolidated statement of financial condition and
income statement: conversion from U.S. GAAP to IAS. This information has been
prepared from, and should be read together with, the historical consolidated
financial statements and related notes of PaineWebber, which are publicly
available from PaineWebber's 10-K for the year ended 31 December 1999.
FOR THE YEAR ENDED 31 DECEMBER 1999
<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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UBS
--------------------------------------------------------------------------------
NOTES TO THE PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000 AND
THE YEAR ENDED 31 DECEMBER 1999
1. RECLASSIFICATION TO CONFORM PAINEWEBBER ACCOUNTS WITH UBS FINANCIAL
PRESENTATION
Reclassifications have been made to the PaineWebber historical financial
information presented under U.S. GAAP to conform to UBS's presentation under
IAS.
The principal income statement reclassifications relate to:
1. Commission revenue, Asset management revenue, and Investment banking revenue
have been reclassified as Net fees and commission revenue.
2. Compensation and benefits expense has been reclassified into the Personnel
balance.
3. Office and equipment expense, Communication expense, Business development
expense, Professional services expense, and Other expenses have been
reclassified into the General and administrative and Depreciation and
Amortization expense balances.
The principal balance sheet reclassifications relate to:
1. Cash and cash equivalents, Cash and securities segregated and on deposit for
federal and other regulations, and Receivables from broker dealers have been
reclassified into Due from banks.
2. Treasury bills and money market securities have been removed from Financial
instruments owned and moved into Money market paper.
3. Positive and negative replacement values on derivatives have been separated
from Financial instruments owned or sold, not yet purchased into their own
respective line items.
4. Receivables from clients have been reclassified to Loans, net of allowances
for credit losses.
5. Dividend and interest receivables and Fees and other receivables have been
reclassified into Accrued income and prepaid expenses.
6. Intangible assets and goodwill have been removed from Other assets and
classified into their own line item.
7. Commercial and money market paper issued by PaineWebber have been removed
from Short term borrowings and reclassified into Money market paper issued.
8. Short term borrowings, excluding those removed above, and Payables to broker
dealers have been reclassified into Due to banks.
9. Dividends and interest payable and Other liabilities and accrued expenses
have been reclassified into Accrued expenses and deferred income.
10. Accrued compensation and benefits have been reclassified into Other
liabilities.
11. Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts have been reclassified into Minority interest.
12. Certain investments were reclassified from Financial instruments owned to
Financial investments and all other Financial instruments owned have been
reclassified into Trading portfolio assets.
None of these reclassification adjustments has an impact on net income or
shareholders' equity.
2. U.S. GAAP TO IAS ADJUSTMENTS
Accounting principles generally accepted in the United States differ in material
respects from IAS. The differences that are material to restating the historical
consolidated financial statements of PaineWebber to comply with IAS are
described below.
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UBS
--------------------------------------------------------------------------------
NOTES TO THE PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS -- (CONTINUED)
Adjustments to Historical PaineWebber Financial Statements:
a. Software Capitalization
IAS 38, Intangible Assets, became effective 1 January 2000 for entities
reporting on a calendar year basis. This standard requires that companies
capitalize certain costs of acquiring or developing internal use software. Prior
to 1 January 2000, these costs were expensed. Under U.S. GAAP, PaineWebber early
adopted SOP 98-1, Accounting for the Costs of Software Developed or Obtained for
Internal Use, and capitalized such costs beginning in 1998. For purposes of the
pro forma presentation, the effects of capitalization and related amortization
prior to 1 January 2000 are reversed and costs are instead recognized in expense
as incurred.
b. Hedge Accounting
Under U.S. GAAP, unrealized gains and losses on derivatives that qualify for
hedge accounting are not recognized on the face of the balance sheet. Under IAS,
the replacement value of all derivative products, including those qualifying for
hedge accounting, are recognized on the balance sheet. For purposes of the pro
forma presentation, positive and negative replacement values for derivatives
qualifying for hedge accounting are reported on the face of the balance sheet,
with the net offset reported as other assets.
c. Repurchase, Resale, and Securities Lending Transactions
Under IAS, repurchase agreements and securities borrowed are accounted for as
collateralized borrowings. Reverse repurchase agreements and securities lending
are accounted for as collateralized lending transactions. Cash collateral is
reported on the balance sheet at amounts equal to the collateral advanced or
received.
Under U.S. GAAP, securities lending and repurchase transactions are also
generally accounted for as collateralized borrowing and lending transactions.
However, certain such transactions may be deemed sale or purchase transactions
under specific circumstances. The accounting for these transactions has been
reversed for purposes of the IAS presentation.
Additionally, under U.S. GAAP, when specific control conditions exist,
securities collateral controlled is recognized as an asset with an offsetting
obligation to return such securities collateral. For purposes of IAS
presentation, such controlled securities collateral has been de-recognized.
d. Goodwill and Other Intangibles
Under IAS, amortization of goodwill and other intangible assets is generally
limited to a maximum period of 20 years. U.S. GAAP provides that goodwill and
other intangibles are amortizable over their useful economic life with a maximum
life of 40 years. For purposes of the pro forma presentation, the amortization
of PaineWebber's goodwill and other intangibles has been restated using the
maximum 20 year period.
e. Trade Date v. Settlement Date
UBS follows a settlement date convention of accounting for inventory in its
trading portfolio, for balance sheet presentation purposes. PaineWebber
recognizes purchases and sales of inventory on its statement of financial
condition at their trade date. For purpose of pro forma presentation
PaineWebber's statement of financial condition has been restated as if it
followed settlement date accounting.
--------------------------------------------------------------------------------
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UBS
--------------------------------------------------------------------------------
NOTES TO THE PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND INCOME STATEMENT
CONVERSION FROM U.S. GAAP TO IAS -- (CONTINUED)
f. Rabbi Trusts
PaineWebber has transferred certain compensation related assets into "Rabbi
Trusts." U.S. GAAP requires consolidation of the assets and liabilities of a
Rabbi Trust. IAS, however, applies a "controls" approach in determining whether
an entity should be consolidated. Under this approach the Rabbi Trusts would not
be consolidated and therefore, for purposes of the pro forma presentation, such
assets and liabilities and their related income and expenses have been
eliminated from the statement of financial condition and income statement,
respectively.
g. Income Taxes
Records the tax effect pertaining to the conversion from U.S. GAAP to IAS on the
unaudited consolidated statement of financial condition and income statement of
PaineWebber, assuming an effective tax rate of 37.3%.
h. Redemption of Mandatorily Redeemable Preferred Stock
Under IAS, preferred shares having mandatory redemption features are classified
as debt with associated dividends recognized in interest expense. For purposes
of pro forma presentation, the Unamortized discount charged to equity on
redemption of preferred stock and Dividends and amortization of discount on
preferred stock, thereon, have been reclassified as Interest expense.
i. Trust Preferred Securities
Under IAS, trust preferred securities having mandatory redemption features are
classified as debt with associated dividends recognized in interest expense. For
purposes of pro forma presentation, Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts have been reclassified to Long-term
debt and the related Minority interest expense to Interest expense.
j. Brokerage, Clearing and Exchange Fees
PaineWebber records certain brokerage, clearing and exchange fees as separate
components of expense for purposes of its U.S. GAAP financial statements. Under
IAS, expenses directly connected with a transaction are charged against
revenues.
k. Private Equity Investments
PaineWebber carries private equity related investments for which there exist
trading restrictions at estimated net realizable value under U.S. GAAP. UBS
records similar investments at cost, less writedowns for impairments in value.
This adjustment reverses unrealized gains on such investments reflected in the
PaineWebber accounts.
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--------------------------------------------------------------------------------
UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000
The following unaudited pro forma condensed consolidated balance sheet and
income statement as of and for the six months ended 30 June 2000 is derived from
the unaudited consolidated balance sheet and income statements of UBS and
PaineWebber as of and for the six months then ended, after giving effect to the
U.S. GAAP adjustments described in the notes to the UBS and PaineWebber
unaudited pro forma condensed consolidated balance sheet and income statement:
conversion from IAS to U.S. GAAP and the pro forma adjustments presented in the
notes to the UBS and PaineWebber unaudited pro forma condensed consolidated
balance sheet and income statement. This information has been prepared from, and
should be read together with, the respective unaudited consolidated financial
statements and related notes of UBS and of PaineWebber, which are included in
this document and publicly available, respectively.
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 JUNE 2000
<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.
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--------------------------------------------------------------------------------
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 document
and publicly available, respectively.
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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UBS
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP
AS OF AND FOR THE SIX MONTHS ENDED 30 JUNE 2000
AND FOR THE YEAR ENDED 31 DECEMBER 1999
1. IAS TO U.S. GAAP ADJUSTMENTS
IAS accounting principles differ in material respects from accounting principles
generally accepted in the U.S. The differences which are material to restating
the historical consolidated financial statements of UBS and PaineWebber to
comply with U.S. GAAP, are described below.
ADJUSTMENTS TO UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEETS AND INCOME STATEMENTS
The differences which are material to restating the UBS unaudited pro forma
consolidated balance sheets and income statements to U.S. GAAP relate to
purchase accounting, restructuring provisions, derivatives held for non-trading
purposes, financial investments, retirement and benefit plans, other employee
benefits, equity participation plans, software capitalization, settlement date
vs. trade date accounting and repurchase, resale and securities lending
transactions as described in notes (a), (b), (c), (d), (e), (f), (g), (h), (i)
and (j), respectively. PaineWebber's IAS to U.S. GAAP adjustments have been
documented in the notes to the PaineWebber unaudited pro forma condensed
consolidated statement of financial condition and income statement: conversion
from U.S. GAAP to IAS, note #2: U.S. GAAP to IAS adjustments. In addition, for
purposes of conforming PaineWebber's accounts to UBS's presentation under U.S.
GAAP, certain investments have been reclassified from financial investments to
Other Assets.
a. Purchase Accounting
General
Under IAS, UBS accounted for the 1998 merger of Union Bank of Switzerland and
Swiss Bank Corporation under the pooling of interests method. The balance sheets
and income statements of the banks were combined and no adjustments to the
carrying values of the assets and liabilities were made.
Under U.S. GAAP, the business combination creating UBS is accounted for under
the purchase method with Union Bank of Switzerland being considered the
accounting acquirer. Under the purchase method, the cost of acquisition is
measured at fair value and the acquirer's interests in identifiable tangible
assets and liabilities of the acquiree are restated to fair values at the date
of acquisition. Any excess consideration paid over the fair value of net
tangible assets acquired is allocated, first to identifiable intangible assets
based on their fair values, if determinable, with the remainder allocated to
goodwill.
Goodwill
Under U.S. GAAP, goodwill and other intangible assets acquired are capitalized
and amortized over the expected periods to be benefited with adjustments, if
any, for impairment.
For purposes of the U.S. GAAP reconciliation, the excess of the consideration
paid for Swiss Bank Corporation over the fair value of the net tangible assets
received has been recorded as Goodwill and is being amortized on a straight line
basis over a weighted average life of 13 years beginning 29 June 1998.
--------------------------------------------------------------------------------
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UBS
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
Other Purchase Accounting Adjustments
For purposes of the U.S. GAAP reconciliation, the restatement of Swiss Bank
Corporation's net assets to fair value resulted in decreasing net tangible
assets by CHF 1,077 million. This amount will be amortized over a period ranging
from 2 years to 20 years depending upon the nature of the restatement.
b. Restructuring Provision
Under IAS, restructuring provisions are recognized when a legal or constructive
obligation has been incurred. In 1997, UBS recognized a CHF 7,000 million
restructuring provision to cover personnel, information technology ("IT"),
premises and other costs associated with combining and restructuring the merged
Group. An additional CHF 300 million provision was recognized in the fourth
quarter of 1999, reflecting the impact of increased precision in the estimation
of certain leased and owned property costs.
Under U.S. GAAP, restructuring provisions for business combinations are not
recognized prior to the consummation date of the business combination. Also, the
criteria for establishing liabilities of this nature are more stringent than
under IAS. Established restructuring provisions are required to be periodically
reviewed for appropriateness and revised if necessary.
For purposes of the U.S. GAAP reconciliation, the aggregate CHF 7,300 million
restructuring provision was reversed. As a result of the business combination
with Swiss Bank Corporation, the decision to combine and streamline certain
activities of the banks for the purpose of reducing costs and improving
efficiencies, Union Bank of Switzerland recognized a restructuring provision of
CHF 1,575 million during 1998 for purposes of the U.S. GAAP reconciliation. CHF
759 million of this provision related to estimated costs for restructuring the
operations and activities of Swiss Bank Corporation and such amount was recorded
as a liability of the acquired business. The remaining CHF 816 million of
estimated costs were charged to restructuring expense during 1998. Adjustments
of CHF 130 million and 600 million to the restructuring provision were
recognized in the six months ended 30 June 2000 and in the year ended 31
December 1999, respectively, for purposes of the U.S. GAAP reconciliation. The
reserve is expected to be substantially exhausted by the end of 2001.
The restructuring provision initially included CHF 756 million for employee
termination benefits, CHF 332 million for the closure and write downs of owned
and leased premises, and CHF 487 million for professional fees, IT costs,
miscellaneous transfer taxes and statutory fees.
The usage of the U.S. GAAP restructuring provision was as follows:
<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>
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.
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UBS
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
c. Derivatives Instruments Held or Issued for Non-Trading Purposes
Under IAS, UBS recognizes transactions in derivative instruments hedging
non-trading positions in the income statement using the accrual or deferral
method, which is generally the same accounting as the underlying item being
hedged.
U.S. GAAP requires that derivatives be reported at fair value with changes in
fair value recorded in income unless specified criteria are met to obtain hedge
accounting treatment (accrual or deferral method).
UBS is not required to comply with all of the criteria necessary to obtain hedge
accounting treatment under U.S. GAAP. Accordingly, for purposes of the U.S. GAAP
reconciliation, derivative instruments held or issued for non-trading purposes
that did not meet U.S. GAAP hedging criteria have been carried at fair value
with changes in fair value recognized as adjustments to net trading income.
d. Financial Investments
Under IAS, financial investments are classified as either current investments or
long-term investments. UBS considers current financial investments to be held
for sale and carried at lower of cost or market value. UBS accounts for
long-term financial investments at cost, less any permanent impairment.
Under U.S. GAAP, investments are classified as either held to maturity
(essentially debt securities), which are carried at amortized cost, or available
for sale (debt and marketable equity securities), which are carried at fair
value with changes in fair value recorded as a separate component of
shareholders' equity. Realized gains and losses are recognized in net profit in
the period sold.
For purposes of the U.S. GAAP reconciliation, amounts reflected in Other income
for the changes in market values of held for sale investments are reclassified
as a component of Shareholders' equity. Held to maturity investments that do not
meet U.S. GAAP criteria are reclassified to the available for sale category.
Unrealized gains or unrealized losses relating to these investments are recorded
as a component of Shareholders' equity.
e. Retirement Benefit Plans
Under IAS, UBS has recorded pension expense based on a specific method of
actuarial valuation of projected plan liabilities for accrued service including
future expected salary increases and expected return on plan assets. Plan assets
are held in a separate trust to satisfy plan liabilities. Plan assets are
recorded at fair value. The recognition of a prepaid asset on the books of UBS
is subject to certain limitations. These limitations generally cause amounts
recognized as expense to equal amounts funded in the same period. Any amount not
recognized as a prepaid asset and the corresponding impact on pension expense
has been disclosed in the financial statements.
Under U.S. GAAP, pension expense, generally, is based on the same method of
valuation of liabilities and assets as under IAS. Differences in the levels of
expense and liabilities (or prepaid assets) exist due to the different
transition date rules and the stricter provisions of IAS as well as industry
practice under IAS for recognition of a prepaid asset.
As a result of the merger of the retirement benefit plans of Union Bank of
Switzerland and Swiss Bank Corporation after the 1998 merger, there was a one
time increase of the vested plan benefits for the beneficiaries of such plans.
This had the effect of increasing the defined benefit obligation at this date by
CHF 3,020 million. Under IAS this resulted in a one-time charge to income which
was offset by the recognition of assets (previously unrecognized due to certain
limitations under IAS).
Under U.S. GAAP, in a business combination that is accounted for under the
purchase method, the assignment of the purchase price to individual assets
acquired and liabilities assumed must include a
--------------------------------------------------------------------------------
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UBS
--------------------------------------------------------------------------------
NOTES TO THE UBS AND PAINEWEBBER UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT
CONVERSION FROM IAS TO U.S. GAAP -- (CONTINUED)
liability for the projected plan liabilities in excess of plan assets or an
asset for plan assets in excess of the projected plan liabilities, thereby
recognizing any previously existing unrecognized net gains or losses,
unrecognized prior service cost, or unrecognized net liabilities or assets.
For purposes of the U.S. GAAP reconciliation, UBS recorded a prepaid asset for
the Union Bank of Switzerland plans as of 1 January 1998. Swiss Bank Corporation
recorded a purchase price adjustment to recognize its prepaid asset at 29 June
1998. The recognition of these assets impacts the pension expense recorded under
U.S. GAAP versus IAS. The pension expense for the year ended 31 December 1999 is
also impacted by the different treatment of the merger of the plans under IAS
versus U.S. GAAP. The assets recognized under IAS (which had been previously
unrecognized due to certain limitations under IAS) were already recognized under
U.S. GAAP due to the absence of such limitations under U.S. GAAP.
f. Other Employee Benefits
Under IAS, UBS has recorded expenses and liabilities for post-retirement
benefits determined under a methodology similar to that described above under
retirement benefit plans.
Under U.S. GAAP, expenses and liabilities for post-retirement benefits would be
determined under a similar methodology as under IAS. Differences in the levels
of expenses and liabilities have occurred due to different transition date rules
and the treatment of the merger of Union Bank of Switzerland and Swiss Bank
Corporation under the purchase method.
g. Equity participation plans
IAS does not specifically address the recognition and measurement requirements
for equity participation plans.
U.S. GAAP permits the recognition of compensation cost on the grant date for the
estimated fair value of equity instruments issued (Statement of Financial
Accounting Standards No. 123) or based on the intrinsic value of equity
instruments issued (Accounting Principles Board Opinion No. 25), with the
disclosure of the pro forma effects of equity participation plans on net profit
and earnings per share, as if the fair value had been recorded on the grant
date. UBS recognized only intrinsic values at the grant date with subsequent
changes in value not recognized.
For purposes of the U.S. GAAP reconciliation, certain of UBS's option awards
have been determined to be variable, primarily because they may be settled in
cash or UBS has offered to hedge their value. Additional compensation expense
from these options awards for the six months ended 30 June and the year ended 31
December 1999, is CHF 44 million and CHF 41 million, respectively. In addition,
certain of UBS's equity participation plans provide for deferral of the awards,
and the instruments are held in trusts for the participants. Certain of these
trusts are recorded on UBS's balance sheet for U.S. GAAP presentation, the
effect of which is to increase assets by CHF 1,070 million and CHF 655 million,
liabilities by CHF 1,162 million and CHF 717 million, and decrease shareholders'
equity by CHF 92 million and CHF 62 million (for UBS shares held by the trusts,
which are treated as treasury shares) at 30 June 2000 and 31 December 1999,
respectively.
h. Software capitalization
Under IAS, effective 1 January 2000, certain costs associated with the
acquisition or development of internal use software are required to be
capitalized. Once the software is ready for its intended use, the costs
capitalized are amortized to the income statement over estimated lives. Under
U.S. GAAP, the same principal applies; however this standard was effective
beginning 1 January 1999. For purposes of the U.S. GAAP reconciliation, the
costs associated with the acquisition or development of internal use
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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 -- (CONTINUED)
software that met the U.S. GAAP software capitalization criteria in 1999 have
been reversed from Operating expenses and amortized over a life of 2 years. From
1 January 2000, the only remaining reconciliation item is the amortization of
software capitalized in 1999 for U.S. GAAP purposes.
i. Settlement Date vs. Trade Date Accounting
UBS's transactions from securities activities are recorded on the settlement
date for balance sheet and on the trade date for income statement purposes. This
results in recording an off-balance sheet forward transaction during the period
between the trade date and the settlement date. Forward positions relating to
trading activities are revalued to fair value and any unrealized profits and
losses are recognized in Net profit.
Under U.S. GAAP, trade date accounting is required for purchases and sales of
securities. For purposes of U.S. GAAP presentation, all purchases and sales of
securities previously recorded on settlement date have been recorded as of trade
date for balance sheet purposes. Trade date accounting has resulted in
receivables and payables to broker-dealers and clearing organizations recorded
in Other assets and Other liabilities.
j. Repurchase, Resale and Securities Lending Transactions
Under IAS, UBS's repurchase agreements and securities borrowed are accounted for
as collateralized borrowings. Reverse repurchase agreements and securities
lending are accounted for as collateralized lending transactions. Cash
collateral is reported on the balance sheet at amounts equal to the collateral
advanced or received.
Under U.S. GAAP, securities lending and repurchase transactions are also
generally accounted for as collateralized borrowing and lending transactions.
However, certain such transactions may be deemed sale or purchase transactions
under specific circumstances. Additionally, under U.S. GAAP, UBS is required to
recognize securities collateral controlled and an offsetting obligation to
return such securities collateral on certain financing transactions, when
specific control conditions exist.
For purposes of U.S. GAAP presentation, securities collateral recognized under
financing transactions is reflected in Due from banks or loans, net of allowance
for credit losses, depending on the counterparty. The related obligation to
return the securities collateral is reflected in the balance sheet in Due to
banks or Due to customers, as appropriate.
2. CONVENIENCE TRANSACTION
30 June 2000 and 31 December 1999 CHF amounts have been translated into U.S.
dollars at the exchange rate of one US$ = CHF 1.63, the exchange rate on 30 June
2000.
3. PROPOSED DIVIDEND
At the extraordinary general meeting of UBS AG, held on 7 September 2000, the
UBS shareholders approved the UBS Board of Directors proposal that a partial
dividend be paid to UBS shareholders on record as of 2 October 2000. The
payment, which is to be made on 5 October 2000, relates to the first nine months
of the year 2000. The payment of $2.75 (CHF 4.50) per share will total
approximately $1.1 billion (CHF 1.8 billion). This proposed dividend has not
been reflected in the assumptions made for purposes of presenting pro forma
financial information.
--------------------------------------------------------------------------------
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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, both actual and as adjusted to give effect to this offering (based upon
expected proceeds of this offering of $1,500,000,000) and the use of the
proceeds from this offering as described under "Use of Proceeds."
<TABLE>
<CAPTION>
30 JUNE 2000
ACTUAL AS ADJUSTED
CHF U.S.$ CHF U.S.$
(in millions)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt
Money market paper issued................. 85,409 52,263 85,409 52,263
Due to banks.............................. 75,172 45,999 75,172 45,999
Cash collateral on securities lent........ 15,334 9,383 15,334 9,383
Due to customers.......................... 279,915 171,286 279,915 171,286
Long-term debt............................ 52,990 32,426 52,990 32,426
-------- -------- -------- --------
Total Debt................................ 508,820 311,357 508,820 311,357
Minority Interest........................... 0 0 2,442 1,494
Shareholders' Equity........................ 31,876 19,506 31,876 19,506
-------- --------
Total capitalization........................ 540,696 330,863 543,138 332,357
======== ======== ======== ========
</TABLE>
CHF amounts have been translated into United States dollars at the rate of CHF 1
= $0.6119
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--------------------------------------------------------------------------------
UBS Preferred Funding Trust I
UBS Preferred Funding Trust I is a statutory business trust that UBS AG created
under the Delaware Business Trust Act, as amended, on 18 September 2000 pursuant
to an initial trust agreement entered into by UBS AG and by the filing of a
certificate of trust with the Secretary of State of the State of Delaware. We
will continue UBS Preferred Funding Trust pursuant to an Amended and Restated
Trust Agreement between UBS Preferred Funding Company, as grantor, and
Wilmington Trust Company, as trustee. We will qualify the Amended and Restated
Trust Agreement as an indenture under the Trust Indenture Act of 1939, as
amended. UBS Preferred Funding Trust will be treated as a grantor trust for U.S.
federal income tax purposes, meaning that investors in trust preferred
securities will generally be treated as if they owned their proportionate shares
of the company preferred securities owned by UBS Preferred Funding Trust.
We have formed UBS Preferred Funding Trust for the purpose of:
- issuing the trust preferred securities,
- investing the proceeds of the trust preferred securities in the company
preferred securities, which benefit from the related UBS AG subordinated
guarantee, and
- engaging in any related or incidental activities.
The only assets of UBS Preferred Funding Trust will be the company preferred
securities and the related rights of UBS Preferred Funding Trust under the UBS
AG subordinated guarantee. The Amended and Restated Trust Agreement will not
permit UBS Preferred Funding Trust to acquire any other assets, issue any other
equity securities or any debt securities, or engage in any other activities. All
expenses and liabilities of UBS Preferred Funding Trust will be paid by the
Stamford branch of UBS AG, except that if the trustee of UBS Preferred Funding
Trust incurs fees, charges or expenses at the request of a holder of trust
preferred securities or other person for which UBS Preferred Funding Trust is
not otherwise liable under the Amended and Restated Trust Agreement, that holder
or other person will be liable for such fees, charges and expenses.
The total pro forma capitalization of UBS Preferred Funding Trust, as adjusted
to give effect to this offering (based on expected proceeds of $1,500,000,000
before deduction of expenses) and the use of the proceeds from this offering, is
$1,500,000,000. Upon completion of the offering, the authorized and issued
capital of UBS Preferred Funding Trust will consist of trust preferred
securities having an aggregate liquidation amount of $1,500,000,000, issuable in
denominations of $1,000 liquidation amount per trust preferred security and
integral multiples of $1,000.
The Amended and Restated Trust Agreement will provide that, to the fullest
extent permitted by law, without the need for any other action of any person,
including the trustee or any other holder of trust preferred securities, each
holder of trust preferred securities will be entitled to enforce, in the name of
UBS Preferred Funding Trust, the rights of UBS Preferred Funding Trust under the
company preferred securities and the UBS AG subordinated guarantee represented
by the trust preferred securities held by such holder. A holder of trust
preferred securities may at any time upon written notice withdraw and hold
directly the underlying company preferred securities represented by such trust
preferred securities, in which case such holder will be entitled to directly
enforce its rights under the UBS AG subordinated guarantee.
The principal executive offices of UBS Preferred Funding Trust are c/o
Wilmington Trust Company, 1100 North Market Street, Wilmington, DE 19890.
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UBS Preferred Funding Company LLC I
INTRODUCTION
UBS Preferred Funding Company LLC I is a limited liability company that UBS AG
formed under the Delaware Limited Liability Company Act, as amended, on 18
September 2000 pursuant to an initial limited liability company agreement
entered into by UBS AG and by filing a certificate of formation with the
Secretary of State of the State of Delaware. We will continue UBS Preferred
Funding Company pursuant to an Amended and Restated Limited Liability Company
Agreement, which we sometimes refer to as the LLC Agreement. UBS Preferred
Funding Company will be treated as a partnership for U.S. federal income tax
purposes.
We have formed UBS Preferred Funding Company for the purpose of :
- issuing the company common securities to UBS AG,
- issuing the company preferred securities, initially to UBS Preferred
Funding Trust,
- investing the proceeds of the company common securities and the company
preferred securities in (1) initially, subordinated notes issued by the
Cayman Islands branch of UBS AG with an aggregate principal amount of
$1,500,000,000 and (2) other securities issued by UBS AG acting through
a branch, agency or other office located outside of the United States or
by a non-U.S. branch of a non-U.S. subsidiary of UBS AG (together,
"eligible investments"), and
- engaging in any related or incidental activities.
The total pro forma capitalization of UBS Preferred Funding Company, as adjusted
to give effect to this offering (based on expected proceeds of $1,500,000,000
before deduction of expenses) and the use of proceeds from this offering, is
$1,500,002,000. Upon completion of this offering, the authorized and issued
capital of UBS Preferred Funding Company will consist of company common
securities representing securityholders' equity of $2,000 and company preferred
securities with an aggregate liquidation preference of $1,500,000,000, issuable
in denominations of $1,000 liquidation preference per company preferred security
and integral multiples of $1,000. UBS Preferred Funding Company will have no
outstanding debt after giving effect to this offering and the use of the
proceeds from this offering.
UBS Preferred Funding Company will apply the income generated by the
subordinated notes and other eligible investments to pay dividends to UBS
Preferred Funding Trust, as holder of company preferred securities, and UBS AG,
as holder of the company common securities. UBS Preferred Funding Trust will
then pass the dividends it receives on the company preferred securities through
to the holders of trust preferred securities as distributions on the trust
preferred securities.
UBS AG is purchasing all of the company common securities for $2,000. UBS
intends to treat the company preferred securities as Tier 1 capital for purposes
of the relevant regulatory capital guidelines of the Swiss Federal Banking
Commission. UBS AG will agree with UBS Preferred Funding Company in the LLC
Agreement that, as long as any company preferred securities are outstanding, UBS
AG will continue to own, directly or indirectly, 100% of the outstanding company
common securities. UBS Preferred Funding Company will also covenant to maintain
"UBS" as part of its name for as long as any trust preferred securities of UBS
Preferred Funding Trust remain outstanding unless, because of a merger or other
business combination involving UBS AG or a change by UBS AG of its own name,
inclusion of "UBS" as part of UBS Preferred Funding Company's name is no longer
appropriate.
UBS AG will also agree in the LLC Agreement that it will from time to time
either (i) contribute (or cause others, including the Stamford branch of UBS AG,
to contribute) to UBS Preferred Funding Company such additional funds as are
necessary in order to enable UBS Preferred Funding Company
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to pay its operating expenses on or before any date when any such operating
expenses are due or (ii) directly pay UBS Preferred Funding Company's operating
expenses then due and payable and not otherwise paid. "Operating expenses"
generally means all expenses and obligations of UBS Preferred Funding Company,
but does not include any payments on the company preferred securities or company
common securities.
The principal executive offices of UBS Preferred Funding Company are located at
The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801.
ACTIVITIES OF UBS PREFERRED FUNDING COMPANY
GENERAL
UBS Preferred Funding Company's principal business objective is to acquire and
hold eligible investments, which include:
- initially, subordinated notes issued by the Cayman Islands branch of UBS
AG with an aggregate principal amount of $1,500,000,000, and
- other securities issued by UBS AG acting through a branch, agency or
other office located outside of the United States or by a non-U.S.
branch of a non-U.S. subsidiary of UBS AG.
UBS Preferred Funding Company will apply the net income generated by the
subordinated notes and other eligible investments to pay dividends to UBS
Preferred Funding Trust, as holder of company preferred securities, and UBS AG,
as holder of the company common securities. UBS Preferred Funding Trust will
then pass through the dividends it receives on the company preferred securities
to the holders of trust preferred securities as distributions on the trust
preferred securities. Although UBS Preferred Funding Company may (with the
consent of the holders of two-thirds (based on the aggregate liquidation
preference) of the company preferred securities and company parity preferred
securities, voting together as a single class) issue additional preferred
securities as described under "Description of Company Preferred Securities," UBS
Preferred Funding Company has no present intention to do so.
DIVIDENDS
UBS Preferred Funding Company currently expects to pay an aggregate amount of
dividends with respect to its outstanding company common securities and company
preferred securities equal to approximately 100% of the interest and other
income it receives on the subordinated notes and any other eligible investments.
The LLC Agreement of UBS Preferred Funding Company will:
- preclude UBS Preferred Funding Company from incurring any indebtedness
for borrowed money (and UBS Preferred Funding Company does not
anticipate having any material liabilities), and
- require approval of holders of at least 66 2/3% of the outstanding
company preferred securities and any outstanding company parity
preferred securities (based on the aggregate liquidation preference),
voting together as a single class, before dividends on the company
preferred securities can be paid out of any source other than interest
income received on the subordinated notes or interest or dividend income
received on other eligible investments.
Under the Delaware Limited Liability Company Act, UBS Preferred Funding Company
may not pay dividends or other distributions on company common securities or
company preferred securities--even if such payments are "mandatory"--if, after
making the distributions, UBS Preferred Funding Company's liabilities would
exceed the fair value of its assets. However, UBS Preferred Funding Company does
not expect to have any material liabilities, so UBS Preferred Funding Company
does
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not anticipate that this restriction will affect its ability to pay dividends on
the company preferred securities.
Dividends on the company preferred securities will in any event be required to
be paid up to the mandatory dividend payment amount on any mandatory dividend
payment date, unless there is a capital limitation on such date. See
"Description of Company Preferred Securities--Dividends--Mandatory Dividends."
INVESTMENT POLICIES
UBS Preferred Funding Company's initial investment policies will be established
pursuant to the LLC Agreement. Under its investment policies, UBS Preferred
Funding Company may not hold or invest in any securities other than eligible
investments as described above under "--Introduction."
The investment policies require that:
- the terms of any eligible investments other than the subordinated notes
purchased by UBS Preferred Funding Company be established in good faith
and, to the extent deemed advisable by UBS AG, reflect arm's-length
terms at the time of purchase, and the purchase by UBS Preferred Funding
Company of such eligible investments be approved by the affirmative vote
of a majority of its entire board of directors, and
- UBS Preferred Funding Company maintain its assets in a manner that will
not require UBS Preferred Funding Company to be registered as an
investment company under the Investment Company Act of 1940.
The investment policies of UBS Preferred Funding Company may be amended only by
the affirmative vote of holders of at least 66 2/3% of the outstanding company
preferred securities and any outstanding company parity preferred securities
(based on the aggregate liquidation preference), voting together as a single
class. Although UBS AG and UBS Preferred Funding Company do not anticipate that
UBS Preferred Funding Company will sell the subordinated notes (and no market
for them is expected to develop), were UBS Preferred Funding Company to do so,
UBS Preferred Funding Company would be required to invest the proceeds of the
sale in accordance with UBS Preferred Funding Company's investment policies as
they exist at the time of such sale.
ADMINISTRATION AGREEMENT
Before issuing the company preferred securities, UBS Preferred Funding Company
will enter into an administration agreement with the Stamford branch of UBS AG,
under which the Stamford branch will provide (or cause others to provide)
accounting, legal, tax and other support services to UBS Preferred Funding
Company, assist UBS Preferred Funding Company in complying with pertinent U.S.
and Swiss local, state and federal laws, and provide administrative, record
keeping and secretarial services to UBS Preferred Funding Company. Under the
administration agreement, UBS Preferred Funding Company will agree to reimburse
the provider of these services for the value of services provided by such
provider to UBS Preferred Funding Company on an arm's-length basis.
UBS Preferred Funding Company will maintain company records that are separate
from those of UBS AG or any of its affiliates. None of the officers, employees
or directors of UBS Preferred Funding Company will have any direct or indirect
pecuniary interest in any security to be acquired or disposed of by UBS
Preferred Funding Company or in any transaction in which UBS Preferred Funding
Company has an interest.
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MANAGEMENT OF UBS PREFERRED FUNDING COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The LLC Agreement of UBS Preferred Funding Company provides that its board of
directors will at all times include not less than three and not more than five
members. Initially, the board of directors will include three members. The
directors will be designated as "managers" of UBS Preferred Funding Company
within the meaning of the Delaware Limited Liability Company Act. The directors
will serve until their successors are duly elected and qualified. UBS Preferred
Funding Company has no present intention to alter the number of directors
comprising the board of directors.
UBS Preferred Funding Company will have three officers when the company
preferred securities are issued. The directors and executive officers of UBS
Preferred Funding Company initially will be:
<TABLE>
<CAPTION>
NAME POSITION AND OFFICES HELD
-------------------------------------------------------------
<S> <C>
Robert Mills Managing Director and President
Per Dyrvik Director and Treasurer
Robert Dinerstein Director and Secretary
</TABLE>
Each of the initial directors and officers of UBS Preferred Funding Company is
an individual who is an officer or employee of UBS AG or its affiliates. UBS
Preferred Funding Company currently anticipates that all officers of UBS
Preferred Funding Company will also be officers or employees of UBS AG or its
affiliates.
ADDITIONAL DIRECTORS
If at any time the aggregate of unpaid dividends on the company preferred
securities or any company parity preferred securities equals or exceeds an
amount equal to three semi-annual dividend payments, the holders of company
preferred securities and any company parity preferred securities, voting
together as a single class, will have the exclusive right to elect two
additional directors. Holders of a majority (based on the aggregate liquidation
preference) of company preferred securities and company parity preferred
securities may exercise this right by written consent or at a meeting of such
holders called for such purpose. The LLC Agreement of UBS Preferred Funding
Company will provide that this meeting may be called at the request of any
holder of company preferred securities or company parity preferred securities.
This right will continue either until all unpaid dividends have been paid in
full or until full dividends have been paid on the company preferred securities
for two consecutive dividend periods. While this right continues, any vacancy in
the office of the additional directors may be filled only by the holders of
company preferred securities and company parity preferred securities voting as
described above.
INDEMNIFICATION AND INSURANCE FOR DIRECTORS
The LLC Agreement of UBS Preferred Funding Company will provide that:
- its directors have no personal liability to UBS Preferred Funding
Company or the holders of company common securities or company preferred
securities for monetary damages (i) for voting not to take enforcement
action with respect to the subordinated notes or any other eligible
investments owned by UBS Preferred Funding Company, or (ii) at any time
for breach of any such director's fiduciary duty, if any, except for
such director's gross negligence or willful misconduct,
- UBS Preferred Funding Company will indemnify any director or officer for
any liability and related expenses, including reasonable counsel's fees,
arising out of such director's or officer's status as a director or
officer of UBS Preferred Funding Company, except for liability
determined by a court of competent jurisdiction to have arisen out of
such director's or officer's gross negligence or willful misconduct,
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- the right to indemnification is a contract right and the LLC Agreement
will set forth certain procedural and evidentiary standards applicable
to the enforcement of a claim under the LLC Agreement of UBS Preferred
Funding Company, and
- UBS Preferred Funding Company may purchase and maintain insurance to
protect any director or officer against any liability asserted against,
or incurred by, him or her, arising out of his or her status as a
director or officer.
COMMON SECURITIES OF UBS PREFERRED FUNDING COMPANY
Holders of company common securities will receive dividends out of interest
payments received by UBS Preferred Funding Company on the subordinated notes and
other eligible investments, if any, not required to be applied to fund dividends
with respect to the company preferred securities or expenses of UBS Preferred
Funding Company. However, as long as the company preferred securities or the
company parity preferred securities are outstanding, no dividends or other
distributions (including redemptions and purchases) may be made with respect to
company common securities unless full dividends on all series of the company
preferred securities have been paid (except as otherwise described under
"Description of Company Preferred Securities--Ranking and Liquidation
Preference"). See "Description of Company Preferred Securities--Dividends."
Subject to the rights, if any, of the holders of company preferred securities
(to the limited extent described herein) and any other series of the company
parity preferred securities, all voting rights are vested in the company common
securities. Holders of company common securities are entitled to vote in
proportion to the stated amounts represented by their company common securities.
All issued and outstanding shares of company common securities are currently,
and upon consummation of the offering will still be, held by UBS AG.
If UBS Preferred Funding Company dissolves, liquidates or winds up (whether
voluntary or involuntary) after all debts and liabilities of UBS Preferred
Funding Company have been satisfied and there have been paid or set aside for
the holders of company preferred securities the full preferential amounts to
which such holders are entitled, the holders of the company common securities
will be entitled to share equally and ratably in any assets remaining.
PREFERRED SECURITIES OF UBS PREFERRED FUNDING COMPANY
Subject to limitations prescribed by Delaware law and UBS Preferred Funding
Company's LLC Agreement, the board of directors of UBS Preferred Funding Company
or, if then constituted, a duly authorized committee of the board of directors
is authorized to issue (with the consent of the holders of two-thirds (based on
the aggregate liquidation preference) of the company preferred securities and
company parity preferred securities, voting together as a single class), from
the authorized but unissued capital shares of UBS Preferred Funding Company,
additional series of preferred securities of the UBS Preferred Funding Company
ranking on a parity with the company preferred securities in such series as the
board of directors (or committee) may determine and to establish, from time to
time, the number or amount by aggregate liquidation preference of shares (if
applicable) of such series to be included in any such series and to fix the
designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the securities of any such series, and such other
subjects or matters as may be fixed by resolution of the board of directors.
However, UBS Preferred Funding Company's LLC Agreement precludes:
- the issuance of any other classes or series of equity securities that
are senior to the company preferred securities, either as to dividends
or as to rights upon dissolution, liquidation or winding up of UBS
Preferred Funding Company, without the approval of each holder of
company preferred securities, and
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- the issuance of any company parity preferred securities without the
approval of 66 2/3% of the holders of company preferred securities and
unless the UBS AG subordinated guarantee is amended so that such
additional company parity preferred securities benefit from the UBS AG
subordinated guarantee in substantially the same manner as the company
preferred securities without any adverse effect on the holders of
company preferred securities. See "Description of Company Preferred
Securities--Voting Rights."
No additional payments will be required pursuant to the Delaware Limited
Liability Company Act for the company parity preferred securities to represent
limited liability company interests in UBS Preferred Funding Company upon
issuance against full payment of the purchase price for the company parity
preferred securities. The specific terms of a particular series of the company
parity preferred securities will be described in the certificate of designation
(as defined in UBS Preferred Funding Company's LLC Agreement) to be incorporated
into UBS Preferred Funding Company's LLC Agreement relating to that series,
except in the case of shares of the company preferred securities where the terms
thereof are set forth in UBS Preferred Funding Company's LLC Agreement.
LEGAL PROCEEDINGS
UBS Preferred Funding Company is not the subject of any litigation. None of UBS
Preferred Funding Company, UBS AG or any of its affiliates is currently involved
in nor, to UBS Preferred Funding Company's knowledge, currently threatened with
any litigation with respect to the subordinated notes or any aspect of UBS
Preferred Funding Company's operations.
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Use of Proceeds
UBS Preferred Funding Trust will use the proceeds of $1,500,000,000 from the
sale of the trust preferred securities to purchase the company preferred
securities.
UBS Preferred Funding Company will use the proceeds of $1,500,000,000 from the
sale of the company preferred securities to UBS Preferred Funding Trust to
acquire $1,500,000,000 aggregate principal amount of subordinated notes issued
by the Cayman Islands branch of UBS AG. See "UBS Preferred Funding Company LLC
I--Activities of UBS Preferred Funding Company."
UBS AG will use the proceeds of $1,500,000,000 from the sale of the subordinated
notes issued by its Cayman Island branch for general corporate purposes,
including paying certain expenses related to the offering and possibly funding a
portion of the purchase price of PaineWebber.
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Description of Trust Preferred Securities
UBS Preferred Funding Trust will issue the trust preferred securities under the
terms of its Amended and Restated Trust Agreement. We will qualify the Amended
and Restated Trust Agreement as an indenture under the Trust Indenture Act. The
terms of the trust preferred securities will include both those stated in the
Amended and Restated Trust Agreement and the Delaware Business Trust Act and
those made part of the Amended and Restated Trust Agreement by the Trust
Indenture Act. The following summary of the material terms and provisions of the
trust preferred securities is not complete and is subject to, and qualified in
its entirety by reference to, the Amended and Restated Trust Agreement, the
Delaware Business Trust Act and the Trust Indenture Act. We have filed a copy of
the Amended and Restated Trust Agreement as an exhibit to the registration
statement of which this prospectus is a part.
GENERAL
The trust preferred securities are certificates of beneficial interest in the
assets of UBS Preferred Funding Trust, the terms of which are set forth in the
Amended and Restated Trust Agreement.
The trust preferred securities will be issued in denominations of $1,000
liquidation amount and whole-number multiples of $1,000. The aggregate
liquidation amount of the trust preferred securities offered by this prospectus
is $1,500,000,000. Each trust preferred security represents a corresponding
amount of the company preferred securities, together with related rights under
the UBS AG subordinated guarantee.
The trustee of UBS Preferred Funding Trust will hold the company preferred
securities and the related rights under the UBS AG subordinated guarantee
deposited in UBS Preferred Funding Trust for the benefit of the holders of trust
preferred securities. The Amended and Restated Trust Agreement provides that, to
the fullest extent permitted by law, without the need for any other action of
any person, including the trustee or any other holder of trust preferred
securities, each holder of trust preferred securities will be entitled to
enforce, in the name of UBS Preferred Funding Trust, the rights of UBS Preferred
Funding Trust under the company preferred securities and the related rights
under the UBS AG subordinated guarantee represented by the trust preferred
securities held by such holder. The trust preferred securities may be exchanged
for the underlying company preferred securities as described under "--Withdrawal
of the Company Preferred Securities."
The funds of UBS Preferred Funding Trust available for distribution to the
holders of trust preferred securities will be limited to payments received from
UBS Preferred Funding Company as dividends, redemption payments and liquidation
payments on the company preferred securities and to payments received from UBS
AG pursuant to the UBS AG subordinated guarantee of those payments. See
"Description of Company Preferred Securities." UBS Preferred Funding Trust will
distribute such payments, upon their receipt, to the holders of trust preferred
securities on a pro rata basis. If UBS Preferred Funding Company does not pay
any semi-annual dividend on the company preferred securities when it is required
to and UBS AG does not perform its obligations under the UBS AG subordinated
guarantee, UBS Preferred Funding Trust will not have sufficient funds to make
the related semi-annual distribution payment on the trust preferred securities.
We have applied to list the trust preferred securities on the Luxembourg Stock
Exchange.
DISTRIBUTIONS
Each trust preferred security will represent a corresponding amount of the
company preferred securities, together with the related rights under the UBS AG
subordinated guarantee. UBS Preferred Funding Trust will make semi-annual or
quarterly distributions or other mandatory distributions on
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the trust preferred securities concurrently with, and in the same amount as, the
semi-annual or quarterly dividends or special dividends on the company preferred
securities. See "Description of Company Preferred Securities--Dividends."
Accordingly, to the extent that dividends are paid on the company preferred
securities, distributions on the trust preferred securities will be paid on the
liquidation amount of the trust preferred securities as follows:
- semi-annually in arrears on the dividend payment dates regularly
scheduled to occur in April and October of each year, commencing --
October 2000, for each dividend period through the dividend period ending
on the dividend payment date in October 2010, at a fixed rate per annum
equal to --% (calculated on the basis of a 360-day year consisting of
twelve 30-day months), and
- thereafter, quarterly in arrears on the dividend payment dates regularly
scheduled to occur in January, April, July and October of each year, at a
floating rate per annum equal to --% above three-month LIBOR (calculated
on the basis of the actual number of days elapsed in a 360-day year).
Whenever, and to the extent, UBS Preferred Funding Trust receives any cash
payments representing a semi-annual dividend, special dividend or redemption
payment on the company preferred securities, UBS Preferred Funding Trust will
distribute such amounts to the holders of trust preferred securities in
proportion to their liquidation amounts. Each semi-annual, quarterly or special
distribution on the trust preferred securities will be payable to holders of
record as they appear on the securities register of UBS Preferred Funding Trust
on the corresponding record date. The record dates for the trust preferred
securities will be the fifteenth day (whether or not a business day) prior to
the relevant semi-annual, quarterly or other distribution date.
If any distribution would be payable on a day that is not a business day, that
distribution will instead be made on the next business day. No interest or other
payment will be due as a result of any such delay.
If dividends are not payable on company preferred securities on any dividend
payment date for the reasons described in "Description of Company Preferred
Securities--Dividends," then the holders of trust preferred securities will not
be entitled to receive a distribution on that date.
REDEMPTION
The trust preferred securities can be redeemed only upon redemption of the
company preferred securities.
If UBS Preferred Funding Company redeems the company preferred securities in
accordance with its LLC Agreement as described under "Description of Company
Preferred Securities--Redemption," then UBS Preferred Funding Company must give
the trustee at least 30 days' prior notice before doing so. The trustee will
mail the notice of redemption not less than 25 days prior to the date fixed for
redemption of the company preferred securities to the holders of trust preferred
securities as provided under "--Notices."
On the date of redemption of the company preferred securities, so long as UBS
Preferred Funding Company or UBS AG has deposited with Wilmington Trust Company,
the paying agent, on behalf of UBS Preferred Funding Trust the aggregate amount
payable upon redemption of all the company preferred securities held by UBS
Preferred Funding Trust to be redeemed, the paying agent on behalf of UBS
Preferred Funding Trust will irrevocably deposit with The Depositary Trust
Company ("DTC") funds sufficient to pay the redemption price and give DTC
irrevocable instructions to pay the redemption price to the holders of trust
preferred securities to be redeemed. See "Book-Entry Issuance of Trust Preferred
Securities." Once the paying agent has received this deposit, all rights of the
holders of trust preferred securities called for redemption will end, except
their right to receive the redemption price, without interest. If any date fixed
for redemption of the trust preferred securities is not a
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business day, then the redemption price will instead be paid on the next
business day, except that if that business day falls in the next calendar year,
the redemption price will be paid on the preceding business day. No interest or
other payment will be due as a result of any such adjustment.
If only some of the outstanding trust preferred securities are to be redeemed,
the trust preferred securities to be redeemed will be selected in accordance
with DTC's procedures. See "Book-Entry Issuance of Trust Preferred
Securities--DTC's Procedures for Notices, Voting and Payments." If the trust
preferred securities do not remain registered in the name of DTC or its nominee
and only some of the outstanding trust preferred securities are to be redeemed,
the trust preferred securities will be redeemed proportionately or selected for
redemption pursuant to the rules of any securities exchange on which the trust
preferred securities are listed at that time. UBS Preferred Funding Company will
promptly notify the registrar and transfer agent for the trust preferred
securities, in writing, of the trust preferred securities selected for
redemption.
WITHDRAWAL OF THE COMPANY PREFERRED SECURITIES
Any beneficial owner of the trust preferred securities may withdraw all, but not
less than all, of the company preferred securities represented by such trust
preferred securities by providing a written notice to the trustee, with evidence
of beneficial ownership in form satisfactory to the trustee and providing to UBS
Preferred Funding Company such documents or information as UBS Preferred Funding
Company may request for tax reporting purposes. The holder's notice will also be
deemed to be such beneficial owner's agreement to be subject to the terms of UBS
Preferred Funding Company's LLC Agreement applicable to the rights of the
holders of company preferred securities.
Within a reasonable period after such a request has been properly made, the
trustee must instruct DTC to reduce the trust preferred securities represented
by the global certificate by the corresponding amount of the company preferred
securities to be so withdrawn by the withdrawing owner. UBS Preferred Funding
Company will issue to the withdrawing owner a certificate representing the
amount of the company preferred securities withdrawn, and the trustee will
reduce the amount of the trust preferred securities represented by the global
certificate accordingly. The company preferred securities will be issued only in
certificated fully-registered form and will not be eligible to be held through
DTC, Euroclear or Clearstream. Under U.S. tax reporting rules, holders of
company preferred securities will thereafter receive an annual Form K-1 instead
of the Form 1099 that holders of trust preferred securities will receive. See
"Certain U.S. Tax Considerations--Information Reporting and Backup Withholding
Tax."
Any holder of company preferred securities may redeposit withdrawn company
preferred securities by delivering to the trustee the certificates for the
company preferred securities to be deposited, which are (i) if required by the
trustee, properly endorsed or accompanied by a properly executed instrument of
transfer or endorsement in form satisfactory to the trustee and in compliance
with the terms of UBS Preferred Funding Company's LLC Agreement and (ii)
accompanied by all such certifications as may be required by the trustee in its
sole discretion and in accordance with the provisions of the Amended and
Restated Trust Agreement. Within a reasonable period after such deposit is
properly made, the trustee will instruct DTC to increase the amount of the trust
preferred securities represented by the global certificate accordingly.
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VOTING RIGHTS
If at any time, the holders of company preferred securities are entitled to vote
under UBS Preferred Funding Company's LLC Agreement, the trustee will:
- notify the holders of trust preferred securities of such right,
- request specific direction from each holder of trust preferred
securities as to the vote with respect to the company preferred
securities represented by such trust preferred securities, and
- vote the relevant company preferred securities only in accordance with
such specific direction.
Upon receiving notice of any meeting at which the holders of company preferred
securities are entitled to vote, the trustee will, as soon as practicable, mail
to the holders of trust preferred securities a notice as provided under
"--Notices." UBS Preferred Funding Company will provide the form of notice to
the trustee to be forwarded to the holders of trust preferred securities. The
notice will contain:
- all the information that is contained in the notice announcing the
meeting of the company preferred securities,
- a statement that the holders of trust preferred securities will be
entitled, subject to any applicable provision of law, to direct the
trustee specifically as to the exercise of the voting rights pertaining
to the number of the company preferred securities represented by their
respective trust preferred securities, and
- a brief description of the manner in which the holders may give such
specific directions.
If the trust receives a written direction from a holder of trust preferred
securities, the trustee will vote, or cause to be voted, the amount of the
company preferred securities represented by such trust preferred securities in
accordance with the instructions set forth in the direction. If the trustee does
not receive specific instructions from the holder of any trust preferred
securities, the trustee will abstain from voting the company preferred
securities represented by those trust preferred securities.
UBS Preferred Funding Company and the trustee may, without the consent of the
holders of the trust preferred securities, enter into one or more agreements
supplemental to the Amended and Restated Trust Agreement, in form satisfactory
to the trustee, for any of the following purposes:
- to evidence the succession of another partnership, corporation or other
entity to UBS Preferred Funding Company and the assumption by any such
successor of the covenants of UBS Preferred Funding Company under the
Amended and Restated Trust Agreement,
- to add to the covenants of UBS Preferred Funding Company for the benefit
of the holders of the trust preferred securities, or to surrender any
right or power herein conferred upon UBS Preferred Funding Company,
- to correct or supplement any provision of the Trust Agreement which may
be defective or inconsistent with any other provision therein,
- to make any other provisions with respect to matters or questions
arising under the Amended and Restated Trust Agreement, provided that
any such action does not materially adversely affect the interests of
the holders of the trust preferred securities, or
- to cure any ambiguity or correct any mistake.
Any other amendment or agreement supplemental to the Amended and Restated Trust
Agreement must be in writing and approved by holders of 66 2/3% of the then
outstanding trust preferred securities.
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TRANSFER AND ISSUE OF DEFINITIVE TRUST PREFERRED SECURITIES
TRANSFER, ISSUE AND DELIVERY
If trust preferred securities are issued in definitive form ("definitive trust
preferred securities") in the limited circumstances described in "Book-Entry
Issuance of Trust Preferred Securities--Termination of and Changes to Depositary
Arrangements," those trust preferred securities may be transferred in any
whole-number multiples of $1,000 by surrendering the definitive trust preferred
securities certificates together with the form of transfer endorsed on it, duly
completed and executed at the office of the transfer agent. The initial transfer
agent will be Wilmington Trust Company. If only part of a definitive trust
preferred securities certificate is transferred, a new definitive trust
preferred securities certificate representing the securities that are not
transferred will be issued to the transferor within three business days after
the transfer agent receives the certificate. The new certificate representing
the trust preferred securities that were not transferred will be delivered to
the transferor by uninsured mail at the risk of the transferor, to the address
of the transferor that appears in the records of UBS Preferred Funding Trust.
The new certificate representing the trust preferred securities that were
transferred will be sent to the transferee within three business days after the
trustee receives the certificate transferred, by uninsured mail at the risk of
the holder entitled to the trust preferred securities represented by the
certificate, to the address specified in the form of transfer.
FORMALITIES FREE OF CHARGE
Registration of transfers of definitive trust preferred securities will be made
without charge by UBS Preferred Funding Trust, but the transferor must pay any
tax or other governmental charges that may be imposed in relation to the
transfer, together with any indemnity that UBS Preferred Funding Trust, UBS AG
or the transfer agent may require.
CLOSED PERIODS
No holder may require the transfer of the trust preferred securities to be
registered during the period of 15 days ending on the due date for any payment
of principal on the trust preferred securities.
UBS Preferred Funding Trust will not be required to register, or cause others to
register, the transfer of trust preferred securities after such trust preferred
securities have been called for redemption.
REGULATIONS CONCERNING TRANSFER AND REGISTRATION
All transfers of definitive trust preferred securities and entries must be made
as provided in the agency agreement relating to the trust preferred securities.
The provisions of this agreement that govern transfers may be changed by UBS
Preferred Funding Trust with the prior written approval of the trustee.
REGISTRAR AND TRANSFER AGENT
Wilmington Trust Company will act as registrar and transfer agent for the trust
preferred securities. As long as the trust preferred securities are listed on
the Luxembourg Stock Exchange, UBS Preferred Funding Trust will also maintain a
transfer agent in Luxembourg. The initial Luxembourg transfer agent will be BNP
Paribas.
PAYMENTS AND PAYING AGENT
As long as the trust preferred securities are in book-entry form, payments on
the trust preferred securities will be made to DTC, which will credit the
relevant accounts at DTC on the scheduled payment dates. The payments will be
distributed to participants, indirect participants and beneficial owners of the
trust preferred securities as described under "Book-Entry Issuance of Trust
Preferred Securities--DTC's Procedures for Notices, Voting and Payments."
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If definitive trust preferred securities are issued in the limited circumstances
described above, payments on the trust preferred securities will be made by
check mailed to the address of the holder entitled to receive the payment, as
the address appears in UBS Preferred Funding Trust's register.
UBS Preferred Funding Trust will maintain a paying agent with respect to the
trust preferred securities which will initially be Wilmington Trust Company. The
paying agent will be permitted to resign as paying agent upon 30 days' written
notice to the trustee. If Wilmington Trust Company resigns as paying agent, the
trustee will appoint another bank or trust company to act as paying agent. As
long as the trust preferred securities are listed on the Luxembourg Stock
Exchange, UBS Preferred Funding Trust will also maintain a paying agent in
Luxembourg. The initial Luxembourg paying agent will be BNP Paribas.
TERMINATION OF AMENDED AND RESTATED TRUST AGREEMENT
The Amended and Restated Trust Agreement will terminate upon the earliest to
occur of the redemption of all of the trust preferred securities, the delivery
of a final distribution of the company preferred securities to the holders of
trust preferred securities, withdrawal of all the company preferred securities
from UBS Preferred Funding Trust (as described under "--Withdrawal of the
Company Preferred Securities") or dissolution of UBS Preferred Funding Trust as
described in the following paragraph.
UBS Preferred Funding Company may instruct the trustee to dissolve UBS Preferred
Funding Trust and distribute the company preferred securities on a pro rata
basis to the holders of trust preferred securities in the case of either a Tax
Event as to UBS Preferred Funding Trust or an Investment Company Act Event as to
UBS Preferred Funding Trust, as each is defined under "Description of Company
Preferred Securities--Redemption."
Any company preferred securities held in definitive fully registered form will
not be eligible to be held through DTC, Euroclear or Clearstream.
EXPENSES OF UBS PREFERRED FUNDING TRUST
All charges or expenses of UBS Preferred Funding Trust, including the charges
and expenses of the trustee, will be paid by the Stamford branch of UBS AG,
except that, if the trustee incurs fees, charges or expenses, for which it is
not otherwise liable under the Amended and Restated Trust Agreement, at the
request of a holder of trust preferred securities or other person, such holder
or other person will be liable for such fees, charges and expenses.
RESIGNATION AND REMOVAL OF THE TRUSTEE
UBS Preferred Funding Trust will at all times have a trustee that is a bank that
has its principal place of business in the State of Delaware and a combined
capital and surplus of $50,000,000. If the trustee ceases to be eligible, it
must resign.
The trustee may resign as trustee under the Amended and Restated Trust Agreement
at any time by giving notice of its resignation to UBS Preferred Funding
Company. The trustee may be removed by UBS Preferred Funding Company at any time
by notice of such removal delivered to the trustee. Any resignation or removal
of the trustee will take effect upon the appointment of a qualified successor
trustee and the successor's acceptance of such appointment.
If the trustee shall resign or be removed, UBS Preferred Funding Company shall,
within 45 days after the delivery of the notice of resignation or removal, as
the case may be, appoint a successor trustee, which shall be a bank or trust
company, or an affiliate of a bank or trust company, having its
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principal office in the State of Delaware and having a combined capital and
surplus of at least $50,000,000.
INFORMATION CONCERNING THE TRUSTEE
Wilmington Trust Company is the trustee. The trustee is required to perform only
those duties that are specifically set forth in the Amended and Restated Trust
Agreement, except when a default has occurred and is continuing with respect to
the trust preferred securities. After a default, the trustee must exercise the
same degree of care a prudent person would exercise under the circumstances in
the conduct of his or her own affairs. Subject to these requirements, the
trustee is under no obligation to exercise any of the powers vested in it by the
Amended and Restated Trust Agreement at the request of any holder of trust
preferred securities, unless the holder offers the trustee reasonable indemnity
against the costs, expenses and liabilities that might be incurred by exercising
those powers.
NOTICES
Notices to the holders of trust preferred securities will be given by delivery
of the relevant notice to DTC, Euroclear, Clearstream and any other relevant
securities clearing system for communication by each of them to entitled
participants, and, as long as the trust preferred securities are listed on one
or more stock exchanges and the rules of such stock exchange(s) so require,
notices will also be published in the manner that the rules of such stock
exchange(s) may require. In addition, for as long as the rules of the Luxembourg
Stock Exchange so require, notices will be published in one English language
daily newspaper of general circulation in London (which is expected to be the
Financial Times) and in a daily newspaper of general circulation in Luxembourg
(which is expected to be the Luxembourger Wort).
If the trust preferred securities are no longer held in the name of DTC or its
nominee, notice to the holders of trust preferred securities will be mailed by
first-class mail, postage prepaid, to the holders' addresses appearing in the
records of UBS Preferred Funding Trust.
GOVERNING LAW
The Trust Agreement and the trust preferred securities are governed by the laws
of the State of Delaware.
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Description of Company Preferred Securities
UBS Preferred Funding Company will issue the company preferred securities under
the terms of its Amended and Restated Limited Liability Company Agreement. The
following summary of the material terms and provisions of the company preferred
securities is not complete and is subject to and qualified in its entirety by
reference to the LLC Agreement of UBS Preferred Funding Company and the Delaware
Limited Liability Company Act. We have filed a copy of the LLC Agreement of UBS
Preferred Funding Company as an exhibit to the registration statement of which
this prospectus is a part.
GENERAL
The company preferred securities are preferred limited liability company
interests in UBS Preferred Funding Company, the terms of which are set forth in
UBS Preferred Funding Company's LLC Agreement.
The company preferred securities are intended to provide holders with rights to
distributions and redemption and liquidation payments that are similar to those
to which holders would be entitled if they had purchased the most senior ranking
noncumulative perpetual preferred shares issued directly by UBS AG that have
financial terms equivalent to those of the company preferred securities.
When issued, the company preferred securities will be validly issued, and no
additional payments will be required for such securities to represent limited
liability company interests in UBS Preferred Funding Company. Holders of company
preferred securities will have no preemptive rights with respect to any other
securities of UBS Preferred Funding Company. The company preferred securities
will not be convertible into company common securities or any other interests in
UBS Preferred Funding Company and will not be subject to any sinking fund or
other obligation of UBS Preferred Funding Company for their repurchase or
retirement.
The company preferred securities will be issued in certificated form only in
denominations of $1,000 liquidation preference and whole-number multiples of
$1,000. The aggregate liquidation preference of the company preferred securities
offered pursuant to this prospectus is $1,500,000,000.
UBS Preferred Funding Company has the power to create and issue additional
preferred limited liability company interests (i) that are junior to the company
preferred securities as to payment of dividends and payments of amounts upon
dissolution, liquidation or winding up of UBS Preferred Funding Company
("company junior securities") or (ii) that are on a parity with the company
preferred securities as to those payments ("company parity preferred
securities"). As long as any company preferred securities remain outstanding, no
company parity preferred securities may be issued unless the holders of at least
66 2/3% of the outstanding company preferred securities and company parity
preferred securities, if any (based on the aggregate liquidation preference),
voting together as a single class, approve or unless the UBS AG subordinated
guarantee is amended so that such company parity preferred securities benefit
from the UBS AG subordinated guarantee in the same manner as the company
preferred securities without any adverse effect on the holders of company
preferred securities. See "--Voting Rights."
The LLC Agreement of UBS Preferred Funding Company will preclude UBS Preferred
Funding Company from issuing, without the consent of each holder of company
preferred securities, any company parity preferred securities or any other
classes or series of equity securities that are senior to the company preferred
securities as to dividend rights or rights upon dissolution, liquidation or
winding up of UBS Preferred Funding Company.
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DIVIDENDS
GENERAL
Dividends on the company preferred securities will be payable from the date of
initial issuance on a noncumulative basis, semi-annually in arrears on April --
and October -- of each year through October 2010 and thereafter quarterly in
arrears on January --, April --, July -- and October -- each year (each a
"dividend payment date") for the dividend period then ending, but only if UBS
Preferred Funding Company has legally available funds for such purpose and
satisfies the other qualifications described below. Each period from and
including a dividend payment date or the date of initial issuance, as
applicable, to but not including the next dividend payment date is a "dividend
period".
Dividends will be payable on the liquidation preference:
- for each dividend period through the dividend period ending on the
dividend payment date in October 2010, at a fixed rate per annum equal to
--% (calculated on the basis of a year of twelve 30-day months), and
- for each dividend period commencing on such dividend payment date and
thereafter, at a floating rate per annum equal to --% above three-month
LIBOR (calculated on the basis of the actual number of days elapsed in a
360-day year).
Dividends will be mandatorily due and payable on a dividend payment date with
respect to the related dividend period and special dividends will be mandatorily
due and payable on other dates in the circumstances described under "--Mandatory
Dividends," except that dividends will never be mandatorily due and payable or
be paid when the capital limitation (described below under "--Capital
Limitation") applies. If dividends are neither mandatorily due and payable on a
dividend payment date nor prohibited by application of the capital limitation,
then:
- payment of dividends on the company preferred securities will be limited
by UBS AG's available distributable profits (see "--Distributable Profits
Limitation"), and
- if UBS AG delivers, on or before the tenth business day immediately
preceding the dividend payment date, an instruction (a "no dividend
instruction") to UBS Preferred Funding Company not to pay dividends on
that dividend payment date or to pay less than full dividends on that
dividend payment date, dividends payable on the related dividend payment
date will be limited as provided in the no dividend instruction (see
"--No Dividend Instruction").
If any dividends will be payable on the company preferred securities on a day
that is not a business day, those dividends will instead be paid on the next
business day. No interest or other payment will be due as a result of any such
adjustment.
LIBOR, with respect to a determination date (as defined below), means the rate
(expressed as a percentage per annum) for deposits in U.S. dollars for a
three-month period commencing on the second London banking day (as defined
below) immediately following that determination date that appears on Telerate
Page 3750 (as defined below) as of 11:00 a.m. (London time) on that
determination date. If such rate does not appear on Telerate Page 3750, LIBOR
will be determined on the basis of the rates which deposits in U.S. dollars for
a three-month period commencing on the second London banking day immediately
following that determination date and in a principal amount of not less than
$1,000,000 are offered to prime banks in the London interbank market by four
major banks in the London interbank market selected by the calculation agent (as
defined below), after consultation with UBS Preferred Funding Company, at
approximately 11:00 a.m., London time, on that determination date.
The calculation agent will request the principal London office of each of such
banks to provide a quotation at its rate. If at least two such quotations are
provided, LIBOR with respect to that determination date will be the arithmetic
mean of such quotations. If fewer than two quotations are provided, LIBOR with
respect to that determination date will be the arithmetic mean of the rates
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quoted by three major money center banks in New York City selected by the
calculation agent, after consultation with UBS Preferred Funding Company, at
approximately 11:00 a.m., New York City time, on that determination date for
loans in U.S. dollars to leading European banks for a three-month period
commencing on the second London banking day immediately following that
determination date and in a principal amount of not less than $1,000,000.
However, if the banks selected by the calculation agent to provide quotations
are not quoting as described in this paragraph, LIBOR for the applicable period
will be the same as LIBOR as determined on the previous determination date.
As used in this prospectus:
"calculation agent" means the London branch of UBS AG.
"determination date" for a dividend period or interest period (as
applicable) means two London banking days preceding the first day of that
dividend period or interest period (as applicable).
"London banking day" means a day on which dealings in deposits in U.S.
dollars are transacted in the London interbank market.
"Telerate Page 3750" means the display designated as "Page 3750" on the
Bridge/Telerate Service (or such other page as may replace Page 3750) on
that service or such other service or services as may be nominated by the
British Bankers' Association as the information vendor for the purpose of
displaying London interbank offered rates for U.S. dollar deposits.
All percentages resulting from any calculations on the company preferred
securities will be rounded, if necessary, to the nearest one hundred-thousandth
of a percentage point, with five one-millionths of a percentage point rounded
upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)),
and all dollar amounts used in or resulting from such calculation will be
rounded to the nearest cent (with one-half cent being rounded upward).
MANDATORY DIVIDENDS
UBS Preferred Funding Company will be required to pay dividends on the company
preferred securities in three circumstances, as follows:
(i) If UBS AG declares or pays dividends or makes any other payment or
distribution on any UBS AG junior obligations, and provided that the
capital limitation does not apply, then UBS Preferred Funding Company
will be required to pay full dividends on the company preferred
securities during the one-year period beginning on and including the
earlier of the date on which such dividend was declared or the date on
which such dividend or other payment was made.
(ii) If UBS AG or any of its subsidiaries redeems, repurchases or
otherwise acquires any UBS AG parity securities or UBS AG junior
obligations for any consideration, except by conversion into or
exchange for shares of UBS AG or UBS AG junior obligations and except
as described below (and provided that the capital limitation does not
apply), then UBS Preferred Funding Company will be required to pay
dividends on the company preferred securities during the one-year
period beginning on and including the date on which such redemption,
repurchase or other acquisition occurred.
(iii) If (x) UBS AG or any of its subsidiaries pays any dividends or makes
any other payment or distribution on any UBS AG parity securities on
any date and (y) during the relevant period (as defined below) ending
on and including that date there occurred a dividend payment date as
to which UBS Preferred Funding Company paid no dividends or less than
full dividends on the company preferred securities, and provided that
the capital limitation does not apply, then on that date UBS
Preferred Funding Company will be required to pay a special dividend
on
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the company preferred securities. The special dividend will be payable
on that date whether or not that date is otherwise a dividend payment
date and, if it is a dividend payment date, will be in addition to any
other dividends required to be paid on that dividend payment date. The
special dividend will be in an amount that, when taken together with
dividends previously paid on the company preferred securities during the
relevant period, represents the same proportion of full dividends on the
company preferred securities for all dividend payment dates during the
relevant period that the dividend on UBS AG parity securities paid
during that relevant period bears to full dividends on such UBS AG
parity securities for that relevant period.
Notwithstanding paragraph (ii) above, UBS Preferred Funding Company will not be
required to pay dividends solely as a result of:
- repurchases, redemptions or other acquisitions of UBS AG parity
securities or UBS AG junior obligations in connection with any
employment contract, benefit plan or other similar arrangement with or
for the benefit of any one or more employees, officers, directors or
consultants, in connection with a dividend reinvestment or shareholder
share purchase plan or in connection with the issuance of UBS AG parity
securities or UBS AG junior obligations (or securities convertible into
or exercisable for such UBS AG parity securities or UBS AG junior
obligations) as consideration in an acquisition transaction,
- market-making in the UBS AG parity securities or UBS AG junior
obligations as part of the securities business of UBS AG or any of its
subsidiaries,
- the purchase of fractional interests in UBS AG parity securities or UBS
AG junior obligations pursuant to the conversion or exchange provisions
of such UBS AG parity securities or UBS AG junior obligations or the
security being converted or exchanged,
- any declaration of a dividend in connection with any shareholder's
rights plan, or the issuance of rights, shares or other property under
any shareholder's rights plan, or the redemption or repurchase of rights
pursuant to any such plan, or
- any dividend in the form of shares, warrants, options or other rights
where the dividend shares or the shares issuable upon exercise of such
warrants, options or other rights are the same shares as that on which
the dividend is being paid or ranks equally with or junior to such
shares.
Any dividend payment date or other date on which dividends on the company
preferred securities are required to be paid as described in clause (i), (ii) or
(iii) of the second paragraph above is a "mandatory dividend payment date." The
amount of dividends required to be paid on any mandatory dividend payment date
(after giving effect to the capital limitation, if applicable) is called the
"mandatory dividend payment amount." If a dividend payment date or other date is
a mandatory dividend payment date, UBS Preferred Funding Company will be
required to pay the mandatory dividend payment amount as dividends on that date
whether or not there are available distributable profits and whether or not
interest is paid on the subordinated notes.
For purposes of this prospectus:
"UBS AG junior obligations" means (i) ordinary shares of UBS AG, (ii) each
class of preferred or preference shares or similar securities of UBS AG
that ranks junior to the most senior ranking preferred or preference shares
or similar securities of UBS AG, and (iii) any indebtedness, guarantee or
support agreement or similar undertaking of UBS AG in respect of any
subsidiary securities that rank junior to the UBS AG subordinated
guarantee.
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"UBS AG parity securities" means (i) each class of preferred or preference
shares or similar securities of UBS AG that ranks equally with the most
senior ranking preferred or preference shares or similar securities of UBS
AG and (ii) any securities issued by any subsidiaries of UBS AG and
entitled to the benefit of any guarantee or support agreement or similar
undertaking of UBS AG that ranks equally with the UBS AG subordinated
guarantee.
"relevant period" means (i) in the case of UBS AG parity securities that
pay dividends less frequently than semi-annually, one year and (ii) in the
case of UBS AG parity securities that pay dividends semi-annually or more
frequently than semi-annually, six months (in each case ending on or
including the date on which the related dividend on a parity security is
paid but not including the corresponding day in the month that is twelve or
six months prior thereto).
CAPITAL LIMITATION
The prohibition on the payment of dividends on the company preferred securities
as described below is called the "capital limitation."
Unless the Swiss Federal Banking Commission expressly permits otherwise, UBS
Preferred Funding Company will not pay dividends on the company preferred
securities on any dividend payment date (whether or not it is a mandatory
dividend payment date) if on such date UBS AG is not in compliance, or because
of a distribution by UBS AG or any of its subsidiaries of profits of UBS AG
(including a payment of dividends on the company preferred securities) would not
be in compliance, with the Swiss Federal Banking Commission's minimum capital
adequacy requirements applicable to UBS AG as then in effect. For a discussion
of UBS's capital resources relative to applicable guidelines, see
"UBS--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources."
DISTRIBUTABLE PROFITS LIMITATION
The limitation or prohibition on the payment of dividends on the company
preferred securities as described below is called the "distributable profits
limitation." The distributable profits limitation will not limit or prohibit
payment of mandatory dividends on a mandatory dividend payment date. The effect
of the distributable profits limitation is to limit the amount of non-mandatory
dividends that UBS Preferred Funding Company may pay on the company preferred
securities to the amount of dividends that UBS AG would have been legally able
to pay on such securities had they been issued directly by UBS AG as
non-cumulative preference shares of UBS AG.
On or before the dividend payment date in April of each year, UBS AG will
deliver a certificate to UBS Preferred Funding Company (a "distributable profits
limitation certificate") specifying:
- the distributable profits (as defined below) of UBS AG for the financial
year ending on the preceding December 31, and
- the available distributable profits (as defined below) for payment of
dividends on the company preferred securities on the dividend payment
dates in the then current year.
Unless UBS Preferred Funding Company is required to pay mandatory dividends:
- the aggregate amount of dividends on the company preferred securities
that UBS Preferred Funding Company may pay on the dividend payment date
in April of the current year may not exceed the lesser of full dividends
and the available distributable profits set forth in such distributable
profits limitation certificate, and
- the aggregate amount of dividends on the company preferred securities
that UBS Preferred Funding Company may pay on any subsequent dividend
payment date in the current year (or in January of the following year in
the case of dividend payment dates occurring after October
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2010) may not exceed the lesser of full dividends and the remaining
amount of such available distributable profits (after giving effect to
the payment of dividends pursuant to this bullet point or the bullet
point immediately above).
For purposes of this prospectus:
"distributable profits" means, for any financial year of UBS AG, profit
that may be distributed in accordance with Swiss law then applicable.
Currently, for any financial year of UBS AG, distributable profits are
equal to profit brought forward, plus profit for the period, minus
appropriation to general statutory reserve, plus other reserves, each as
shown in the audited unconsolidated balance sheet and statement of
appropriation of retained earnings of UBS AG and as determined in
accordance with accounting standards applicable under Swiss law. The
"appropriation to general statutory reserve" is equal to up to 5% of annual
profit to the extent the general reserves of UBS AG do not equal 20% of the
paid-in share capital plus 10% of the amount distributed as a dividend from
profit for the period in excess of 5% of the par value of the UBS common
shares. UBS AG's distributable profits for 1999 were approximately CHF 12
billion.
"available distributable profits" means, for any financial year of UBS AG:
- if there are no UBS AG parity securities outstanding, distributable
profits for the immediately preceding financial year of UBS AG, and
- if there are UBS AG parity securities outstanding, then an amount
determined as the product of:
(x) distributable profits for the immediately preceding financial year
of UBS AG, and
(y) a ratio (I) the numerator of which is the aggregate amount of full
dividends on the company preferred securities to be paid on the
dividend payment dates that occur during the then current financial
year (but excluding dividends paid on January of the current year
and including dividends to be paid on January of the following
year, in the case of calculations occurring after October 2010) and
(II) the denominator of which is equal to the amount determined
pursuant to clause (I) plus the aggregate amount of full dividends
on the UBS AG parity securities to be paid on dividend payment
dates which occur during the then current financial year.
NO DIVIDEND INSTRUCTION
Except for the mandatory dividend payment amounts required to be paid on
mandatory dividend payment dates:
- dividends on the company preferred securities will not be payable on a
dividend payment date if, on or before the tenth business day
immediately preceding such dividend payment date, UBS AG delivers a no
dividend instruction to UBS Preferred Funding Company instructing it not
to pay dividends on that dividend payment date, and
- if, on or before the tenth business day immediately preceding such
dividend payment date, UBS AG delivers a no dividend instruction to UBS
Preferred Funding Company limiting but not prohibiting the payment of
dividends on such dividend payment date, dividends on the company
preferred securities will be payable on that dividend payment date only
to the extent permitted by such no dividend instruction.
If a no dividend instruction is given, then UBS Preferred Funding Company must
promptly give notice to the holders of company preferred securities in the
manner described under "--Notices" of the fact
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that it has received a no dividend instruction and the amount of dividends, if
any, that will be paid on the related dividend payment date.
ADDITIONAL AMOUNTS
If UBS Preferred Funding Company or UBS Preferred Funding Trust is required to
withhold any taxes, duties or other governmental charges with respect to any
dividend payment on the trust preferred securities or the company preferred
securities, UBS Preferred Funding Company will be required to pay, as additional
amounts included in the dividend payment (and UBS AG will be required to include
in any related payment made by it under the UBS AG subordinated guarantee), an
amount sufficient that the net amount received by the holder of company
preferred securities or trust preferred securities, as applicable, after the
withholding, will not be less than the dividend payment amount. However, UBS
Preferred Funding Company will not be required to pay any such additional
amounts to the extent that the taxes, duties or other governmental charges are
imposed or levied by Switzerland or the Cayman Islands because the holder or
beneficial owner of trust preferred securities or company preferred securities:
- has some connection with Switzerland or the Cayman Islands, as
applicable, other than being a holder or beneficial owner of those trust
preferred securities or company preferred securities, or
- has not made a declaration of non-residence in, or other lack of
connection with, Switzerland or the Cayman Islands, as applicable, or
any similar claim for exemption, if UBS Preferred Funding Company has
given the beneficial owner of those trust preferred securities or
company preferred securities or its nominee at least 60 days' prior
notice of an opportunity to make the declaration or claim.
RANKING AND LIQUIDATION PREFERENCE
The company preferred securities ordinarily will rank senior to the company
common securities as to the payment of dividends. However, UBS AG has the right
to shift the dividend preference of the company preferred securities to the
company common securities on any dividend payment date to the extent that the
mandatory dividend payment amount then required to be paid as dividends on the
company preferred securities (if any) is less than full dividends on the company
preferred securities. If UBS AG shifts the dividend preference to the company
common securities, the interest payment received by UBS Preferred Funding
Company on the subordinated notes will be returned as dividends to UBS AG, as
the holder of company common securities, before any dividends are paid on the
company preferred securities.
As long as any company preferred securities are outstanding, UBS AG will agree
in UBS Preferred Funding Company's LLC Agreement that it will take no voluntary
action to cause UBS Preferred Funding Company to dissolve or liquidate unless
UBS AG also liquidates. UBS Preferred Funding Company's LLC Agreement will
provide that UBS Preferred Funding Company will be liquidated if UBS AG is
liquidated.
If UBS Preferred Funding Company dissolves, liquidates or winds up, then after
the claims of any creditors of UBS Preferred Funding Company are satisfied, the
holders of company preferred securities will be entitled to receive, before any
distribution of assets is made to the holders of company common securities or
any other class of shares ranking junior to the company preferred securities
upon liquidation, liquidating distributions in respect of the company preferred
securities in the amount of:
- the liquidation preference of the company preferred securities, plus
- an amount equal to unpaid dividends, if any, on the company preferred
securities with respect to the current dividend period accrued on a
daily basis to the date of liquidation, plus
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- an amount equal to unpaid definitive dividends for any prior dividend
period, without interest and without accumulation of unpaid
nondefinitive dividends for any prior dividend period.
For purposes of this prospectus:
"definitive dividends" means, as to a dividend payment date and related
dividend period, dividends that are due and payable because (i) they are not
limited by the capital limitation and (ii) either (x) they are mandatory
dividends or (y) a no dividend instruction was not delivered and they are
not limited by the distributable profit limitation.
"nondefinitive dividends" means, as to a dividend payment date and related
dividend period, dividends that are not definitive dividends.
If UBS AG is liquidated, whether voluntarily or involuntarily, (i) UBS Preferred
Funding Company will be liquidated and (ii) under the UBS AG Subordinated
Guarantee Agreement, the holders of company preferred securities (whether
through UBS Preferred Funding Trust or as direct holders who have withdrawn
their company preferred securities from UBS Preferred Funding Trust) will have a
claim entitling them to substantially the same liquidating distributions in the
liquidation of UBS AG that they would have been entitled to if they had
purchased preferred shares of UBS AG having an aggregate liquidation preference
equal to the aggregate liquidation preference of the company preferred
securities and bearing dividends at the rate of dividends applicable to the
company preferred securities. The UBS AG Subordinated Guarantee Agreement and
UBS Preferred Funding Company's LLC Agreement, taken together, will provide that
the holders of company preferred securities may not receive liquidating
distributions in a liquidation of UBS Preferred Funding Company and payments
under the UBS AG subordinated guarantee that, taken together, exceed the
liquidating distributions to which they would have been entitled had they
instead owned preferred shares of UBS AG with equivalent terms as described
above.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated below,
the holders of company preferred securities will not be entitled to vote. If the
holders of company preferred securities are entitled to vote as indicated below,
each $1,000 liquidation preference of the company preferred securities will be
entitled to one vote on matters on which the holders of company preferred
securities are entitled to vote.
If at any time the aggregate of unpaid dividends equals or exceeds an amount
equal to three semi-annual dividend payments, the holders of company preferred
securities and any company parity preferred securities, voting together as a
single class, will have the exclusive right to elect two additional directors of
their choosing. Holders of a majority (based on the aggregate liquidation
preference) of the company preferred securities and any company parity preferred
securities may exercise this right by written consent or at a meeting of such
holders called for such purpose. This right will continue either until all
unpaid dividends have been paid in full or until full dividends have been paid
on the company preferred securities for two consecutive dividend periods. While
this right continues, any vacancy in the office of the additional directors may
be filled only by the holders of company preferred securities and company parity
preferred securities voting as described above.
UBS Preferred Funding Company's LLC Agreement will provide that a meeting will
be called at the request of holders of 25% (based on the aggregate liquidation
preference) of the company preferred securities and any company parity preferred
securities.
As long as any company preferred securities are outstanding, UBS Preferred
Funding Company may not, without the consent or vote of holders of at least
66 2/3% of the outstanding company preferred
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securities and company parity preferred securities, if any (based on the
aggregate liquidation preference), voting together as a single class:
- change or remove any provision of UBS Preferred Funding Company's LLC
Agreement (including the terms of the company preferred securities),
issue any company parity preferred securities, redeem or repurchase any
company common securities, or consent to a change in the booking
location of the issuance of the subordinated notes to a branch or other
office of UBS AG other than the Cayman Islands branch of UBS AG, in each
case, if such action would materially and adversely affect the rights,
preferences, powers or privileges of the company preferred securities
and such company parity preferred securities,
- to the fullest extent permitted by law, liquidate, dissolve or terminate
UBS Preferred Funding Company without the concurrent liquidation of UBS
AG,
- amend or modify UBS Preferred Funding Company's investment policies, or
- merge, convert, consolidate, reorganize or effect any other business
combination involving UBS Preferred Funding Company, unless the
resulting entity will have no class or series of equity securities
either authorized or outstanding that ranks ahead of the company
preferred securities as to dividends or as to the distribution of assets
upon liquidation, dissolution or winding up, except the same number of
shares of such equity securities with the same preferences, conversion
or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications or terms or conditions
or redemption as the shares of equity securities of UBS Preferred
Funding Company that are authorized and outstanding immediately prior to
such transaction, and each holder of company preferred securities
immediately prior to such transaction shall receive securities with the
same preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions or redemption of the resulting
entity as the company preferred securities held by such holder
immediately prior to the transaction.
As long as any company preferred securities are outstanding, UBS Preferred
Funding Company may not, without the consent of the holders of each outstanding
company preferred security, authorize, create or increase the authorized amount
of, or issue any class or series of, any equity securities of UBS Preferred
Funding Company, or any warrants, options or other rights convertible or
exchangeable into any class or series of any equity securities of UBS Preferred
Funding Company, ranking prior to the company preferred securities, either as to
dividend rights or rights on dissolution, liquidation or winding up of UBS
Preferred Funding Company.
Notwithstanding any of the foregoing, without consent of any holder of company
preferred securities, UBS AG may amend or supplement the UBS AG Subordinated
Guarantee Agreement to correct or supplement any provision in the UBS AG
Subordinated Guarantee Agreement which may be defective or inconsistent with any
other provision therein, or to make any other provisions with respect to matters
or questions arising under the UBS AG Subordinated Guarantee Agreement, so long
as any such action shall not materially adversely affect the interests of the
holders of company preferred securities. See "Description of UBS AG Subordinated
Guarantee--Amendments."
Notwithstanding the foregoing, without the consent of any holder of company
preferred securities, UBS AG may amend or supplement the UBS Preferred Funding
Company's LLC Agreement:
- to correct or supplement any provision in the UBS Preferred Funding
Company's LLC Agreement which may be defective or inconsistent with any
other provision therein, or to make any other provisions with respect to
matters or questions arising under the UBS Preferred Funding Company's
LLC Agreement, so long as any such action shall not materially adversely
affect the interests of the holders of company preferred securities, or
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- to cure any ambiguity or correct any mistake.
REDEMPTION
The company preferred securities may not be redeemed before the dividend payment
date scheduled to occur in October 2010 unless a Tax Event, an Investment
Company Act Event or a Capital Event occurs, in which case UBS Preferred Funding
Company may redeem the company preferred securities in whole (but not in part)
at any time on not less than 30 nor more than 60 days' notice. On or after the
dividend payment date regularly scheduled to occur in October 2010, UBS
Preferred Funding Company may redeem the company preferred securities on any
dividend payment date for cash, in whole or in part, on not less than 30 nor
more than 60 days' notice.
The redemption price for such redemptions on or after the regularly scheduled
dividend payment date in October 2010 will be:
- 100% of the liquidation preference of the company preferred securities
being redeemed, plus
- an amount equal to unpaid dividends, if any, on the company preferred
securities with respect to the current dividend period (whether or not
declared) accrued on a daily basis to the date fixed for redemption, plus
- an amount equal to unpaid definitive dividends for any prior dividend
period, without interest and without accumulation of unpaid nondefinitive
dividends for any prior dividend period.
UBS Preferred Funding Company will also have the right to redeem the company
preferred securities in whole (but not in part) at any time prior to the
dividend payment date regularly scheduled to occur in October 2010, upon the
occurrence of a Tax Event, an Investment Company Act Event or a Capital Event.
The redemption price for a redemption arising out of a Tax Event resulting from
a Change in Tax Law (as defined below) and relating to the:
- imposition of tax on UBS Preferred Funding Trust or UBS Funding Company,
or
- the imposition of withholding tax on UBS Preferred Funding Company's
payment of dividends on the company preferred securities, on UBS
Preferred Funding Trust's payment of dividends on the trust preferred
securities, on UBS AG's payment of interest on the subordinated notes or
on UBS AG's payment under the subordinated guarantee
(which are the events described in clauses (A), (B) and (C) of the definition of
"Tax Event") will be the redemption price described above for optional
redemptions. Otherwise, the redemption price for such redemptions will be:
- the Make Whole Amount (as defined below), plus
- an amount equal to unpaid dividends, if any, on the company preferred
securities with respect to the current dividend period (whether or not
declared) accrued on a daily basis to the date fixed for redemption,
plus
- an amount equal to unpaid definitive dividends for any prior dividend
period, without interest and without accumulation of unpaid
nondefinitive dividends for any prior dividend period.
UBS Preferred Funding Company will have until the dividend payment date
regularly scheduled to occur in October 2010 after the occurrence of a Tax
Event, an Investment Company Act Event or a Capital Event to exercise its right
to redeem the company preferred securities.
Any redemption of the company preferred securities must comply with applicable
regulatory requirements, including the prior approval of the Swiss Federal
Banking Commission if then required under applicable guidelines or policies of
the Swiss Federal Banking Commission. The Swiss Federal
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Banking Commission in its discretion may impose conditions on its approval of
any proposed redemption of the company preferred securities. If dividends on any
company preferred securities are unpaid, no company preferred securities may be
redeemed unless all outstanding company preferred securities are redeemed, and
UBS Preferred Funding Company may not purchase or otherwise acquire any company
preferred securities, except pursuant to a purchase or exchange offer made on
the same terms to the holders of all outstanding company preferred securities.
The company preferred securities will not be subject to any sinking fund or
mandatory redemption and will not be convertible into any other securities of
UBS Preferred Funding Company or any securities of UBS AG.
As long as any company preferred securities are outstanding, other company
parity preferred securities may not be redeemed or repurchased unless UBS
Preferred Funding Company concurrently redeems an approximately equal proportion
of the aggregate liquidation preference of the outstanding company preferred
securities or each rating agency then rating the company preferred securities
informs UBS Preferred Funding Company in writing that the redemption or
repurchase of such company parity preferred securities would not result in a
reduction or withdrawal of the rating then assigned by that rating agency to the
company preferred securities.
If fewer than all outstanding company preferred securities are to be redeemed,
the amount of the company preferred securities to be redeemed will be determined
by the board of directors of UBS Preferred Funding Company, and the securities
to be redeemed will be determined by lot or pro rata as the board of directors
in its sole discretion determines to be equitable. UBS Preferred Funding Company
will promptly notify the registrar and transfer agent for the company preferred
securities in writing of the securities selected for redemption and, in the case
of any partial redemption, the liquidation preference to be redeemed.
Any company preferred securities redeemed will be canceled. There will be no
prescription period in respect of uncollected dividends on the company preferred
securities.
As used in this prospectus:
"administrative action" means any judicial decision, official
administrative pronouncement, published or private ruling, regulatory
procedure, notice or announcement (including any notice or announcement of
intent to adopt such procedures or regulations) by any legislative body,
court, governmental authority or regulatory body having appropriate
jurisdiction.
"Capital Event" means the determination by UBS AG after consultation with
the Swiss Federal Banking Commission that the company preferred securities
cannot be included in calculating the Tier 1 capital of UBS AG on a
consolidated basis.
"Change in Tax Law" means the receipt by UBS AG of an opinion of a
nationally recognized law firm or other tax advisor (which may be an
accounting firm) in Switzerland, the United States or the Cayman Islands,
as appropriate, experienced in such matters to the effect that an event of
the type described in clause (A), (B) or (C) of the definition of "Tax
Event" has occurred or will occur as a result of (i) any amendment to,
clarification of, or change (including any announced prospective change)
in, the laws or treaties (or any regulations under any laws or treaties) of
the United States, Switzerland or the Cayman Islands or any political
subdivision or taxing authority of or in the United States, Switzerland or
the Cayman Islands affecting taxation or (ii) any administrative action or
any amendment to, clarification of, or change in the official position of
or UBS AG interpretation of any administrative action or any interpretation
or pronouncement that provides for a position with respect to any
administrative action that differs from the previously generally accepted
position, in each case, by any legislative body, court, governmental
authority or regulatory body, regardless of the manner in which such
amendment, clarification, change,
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interpretation or pronouncement is made known, which amendment,
clarification, change or administrative action is effective or which
interpretation or pronouncement is announced on or after the date of
issuance of the company preferred securities.
"Investment Company Act Event" means the receipt by UBS AG of an opinion of
a nationally recognized law firm in the United States experienced in such
matters to the effect that there is more than an insubstantial risk that
UBS Preferred Funding Company or UBS Preferred Funding Trust is an
"investment company" within the meaning of the Investment Company Act of
1940.
"Make Whole Amount" as applied to a redemption of the company preferred
securities means the greater of (i) 100% of the liquidation preference of
the company preferred securities and (ii) as determined by a quotation
agent (as defined below), the sum of the present value of the liquidation
preference of the company preferred securities together with the present
values of scheduled payments of dividends accrued from the date of
redemption to the dividend payment date in October 2010 (the "remaining
life"), in each case discounted to the date of redemption on a semi-annual
basis (assuming a 360-day year consisting of twelve 30-day months) at the
adjusted treasury rate.
For purposes of determining the Make Whole Amount:
"adjusted treasury rate" means, with respect to any redemption date, the
treasury rate plus .75.
"comparable treasury issue" means with respect to any redemption date
the United States Treasury security selected by the quotation agent as
having a maturity comparable to the remaining life that would be
utilized, at the time of selection and in accordance with customary
financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the remaining life. If no United States
Treasury security has a maturity that is within a period from three
months before to three months after the interest payment date and
dividend payment date in October 2010, the two most closely
corresponding United States Treasury securities will be used as the
comparable treasury issue, and the treasury rate will be interpolated or
extrapolated on a straight-line basis, rounding to the nearest month
using such securities.
"comparable treasury price" means (A) the average of five reference
treasury dealer quotations for such redemption date, after excluding the
highest and lowest of such reference treasury dealer quotations, or (B)
if the quotation agent obtains fewer than five such reference treasury
dealer quotations, the average of all such quotations.
"quotation agent" means UBS Warburg LLC and its successors, except that
if UBS Warburg LLC ceases to be a primary U.S. Government securities
dealer in New York City (a "primary treasury dealer"), UBS Preferred
Funding Company will designate another primary treasury dealer.
"reference treasury dealer" means (i) the quotation agent and (ii) any
other primary treasury dealer selected by the quotation agent after
consultation with UBS Preferred Funding Company.
"reference treasury dealer quotations" means, with respect to each
reference treasury dealer and any redemption date, the average, as
determined by the quotation agent, of the bid and asked prices for the
comparable treasury issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the quotation agent by such
reference treasury dealer at 5:00 p.m., New York City time, on the third
business day preceding such redemption date.
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"treasury rate" means (i) the yield, under the heading which represents
the average for the week immediately prior to the redemption date,
appearing in the most recently published statistical release designated
"H.15(519)" or any successor publication which is published weekly by
the Federal Reserve and which establishes yields on actively traded
United States Treasury securities adjusted to constant maturity under
the caption "Treasury Constant Maturities," for the maturity
corresponding to the remaining life (or, if no maturity is within three
months before or after the remaining life, yields for the two published
maturities most closely corresponding to the remaining life will be
determined and the treasury rate will be interpolated or extrapolated
from such yields on a straight-line basis, rounding to the nearest
month) or (ii) if such release (or any successor release) is not
published during the week preceding the calculation date or does not
contain such yields, the rate per annum equal to the semi-annual
equivalent yield to maturity of the comparable treasury issue,
calculated using a price for the comparable treasury issue (expressed as
a percentage of its principal amount) equal to the comparable treasury
price for such redemption date. The treasury rate will be calculated on
the third business day preceding the redemption date.
"Tax Event" means the receipt by UBS AG of an opinion of a nationally recognized
law firm or other tax advisor (which may be an accounting firm) in Switzerland
or the United States, as appropriate, experienced in such matters to the effect
that, as a result of (i) any amendment to, clarification of, or change
(including any announced prospective change) in, the laws or treaties (or any
regulations under any laws or treaties) of the United States, Switzerland or the
Cayman Islands or any political subdivision or taxing authority of or in the
United States, Switzerland or the Cayman Islands affecting taxation or (ii) any
administrative action or any amendment to, clarification of, or change in the
official position or the interpretation of any administrative action or any
interpretation or pronouncement that provides for a position with respect to any
administrative action that differs from the theretofore generally accepted
position, in each case, by any legislative body, court, governmental authority
or regulatory body, irrespective of the manner in which such amendment,
clarification, change, interpretation or pronouncement is made known, which
amendment, clarification, change or administrative action is effective or which
interpretation pronouncement or decision is announced on or after the date of
issuance of the company preferred securities, there is more than an
insubstantial risk that (A) UBS Preferred Funding Company or UBS Preferred
Funding Trust is or will be subject to more than a de minimis amount of
additional taxes, duties or other governmental charges, (B) UBS AG is or will be
required to pay any additional amounts in respect of any taxes, duties or other
governmental charges with respect to payments of interest or principal on the
subordinated notes and with respect to any payments on the trust preferred
securities, (C) UBS Preferred Funding Company is or will be required to pay any
additional amounts in respect of any taxes, duties or other governmental charges
with respect to payments of dividends on the company preferred securities or UBS
Preferred Funding Trust is or will be required to pay any additional amounts in
respect of any taxes, duties or other governmental charges with respect to
distributions on the trust preferred securities, or (D) the treatment of any of
UBS Preferred Funding Company's items of income, gain, loss, deduction or
expense, or the treatment of any item of income, gain, loss, deduction or
expense of UBS AG related to the subordinated notes or its ownership of UBS
Preferred Funding Company, in each case as reflected on the tax returns
(including estimated returns) filed (or to be filed) by UBS Preferred Funding
Company or UBS AG, will not be respected by a taxing authority, as a result of
which UBS Preferred Funding Company or UBS AG is or will be subject to more than
a de minimis amount of additional taxes, duties or other governmental charges or
civil liabilities, the effect of which cannot be avoided by UBS Preferred
Funding Company or UBS AG taking reasonable measures available to it without any
adverse effect on or material cost to UBS AG or UBS Preferred Funding Company
(as determined by UBS AG in its sole discretion).
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REGISTRAR AND TRANSFER AGENT
Wilmington Trust Company, or any other entity that UBS AG designates, will act
as registrar and transfer agent for the company preferred securities.
Registration of transfers of the company preferred securities will be effected
without charge by or on behalf of UBS Preferred Funding Company, but upon
payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. UBS Preferred Funding Company will not
be required to register or cause to be registered the transfer of the company
preferred securities after such company preferred securities have been called
for redemption.
The LLC Agreement of UBS Preferred Funding Company provides that, in the event
of a partial redemption of the company preferred securities that would result in
a delisting of the trust preferred securities from any securities exchange on
which the trust preferred securities are then listed, UBS Preferred Funding
Company will redeem the company preferred securities in whole.
NOTICES
Notices to the holders of company preferred securities will be mailed by
first-class mail, postage prepaid, to the holders' addresses appearing in UBS
Preferred Funding Company's records.
GOVERNING LAW
The LLC Agreement of UBS Preferred Funding Company and the company preferred
securities are governed by the laws of the State of Delaware.
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Book-entry Issuance of Trust Preferred Securities
The trust preferred securities will initially be issued to investors only in
book-entry form. The total aggregate amount of the trust preferred securities
will be represented by a permanent global security in fully registered form (a
"global certificate") and deposited with a custodian for, and registered in the
name of The Depository Trust Company ("DTC") or its nominee. The global
certificate will initially be deposited with Wilmington Trust Company, as the
custodian for DTC, and registered in the name of Cede & Co., as the nominee of
DTC.
Except as described below, the global certificate may be transferred, in whole
and not in part, only to another nominee of DTC or a successor of DTC or its
nominee. Beneficial interests in the global certificate may not be exchanged for
the trust preferred securities in certificated form except in the limited
circumstances described below.
Persons that acquire beneficial ownership interests in the global certificate
will hold their interests through either (i) DTC in the United States or (ii)
Clearstream Banking or Euroclear System in Europe if such persons are
participants of systems, or indirectly through organizations that are
participants in those systems. Clearstream and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Clearstream's and Euroclear's names on the books of their respective
depositaries, which in turn will hold those positions in customers' securities
accounts in the depositaries' names on the books of DTC. Unless and until
certificated securities are issued, the only "holder" of trust preferred
securities will be Cede & Co., as nominee of DTC, or the nominee of a successor
depositary. Beneficial owners will be permitted to exercise their rights only
indirectly through DTC, Clearstream, Euroclear and their participants.
WITHDRAWAL OF THE COMPANY PREFERRED SECURITIES REPRESENTED BY THE TRUST
PREFERRED SECURITIES
Any beneficial owner of the trust preferred securities may withdraw and hold
directly a corresponding amount of the company preferred securities as described
under "Description of Trust Preferred Securities--Withdrawal of the Company
Preferred Securities." Within a reasonable period after such request has been
properly made, the trustee of UBS Preferred Funding Trust will instruct DTC to
reduce the number of trust preferred securities represented by the global
certificate by the amount of the company preferred securities to be so withdrawn
by the withdrawing owner.
The company preferred securities that are withdrawn will be issued only in
definitive, fully-registered form and will not be eligible to be held through
DTC, Euroclear or Clearstream, and the holders of such company preferred
securities will receive an annual Form K-1 instead of the Form 1099 that is
received by the holders of trust preferred securities. See "Certain U.S. Tax
Considerations--Information Reporting and Backup Withholding Tax."
Any holder of company preferred securities may redeposit, the company preferred
securities as described under "Description of Trust Preferred
Securities--Withdrawal of the Company Preferred Securities." Within a reasonable
period after such deposit is properly made, the trustee of UBS Preferred Funding
Trust will instruct DTC to increase the number of trust preferred securities
represented by the global certificate accordingly.
THE DEPOSITORY TRUST COMPANY
The Depository Trust Company, or DTC, is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York
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Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934.
DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among its participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in its participants' accounts, eliminating the
need for physical movement of securities certificates. Participants in DTC
include Clearstream and Euroclear, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations.
DTC is owned by a number of its participants and by the New York Stock Exchange,
the American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to DTC is also available to others, such as securities
brokers and dealers, banks and trust companies, that clear through or maintain a
custodial relationship with a DTC participant, either directly or indirectly.
The rules applicable to DTC and its participants are on file with the SEC. In
March 1999, DTC announced plans to merge with the National Securities Clearing
Corporation, subject to regulatory approvals. Upon consummation of the merger,
DTC is expected to be managed as a separate operating subsidiary.
CLEARSTREAM BANKING
Clearstream Banking societe anonyme, or Clearstream, is incorporated under the
laws of Luxembourg as a professional depositary. Clearstream holds securities
for its participating organizations and facilitates the clearance and settlement
of securities transactions between its participants through electronic
book-entry changes in accounts of its participants, eliminating the need for
physical movement of certificates. Transactions may be settled in Clearstream in
any of 28 currencies, including United States dollars.
Clearstream provides to its participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream interfaces with
domestic markets in several countries. As a professional depositary, Clearstream
is subject to regulation by the Luxembourg Monetary Institute. Clearstream
participants are recognized financial institutions around the world, including
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Indirect access to Clearstream is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream
participant, either directly or indirectly.
EUROCLEAR SYSTEM
Euroclear System, or Euroclear, was created in 1968 to hold securities for its
participants and to clear and settle transactions between its participants
through simultaneous electronic book-entry delivery against payment, eliminating
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in this prospectus.
Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust
Company of New York, the Euroclear Operator, under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation, which we refer to as
the cooperative. All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the cooperative. The cooperative establishes
policy for Euroclear on behalf of Euroclear participants.
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Euroclear participants include banks, including central banks, securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly. The Euroclear Operator is the Belgian branch of a New York trust
company that is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Federal Reserve and the New York State Banking
Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System, collectively, the Euroclear Terms
and Conditions, and applicable Belgian law. The Euroclear Terms and Conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Euroclear Terms and
Conditions only on behalf of Euroclear participants, and has no record of or
relationship with persons holding through Euroclear participants.
PARTICIPANTS AND BENEFICIAL OWNERS
Purchases of the trust preferred securities within the DTC system must be made
by or through DTC participants, which will receive a credit for the trust
preferred securities on DTC's records and on the records of Clearstream or
Euroclear, if applicable. The ownership interest of each actual purchaser of the
trust preferred securities, which is that of a beneficial owner of an interest
in a global certificate, is in turn to be recorded on the DTC participants' and
indirect participants' records.
Beneficial owners of interests in a global certificate will not receive written
confirmation from DTC of their purchases, but beneficial owners of an interest
in a global certificate are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the DTC participants or indirect participants through which the beneficial
owners of an interest in a global certificate purchased their ownership
interests in the trust preferred securities. Transfers of ownership interests in
the trust preferred securities will be accomplished by entries made on the books
of DTC participants and indirect participants acting on behalf of beneficial
owners of an interest in a global certificate. Beneficial owners of interests in
a global certificate will not receive certificates representing their ownership
interests in the trust preferred securities, unless use of the book-entry system
for the trust preferred securities is discontinued.
TRANSFERS AMONG DTC, CLEARSTREAM AND EUROCLEAR
Transfers between DTC participants will occur in accordance with the rules of
DTC. Transfers between Clearstream and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through Clearstream or
Euroclear participants, on the other, will be effected in DTC in accordance with
the rules of DTC on behalf of the relevant European international clearing
system by the relevant European depositary. However, those cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines, European
time. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
relevant European depositary to take action to effect final settlement on its
behalf by delivering or receiving securities in DTC, and making or receiving
payment
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in accordance with normal procedures for same-day funds settlement applicable to
DTC. Clearstream and Euroclear participants may not deliver instructions
directly to the European depositaries.
Because of time zone differences, credits of the trust preferred securities
received in Clearstream or Euroclear as a result of a transaction with a person
that does not hold the trust preferred securities through Clearstream or
Euroclear will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. Those credits or any
transactions in those securities settled during that processing will be reported
to the relevant Euroclear or Clearstream participants on that business day. Cash
received in Clearstream or Euroclear as a result of sales of the trust preferred
securities by or through a Clearstream or Euroclear participant to a DTC
participant will be received with value on the DTC settlement date, but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC.
LIMITATIONS ON RESPONSIBILITIES OF DTC, CLEARSTREAM AND EUROCLEAR
DTC, Clearstream and Euroclear have no knowledge of the actual beneficial owners
of interests in a global certificate representing the trust preferred
securities. DTC's records reflect only the identity of the DTC participants,
including Clearstream and Euroclear, to whose accounts those trust preferred
securities are credited, which may or may not be the beneficial owners of
interests in a global certificate. Similarly, the records of Clearstream and
Euroclear reflect only the identity of the Clearstream or Euroclear participants
to whose accounts those trust preferred securities are credited, which also may
or may not be the beneficial owners of interests in a global certificate. DTC,
Clearstream and Euroclear participants and indirect participants will remain
responsible for keeping account of their holdings on behalf of their customers.
DTC'S PROCEDURES FOR NOTICES, VOTING AND PAYMENTS
So long as DTC, or its nominee, is the registered owner or holder of a global
certificate, DTC or that nominee, as the case may be, will be considered the
sole owner or holder of trust preferred securities represented by the global
certificate for all purposes under the Amended and Restated Trust Agreement. No
beneficial owner of an interest in a global certificate will be able to transfer
that interest except in accordance with DTC's applicable procedures, in addition
to those provided for under the Amended and Restated Trust Agreement.
DTC has advised UBS AG, as provider of the UBS AG subordinated guarantee, that
it will take any action permitted to be taken by a holder of trust preferred
securities, including the presentation of the trust preferred securities for
exchange as described below, only at the direction of one or more of its
participants to whose account the DTC interests in the global certificates are
credited and only in respect of that portion of the aggregate liquidation amount
of the trust preferred securities as to which that participant or participants
has or have given the direction.
Conveyance of notices and other communications by DTC to its participants, by
those participants to its indirect participants, and by participants and
indirect participants to beneficial owners of interests in a global certificate
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
The trustee will send redemption notices in respect of the trust preferred
securities held in book-entry form to Cede & Co., and will also give those
notices in the manner indicated under "Description of Trust Preferred
Securities--Notices." If less than all the trust preferred securities are being
redeemed, DTC will determine the amount of the interest of each DTC participant
to be redeemed in accordance with its procedures.
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Although voting with respect to the trust preferred securities is limited, in
those cases where a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to the trust preferred securities. Under its usual
procedures, DTC will mail an Omnibus Proxy to UBS Preferred Funding Trust as
soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights of those participants to whose accounts the trust
preferred securities are allocated on the record date identified in a listing
attached to the Omnibus Proxy.
Distributions on the trust preferred securities held in book-entry form will be
made to DTC in immediately available funds. DTC's practice is to credit its
participants' accounts on the relevant payment date in accordance with their
respective holdings shown on DTC's records unless DTC has reason to believe that
it will not receive payments on that payment date. Payments by DTC's
participants and indirect participants to beneficial owners of interests in a
global certificate will be governed by standing instructions and customary
practices. Such payments will be the responsibility of those participants and
indirect participants and not of DTC, UBS Preferred Funding Trust or UBS AG, as
the guarantor, subject to any statutory or regulatory requirements that may be
in effect from time to time. Payment of any dividends or other amounts to DTC is
the responsibility of UBS Preferred Funding Trust, disbursement of such payments
to participants is the responsibility of DTC, and disbursement of those payments
to the beneficial owner of an interest in a global certificate is the
responsibility of participants and indirect participants.
Except as described in this prospectus, a beneficial owner of an interest in a
global certificate will not be entitled to receive physical delivery of the
trust preferred securities. Accordingly, each beneficial owner of an interest in
a global certificate must rely on the procedures of DTC to exercise any rights
under the trust preferred securities.
TERMINATION OF AND CHANGES TO DEPOSITARY ARRANGEMENTS
A global certificate is exchangeable for the trust preferred securities in
registered certificated form if DTC:
- notifies UBS Preferred Funding Trust that it is unwilling or unable to
continue as depositary for the global certificates and UBS Preferred
Funding Trust does not appoint a successor depositary, or
- has ceased to be a clearing agency registered under the Securities
Exchange Act of 1934.
Although DTC, Clearstream and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of interests in the global certificates among
participants, none is under any obligation to perform or continue to perform
those procedures, and those procedures may be discontinued at any time. Neither
UBS AG nor UBS Preferred Funding Trust will have any responsibility for the
performance by DTC, Clearstream, Euroclear or their participants or indirect
participants under the rules and procedures governing them. DTC, Clearstream and
Euroclear may discontinue providing their services as securities depositary with
respect to the trust preferred securities at any time by giving notice to UBS
Preferred Funding Trust. Under those circumstances, definitive trust preferred
security certificates would be delivered as described under "Description of
Trust Preferred Securities--Transfer and Issue of Definitive Trust Preferred
Securities."
LIMITATIONS ON RIGHTS RESULTING FROM BOOK-ENTRY FORM
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive form. These laws may impair
the ability to transfer beneficial interests in the global trust preferred
securities as represented by a global certificate.
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Description of UBS AG Subordinated Guarantee
At or prior to the issuance of the trust preferred securities and the company
preferred securities, UBS AG and Wilmington Trust Company, as guarantee trustee,
will execute the UBS AG Subordinated Guarantee Agreement. We will qualify the
UBS AG Subordinated Guarantee Agreement as an indenture under the Trust
Indenture Act. The terms of the UBS AG subordinated guarantee will include both
those stated in the UBS AG Subordinated Guarantee Agreement and those made part
of the UBS AG Subordinated Guarantee Agreement by the Trust Indenture Act. The
following summary of the material terms and provisions of the UBS AG
subordinated guarantee is not complete and is subject to, and qualified in its
entirety by reference to, the UBS AG Subordinated Guarantee Agreement and the
Trust Indenture Act. We have filed a copy of the UBS AG Subordinated Guarantee
Agreement as an exhibit to the registration statement of which this prospectus
is a part.
GUARANTEED OBLIGATIONS
In the UBS AG Subordinated Guarantee Agreement, UBS AG will unconditionally
guarantee, on a subordinated basis, the payment by UBS Preferred Funding Company
of the following, without duplication:
- any dividends on the company preferred securities that are due and
payable on any mandatory dividend payment date in an amount equal to the
mandatory dividend payment;
- any discretionary dividends on the company preferred securities that
become definitive because UBS AG does not deliver a no dividend
instruction;
- the redemption price payable with respect to any company preferred
securities called for redemption by UBS Preferred Funding Company;
- the liquidating distribution on each company preferred security payable
upon liquidation of UBS Preferred Funding Company; and
- any additional amounts payable by UBS Preferred Funding Company as
described under "Description of Company Preferred Securities--Additional
Amounts".
Subject to the subordination provisions described below, UBS AG will be
obligated to make such payments as and when due, regardless of any defense,
right of set-off or counterclaim that UBS Preferred Funding Company may have or
assert, other than the defense of payment, and whether or not UBS Preferred
Funding Company has legally available funds for the guaranteed payments. UBS
AG's obligations under the UBS AG Subordinated Guarantee Agreement are several
and independent of the obligations of UBS Preferred Funding Company with respect
to the company preferred securities.
See "Description of Company Preferred Securities--Dividends" for a description
of circumstances when dividend on the company preferred securities are
mandatory, "Description of Company Preferred Securities--Redemption" for a
description of the company preferred securities' redemption provisions, and
"Description of Company Preferred Securities--Ranking and Liquidation
Preference" for a description of the liquidation claim to which the holders are
entitled in a liquidation of UBS Preferred Funding Company.
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DESCRIPTION OF UBS AG SUBORDINATED GUARANTEE
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SUBORDINATION
The UBS AG subordinated guarantee is a general and unsecured obligation of UBS
AG and, in liquidation of UBS AG, will rank, both as to payment and in
liquidation:
- subordinate and junior to all deposits and other liabilities (including
those in respect of bonds, notes and debentures of UBS AG) that do not
expressly rank equally with the obligations of UBS AG under the UBS AG
Subordinated Guarantee Agreement, and
- senior to the ordinary shares of UBS AG and any other securities or
shares of UBS AG expressed to rank junior to the most senior preference
shares of UBS AG (if any) from time to time outstanding.
The foregoing liabilities that rank senior to the UBS AG subordinated guarantee
are collectively called "UBS AG senior liabilities."
Payments under the UBS AG subordinated guarantee (other than payments upon a
winding-up or dissolution, by bankruptcy or otherwise, in Switzerland of UBS AG
as provided below) are conditional upon UBS AG not being in default in the
payment of UBS AG senior liabilities and being solvent at the time of payment. A
report as to the insolvency of UBS AG by two persons, each being a managing
director, director or other authorized officer or agent of UBS AG or employees
of the independent accountants of UBS AG will, in the absence of manifest error
be treated and accepted by UBS AG, the holders of company preferred securities
and all other interested parties as correct and sufficient evidence thereof.
If UBS AG is liquidated, whether voluntarily or involuntarily, (i) UBS Preferred
Funding Company will be liquidated and (ii) under the UBS AG Subordinated
Guarantee Agreement, the holders of company preferred securities (whether
through UBS Preferred Funding Trust or as direct holders who have withdrawn
their company preferred securities from UBS Preferred Funding Trust) will have a
claim entitling them to substantially the same liquidating distributions in the
liquidation of UBS AG that they would have been entitled to if they had
purchased preferred shares of UBS AG having an aggregate liquidation preference
equal to the aggregate liquidation preference of the company preferred
securities and bearing dividends at the rate of dividends applicable to the
company preferred securities. The UBS AG Subordinated Guarantee Agreement and
UBS Preferred Funding Company's LLC Agreement, taken together, will provide that
the holders of company preferred securities will not receive liquidating
distributions in a liquidation of UBS Preferred Funding Company and payments
under the UBS AG subordinated guarantee that, taken together, exceed the
liquidating distributions to which they would have been entitled had they
instead owned non-cumulative perpetual preferred shares of UBS AG with
equivalent terms as described above.
The subordination provisions set out above are irrevocable. UBS AG may not
create or permit to exist any charge or other security interest over its assets
to secure its obligations in respect of the UBS AG subordinated guarantee.
The obligations of UBS AG in respect of the UBS AG subordinated guarantee are,
prior to the winding up or dissolution of UBS AG, conditional upon UBS AG being
solvent immediately before and after payment by the Cayman Islands branch. If
this condition is not satisfied, any amounts that might otherwise have been
allocated in or towards payment in respect of the UBS AG subordinated guarantee
may be used to absorb losses of UBS AG.
If a capital loss (as defined below) occurs, the board of directors of UBS AG is
required by Article 725 paragraph 1 of the Swiss Code of Obligations to call a
general meeting of the shareholders of UBS AG and propose at such meeting
measures for a financial reorganization of UBS AG. Holders of trust preferred
securities and company preferred securities will not have any right to attend or
take any
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action at any such meeting because they are not shareholders of UBS AG. Neither
the calling of such a meeting nor the proposal of such financial organization
will itself affect the obligations of UBS AG under the UBS AG Subordinated
Guarantee Agreement.
If at any time UBS AG's unconsolidated unsubordinated liabilities exceed its
unconsolidated total assets (valued at the higher of their going-concern and
their liquidation value), as calculated based on the most recent unconsolidated
interim balance sheet of UBS AG, the board of directors of UBS AG is required by
Article 725 paragraph 2 of the Swiss Code of Obligations to notify the competent
court of such excess, unless unsubordinated creditors of UBS AG agree to
subordinate their claims to the extent that such unsubordinated liabilities
exceed such assets. Upon any such notification, such court must declare the
bankruptcy of UBS AG in accordance with Article 725a paragraph 1 of the Swiss
Code of Obligations and Article 35 paragraph 2 of the Swiss Banking Law. In the
past, however, the Swiss Federal Banking Commission has usually exercised the
broad discretion granted to it under Swiss banking law before the occurrence of
such an excess when it has perceived the interests of creditors of a Swiss bank
to be at risk. In such cases, the Swiss Federal Banking Commission has generally
withdrawn the banking license of the affected bank, which has then been required
to go into liquidation (pursuant to Article 23 quinquies of the Swiss Banking
Law).
As used in this prospectus:
"assets" means the consolidated gross assets of UBS AG.
A "capital loss" is deemed to occur if UBS AG's assets are less than the
sum of (i) its liabilities and (ii) one-half of its share capital and
statutory reserves, each as shown on and as calculated based on the latest
published annual unconsolidated balance sheet of UBS AG. The sum of UBS
AG's unconsolidated share capital and statutory reserves at 31 December
1999 was CHF 18,837 millions.
"liabilities" means the consolidated gross liabilities of UBS AG, all as
shown by the latest published audited consolidated balance sheet of UBS AG
as adjusted for contingencies and for subsequent events, all valued in such
manner as UBS AG or any liquidator (as the case may be) may determine and
calculated in accordance with IAS.
"solvent" means (i) UBS AG is able to pay its debts as they fall due and
(ii) UBS AG's assets exceed its liabilities (other than its liabilities to
persons who are not senior creditors).
Subject to applicable law, no beneficiary of the UBS AG subordinated guarantee
may exercise, claim or plead any right of set-off, compensation or retention in
respect of any amount owed to it by UBS AG arising under or in connection with
the UBS AG subordinated guarantee and each beneficiary of the UBS AG
subordinated guarantee shall, by virtue of being a beneficiary of the UBS AG
subordinated guarantee, be deemed to have waived all such rights to set-off,
compensation or retention.
ADDITIONAL AMOUNTS
UBS AG will make all payments under the UBS AG subordinated guarantee without
withholding or deducting for, or on account of, any present or future tax,
duties, assessments or governmental charges imposed or levied by Switzerland or
the jurisdiction of residence of the issuer of any subordinated notes held by
UBS Preferred Funding Company or from which any payment on such notes is made or
any authority of any of those jurisdictions that has the power to tax, unless
UBS AG is required by law to withhold or deduct the present or future tax,
duties, assessments or governmental charges. If UBS AG is required to withhold
or deduct any portion of a payment, UBS AG will pay additional amounts in order
to cause the net amounts received by the holders of trust preferred securities
and company preferred securities to be the same as the holders would have
received in the absence of the withholding or deduction, subject to the same
limitations or additional amounts payable by UBS
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Preferred Funding Company as described above under "Description of Company
Preferred Securities--Additional Amounts."
If payment of the amounts described above cannot be made by reason of any
limitation referred to above, those amounts will be payable in proportion to the
amounts that would have been payable but for that limitation.
OTHER PROVISIONS
The guarantee trustee, on behalf of the holders of company preferred securities,
may enforce the UBS AG subordinated guarantee directly against UBS AG if UBS AG
defaults under the UBS AG subordinated guarantee. The UBS AG Subordinated
Guarantee Agreement provides that, to the fullest extent permitted by law,
without the need for any other action of any person, including the guarantee
trustee or any other holder of the trust preferred securities or company
preferred securities, each holder of trust preferred securities or company
preferred securities will be entitled to enforce the rights of the holders of
the company preferred securities under the UBS AG Subordinated Guarantee
Agreement represented by the trust preferred securities or company preferred
securities held by such holder.
CERTAIN COVENANTS OF UBS AG AND UBS PREFERRED FUNDING COMPANY
ISSUANCE AND GUARANTEE OF PREFERENCE SHARES
UBS AG will not issue any preferred or preference shares with liquidation rights
effectively ranking senior to its obligations under the UBS AG subordinated
guarantee or give any guarantee in respect of any of its preferred shares or
preferred shares issued by any of its subsidiaries if the guarantee would rank
senior to the UBS AG subordinated guarantee unless the UBS AG subordinated
guarantee is amended to give the holders of company preferred securities and the
trust preferred securities the same rights and entitlements as are contained in
or attached to the other guarantees so that the UBS AG subordinated guarantee
ranks equally with those guarantees and, from a financial point of view,
effectively, with those preferred shares. Except to the extent described above,
the UBS AG subordinated guarantee does not limit the incurrence or issuance of
other secured or unsecured debt or other obligations of UBS.
PAYMENT OF DIVIDENDS
UBS AG will agree in the UBS AG subordinated guarantee that if any amount
required to be paid under the UBS AG subordinated guarantee in respect of any
dividends on the trust preferred securities or company preferred securities
payable in respect of the most recent dividend period has not been paid, UBS AG
will pay that amount before paying any dividend or other payment on any UBS AG
junior obligations, except dividends in the form of the ordinary shares.
NO ASSIGNMENT
UBS AG may not assign its obligations under the UBS AG subordinated guarantee,
except in the case of merger, consolidation or sale of substantially all of its
assets where UBS AG is not the surviving entity.
TERMINATION
The UBS AG subordinated guarantee will terminate on the earlier of:
- the payment of the redemption price for all company preferred securities
or purchase and cancellation of all company preferred securities,
- full payment of the liquidating distribution on all company preferred
securities.
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However, the UBS AG subordinated guarantee will continue to be effective or will
be reinstated, as the case may be, if the holder is required to return any
payment made under the company preferred securities or the UBS AG subordinated
guarantee.
AMENDMENTS
Any changes to the provisions of the UBS AG subordinated guarantee that
establish the amount and timing of the payments under the UBS AG subordinated
guarantee must be approved by each holder of company preferred securities. Any
other provision of the UBS AG subordinated guarantee may be modified only with
the prior approval of the holders of not less than two-thirds (based on the
aggregate liquidation preference) of the company preferred securities.
Notwithstanding the foregoing, without the consent of any holder of company
preferred securities, UBS AG may amend or supplement the UBS AG Subordinated
Guarantee Agreement:
- to evidence the succession of another entity to UBS AG and the
assumption by any such successor of the covenants of UBS AG in the UBS
AG Subordinated Guarantee Agreement,
- to add to the covenants of UBS AG for the benefit of the holders of
company preferred securities, or to surrender any right or power
conferred upon UBS AG under the UBS AG Subordinated Guarantee Agreement,
- to correct or supplement any provision in the UBS AG Subordinated
Guarantee Agreement which may be defective or inconsistent with any
other provision therein, or to make any other provisions with respect to
matters or questions arising under the UBS AG Subordinated Guarantee
Agreement, so long as any such action shall not materially adversely
affect the interests of the holders of company preferred securities, or
- to cure any ambiguity or correct any mistake.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
Wilmington Trust Company is the guarantee trustee. The guarantee trustee is
required to perform only those duties that are specifically set forth in the UBS
AG subordinated guarantee, except when a default has occurred and is continuing
with respect to the UBS AG subordinated guarantee. After a default, the
guarantee trustee must exercise the same degree of care a prudent person would
exercise under the circumstances in the conduct of his or her own affairs.
Subject to these requirements, the guarantee trustee is under no obligation to
exercise any of the powers vested in it by the UBS AG subordinated guarantee at
the request of any holder of company preferred securities or any holder of trust
preferred securities, as the case may be, unless the holder offers the guarantee
trustee reasonable indemnity against the costs, expenses and liabilities that
might be incurred by exercising those powers.
GOVERNING LAW
The UBS AG subordinated guarantee will be governed by and construed in
accordance with the laws of the State of New York.
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Description of Subordinated Notes of UBS AG
The following summary of the material terms and provisions of the subordinated
notes is not complete and is subject to, and qualified in its entirety by
reference to, the terms and provisions of the subordinated notes. We have filed
a copy of the form of subordinated note as an exhibit to the registration
statement of which this prospectus is a part.
GENERAL
UBS Preferred Funding Company will apply the proceeds of the company preferred
securities and company common securities to purchase from the Cayman Islands
branch of UBS AG newly issued subordinated notes of the Cayman Islands branch.
The subordinated notes will be undated perpetual obligations of UBS AG, acting
through the Cayman Islands branch, and have an aggregate principal amount of
$1,500,000,000. Interest on the subordinated notes will be payable from the date
of initial issuance, semi-annually in arrears on April -- and October -- of each
year through October 2010 and thereafter quarterly in arrears on January --,
April --, July -- and October -- of each year (or, if any such day is not a
business day, the next business day, but without any additional interest or
other payment in respect of such delay) (each an "interest payment date" and the
period from and including an interest payment date, or the date of initial
issuance, as applicable, to but not including the next interest payment date, an
"interest period") as follows:
- for each interest period through the interest period ending on the
interest payment date in October 2010, at a fixed rate per annum equal
to --% (calculated on the basis of a 360-day year consisting of twelve
30-day months), and
- for each interest period ending after October 2010, at a floating rate
per annum equal to --% above three-month LIBOR (calculated on the basis
of the actual number of days elapsed in a 360-day year).
The calculation of LIBOR is described under "Description of Company Preferred
Securities--Dividends." Interest due on an interest payment date will be
deferrable at the option of UBS AG's Cayman Islands branch to the extent that
dividends on the company preferred securities due on the corresponding dividend
payment date would constitute nondefinitive dividends. Interest deferred in this
manner will not itself bear interest.
REDEMPTION
The subordinated notes will be redeemable with the consent of the Swiss Federal
Banking Commission and at the option of the Cayman Islands branch of UBS AG:
- on the interest payment date in October 2010 or any interest payment
date occurring after that date, in whole or in part, at a redemption
price equal to 100% of their principal amount plus interest accrued but
unpaid to the date fixed for redemption,
- prior to the interest payment date in October 2010, in whole but not in
part, if a Tax Event resulting from a Change in Tax Law (and relating to
an event described in clauses (A), (B) or (C) of the definition of "Tax
Event") occurs at a redemption price equal to 100% of their principal
amount plus interest accrued but unpaid to the date fixed for
redemption, or
- prior to the interest payment date in October 2010, in whole but not in
part, if a Tax Event not resulting from a Change in Tax Law relating to
an event described in clause (A), (B) or (C) of the definition of "Tax
Event", an Investment Company Act Event or a Capital Event occurs at a
redemption price equal to interest accrued but unpaid to the date fixed
for redemption plus a make whole amount calculated in substantially the
same manner as the Make Whole Amount applicable to the company preferred
securities.
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ADDITIONAL AMOUNTS
If the Cayman Islands branch of UBS AG is required to withhold any taxes, duties
or other governmental charges with respect to any payment in respect of the
subordinated notes, the Cayman Islands branch will pay such additional amounts
as shall be required so that the amount received by UBS Preferred Funding
Company under the subordinated notes shall not be reduced as a result of any
such additional taxes, duties or other governmental charges.
SUBORDINATION
The subordinated notes are a general and unsecured obligation of UBS AG and, in
liquidation of UBS AG, will rank, both as to payment and in liquidation:
- subordinate and junior to UBS AG senior liabilities, as defined under
"Description of UBS AG Subordinated Guarantee--Subordination," and
- senior to the ordinary shares of UBS AG and any other securities or
shares of UBS AG expressed to rank junior to the most senior preference
shares of UBS AG (if any) from time to time outstanding.
Payments under the subordinated notes (other than payments upon a winding-up or
dissolution, by bankruptcy or otherwise, in Switzerland of UBS AG) are
conditional upon UBS AG not being in default in the payment of UBS AG senior
liabilities, and being solvent, as defined under "Description of UBS AG
Subordinated Guarantee--Subordination," at the time of payment. A report as to
the insolvency of UBS AG by two persons, each being a managing director,
director or other authorized officer or agent of UBS AG or employees of the
independent accountants of UBS AG will, in the absence of manifest error be
treated and accepted by UBS AG, the holders of the company preferred securities
and all other interested parties as correct and sufficient evidence thereof.
ENFORCEMENT OF THE SUBORDINATED NOTES
Any consent, notice or other action (including any enforcement action) given or
taken by or on behalf of UBS Preferred Funding Company with respect to the
subordinated notes may be given or taken at the discretion of a majority of the
entire board of directors of UBS Preferred Funding Company.
TRANSFER OF THE SUBORDINATED NOTES
The subordinated notes will be represented by a single definitive note
registered in the name of UBS Preferred Funding Company. UBS Preferred Funding
Company's LLC Agreement will provide that UBS Preferred Funding Company may sell
the subordinated notes only upon the affirmative vote of both a majority of the
board of directors of UBS Preferred Funding Company and the holders of
two-thirds (based on the aggregate liquidation preference) of the company
preferred securities and other company parity preferred securities (if any),
voting together as a single class.
Although UBS Preferred Funding Company may sell the subordinated notes subject
to the requirements of the Securities Act of 1933 and other applicable laws and
the foregoing requirements, UBS AG and UBS Preferred Funding Company do not
anticipate that UBS Preferred Funding Company will sell the subordinated notes
and there is no expectation that a market will develop or exist for the
subordinated notes. The subordinated notes, by their terms, will provide that
they may be sold in whole and not in part and may not be divided into
denominations of less than $1,000.
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DESCRIPTION OF SUBORDINATED NOTES OF UBS AG
--------------------------------------------------------------------------------
EVENTS OF DEFAULT
The subordinated notes will not provide for acceleration if the Cayman Islands
branch of UBS AG fails to make a payment when due. If the Cayman Islands branch
fails to make a payment when due of an installment of interest on the
subordinated notes, UBS Preferred Funding Company will be entitled to seek to
enforce payment only of the defaulted installment but not in respect of any
failure to pay interest due under the subordinated notes that was deferred
because the dividends on the company preferred securities on the corresponding
dividend payment date would have constituted nondefinitive dividends. A
"default" under the subordinated notes will occur if the Cayman Islands branch
fails to make a payment when due of an installment of principal or interest.
MODIFICATION AND AMENDMENT OF THE SUBORDINATED NOTES
The subordinated notes may be modified or amended only by the written agreement
of the Cayman Islands branch of UBS AG and UBS Preferred Funding Company.
However, UBS Preferred Funding Company's LLC Agreement will provide that UBS
Preferred Funding Company may not agree to any such modification or amendment
for so long as any company preferred securities or other company parity
preferred securities, if any, are outstanding unless holders of two-thirds
(based on the aggregate liquidation preference) of the company preferred
securities and other company parity preferred securities, if any, voting as a
class, consent to such modification or amendment (except that such consent of
the holders of company preferred securities and any other company parity
preferred securities shall not be required if (a) the proposed amendment or
modification would not materially and adversely affect the rights, preferences,
powers or privileges of UBS Preferred Funding Company and (b) UBS Preferred
Funding Company has received a letter from each of Moody's Investors Service,
Inc. and Standard & Poor's Ratings Services to the effect that such amendment
will not result in a downgrading of its respective rating then assigned to the
company preferred securities).
GOVERNING LAW
The subordinated notes will be governed by the laws of the State of New York.
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Certain U.S. Tax Considerations
In the opinion of Sullivan & Cromwell, the following accurately describes the
material United States federal income tax (and, where specifically noted, United
States federal estate tax) consequences of the purchase of the trust preferred
securities and the ownership and disposition of the trust preferred securities
and the company preferred securities.
YOU SHOULD CONSULT WITH YOUR OWN TAX ADVISORS AS TO THE UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRUST
PREFERRED SECURITIES OR THE COMPANY PREFERRED SECURITIES, AS WELL AS THE EFFECT
OF ANY STATE, LOCAL OR FOREIGN TAX LAWS IN LIGHT OF YOUR PARTICULAR
CIRCUMSTANCES.
This discussion addresses only the tax consequences to a person that acquires
the trust preferred securities on their original issue at their original
offering price and that holds the trust preferred securities, and any company
preferred securities received in exchange for the trust preferred securities, as
capital assets. It does not address all tax consequences that may be applicable
to a beneficial owner of the trust preferred securities, nor does it address the
tax consequences to:
- persons that may be subject to special treatment under United States
federal income tax law, such as tax exempt entities, certain insurance
companies, broker-dealers, traders in securities that elect to mark to
market, persons liable for alternative minimum tax or persons that
actually or constructively own 10% or more of the voting stock of UBS
AG,
- persons that will hold the trust preferred securities or the company
preferred securities as part of a larger transaction, such as a
"straddle" or a "hedging" or "conversion" transaction, or
- persons whose functional currency is not the United States dollar.
This discussion is based upon the Internal Revenue Code of 1986, as amended,
Treasury regulations, Internal Revenue Service rulings and pronouncements and
judicial decisions as of the date hereof, all of which are subject to change,
possibly with retroactive effect.
CLASSIFICATION OF UBS PREFERRED FUNDING TRUST AND UBS PREFERRED FUNDING COMPANY
Under current law, and assuming compliance with the terms of the Amended and
Restated Trust Agreement, UBS Preferred Funding Trust will be treated as a
grantor trust and not as a partnership or an association taxable as a
corporation for United States federal income tax purposes. As a result, each
beneficial owner of the trust preferred securities will be considered the
beneficial owner of a pro rata portion of the company preferred securities held
by UBS Preferred Funding Trust.
Under current law, and assuming compliance with the LLC Agreement, UBS Preferred
Funding Company will be treated as a partnership for United States federal
income tax purposes. A partnership is not a taxable entity and incurs no United
States federal income tax liability. Instead, each partner is required to take
into account its allocable share of items of income, gain, loss and deduction of
the partnership in computing its United States federal income tax liability,
regardless of whether distributions are made to the partner. These items
generally will be treated as if realized by the partner directly from the same
source realized by UBS Preferred Funding Company.
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CERTAIN U.S. TAX CONSIDERATIONS
--------------------------------------------------------------------------------
UNITED STATES HOLDERS
You are a "United States Holder" if you are a beneficial owner of the trust
preferred securities and you are:
- an individual citizen or resident of the United States,
- a corporation organized in or under the laws of the United States or any
state thereof or the District of Columbia,
- an estate, and your income is subject to United States federal income
tax regardless of source, or
- a trust, and
- a United States court is able to exercise primary supervision over
your administration, and
- no non-United States person has the authority to control any of your
substantial decisions.
INCOME FROM THE TRUST PREFERRED SECURITIES
Under the LLC Agreement, upon the declaration, or deemed declaration, of
dividends on the company preferred securities, a like amount of UBS Preferred
Funding Company's ordinary income will be allocated to the holders of company
preferred securities. Regardless of when dividends on the trust preferred
securities are actually paid, income allocated to the holders of company
preferred securities will be includable as ordinary income by a United States
Holder for its taxable year that includes December 31 of the calendar year in
which the income is allocated, except that if the United States Holder disposes
of its entire holding of the trust preferred securities and the company
preferred securities (if any), the amount allocated for the calendar year of
that disposition will be includable for the United States Holder's taxable year
that includes the date of that disposition.
Assuming compliance with the terms of the Amended and Restated Trust Agreement,
UBS Preferred Funding Trust will distribute, on a semi-annual basis, an amount
of cash equal to all of the income that is allocated to it as a holder of
company preferred securities. As a consequence, a United States Holder will not
recognize income in respect of the trust preferred securities without receiving
the corresponding cash distribution, unless the United States Holder sells or
otherwise disposes of those trust preferred securities between the declaration
date of dividends on the company preferred securities and the corresponding
record date for dividends on the trust preferred securities. In the case of a
sale between those dates, a United States Holder will recognize ordinary income
in an amount equal to the dividends on the company preferred securities, which
would increase the United States Holder's basis in the trust preferred
securities and reduce the gain, or increase the loss, recognized on the sale or
other disposition.
A United States Holder's allocated share of UBS Preferred Funding Company's
income from the initial subordinated notes will be foreign source income for
purposes of determining the limitation on any allowable foreign tax credit. The
overall limitation on foreign taxes eligible for credit is calculated separately
with respect to specific classes of income. For this purpose, a United States
Holder's allocated share of UBS Preferred Funding Company's income from the
initial subordinated notes generally will constitute "passive income" or, in the
case of certain United States Holders, "financial services income." If, with
respect to any distribution to a United States Holder, additional amounts are
paid by UBS Preferred Funding Company as a result of withholding taxes imposed
on the distribution, those additional amounts will be taxable to the United
States Holder as foreign source income. However, withholding taxes in the amount
of those additional amounts will generally be treated as foreign income taxes
eligible for credit against that United States Holder's United States federal
income
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CERTAIN U.S. TAX CONSIDERATIONS
--------------------------------------------------------------------------------
tax liability, subject to generally applicable limitations and conditions or, at
the election of that United States Holder, for deduction in computing the United
States Holder's taxable income.
No portion of the income derived by a United States Holder from the trust
preferred securities will be eligible for the dividends-received deduction
generally available to United States corporations in respect of dividends
received from other United States corporations.
UBS AG believes that it is not a "passive foreign investment company" (sometimes
known as a "PFIC") for United States federal income tax purposes, but this
conclusion is a factual determination made annually and thus may be subject to
change. A United States Holder might be subject to special rules with respect to
certain amounts earned by UBS Preferred Funding Company with respect to the
initial subordinated notes if UBS AG were treated as a PFIC for United States
federal income tax purposes.
RECEIPT OF THE COMPANY PREFERRED SECURITIES UPON LIQUIDATION OF UBS PREFERRED
FUNDING TRUST
Under certain circumstances, the company preferred securities may be distributed
to the trust preferred securityholders in exchange for their trust preferred
securities and in liquidation of UBS Preferred Funding Trust. Unless the
liquidation of UBS Preferred Funding Trust occurs as a result of UBS Preferred
Funding Trust being subject to United States federal income taxes, such a
distribution to a United States Holder would be treated, for United States
federal income tax purposes, as a non-taxable event. Each United States Holder
would receive an aggregate tax basis in the company preferred securities equal
to the United States Holder's aggregate tax basis in its trust preferred
securities and the United States Holder's holding period in the company
preferred securities received would include the period during which the trust
preferred securities were held by the United States Holder. If, however, the
liquidation of UBS Preferred Funding Trust were to occur because UBS Preferred
Funding Trust is subject to United States federal income taxes, the distribution
of the company preferred securities to United States Holders by UBS Preferred
Funding Trust would likely be a taxable event to each United States Holder, and
a United States Holder would recognize gain or loss as if the United States
Holder had exchanged its trust preferred securities for the company preferred
securities it received. The gain or loss would be equal to the difference
between the United States Holder's aggregate tax basis in its trust preferred
securities surrendered in the exchange and the aggregate fair market value of
the company preferred securities received in the exchange.
If the company preferred securities are distributed to the holders of trust
preferred securities in liquidation of UBS Preferred Funding Trust, U.S. tax
information will be provided to beneficial owners of the trust preferred
securities and to the Internal Revenue Service on Schedule K-1, rather than in
the manner described below under "--Information Reporting and Backup Withholding
Tax".
DISPOSITION OF THE TRUST PREFERRED SECURITIES OR THE COMPANY PREFERRED
SECURITIES
A United States Holder will recognize gain or loss on a sale, exchange or other
taxable disposition of the trust preferred securities or the company preferred
securities in an amount equal to the difference between the United States
Holder's adjusted tax basis and the amount realized on the disposition. A United
States Holder's adjusted tax basis in the trust preferred securities generally
will equal the amount paid for the trust preferred securities, increased by the
amount of income allocated to the United States holder and reduced by the amount
of any cash, and the fair market value of any other property, distributed to the
United States Holder. Any gain or loss so recognized generally will be capital
gain or loss, will be long-term capital gain or loss if the United States
Holder's holding period is more than one year and will be U.S. source income or
loss for purposes of determining the
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CERTAIN U.S. TAX CONSIDERATIONS
--------------------------------------------------------------------------------
limitation on any allowable foreign tax credit. In the case of a non-corporate
United States Holder, long-term capital gains are generally subject to tax at
preferential rates.
The trust preferred securities may trade at a price that does not fully reflect
the value of income that may have been allocated to a United States Holder with
respect to the United States Holder's trust preferred securities. A United
States Holder that disposes of the trust preferred securities between the
declaration date of dividends on the company preferred securities and the
corresponding record date for dividends on the trust preferred securities will
be required to include as ordinary income an amount equal to dividends on the
company preferred securities and to add the amount of that income to its
adjusted tax basis in the trust preferred securities. Accordingly, such a United
States Holder will recognize a capital loss to the extent that the selling price
is less than the United States Holder's adjusted tax basis. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
NON-UNITED STATES HOLDERS
You are a "Non-United States Holder" if you are a beneficial owner of the trust
preferred securities or the company preferred securities and you are not a
United States Holder.
UBS Preferred Funding Company intends to operate so that it will not be engaged
in a trade or business within the United States for United States federal income
tax purposes. Moreover, UBS Preferred Funding Company intends to invest in
securities the income from which will be either generally exempt from United
States federal withholding tax or exempt from United States federal withholding
tax to the extent allocable to a Non-United States Holder.
A Non-United States Holder will not be subject to United States federal income
or withholding tax on any allocated share of UBS Preferred Funding Company's
income or gain, or any gain realized on the sale or exchange of the trust
preferred securities, unless, in the case of gains, the Non-United States Holder
is an individual who was present in the United States for 183 days or more in
the taxable year in which the gain is realized and certain other conditions are
met. A Non-United States Holder will not be subject to backup withholding
provided certain certification requirements are satisfied as described under
"--Information Reporting and Backup Withholding Tax."
The treatment of the trust preferred securities and the company preferred
securities for United States federal estate tax purposes is unclear. If you are
an individual Non-United States Holder, you should consult your tax advisor
about the possibility that the trust preferred securities or the company
preferred securities will be includable in your gross estate for purposes of the
United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The amount of income paid or accrued on the trust preferred securities generally
will be reported to United States Holders on Internal Revenue Service Form 1099.
"Backup" withholding at a rate of 31% will apply to payments made within the
United States to a beneficial owner of the trust preferred securities, other
than a corporation or another exempt United States Holder, unless the beneficial
owner of the trust preferred securities certifies as to its non-United States
status or furnishes its taxpayer identification number in the manner prescribed
in applicable Treasury regulations, certifies that the number is correct,
certifies as to no loss of exemption from backup withholding and meets certain
other conditions.
Payment of the proceeds from the disposition of the trust preferred securities
within the United States is subject to information reporting and backup
withholding unless the beneficial owner of the trust preferred securities
certifies its non-United States status or otherwise establishes an exemption.
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CERTAIN U.S. TAX CONSIDERATIONS
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Payments of the proceeds from the disposition of the trust preferred securities
will not be subject to information reporting or backup withholding if made to or
through a foreign office of a broker, except that information reporting may
apply, unless the beneficial owner of the trust preferred securities certifies
its non-United States status or otherwise establishes an exemption, if the
broker is:
- a United States person,
- a controlled foreign corporation for United States tax purposes,
- a foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified
three-year period, or
- with respect to payments made after 31 December 2000, a foreign
partnership, if at any time during its tax year, one or more of its
partners are United States persons, as defined in United States Treasury
regulations, who in the aggregate hold more than 50% of the income or
capital interest in the partnership or if, at any time during its tax
year, the foreign partnership is engaged in a United States trade or
business.
Any amounts withheld from a beneficial owner of the trust preferred securities
under the backup withholding rules will be allowed as a refund or as a credit
against the beneficial owner's United States federal income tax liability, so
long as the required information is furnished to the IRS.
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<PAGE> 204
Certain Tax Considerations Under the Laws of Switzerland
GENERAL
The tax information set forth below is based on the opinion of ATAG Ernst &
Young AG, Switzerland, dated 7 August 2000, and has been approved by them for
its accuracy. The following is a summary of the material Swiss tax consequences
related to the acquisition, ownership and disposition of the trust preferred
securities. The summary is based on legislation as of the date of this
prospectus and does not aim to be a comprehensive description of all the tax
considerations that may be relevant to a decision to invest in the trust
preferred securities. The tax treatment for each shareholder depends on the
particular situation of the shareholder and prospective investors are therefore
advised to consult with their professional tax advisors as to the respective tax
consequences of the purchase, ownership and disposition of the trust preferred
securities.
Furthermore, this summary does not address the tax treatment of the holders of
trust preferred securities subject to special tax rules.
HOLDERS WHO ARE NOT RESIDENTS OR DOMICILIARIES OF SWITZERLAND AND HAVE NO
PERMANENT ESTABLISHMENT OR REPRESENTATIVE IN SWITZERLAND
Holders of trust preferred securities who are not residents or domiciliaries of
Switzerland and have no permanent establishment or permanent representative in
Switzerland to which or to whom the shares are attributable or to which or to
whom the trust preferred securities belong, will not be subject to Swiss
corporate or individual income and capital tax or capital gains tax on the
holding and disposition of the trust preferred securities. Furthermore, there
will be no inheritance or gift tax imposed in Switzerland on the trust preferred
securities if the holder is an individual who is not domiciled in Switzerland.
ISSUANCE STAMP TAX
The issuance of the trust preferred securities will not be a taxable event for
Swiss issuance stamp tax purposes.
SECURITIES TURNOVER TAX
On the sale or purchase of the trust preferred securities through a registered
Swiss securities dealer a turnover tax of 0.15% will be imposed on each party.
No turnover tax will be imposed on transactions that are not through a
registered Swiss securities dealer.
HOLDERS WHO ARE RESIDENTS OR DOMICILIARIES OF SWITZERLAND OR HAVE A PERMANENT
ESTABLISHMENT OR REPRESENTATIVE IN SWITZERLAND
The following summary of the treatment of the holders of trust preferred
securities who are residents or domiciliaries of, or who have a permanent
establishment or residence in Switzerland, is based upon the conclusion that for
Swiss tax purposes the trust preferred securities are shareholder's equity
rather than debt.
WITHHOLDING TAX
No Swiss withholding tax is levied on dividend payments on the trust preferred
securities.
DIVIDENDS
Dividends received by a Swiss resident company or by an individual on the trust
preferred securities are subject to Swiss income tax.
Dividends received by a Swiss resident company qualify for the participation
exemption, if the recipient of the dividend owns at least 20% of the shares of
the distributing corporation or if the
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CERTAIN TAX CONSIDERATIONS UNDER THE LAWS OF SWITZERLAND
--------------------------------------------------------------------------------
recipient holds shares with a market value of at least CHF 2 million. Moreover,
an investment in the trust preferred securities may qualify as a participation
for determining the holder privilege.
CAPITAL GAINS
Capital gains or losses realized by legal entities on the disposal or exchange
of the trust preferred securities are treated as ordinary income or expense. The
basis for determining the gain or loss is the tax value, which is generally the
book value.
As a result of a recent change of the Federal Tax Law, a corporation that
controls a participation of 20% or more in another corporation may claim the
participation relief for capital gains.
Nonbusiness capital gains realized by individuals are not taxed in Switzerland.
Individuals are only taxed on capital gains if they qualify as professional
securities dealers, or if the trust preferred securities are attributable to a
business carried on in Switzerland.
REDEMPTION OF CAPITAL
The amount distributed to individual shareholders in excess of the nominal share
capital is regarded as a dividend, which is subject to Swiss income tax.
For the trust preferred securities attributed to a business in Switzerland or a
legal entity, the principles of taxation of capital gains apply.
INHERITANCE AND GIFT TAXES
Almost all cantons levy separate inheritance and gift taxes. No inheritance or
gift taxes are imposed on the federal level. Inheritance and gift taxes are only
imposed on individuals. No corporate inheritance or gift tax is levied. The tax
is due on the transfer of the trust preferred securities by way of gift or upon
the death of a holder, provided the holder is domiciled in Switzerland. The tax
is based on the fair market value of the trust preferred securities.
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Certain ERISA Considerations
If you are a fiduciary of a pension, profit-sharing or other employee benefit
plan subject to the Employee Retirement Income Security Act ("ERISA"), you
should review the fiduciary standards of ERISA and the plan's particular
circumstances before deciding to invest in the trust preferred securities. You
should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and whether the investment would be
consistent with the terms of the plan and the other agreements which apply to
plan investments.
A fiduciary of a plan subject to ERISA, as well as a person investing on behalf
of an individual retirement account or a pension or profit-sharing plan for one
or more self-employed persons, should also consider whether an investment in the
trust preferred securities could result in a prohibited transaction. ERISA and
the Internal Revenue Code of 1986, as amended, prohibit plans and individual
retirement accounts from engaging in certain transactions involving plan assets
with persons who are parties in interest under ERISA or disqualified persons
under the Internal Revenue Code of 1986, as amended, with respect to the plan or
individual retirement account. A violation of these rules may result in a
substantial excise tax under the Internal Revenue Code of 1986, as amended, and
other liabilities under ERISA. Employee benefit plans that are governmental
plans, foreign plans or church plans generally are not subject to the prohibited
transaction rules or the fiduciary standards of ERISA.
The assets of UBS Preferred Funding Trust would be treated as plan assets for
purposes of the prohibited transaction rules under a U.S. Department of Labor
regulation if plans and individual retirement accounts purchase trust preferred
securities, unless an exception under the regulation applies. The regulation
provides an exception if the trust preferred securities are considered to be
publicly-offered securities. The underwriters expect that the trust preferred
securities will be publicly-offered securities under the regulation because:
- the underwriters expect that the trust preferred securities will be
purchased initially by at least 100 persons who are independent of us
and each other,
- the trust preferred securities can be transferred freely,
- the trust preferred securities are being sold through this prospectus
which is part of an effective registration statement filed with the SEC,
and
- the trust preferred securities will be timely registered with the SEC
under Securities Exchange Act of 1934.
If we are a party in interest or a disqualified person with respect to a plan or
individual retirement account that buys the trust preferred securities, either
directly or because we own banking or other subsidiaries, the sale could be
treated as a prohibited transaction unless an administrative exemption issued by
the Department of Labor applies. The Department of Labor has issued class
exemptions that may apply to exempt transactions resulting from the purchase or
holding of the trust preferred securities. Among those class exemptions are:
- 96-23, for transactions determined by in-house asset managers;
- 95-60, for transactions involving insurance company general accounts;
- 91-38, for transactions involving bank collective investment funds;
- 90-1, for transactions involving insurance company separate accounts;
and
- 84-14, for transactions determined by independent qualified asset
managers.
These rules are very complicated and the penalties that may be imposed upon
persons involved in prohibited transactions can be substantial. This makes it
very important that fiduciaries or other persons considering purchasing the
trust preferred securities on behalf of a benefit plan investor consult with
their lawyer regarding what could happen if the assets of UBS Preferred Funding
Trust were
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CERTAIN ERISA CONSIDERATIONS
--------------------------------------------------------------------------------
deemed to be plan assets and if the investor can use one of the above class
exemptions or another applicable exemption.
Before relying on any of these exemptions, a purchaser must conclude that the
exemption provides the necessary relief for all potential prohibited
transactions arising from the purchase of and from holding the trust preferred
securities. Neither the underwriters, UBS AG nor any of their respective
affiliates, agents or representatives have or can represent that these
exemptions apply with respect to any purchase of trust preferred securities by
any holder.
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--------------------------------------------------------------------------------
Underwriting
Subject to the terms and conditions set forth in the underwriting agreement,
dated as of the date of this prospectus, among UBS AG, UBS Preferred Funding
Company, UBS Preferred Funding Trust and each of the underwriters, UBS AG and
UBS Preferred Funding Company have agreed that UBS Preferred Funding Company
will cause UBS Preferred Funding Trust to issue, and each of the underwriters
has severally agreed to underwrite, the respective liquidation amount of the
trust preferred securities set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS THE TRUST PREFERRED SECURITIES
-------------------------------------------------------------------------------------------
(by liquidation amount)
<S> <C>
UBS Warburg LLC............................................ $
PaineWebber Incorporated...................................
Credit Suisse First Boston.................................
Goldman, Sachs & Co. ......................................
Merrill Lynch & Co. .......................................
Morgan Stanley Dean Witter.................................
Salomon Smith Barney.......................................
--------
Total...................................................... $--
========
</TABLE>
Under the terms and conditions of the underwriting agreement, the underwriters
are committed to take and pay for all the trust preferred securities offered
hereby, if any are taken. The underwriting agreement entitles the underwriters
to terminate the underwriting agreement in certain circumstances before payment
is made to UBS Preferred Funding Trust.
The purchase price for the trust preferred securities will be the initial
offering price set forth on the cover page of this prospectus. UBS AG will pay
the underwriters a commission of $-- for each trust preferred security. The
underwriting agreement provides that UBS AG will reimburse the underwriters for
certain expenses of the offering. The underwriters propose to offer shares of
the trust preferred securities at the offering price. After the trust preferred
securities are released for sale, the offering price and other selling terms may
be varied from time to time by the underwriters.
During a period of 30 days from the date of the prospectus, neither UBS
Preferred Funding Trust nor UBS Preferred Funding Company nor any other
subsidiary of UBS AG that is similar to UBS Preferred Funding Trust or UBS
Preferred Funding Company will, without the prior written consent of the
underwriters, directly or indirectly, sell, offer to sell, grant any option for
sale of, or otherwise dispose of, any trust preferred securities or any company
preferred securities or any security convertible into or exchangeable into or
exercisable for the trust preferred securities or the company preferred
securities.
We have applied to list the trust preferred securities on the Luxembourg Stock
Exchange. In connection with that application, a legal notice relating to the
issue of the trust preferred securities and a copy of the Trust Agreement will
be deposited with the Registrar of the District Court of Luxembourg (Greffier en
Chef du Tribunal d'Arrondissement a Luxembourg), where those documents may be
examined and copies obtained.
In connection with the offering, the underwriters may purchase and sell the
trust preferred securities in the open market. These transactions may include
stabilizing transactions and purchases to cover short positions created by the
underwriters, and the imposition of a penalty bid, in connection with the
offering. Stabilizing transactions consist of certain bids or purchases for the
purpose of preventing or retarding a decline in the market price of the trust
preferred securities; and short positions created by the underwriters involve
the sale by the underwriters of a greater number of the trust preferred
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UNDERWRITING
--------------------------------------------------------------------------------
securities than they are required to purchase from UBS Preferred Funding Company
in the offering. The underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the trust preferred
securities sold in the offering may be reclaimed by the underwriters if such
trust preferred securities are repurchased by the underwriters in stabilizing or
covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the trust preferred securities, which may be higher
than the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected in the over-the-counter market or otherwise.
Each underwriter has agreed that:
- it has not offered or sold and before the date six months after the date
of issue of the trust preferred securities will not offer or sell any
trust preferred securities to persons in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments as principal or agent, for the
purposes of their businesses or otherwise in circumstances that have not
resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities
Regulations 1995,
- it has complied and will comply with all the applicable provisions of
the Financial Services Act of 1986 with respect to anything done by it
in relation to the trust preferred securities in, from or otherwise
involving the United Kingdom, and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue
of the trust preferred securities to a person who is of a kind described
in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996, or is a person to whom the
document may otherwise lawfully be issued or passed on.
Because the NASD considers this offering an offering of interests in a "direct
participation program" as that term is defined in Rule 2810(a)(4) of the NASD,
the offering is being conducted in accordance with Rule 2810 of the NASD.
Pursuant to Rule 2810 of the NASD and with regard to the trust preferred
securities, no NASD member will (i) execute transactions in any discretionary
account without the prior written approval of the customer, nor (ii) recommend
to a customer the purchase, sale or exchange of a trust preferred security
without reasonable grounds to believe, on the basis of information obtained from
the customer concerning his investment objectives, other investments, financial
situation and needs, and any other information known by the member or associated
person including whether (a) the customer is or will be in a financial position
appropriate to enable him to realize to a significant extent the benefits
described in this prospectus; (b) the customer has a fair market net worth
sufficient to sustain the risks inherent in the program, including loss of
investment and lack of liquidity; and (c) the program is otherwise suitable for
the customer. Also pursuant to Rule 2810 of the NASD, NASD members participating
in the offering will maintain in the files of the member documents disclosing
the basis upon which the determination of suitability was reached as to each
customer.
In the aggregate, underwriters affiliated with UBS AG have severally agreed to
purchase approximately % of the shares offered in the offering. If any of
the shares underwritten by these affiliates are sold by them at a price less
than the initial public offering price, the net proceeds from the offerings to
UBS AG on a consolidated basis will be reduced because these affiliates and UBS
AG are accounted for on a consolidated basis.
Following the initial distribution of the trust preferred securities, UBS
Warburg LLC and PaineWebber Incorporated may offer and sell the trust preferred
securities in the course of their business as broker-
--------------------------------------------------------------------------------
208
<PAGE> 210
UNDERWRITING
--------------------------------------------------------------------------------
dealers, subject to obtaining any necessary approvals for any such offers and
sales. UBS Warburg LLC and PaineWebber Incorporated may act as principals or
agents in these transactions. This prospectus may be used by UBS Warburg LLC and
PaineWebber Incorporated in connection with these transactions. These sales, if
any, will be made at varying prices related to prevailing market prices at the
time of sale or otherwise. Neither UBS Warburg LLC nor PaineWebber Incorporated
is obligated to make a market in the trust preferred securities and either of
them may discontinue market-making at any time without notice. No assurance can
be given as to the liquidity of the trading market for the trust preferred
securities. UBS AG does not expect that UBS Warburg LLC nor PaineWebber
Incorporated will pay any proceeds from these market-making resales to UBS AG.
Unless UBS AG or an agent informs you in your confirmation of sale that your
trust preferred security is being purchased in its original offering and sale,
you may assume that you are purchasing your trust preferred security in a
market-making transaction.
UBS Preferred Funding Company and UBS AG have agreed to indemnify the
underwriters against, or contribute to payments that the underwriters may be
required to make in respect of, certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
The underwriters and/or their affiliates have provided investment banking,
commercial banking and financial advisory services to UBS AG or its affiliates
in the past, for which they have received customary compensation and expense
reimbursement, and may do so again in the future.
Purchasers of the trust preferred securities may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price.
--------------------------------------------------------------------------------
209
<PAGE> 211
--------------------------------------------------------------------------------
Validity of the securities
Certain matters of Delaware law relating to the validity of the trust preferred
securities and the company preferred securities will be passed upon by Richards,
Layton & Finger, P.A., special Delaware counsel to UBS AG, UBS Preferred Funding
Trust and UBS Preferred Funding Company. The validity of the subordinated notes
and the UBS AG Subordinated Guarantee Agreement will be passed upon for UBS AG,
UBS Preferred Funding Trust and UBS Preferred Funding Company by Sullivan &
Cromwell. The validity of the subordinated notes and the UBS AG Subordinated
Guarantee Agreement will be passed upon for the underwriters by Davis Polk &
Wardwell. Sullivan & Cromwell and Davis Polk & Wardwell will rely upon the
opinion of Richards, Layton & Finger, P.A., as to matters of Delaware law and
the opinion of Bar & Karrer, Swiss counsel to UBS AG, as to matters of Swiss
law. Certain matters relating to United States federal income tax considerations
will be passed upon for UBS AG, UBS Preferred Funding Trust and UBS Preferred
Funding Company by Sullivan & Cromwell.
Experts
The consolidated financial statements of UBS at 31 December 1999 and 1998 and
for each of the three years in the period ended 31 December 1999 appearing in
this document have been audited by ATAG Ernst & Young Ltd., independent auditors
as set forth in their report thereon appearing elsewhere in this prospectus, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
Limitations on enforcement of U.S. laws against UBS AG,
its management and others
UBS AG is a Swiss bank. Many of its directors and executive officers, including
all of the persons who signed the registration statement of which this
prospectus is a part, and certain experts named in this prospectus, are resident
outside the United States, and all or a substantial portion of our assets and
the assets of such persons are located outside the United States. As a result,
it may be difficult for you to serve legal process on UBS AG or its management
or have any of them appear in a U.S. court. We have been advised by Bar &
Karrer, Swiss counsel to UBS AG, that there is doubt as to enforceability in
Switzerland, in original actions or in actions for enforcement of judgment of
U.S. courts, of liabilities based solely on the federal securities laws of the
United States.
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210
<PAGE> 212
--------------------------------------------------------------------------------
General Information
LISTING
We have applied to list the trust preferred securities on the Luxembourg Stock
Exchange.
In connection with the listing on the Luxembourg Stock Exchange, a notice
relating to the issue of the trust preferred securities (Notice Legale) and the
LLC Agreement of UBS Preferred Funding Company have been filed with the Chief
Registrar of the District Court of Luxembourg (Greffier en Chef du Tribunal
d'Arrondissement de et a Luxembourg), where such documents are available for
inspection and copies of such documents will be obtainable upon request. For
listing purposes, the trust preferred securities will be considered as debt
instruments and will appear under the heading "emprunts ordinaires."
CLEARING SYSTEMS
The trust preferred securities have been accepted for clearance by Clearstream
and Euroclear. The Common Code for the trust preferred securities is -- and the
International Security Identification Number (ISIN) for the trust preferred
securities is US90262PAA66.
AUTHORIZATION
The transactions constituting the formation of UBS Preferred Funding Company
were authorized by a resolution of the board of directors of UBS AG passed on 14
September 2000 and the issue of the company preferred securities was authorized
by UBS Preferred Funding Company as of 18 September 2000.
DOCUMENTS
As long as any trust preferred securities are outstanding, copies of UBS
Preferred Funding Company's LLC Agreement, the Amended and Restated Trust
Agreement of UBS Preferred Funding Trust and the UBS AG subordinated guarantee
will be available for inspection during usual business hours at the specified
office of the paying agent in Luxembourg.
As long as any trust preferred securities are outstanding, a copy of the English
translation of the statutes and by-laws of UBS AG will be available for
inspection at the specified office of the paying agent in Luxembourg.
Copies of the latest annual report of UBS Preferred Funding Company and copies
in the English language of the latest annual report on a consolidated and an
unconsolidated basis and the published consolidated semi-annual financial
statements of UBS AG will be available at the specified office of the paying
agent in Luxembourg, so long as any trust preferred securities are outstanding.
Neither UBS Preferred Funding Trust nor UBS Preferred Funding Company currently
publish interim financial statements. UBS Preferred Funding Trust and UBS
Preferred Funding Company do not intend to publish non-consolidated financial
statements. UBS Preferred Funding Trust will make available in Luxembourg any
separate financial information about it made publicly available in the United
States, Switzerland or elsewhere.
MATERIAL ADVERSE CHANGE
Except as disclosed in this prospectus, there has been no material adverse
change in the financial position of UBS AG since 30 June 2000 and in the
financial position of UBS Preferred Funding Trust or UBS Preferred Funding
Company since 18 September 2000.
--------------------------------------------------------------------------------
211
<PAGE> 213
GENERAL INFORMATION
--------------------------------------------------------------------------------
LITIGATION
None of UBS Preferred Funding Trust, UBS Preferred Funding Company or UBS AG are
involved in any litigation or arbitration proceedings relating to claims or
amounts that are material in the context of the issue of the trust preferred
securities nor, so far as UBS Preferred Funding Trust, UBS Preferred Funding
Company or UBS AG are aware, is any such litigation or arbitration pending or
threatened.
GOVERNING LAW
The LLC Agreement of UBS Preferred Funding Company, the company preferred
securities, the Amended and Restated Trust Agreement and the trust preferred
securities will be governed by the laws of the State of Delaware without regard
to any conflicts of laws principles that would require the application of the
laws of a jurisdiction other than the State of Delaware. The subordinated notes
and the UBS AG Subordinated Guarantee Agreement will be governed by the laws of
the State of New York.
--------------------------------------------------------------------------------
212
<PAGE> 214
--------------------------------------------------------------------------------
Where You Can Find More Information
UBS files periodic reports and other information with the Securities and
Exchange Commission. You may read and copy any document that UBS files with the
SEC at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of its public reference room. You may also inspect UBS's SEC reports
and other information at the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005.
We have filed a registration statement on Form F-1 under the Securities Act of
1933, as amended, with the SEC covering the trust preferred securities, the
company preferred securities and the UBS AG subordinated guarantee. For further
information on the trust preferred securities, the company preferred securities,
the UBS AG subordinated guarantee, UBS Preferred Funding Trust, UBS Preferred
Funding Company and UBS AG, you should review our registration statement and its
exhibits. This prospectus summarizes material provisions of the contracts and
other documents that we refer you to. Since this prospectus may not contain all
the information that you may find important, you should review the full text of
these documents. We have included copies of these documents as exhibits to our
registration statement.
Presentation of Financial Information
UBS's financial statements have been prepared in accordance with International
Accounting Standards and are denominated in Swiss francs, or "CHF," the legal
tender of Switzerland. For convenience, 31 December 1999 CHF amounts have been
translated into United States dollars, or "$," at the rate of CHF 1=$0.6277,
which was the noon buying rate on 31 December 1999, and 31 June 2000 CHF amounts
have been translated into United States dollars at the rate of CHF 1=$0.6129,
which was the noon buying rate on 30 June 2000. This translation should not be
construed as a representation that the Swiss franc amounts actually denote such
United States dollar amounts or have been, could have been or could be,
converted into United States dollars at the rate indicated.
The table below sets forth, for the periods and dates indicated, information
concerning the noon buying rate for the Swiss franc, expressed in United States
dollars per one Swiss franc. The "noon buying rate" is the rate in New York City
for cable transfers in foreign currencies as certified for customs purposes by
the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
HIGH LOW AVERAGE RATE(1)
YEAR ENDED 31 DECEMBER ($ 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 August 31)................... 0.7539 0.6442 0.6023 0.7510
</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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213
<PAGE> 215
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
</TABLE>
--------------------------------------------------------------------------------
F- i
<PAGE> 216
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Group Executive Board UBS AG:
We have audited the accompanying consolidated balance sheets of UBS AG and
subsidiaries as of 31 December 1999 and 1998, and the related consolidated
statements of income, cash flows and changes in shareholders' equity for each of
the three years in the period ended 31 December 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of UBS AG as of 31 December 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended 31 December 1999, in conformity with
International Accounting Standards ("IAS") and comply with Swiss Law.
IAS vary in certain significant respects from accounting principles generally
accepted in the United States of America. Application of accounting principles
generally accepted in the United States of America would have affected
shareholders' equity as of 31 December 1999 and 1998 and the results of
operations for the two years then ended to the extent summarized in Note 42 of
the Notes to the Financial Statements.
Basel, 8 March 2000, except for Note 38,
as to which the date is 18 April 2000
and Note 1(t) as to which
the date is 17 August 2000
ATAG Ernst & Young Ltd.
<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> 217
CONSOLIDATED FINANCIAL STATEMENTS
UBS GROUP
YEARS ENDED 31 DECEMBER 1999, 1998 AND 1997
--------------------------------------------------------------------------------
F- 2
<PAGE> 218
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> 219
UBS GROUP
BALANCE SHEET
<TABLE>
<CAPTION>
31.12.1999(1) 31.12.1998(1)
NOTE ------------- -------------
<S> <C> <C> <C>
CHF MILLION
ASSETS
Cash and balances with central banks................. 5,073 3,267
Money market paper................................... 11 69,717 18,390
Due from banks....................................... 12a 29,907 68,495
Cash collateral on securities borrowed............... 13 113,162 91,695
Reverse repurchase agreements........................ 14 132,474 141,285
Trading portfolio assets............................. 15 212,440 159,179
Positive replacement values.......................... 27 64,698 90,511
Loans, net of allowance for credit losses............ 12a 234,858 247,926
Financial investments................................ 16 7,039 6,914
Accrued income and prepaid expenses.................. 5,167 6,627
Investments in associates............................ 17 1,102 2,805
Property and equipment............................... 18 8,701 9,886
Intangible assets and goodwill....................... 19 3,543 2,210
Other assets......................................... 20 11,007 12,092
------------- -------------
TOTAL ASSETS......................................... 898,888 861,282
============= =============
Total subordinated assets............................ 600 496
------------- -------------
LIABILITIES
Money market paper issued............................ 64,655 51,527
Due to banks......................................... 21 76,365 85,716
Cash collateral on securities lent................... 13 12,832 19,171
Repurchase agreements................................ 14 196,914 137,617
Trading portfolio liabilities........................ 15 54,586 47,033
Negative replacement values.......................... 27 95,786 125,847
Due to customers..................................... 21 279,960 274,850
Accrued expenses and deferred income................. 12,040 11,232
Long-term debt....................................... 22 56,332 50,783
Other liabilities.................................... 23,24,25 18,376 27,722
------------- -------------
TOTAL LIABILITIES.................................... 867,846 831,498
------------- -------------
MINORITY INTERESTS................................... 26 434 990
------------- -------------
SHAREHOLDERS' EQUITY
Share capital........................................ 4,309 4,300
Share premium account................................ 14,437 13,617
Foreign currency translation......................... (442) (456)
Retained earnings.................................... 20,327 16,224
Treasury shares...................................... (8,023) (4,891)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY........................... 30,608 28,794
------------- -------------
TOTAL LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS' EQUITY............................... 898,888 861,282
============= =============
Total subordinated liabilities....................... 14,801 13,652
------------- -------------
</TABLE>
---------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
--------------------------------------------------------------------------------
F- 4
<PAGE> 220
UBS GROUP
STATEMENT OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
31.12.1999(1) 31.12.1998(1) 31.12.1997
FOR THE YEAR ENDED ------------- ------------- ----------
CHF MILLION
<S> <C> <C> <C>
ISSUED AND PAID UP SHARE CAPITAL
Balance at the beginning of the year................ 4,300 4,296 4,255
Issue of share capital.............................. 9 4 41
------------- ------------- ------
BALANCE AT THE END OF THE YEAR(2)................... 4,309 4,300 4,296
============= ============= ======
SHARE PREMIUM
Balance at the beginning of the year as previously
reported.......................................... 13,740 13,260 13,001
Change in accounting policy......................... (123) 1406(4) 0
Balance at the beginning of the year (restated)..... 13,617 14,666 13,001
Premium on shares issued, and warrants exercised.... 45 111 130
Own equity derivatives.............................. 526 (1,598) 0
Net premium on treasury share and own equity
derivative activity............................... 249 438 129
------------- ------------- ------
BALANCE AT THE END OF THE YEAR...................... 14,437 13,617 13,260
============= ============= ======
FOREIGN CURRENCY TRANSLATION
Balance at the beginning of the year................ (456) (111) (155)
Movements during the year........................... 14 (345) 44
------------- ------------- ------
BALANCE AT THE END OF THE YEAR...................... (442) (456) (111)
============= ============= ======
RETAINED EARNINGS
Balance at the beginning of the year as previously
reported.......................................... 16,293 15,464 16,931
Change in accounting policy......................... (69) 0 0
Balance at the beginning of the year (restated)..... 16,224 15,464 16,931
Net profit/(loss) for the year restated............. 6,153 2,972 (667)
Dividends paid restated............................. (2,050) (2,212) (800)
------------- ------------- ------
BALANCE AT THE END OF THE YEAR...................... 20,327 16,224 15,464
============= ============= ======
TREASURY SHARES, AT COST
Balance at the beginning of the year as previously
reported.......................................... (1,482) (1,982) (702)
Change in accounting policy......................... (3,409) (2,345)(4) 0
Balance at the beginning of the year (restated)..... (4,891) (4,327) (702)
Acquisitions restated............................... (6,595) (3,860) (3,172)
Disposals restated.................................. 3,463 3,296 1,892
------------- ------------- ------
BALANCE AT THE END OF THE YEAR(3)................... (8,023) (4,891) (1,982)
============= ============= ======
TOTAL SHAREHOLDERS' EQUITY.......................... 30,608 28,794 30,927
============= ============= ======
</TABLE>
---------------
(1) The 1999 and 1998 figures have been restated to reflect retroactive changes
in accounting policy arising from newly applicable IAS and changes in
presentation (see Note 1: Basis of Accounting).
(2) Comprising 430,893,162 ordinary shares at 31 December 1999; 429,952,612
ordinary shares at 31 December 1998; and 428,724,700 ordinary shares at 31
December 1997 (as restated for the 1998 merger of Union Bank of Switzerland
and Swiss Bank Corporation), at CHF 10 each, fully paid.
(3) Comprising 36,873,714 shares at 31 December 1999; 24,456,698 shares at 31
December 1998; and 11,692,326 shares at 31 December 1997.
(4) Opening balance sheet adjustment to 1 January 1998, with no restatement to
1997.
In addition to the Treasury shares, a maximum of 1,057,908 unissued shares
(conditional capital) (1,998,458 at 31 December 1998 and 2,884,672 at 31
December 1997) can be issued without the approval of the shareholders. This
amount consists of unissued and reserved shares for the former Swiss Bank
Corporation employee share ownership plan and optional dividend warrants. The
optional dividend warrants were the warrants granted in lieu of a cash dividend
by the former Swiss Bank Corporation in February 1996 (at the option of the
shareholder).
--------------------------------------------------------------------------------
F- 5
<PAGE> 221
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> 222
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of accounting
UBS AG and subsidiaries ("UBS" or the "Group") provides a broad range of
financial services such as advisory, underwriting, financing, market making,
asset management, brokerage, and retail banking on a global level. The Group was
formed on 29 June 1998 when Swiss Bank Corporation and Union Bank of Switzerland
merged. The merger was accounted for using the pooling of interests method of
accounting. Due to the merger, the Group harmonized its accounting policies,
which have been retrospectively applied for the presentation of comparative
information.
The Group adopted new International Accounting Standards ("IAS") and changed the
presentation of certain financial information effective 1 January 2000. The
consolidated financial statements have been restated, where practicable, to give
retroactive effect to these changes -- see t) below.
The consolidated financial statements are stated in Swiss francs, the currency
of the country in which UBS AG is incorporated. They are prepared in accordance
with International Accounting Standards. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the amounts reported. Actual results could differ from such estimates and the
differences may be material to the consolidated financial statements.
b) Consolidation
The consolidated financial statements comprise those of the parent company (UBS
AG), its subsidiaries and its special purpose entities, presented as a single
economic entity. Subsidiaries and special purpose entities which are directly or
indirectly controlled by the Group are consolidated. Subsidiaries acquired are
consolidated from the date control passes. Companies which are acquired and held
with a view to their subsequent disposal are recorded as financial investments.
The effects of intra-group transactions are eliminated in preparing the Group
financial statements, except for certain intercompany derivatives for which
hedge accounting is used.
Equity and net income attributable to minority interests are shown separately in
the balance sheet and income statement respectively.
c) Offsetting
Assets and liabilities are offset only when the Group has a legal right to
offset amounts with the same counterparty and transactions are expected to be
settled on a net basis.
d) Trade date/settlement date accounting
When the Group becomes party to a contract in its trading activities it
recognizes from that date ("trade date") any unrealized profits and losses
arising from revaluing that contract to fair value. These unrealized profits and
losses are recognized in the income statement.
On a date subsequent to the trade date, the terms of spot and forward trading
transactions are fulfilled ("settlement date") and a resulting financial asset
or liability is recognized on the balance sheet at the fair value of the
consideration given or received.
e) Foreign currency translation
Foreign currency transactions are recorded at the rate of exchange on the date
of the transaction. At the balance sheet date, monetary assets and liabilities
denominated in foreign currencies are reported
--------------------------------------------------------------------------------
F- 7
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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
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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
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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
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UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities are recognized for temporary differences between the
carrying amounts of assets and liabilities in the Group balance sheet and their
amounts as measured for tax purposes, which will result in taxable amounts in
future periods. Deferred tax assets are recognized for temporary differences
which will result in deductible amounts in future periods, but only to the
extent it is probable that sufficient taxable profits will be available against
which these differences can be utilized.
Deferred tax assets and liabilities are measured at the tax rates that are
expected to apply to the period in which the asset will be realized or the
liability will be settled.
Current and deferred tax assets and liabilities are offset when they arise from
the same tax reporting group and relate to the same tax authority and when the
legal right to offset exists.
p) Own shares, own bonds and derivatives on own shares
In the normal course of its trading and market making activities, the Group buys
and sells own shares, own bonds and derivatives on own shares. In 1997, these
instruments were held in the trading portfolio similar to other trading
instruments, and carried at fair value. Changes in fair value and dividends
received on UBS AG shares and interest on own bonds in the trading portfolio
were recognized as net trading income (See Note t).
The Group also holds its own shares for non-trading purposes for instance
employee compensation schemes and other strategic purposes. These shares are
recorded within treasury shares and are deducted from shareholders' equity. The
difference between the proceeds of the sale of treasury shares and their cost
basis is recognized in share premium. Dividends relating to treasury shares are
not recognized.
q) Retirement benefits
The Group sponsors a number of retirement benefit plans for its employees
worldwide. These plans include both defined benefit and defined contribution
plans and various other retirement benefits such as post-employment medical
benefit. As of 1 January 1999, the Group adopted IAS 19, Employee Benefits
(revised 1998) ("IAS 19") to account for such plans. Under IAS 19, Group
contributions to defined contribution plans are expensed when employees have
rendered services in exchange for such contributions, generally in the year of
contribution.
In accordance with IAS 19, the Group uses the projected unit credit actuarial
method to determine the present value of its defined benefit obligations and the
related current service cost and, where applicable, past service cost.
The principal actuarial assumptions made by the actuary are set out in Note 35.
The Group recognizes a portion of its actuarial gains and losses as income or
expenses if the net cumulative unrecognized actuarial gains and losses at the
end of the previous reporting period exceeded the greater of:
a) 10% of the present value of the defined benefit obligation at that
date (before deducting plan assets); and
b) 10% of the fair value of any plan assets at that date.
The unrecognized actuarial gains and losses exceeding the greater of the two
values are recognized in the income statement over the expected average
remaining working lives of the employees participating in the plans.
--------------------------------------------------------------------------------
F- 11
<PAGE> 227
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
r) Derivative instruments
Derivative instruments are carried at fair value. Fair values are obtained from
quoted market prices, discounted cash flow models and option pricing models as
appropriate. The fair values of derivative instruments are shown in the balance
sheet as positive and negative replacement values. Realized and unrealized gains
and losses are recognized in net trading income. Valuation adjustments to cover
credit and market liquidity risks have been made.
Transactions in derivative instruments entered into for hedging of non-trading
positions are recognized in the income statement on the same basis as to the
underlying item being hedged.
s) Comparability
Certain amounts have been reclassified from previous years to conform to the
1999 presentation.
The prior year financial statements reflect the requirements of the following
revised or new International Accounting Standards, which the Group implemented
in 1999:
<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> 228
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
reclassification of own shares and derivatives on own shares held at those
dates. Of the CHF 4,227 million for 31 December 1999, CHF 4,561 million was a
reduction in trading portfolio assets and the remaining CHF 334 million was an
increase in positive replacement values. Of the CHF 3,601 million for 31
December 1998, CHF 3,409 million was a reduction to trading portfolio assets and
the remaining CHF 192 million was a reduction to positive replacement values. In
addition, shareholders' equity was adjusted as of 1 January 1998.
Offsetting of Amounts Related to Certain Contracts
In order to improve comparability with its main competitors, the Group has
offset positive and negative replacement values and reverse repurchase
agreements and repurchase agreements with the same counter-party for
transactions covered by legally enforceable master netting agreements. Positive
and negative replacement values have been reduced by CHF 66,136 million and CHF
79,233 million as of 31 December 1999 and 1998, respectively. Reverse repurchase
and repurchase agreements have been reduced by CHF 12,322 million as of 31
December 1999.
Interest and Dividend Income and Expense on Trading Assets and Liabilities
In prior periods, interest and dividend income and expense on trading assets and
liabilities were included in net trading income. In order to improve
comparability with its main competitors, the Group has included interest and
dividend income on trading assets and interest expense on trading liabilities in
interest income and interest expense, respectively, and has discontinued the
allocation of funding costs to net trading income.
Interest income was increased by CHF 17,281 million and CHF 14,607 million for
the years ended 31 December 1999 and 1998, respectively. Interest expense was
increased by CHF 17,728 million and CHF 16,251 million for the years ended 31
December 1999 and 1998, respectively. Net trading income was increased by CHF
447 million and CHF 1,644 million for the years ended 31 December 1999 and 1998,
respectively.
Tax Expense
Capital taxes were included in tax expense. The Group has reclassified CHF 80
million and CHF 118 million in Capital taxes from tax expense to General and
administrative expenses for the years ended 31 December 1999 and 1998,
respectively.
Segment Information
In the first half of 2000, the Group reorganized its business divisions. The
segment reporting for the year ended 31 December 1999 and 1998 has been restated
to reflect the new Group structure.
The following IAS were adopted as of 1 January 2000, but this adoption had no
material impact on the prior periods presented herein.
IAS 37, Provisions, Contingent Liabilities and Contingent Assets
In July 1998, the IASC issued IAS 37, Provisions, Contingent Liabilities and
Contingent Assets, which is required to be adopted for the Group's financial
statements as of 1 January 2000. The Standard provides accounting and disclosure
requirements for contingent liabilities and contingent assets. IAS 37 also
provides recognition and measurement requirements for provisions.
--------------------------------------------------------------------------------
F- 13
<PAGE> 229
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
IAS 38, Intangible Assets
In July 1998, the IASC issued IAS 38, Intangible Assets, which is required to be
adopted prospectively for the Group's financial statements as of 1 January 2000.
The Standard requires the capitalization and amortization of intangible assets,
if it is probable that the future economic benefits that are attributable to the
assets will flow to the enterprise and the cost of the asset can be measured
reliably. The amortization period for recognized intangible assets should not
exceed 20 years. If adopted in 1999 this standard would have increased operating
profit by approximately CHF 300 million.
IAS 10 (revised), Events After the Balance Sheet Date
In May 1999, the IASC issued IAS 10 (revised), Events After the Balance Sheet
Date, which is required to be adopted for the Group's financial statements as of
1 January 2000. IAS 10 (revised) establishes requirements for the recognition
and disclosure of events after the balance sheet date.
u) Recent accounting standards not yet adopted
IAS 39, Recognition and Measurement of Financial Instruments
In December 1998, the IASC issued IAS 39, Recognition and Measurement of
Financial Instruments, which is required to be adopted for the Group's financial
statements as of 1 January 2001 on a prospective basis. The Standard provides
comprehensive guidance on accounting for financial instruments. Financial
instruments include conventional financial assets and liabilities and
derivatives. IAS 39 requires that all financial instruments should be recognized
on the balance sheet. Most financial instruments should be carried at fair
value. IAS 39 also establishes hedge accounting criteria and guidelines. While
the specific impact on earnings and financial position of IAS 39 has not been
determined, the activities that will be most affected by the new Standard have
been identified. Specifically, the use of derivatives to hedge loans, deposits,
and issuance of debt, primarily hedge of interest rate risk, will be affected by
IAS 39. Management is currently evaluating the impact of IAS 39. The actual
assessment of the impact of IAS 39 on the Group's earnings and financial
position will be based on the 1 January 2001 financial position, among other
things, in accordance with the Standard.
--------------------------------------------------------------------------------
F- 14
<PAGE> 230
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 SEGMENT REPORTING BY BUSINESS GROUP
The business group results have been presented on a management reporting basis.
Consequently, internal charges and transfer pricing adjustments have been
reflected in the performance of each business. The basis of the reporting
reflects the management of the business within the Group. Total revenue includes
income which is directly attributable to a business group whether from sales to
external customers or from transactions with other segments. Revenue sharing
agreements are used to allocate external customer revenues to a business group
on a reasonable basis. Transactions between business groups are conducted at
arms length.
<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> 231
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> 232
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> 233
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 SEGMENT REPORTING BY GEOGRAPHICAL LOCATION
The geographical analysis of total assets is based on customer domicile whereas
operating income and capital investment is based on the location of the office
in which the transactions and assets are recorded. Because of the global nature
of financial markets the Group's business is managed on an integrated basis
world-wide, with a view to profitability by product line. The geographical
analysis of operating income, total assets, and capital investment is provided
in order to comply with International Accounting Standards, and does not reflect
the way the Group is managed. Management believes that analysis by business
division, as shown in Note 2 to these financial statements, is a more meaningful
representation of the way in which the Group is managed.
<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> 234
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> 235
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> 236
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> 237
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> 238
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12A DUE FROM BANKS AND LOANS TO CUSTOMERS
The composition of due from banks, the loan portfolio and the allowances for
credit losses by type of exposure at the end of the year was as follows:
<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> 239
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12B ALLOWANCE AND PROVISION FOR CREDIT LOSSES
The allowance and provision for credit losses developed as follows:
<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> 240
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The non-performing loans by geographical region based on the location of the
borrower were as follows:
<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> 241
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> 242
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> 243
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 INTANGIBLE ASSETS AND GOODWILL
<TABLE>
<CAPTION>
ACCUMULATED CARRYING CARRYING ACCUMULATED
AMORTIZATION AMOUNT AMOUNT AMORTIZATION
HISTORICAL AS OF AS OF AMORTIZATION, AS OF AS OF
CHF MILLION COST 31.12.1998 31.12.1998 ADDITIONS(1) WRITE-OFFS 31.12.1999 31.12.1999(2)
----------- ---------- ------------ ---------- ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Intangible assets............ 553 (301) 252 55 (42) 265 (40)
Goodwill..................... 2,447 (489) 1,958 1,618 (298) 3,278 (951)
----- ---- ----- ----- ---- ----- ----
TOTAL INTANGIBLE ASSETS AND
GOODWILL................... 3,000 (790) 2,210 1,673 (340) 3,543 (991)
===== ==== ===== ===== ==== ===== ====
</TABLE>
---------------
(1) Including currency translation differences.
(2) After elimination of CHF 139 million accumulated amortization relating to
intangible assets fully written off and no longer used.
NOTE 20 OTHER ASSETS
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999 31.12.1998
----------- ---------- ----------
<S> <C> <C>
Deferred tax assets(1)...................................... 742 1,205
Settlement and clearing accounts............................ 4,911 5,543
VAT and other tax receivables............................... 702 839
Other receivables........................................... 4,652 4,505
------ ------
TOTAL OTHER ASSETS.......................................... 11,007 12,092
====== ======
</TABLE>
---------------
(1) Additional tax information is provided in Note 25.
NOTE 21 DUE TO BANKS AND CUSTOMERS
<TABLE>
<CAPTION>
31.12.1999 31.12.1998
CHF MILLION ---------- ----------
<S> <C> <C>
Due to banks................................................ 76,365 85,716
Due to customers in savings and investment accounts......... 78,640 79,723
Amounts due to customers on demand and time................. 201,320 195,127
------- -------
Total due to customers...................................... 279,960 274,850
------- -------
TOTAL DUE TO BANKS AND CUSTOMERS............................ 356,325 360,566
======= =======
</TABLE>
NOTE 22 LONG-TERM DEBT
<TABLE>
<CAPTION>
31.12.1999
CHF MILLION -----------
<S> <C>
Total bond issues........................................... 48,305
Shares in bond issues of the Swiss Regional or Cantonal
Banks' Central Bond Institutions.......................... 2,055
Medium term notes........................................... 5,972
------
TOTAL LONG-TERM DEBT........................................ 56,332
======
</TABLE>
--------------------------------------------------------------------------------
F- 28
<PAGE> 244
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
UBS AG (PARENT) SUBSIDIARIES
--------------------- ---------------------
FLOATING FLOATING TOTAL TOTAL
FIXED RATE RATE FIXED RATE RATE 31.12.1999 31.12.1998
CHF MILLION ---------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONTRACTUAL MATURITY DATE
2000................................. 13,395 524 818 0 14,737 8,208
2001................................. 7,866 121 1,354 0 9,341 7,803
2002................................. 5,313 270 2,158 399 8,140 8,368
2003................................. 3,093 147 129 0 3,369 6,534
2004................................. 2,316 47 286 1,705 4,354 3,772
2005-2009............................ 9,795 208 581 1,378 11,962 12,562
Thereafter........................... 3,476 32 921 0 4,429 3,536
------ ----- ----- ----- ------ ------
TOTAL................................ 45,254 1,349 6,247 3,482 56,332 50,783
====== ===== ===== ===== ====== ======
</TABLE>
The Group issues both CHF and non-CHF denominated fixed and floating rate debt.
Publicly placed fixed rate debt pays interest at rates up to 16%. Floating rate
debt pays interest based on the three-month or six-month London Interbank
Offered Rate ("LIBOR").
Subordinated debt securities are unsecured obligations of the Group and are
subordinated in right of payment to all present and future senior indebtedness
and certain other obligations of the Group. At 31 December 1999 and 31 December
1998, the Group had CHF 13,106 million and CHF 12,071 million, respectively, in
subordinated debt excluding convertible and exchangeable debt and notes with
warrants which have been included in the following paragraph. Subordinated debt
usually pays interest annually and provides for single principal payments upon
maturity. At 31 December 1999 and 31 December 1998, the Group had CHF 41,093
million and CHF 36,379 million, respectively, in unsubordinated debt.
The Group issues convertible obligations that can be exchanged for ordinary
shares of UBS AG and notes with warrants attached on UBS AG shares. Furthermore,
the Group issues notes exchangeable into common stock or preferred stock of
other companies, or repaid based on the performance of an index or group of
securities. At 31 December 1999 and 31 December 1998, the Group had CHF 2,133
million and CHF 2,333 million, respectively, in convertible and exchangeable
debt and notes with warrants attached outstanding.
The Group, as part of its interest-rate risk management process, utilizes
derivative instruments to modify the repricing and maturity characteristics of
the notes/bonds issued. The Group also utilizes other derivative instruments to
manage the foreign exchange impact of certain long-term debt obligations.
Interest rate swaps are utilized to convert the economic characteristics of
fixed rate debt to those of floating rate debt.
The Group issues credit-linked notes generally through private placements. The
credit-linked notes are usually senior unsecured obligations of UBS AG, acting
through one of its branches, and can be subject to early redemption at the
option of the Group or in the event of a defined credit event. Payment of
interest and/or principal is dependent upon the performance of a reference
entity or security. The rate of interest on each credit-linked note is either
floating and determined by reference to LIBOR plus a spread or fixed.
Medium-term and credit-linked notes have been included in the amounts disclosed
above as unsubordinated debt.
--------------------------------------------------------------------------------
F- 29
<PAGE> 245
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> 246
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
As of today, many of the actions under these plans are completed or near
completion. As a result of the real estate lease breaks or disposals which have
been identified, the Group recognized an additional restructuring provision of
CHF 300 million in 1999.
NOTE 25 INCOME TAXES
<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> 247
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Group's deferred income tax assets and liabilities
(gross) are as follows:
<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> 248
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> 249
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Cross currency interest rate swaps generally involve the exchange of payments
which are based on the interest reference rates available at the inception of
the contract on two different currency principal balances that are exchanged.
The principal balances are re-exchanged at an agreed upon rate at a specified
future date. Interest rate swaps subject the Group to market risks associated
with changes in interest rates and possibly foreign exchange rates. Exposure to
the credit risk associated with counterparty default also exists.
Forwards and futures
Forwards and futures are contractual obligations to buy or sell a financial
instrument on a future date at a specified price. Forward contracts are
effectively tailor-made agreements that are transacted between counterparties in
the over-the-counter market (OTC), whereas futures are standardized contracts
that are transacted on regulated exchanges. Varying levels of credit risk and
market risk exist with respect to these instruments. For futures contracts
closed prior to settlement, the cash receipt or payment is limited to the change
in value of the underlying instrument. Futures contracts allow for daily cash
settlement, therefore the credit risk is generally limited to one day's
variation margin. Forward contracts are settled at maturity by the exchange of
notional amounts specified under the contracts. Forwards generally have a
greater degree of credit risk since daily cash settlements are not required.
Options
Options are contractual agreements under which the seller (writer) grants the
purchaser the right, but not the obligation, either to buy (call option) or sell
(put option) by or at a set date, a specified amount of a financial instrument
at a predetermined price. The seller receives a premium from the purchaser for
this right. For options purchased, the Group is subject to credit and market
risk to the extent of the carrying value of the options. For options sold, the
Group is subject to market risk in excess of the carrying values but is not
subject to credit risk, except that for put options sold, credit risk may arise
from the underlying instrument that the Group may be obligated to buy.
Notional amounts and replacement values
The table below provides the notional amounts and the positive and negative
replacement values of the Group's derivative transactions. The notional amount
is the amount of a derivative's underlying asset, reference rate or index and is
the basis upon which changes in the value of derivatives are measured. It
provides an indication of the volume of business transacted by the Group but
does not provide any measure of risk.
Some derivatives are standardized in terms of their nominal amounts and
settlement dates, and these are designed to be bought and sold in active markets
(exchange traded). Others are packaged specifically for individual customers and
are not exchange traded although they may be bought and sold between
counterparties at negotiated prices (over-the-counter or OTC instruments).
Positive replacement value represents the cost to the Group of replacing all
transactions with a receivable amount if all the Group's counterparties were to
default. This measure is the industry standard for the calculation of current
credit exposure. Positive replacement values represent current credit risk
without giving effect to any possible reductions due to master netting
agreements, collateral, or other security. Negative replacement value is the
cost to the Group's counterparties of replacing all the Group's transactions
with a commitment if the Group were to default. The total positive and negative
replacement values are reported separately on the balance sheet on a net by
counterparty basis.
--------------------------------------------------------------------------------
F- 34
<PAGE> 250
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> 251
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> 252
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 28 PLEDGED ASSETS
ASSETS PLEDGED OR ASSIGNED AS SECURITY FOR LIABILITIES AND ASSETS SUBJECT TO
RESERVATION OF TITLE
<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> 253
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
of the clients is part of the normal credit risk management process, and the
fees charged for maintenance of the facilities reflect the various credit risks.
<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> 254
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
MORTGAGE OTHER
CHF MILLION COLLATERAL COLLATERAL UNSECURED TOTAL
----------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C>
OVERVIEW OF COLLATERAL
Gross contingent liabilities...................... 191 11,356 16,761 28,308
Gross irrevocable committments.................... 386 8,774 56,533 65,693
Liabilities for calls on shares and other
equities........................................ 0 0 57 57
--- ------ ------ -------
TOTAL 31.12.1999.................................. 577 20,130 73,351 94,058
=== ====== ====== =======
TOTAL 31.12.1998.................................. 389 33,363 86,425 120,177
=== ====== ====== =======
</TABLE>
NOTE 31 OPERATING LEASE COMMITMENTS
Our minimum commitments for non-cancellable leases of premises and equipment are
presented as follows:
<TABLE>
<CAPTION>
CHF MILLION 31.12.1999
----------- -----------
<S> <C>
OPERATING LEASES DUE:
2000........................................................ 247
2001........................................................ 202
2002........................................................ 184
2003........................................................ 187
2004........................................................ 153
2005 and thereafter......................................... 1,919
-----
TOTAL COMMITMENTS FOR MINIMUM PAYMENTS UNDER OPERATING
LEASES.................................................... 2,892
=====
</TABLE>
Operating expenses include CHF 742 million and CHF 797 million in respect of
operating lease rentals for the year ended 31 December 1999 and for the year
ended 31 December 1998 respectively.
NOTE 32 LITIGATION
In the United States, several class actions, in relation to what is known as the
Holocaust affair, have been brought against UBS AG (as legal successor to Swiss
Bank Corporation and Union Bank of Switzerland) in the United States District
Court for the Eastern District of New York (Brooklyn). These lawsuits were
initially filed in October 1996. Another Swiss bank has been designated as a
defendant alongside us. On 12 August 1998, however, a settlement was reached
between the parties. This settlement provides for a payment by the defendant
banks to the plaintiffs, under certain terms and conditions, of an aggregate
amount of USD 1.25 billion. UBS agreed to contribute up to two-thirds of this
amount. To the extent that other Swiss companies agreed to participate in this
fund, and to the extent of applicable payments to beneficiaries of eligible
dormant accounts, our share was to be reduced. Based on our estimate of such
expected contributions, we provided a reserve of USD 610 million in 1998 and an
additional USD 95 million in 1999. A number of persons have elected to opt out
of the settlement and not participate in the class action. It is expected that a
decision approving the settlement will be issued in 2000, which will be followed
by hearings on the allocation of the settlement amount. We will continue to
monitor the contributions of other Swiss companies, in order to determine
whether we will need an adjustment to the reserve.
In addition, UBS AG and other companies within the Group are subject to various
claims, disputes and legal proceedings, as part of the normal course of
business. The Group makes provision for such matters when, in the opinion of
management and its professional advisors, it is probable that a
--------------------------------------------------------------------------------
F- 39
<PAGE> 255
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
payment will be made by the Group, and the amount can be reasonably estimated.
All litigation provisions are included under Business risk provision within
Other liabilities in the accompanying Group Balance Sheet.
In respect of the further claims asserted against the Group of which management
is aware (which, according to the principles outlined above, have not been
provided for), it is the opinion of management that such claims are either
without merit, can be successfully defended or will result in exposure to the
Group which is immaterial to both financial position and results of operations.
OTHER INFORMATION
NOTE 33 FINANCIAL INSTRUMENTS RISK POSITION
OVERALL RISK POSITION
The Group manages risk in a number of ways, including the use of a value at risk
model combined with a system of trading limits.
This section presents information about the results of the Group's management of
the risks associated with the use of financial instruments.
(a) Interest Rate Risk
Interest rate risk is the potential impact of changes in market interest rates
on the fair values of assets and liabilities on the balance sheet and on the
annual interest income and expense in the income statement.
Interest rate sensitivity
One commonly used method to present the potential impact of market movements is
to show the effect of a one basis point (0.01%) change in interest rates on the
fair values of assets and liabilities, analyzed by time bands within which the
Group is committed. This type of presentation, described as a sensitivity
analysis, is set out below. Interest rate sensitivity is one of the inputs to
the value at risk model used by the Group to manage its overall market risk, of
which interest rate risk is a part.
The following sets out the extent to which the Group was exposed to interest
rate risk at 31 December 1999 and 31 December 1998. The tables show the
potential impact of a one basis point (0.01%) increase in market interest rates
which would influence the fair values of both assets and liabilities that are
subject to fixed interest rates. The impact of such an increase in rates depends
on the net asset or net liability position of the Group in each category,
currency and time band in the table. A negative amount in the table reflects a
potential loss to the Group due to the changes in fair values as a result of an
increase in interest rates. A positive amount reflects a potential gain as a
result of an increase in interest rates. Both primary and derivative instruments
in trading and non-trading activities, as well as off-balance-sheet commitments,
are included in the table.
--------------------------------------------------------------------------------
F- 40
<PAGE> 256
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> 257
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Non-trading
The interest rate risk related to client business with undefined maturities and
non-interest bearing business including the strategic management of overall
balance sheet interest rate exposure is managed by the Corporate Center.
Significant contributors to the overall USD and GBP interest rate sensitivity
were strategic long-term subordinated note issues which are intentionally
unswapped since they are regarded as constituting a part of the Group's equity
for asset and liability management purposes. At 31 December 1999, the Group's
equity was invested in a portfolio of fixed rate CHF deposits with an average
duration of 2.16 years. As this equity investment is the most significant
component of the CHF book, this results in the entire book having an interest
rate sensitivity of CHF (7.9) million, which is reflected in the table above.
This is in line with the duration and sensitivity targets set by the Group
Executive Board. Investing in shorter-term or variable rate instruments would
mean exposing the earnings stream (interest income) to higher fluctuations.
(b) Credit Risk
Credit risk is the risk of loss from the default by an obligor or counterparty.
This risk is managed primarily based on reviews of the financial status of each
specific counterparty. Credit risk is greater when counterparties are
concentrated in a single industry or geographical region. This is because a
group of otherwise unrelated counterparties could be adversely affected in their
ability to repay their obligations because of economic developments affecting
their common industry or region.
Concentrations of credit risk exist if a number of clients are engaged in
similar activities, or are located in the same geographic region or have
comparable economic characteristics such that their ability to meet contractual
obligations would be similarly affected by changes in economic, political or
other conditions. Concentrations of credit risk indicate the relative
sensitivity of the bank's performance to developments affecting a particular
industry or geographic location.
(b)(i) On-balance sheet assets
As of 31 December 1999, due from banks and loans to customers amounted to CHF
278 billion (as of 31 December 1998 CHF 331 billion). 66.2% (56.6%) of the loans
were with clients domiciled in Switzerland. Please refer to Note 12 for a
breakdown by region.
(b)(ii) Off-balance sheet financial instruments
Credit commitments and contingent liabilities
Of the CHF 94 billion in credit commitment and contingent liabilities as of 31
December 1999 (as of 31 December 1998 CHF 120 billion), 11% (11%) relate to
clients domiciled in Switzerland, 36% (21%) in Europe (excluding Switzerland)
and 42% (55%) in North America.
Derivatives
Credit risk represents the current replacement value of all outstanding
derivative contracts in a gain position without factoring in the impact of
master netting agreements or the value of any collateral. Positive replacement
values amounted to CHF 130 billion as at 31 December 1999 (CHF 169 billion as at
31 December 1998), before applying any master netting agreements. Based on the
location of the ultimate counterparty, 4% (8%) of this credit risk amount
relates to Switzerland, 49% (47%) to Europe (excluding Switzerland) and 37%
(33%) to North America. 71% (76%) of the positive replacement values are with
other banks.
--------------------------------------------------------------------------------
F- 42
<PAGE> 258
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(b)(iii) Credit risk mitigation techniques
Credit risk associated with derivative instruments is mitigated by the use of
master netting agreements. A further method of reducing credit exposure arising
from derivatives transactions is to use collateralization arrangements.
Master netting agreements eliminate risk to the extent that only the net claim
is due to be settled in the case of a default of the counterparty. The impact of
master netting agreements as at 31 December 1999 is to mitigate credit risk on
derivative instruments by approximately CHF 66 billion (as of 31 December 1998
CHF 79 billion). The impact can change substantially over short periods of time,
because the exposure is affected by each transaction subject to the arrangement.
The Group subjects its derivative-related credit risks to the same credit
approval, limit and monitoring standards that it uses for managing other
transactions that create credit exposure. This includes evaluation of
counterparties as to creditworthiness, and managing the size, diversification
and maturity structure of the portfolio. Credit utilization for all products is
compared with established limits on a continual basis and is subject to a
standard exception reporting process.
(c) Currency Risk
The Group views itself as a Swiss entity, with the Swiss franc as its reporting
currency. Hedging transactions are used to manage risks in other currencies.
Breakdown of assets and liabilities by currencies
<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> 259
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> 260
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> 261
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> 262
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 34 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the fair value of on- and off-balance sheet
financial instruments based on the following valuation methods and assumptions.
It is presented because not all financial instruments are reflected in the
financial statements at fair value.
Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm's-length transaction.
A market price, where an active market (such as a recognized stock exchange)
exists, is the best evidence of the fair value of a financial instrument.
However, market prices are not available for a significant number of the
financial assets and liabilities held and issued by the Group. Therefore, for
financial instruments where no market price is available, the fair values
presented in the following table have been estimated using present value or
other estimation and valuation techniques based on market conditions existing at
balance sheet date.
The values derived using these techniques are significantly affected by
underlying assumptions concerning both the amounts and timing of future cash
flows and the discount rates used. The following methods and assumptions have
been used:
(a) trading assets, derivatives and other transactions undertaken for
trading purposes are measured at fair value by reference to quoted market
prices when available. If quoted market prices are not available, then fair
values are estimated on the basis of pricing models, or discounted cash
flows. Fair value is equal to the carrying amount for these items;
(b) the fair value of liquid assets and other assets maturing within
12 months is assumed to approximate their carrying amount. This assumption
is applied to liquid assets and the short-term elements of all other
financial assets and financial liabilities;
(c) the fair value of demand deposits and savings accounts with no
specific maturity is assumed to be the amount payable on demand at the
balance sheet date;
(d) the fair value of variable rate financial instruments is assumed
to approximate their carrying amounts; and
(e) the fair value of fixed rate loans and mortgages is estimated by
comparing market interest rates when the loans were granted with current
market rates offered on similar loans. Changes in the credit quality of
loans within the portfolio are not taken into account in determining gross
fair values as the impact of credit risk is recognized separately by
deducting the amount of the allowance for credit losses from both book and
fair values.
The assumptions and techniques have been developed to provide a consistent
measurement of fair value for the Group's assets and liabilities. However,
because other institutions may use different methods and assumptions, such fair
value disclosures cannot necessarily be compared from one financial institution
to another.
--------------------------------------------------------------------------------
F- 47
<PAGE> 263
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> 264
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The hedging derivative instruments are carried at fair value on the balance
sheet and are part of the replacement values in the above table. The difference
between the total amount of valuation gains and losses and the amortized amount
is deferred and shown net in the table as fair value effect on income of hedging
derivatives recorded on accruals basis.
During 1999, the interest rate level of leading economies increased
substantially. The biggest move in rates was noted in Switzerland, where in
particular mid- and long-term rates increased. These moves in rates had a direct
impact on the fair value calculation of fixed term transactions.
As the bank has an excess volume of fixed rate long-term assets over fixed rate
long-term liabilities, the net fair value unrealized gain is reduced
substantially. In addition to fixed rate balance sheet positions, the bank has a
number of retail products traditionally offered in Switzerland such as variable
mortgage loans and customer savings and deposits. These instruments have no
maturity or have a contractual repricing maturity of less than one year. Based
on the assumptions and the guidance under IAS, they are excluded from the fair
value calculations of the table above.
The exclusion of the above traditional banking products from the fair value
calculation leads to certain fair value swings. By calculating the fair value
differences based on the economic maturity of the non-maturity liabilities, such
as savings and deposits, in an environment of raising interest rates, they would
generate fair value gains which may offset most of the fair value loss reported
for fixed term transactions.
NOTE 35 RETIREMENT BENEFIT PLANS AND OTHER EMPLOYEE BENEFITS
The Group has established various pension plans inside and outside of
Switzerland. The major plans are located in Switzerland, the UK, the U.S. and
Germany. Independent actuarial valuations are performed for the plans in those
locations.
Swiss Pension Plans until 30 June 1999
The pension funds of the Group are set up as trusts, domiciled in Basel and
Zurich. All domestic employees are covered. The pension funds are defined
benefit plans. The pension plan benefits exceed the minimum benefits required
under the Swiss law.
Contributions are paid for by the Group and the employees. The employee
contributions are calculated as a percentage of the insured annual salary and
are deducted monthly. The percentages deducted from the salary depend on age and
vary between 8% and 12%. The Group contributions are variable and amount from
125% to 250% of the employees contributions depending on the financial situation
of the pension fund.
The pension plan formula is based on years of contributions and final covered
salary. The benefits covered include retirement benefits, disability, death and
survivor pension.
Swiss Pension Plans starting 1 July 1999
The pension plans of both former banks in Switzerland are in the process of
being liquidated and a new foundation with domicile in Zurich was created as of
21 January 1999. The new pension scheme became operational as of 1 July 1999.
As a result of the merger of the plans of the former banks in Switzerland, on 1
July 1999 there was a one-time increase of vested plan benefits for the
beneficiaries of such plans. This had the effect of increasing the defined
benefit obligation at this date by CHF 3,525 million. In accordance with IAS 19
(revised 1998) this resulted in a one-time charge to income which was offset by
the recognition of
--------------------------------------------------------------------------------
F- 49
<PAGE> 265
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
assets (previously unrecognized due to the paragraph 58(b) limitation of IAS 19
(revised 1998)) used to fund this increase in benefits.
The pension plan covers practically all employees in Switzerland and exceeds the
minimum benefits requirements under the Swiss law.
Contributions for the pension plan are paid for by the employees and the Group.
The employee contributions are calculated as a percentage of the insured annual
salary and are deducted monthly. The percentages deducted from the salary for
the full benefit coverage (including risk benefits) depend on age and vary
between 7% and 10%. The Group pays a variable contribution that ranges between
150% and 220% of the sum of the employees' contributions.
The pension plan formula is based on years of contributions and final covered
salary. The benefits covered include retirement benefits, disability, death and
survivor pension.
The Group booked an amount of CHF 456 million in 1999 related to the recognition
of "Excess Employer Contributions." These assets were recognized in the fourth
quarter as certain legal and regulatory issues related to the Group's ability to
utilize these assets for future funding purposes were resolved.
<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> 266
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Pension Plans
The foreign locations of UBS operate various pension schemes in accordance with
local regulations and practices. Among these schemes are defined contribution
plans as well as defined benefit plans. The locations with defined benefit plans
of a material nature are in the UK, the U.S. and Germany. These locations,
together with Switzerland, cover nearly 90% of the active workforce. Certain of
these schemes permit employees to make contributions and earn matching or other
contributions from the Group.
The retirement plans provide benefits in the event of retirement, death,
disability or employment termination. The plans' retirement benefits depend on
age, contributions and level of compensation. The principal plans are financed
in full by the Group. The funding policy for these plans is consistent with
local government and tax requirements.
The assumptions used in foreign plans take into account local economic
conditions.
The amounts shown for foreign plans reflect the net funded positions of the
major foreign plans.
Postretirement Medical and Life Plans
The Group in the U.S. and the UK offers retiree medical benefits that contribute
to the health care coverage of the employees and beneficiaries after retirement.
In addition to retiree medical, the U.S. also provides retiree life insurance
benefits.
The benefit obligation in excess of plan assets for those plans amounts to CHF
113 million as of 31 December 1999 (1998 CHF 93 million, 1997 CHF 100 million)
and the total unfunded accrued postretirement liabilities to CHF 83 million
(1998 CHF 62 million, 1997 CHF 50 million). The actuarially determined net
postretirement cost amounts to CHF 17 million for 1999 (1998 CHF 17 million,
1997 CHF 14 million).
<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> 267
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> 268
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The Group's policy is to recognize expense as of the date of grant for equity
participation instruments (stock, warrants, options and other derivatives for
which the underlying is the Group's own shares). The amount of expense
recognized is equal to the intrinsic value of the instrument at such date.
Options in UBS AG Shares
<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> 269
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Members of the Board of Directors, Group Executive Board and Group Managing
Board are granted mortgages at the same terms and conditions as other employees.
Terms and conditions are based on third party conditions excluding credit
margin.
Loans and advances to significant associated companies were as follows:
<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> 270
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> 271
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> 272
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> 273
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> 274
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 41 SWISS BANKING LAW REQUIREMENT
The significant differences between International Accounting Standards (IAS),
which are the principles followed by the Group, and the accounting for banks
under Swiss laws and regulations, are as follows:
Securities borrowing and lending
Under IAS, only the cash collateral delivered or received is recognized in the
balance sheet. There is no recognition or derecognition for the securities
received or delivered. The Swiss requirement is to recognize the securities
received or delivered in the balance sheet along with any collateral in respect
of those securities for which control is transferred.
Treasury shares
Treasury shares is the term used to describe the holding by an enterprise of its
own equity instruments. In accordance with IAS, treasury shares are presented in
the balance sheet as a deduction from equity. No gain or loss is recognized in
the income statement on the sale, issuance, or cancellation of those shares.
Consideration received is presented in the financial statement as a change in
equity.
Under Swiss requirements, treasury shares and derivatives on treasury shares
would be carried in the balance sheet as financial investments with gains and
losses on the sale, issuance, or cancellation of treasury shares reflected in
the income statement.
Extraordinary income and expense
Under IAS, most items of income and expense arise in the course of ordinary
business, and extraordinary items are expected to be rare. Under the Swiss
requirements, income and expense not directly related with the core business
activities of the enterprise (e.g., sale of fixed assets or bank premises) are
recorded as extraordinary income or expense.
<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> 275
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> 276
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Other purchase accounting adjustments
Under U.S. GAAP, the results of operations of Swiss Bank Corporation would have
been included in the Group's consolidated financial statements beginning 29 June
1998. For purposes of the U.S. GAAP reconciliation, Swiss Bank Corporation's Net
profit for the six-month period ended 29 June 1998 has been excluded from the
Group's Net profit. For purposes of the U.S. GAAP reconciliation, the
restatement of Swiss Bank Corporation's net assets to fair value resulted in
decreasing net tangible assets by CHF 1,077 million. This amount will be
amortized over a period ranging from 2 years to 20 years depending upon the
nature of the restatement.
b. Harmonization of accounting policies
The business combination noted above was accounted for under the pooling of
interests method under IAS. Under the pooling of interests method of accounting,
a single uniform set of accounting policies was adopted and applied to all
periods presented. This resulted in a restatement of 1997 Shareholders' equity
and Net loss.
U.S. GAAP requires that accounting changes be accounted for in the income
statement in the period the change is made. For purposes of the U.S. GAAP
reconciliation the accounting policy harmonization recorded in 1997 was reversed
because the business contribution noted above is being accounted for under the
purchase method and the impact of the accounting changes was recorded in 1998.
The income statement effects of this conforming adjustment was as follows:
<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> 277
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
such amount was recorded as a liability of the acquired business. The remaining
CHF 816 million of estimated costs were charged to restructuring expense during
1998. A CHF 600 million adjustment to the restructuring provision was recognized
in 1999 for purposes of the U.S. GAAP reconciliation. The reserve is expected to
be substantially exhausted by the end of 2001.
The restructuring provision initially included CHF 756 million for employee
termination benefits, CHF 332 million for the closure and write downs of owned
and leased premises, and CHF 487 million for professional fees, IT costs,
miscellaneous transfer taxes and statutory fees.
The usage of the U.S. GAAP restructuring provision was as follows:
<TABLE>
<CAPTION>
1998 1998 BALANCE 1999 1999 BALANCE
PROVISION USAGE 31.12.1998 USAGE PROVISION 31.12.1999
CHF MILLION --------- ----- ---------- ----- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Personnel....................... 756 (374) 382 (254) 553 681
Premises........................ 332 (27) 305 (244) 179 240
IT.............................. 93 (68) 25 (5) 7 27
Other........................... 394 (81) 313 (45) (139) 129
---- ---- ----- ---- ---- -----
Total........................... 1,575 (550) 1,025 (548) 600 1,077
==== ==== ===== ==== ==== =====
</TABLE>
Additionally, for purposes of the U.S. GAAP reconciliation, CHF 150 million and
CHF 273 million of restructuring costs were expensed as incurred in 1999 and
1998, respectively.
d. Derivatives instruments held or issued for non-trading purposes
Under IAS, the Group recognizes transactions in derivative instruments hedging
non-trading positions in the income statement using the accrual or deferral
method, which is generally the same accounting as the underlying item being
hedged.
U.S. GAAP requires that derivatives be reported at fair value with changes in
fair value recorded in income unless specified criteria are met to obtain hedge
accounting treatment (accrual or deferral method).
The Group is not required to comply with all of the criteria necessary to obtain
hedge accounting treatment under U.S. GAAP. Accordingly, for purposes of the
U.S. GAAP reconciliation, derivative instruments held or issued for non-trading
purposes that did not meet U.S. GAAP hedging criteria have been carried at fair
value with changes in fair value recognized as adjustments to net trading
income.
e. Own shares and derivatives on own shares -- trading
As of 1 January 2000, upon adoption of SIC 16 "Share Capital -- Reacquired Own
Equity Instruments (Treasury Shares)" for IAS, all own shares are treated as
treasury shares and reduce total shareholders' equity. This applies also to the
number of shares outstanding. Derivatives on own shares are classified as
assets, liabilities or in shareholders' equity depending upon the manner of
settlement. As a result of this adoption, there is no difference between IAS and
U.S. GAAP. For 1999 and 1998, figures have been retroactively restated (see Note
1(t)).
f. Financial investments
Under IAS, financial investments are classified as either current investments or
long-term investments. The Group considers current financial investments to be
held for sale and carried at lower of cost or market value. The Group accounts
for long-term financial investments at cost, less any permanent impairments.
--------------------------------------------------------------------------------
F- 62
<PAGE> 278
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Under U.S. GAAP, investments are classified as either held to maturity
(essentially debt securities) which are carried at amortized cost or available
for sale (debt and marketable equity securities), which are carried at fair
value with changes in fair value recorded as a separate component of
shareholders' equity. Realized gains and losses are recognized in net profit in
the period sold.
For purposes of the U.S. GAAP reconciliation, amounts reflected in Other income
for the changes in market values of held for sale investments are reclassified
as a component of Shareholders' equity. Held to maturity investments that do not
meet U.S. GAAP criteria are reclassified to the available for sale category.
Unrealized gains or unrealized losses relating to these investments are recorded
as a component of Shareholders' equity.
g. Retirement benefit plans
Under IAS, the Group has recorded pension expense based on a specific method of
actuarial valuation of projected plan liabilities for accrued service including
future expected salary increases and expected return on plan assets. Plan assets
are held in a separate trust to satisfy plan liabilities. Plan assets are
recorded at fair value. The recognition of a prepaid asset on the books of the
Group is subject to certain limitations. These limitations generally cause
amounts recognized as expense to equal amounts funded in the same period. Any
amount not recognized as a prepaid asset and the corresponding impact on pension
expense has been disclosed in the financial statements.
Under U.S. GAAP, pension expense, generally, is based on the same method of
valuation of liabilities and assets as under IAS. Differences in the levels of
expense and liabilities (or prepaid assets) exist due to the different
transition date rules and the stricter provisions as well as industry practice
under IAS for recognition of a prepaid asset.
As a result of the merger of the benefit plans of Union Bank of Switzerland and
Swiss Bank Corporation, there was a one time increase of the vested plan
benefits for the beneficiaries of such plans. This had the effect of increasing
the defined benefit obligation at this date by CHF 3,020 million. Under IAS this
resulted in a one time charge to income which was offset by the recognition of
assets (previously unrecognized due to certain limitations under IAS).
Under U.S. GAAP, in a business combination that is accounted for under the
purchase method, the assignment of the purchase price to individual assets
acquired and liabilities assumed must include a liability for the projected plan
liabilities in excess of plan assets or an asset for plan assets in excess of
the projected plan liabilities, thereby recognizing any previously existing
unrecognized net gains or losses, unrecognized prior service cost, or
unrecognized net liabilities or assets.
For purposes of the U.S. GAAP reconciliation, the Group recorded a prepaid asset
for the Union Bank of Switzerland plans as of 1 January 1998. Swiss Bank
Corporation recorded a purchase price adjustment to recognize its prepaid asset
at 29 June 1998. The recognition of these assets impacts the pension expense
recorded under U.S. GAAP versus IAS. The pension expense for the year ended 31
December 1999 is also impacted by the different treatment of the merger of the
plans under IAS versus U.S. GAAP. The assets recognized under IAS (which had
been previously unrecognized due to certain limitations under IAS) were already
recognized under U.S. GAAP due to the absence of such limitations under U.S.
GAAP.
h. Other employee benefits
Under IAS, the Group has recorded expenses and liabilities for post-retirement
benefits determined under a methodology similar to that described above under
retirement benefit plans.
--------------------------------------------------------------------------------
F- 63
<PAGE> 279
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Under U.S. GAAP, expenses and liabilities for post-retirement benefits would be
determined under a similar methodology as under IAS. Differences in the levels
of expenses and liabilities have occurred due to different transition date rules
and the treatment of the merger of Union Bank of Switzerland and Swiss Bank
Corporation under the purchase method.
i. Equity participation plans
IAS does not specifically address the recognition and measurement requirements
for equity participation plans.
U.S. GAAP permits the recognition of compensation cost on the grant date for the
estimated fair value of equity instruments issued (Statement of Financial
Accounting Standard ("SFAS") No. 123) or based on the intrinsic value of equity
instruments issued (APB No. 25), with the disclosure of the pro forma effects of
equity participation plans on net profit and earnings per share, as if the fair
value had been recorded on the grant date. The Group recognized only intrinsic
values at the grant date with subsequent changes in value not recognized.
For purposes of the U.S. GAAP reconciliation, certain of the Group's option
awards have been determined to be variable, primarily because they may be
settled in cash or the Group has offered to hedge their value. Additional
compensation expense from these options awards for the years ended 31 December
1999 and 31 December 1998 is CHF 41 million and CHF 1 million, respectively. In
addition, certain of the Group's equity participation plans provide for deferral
of the awards, and the instruments are held in trusts for the participants.
Certain of these trusts are recorded on the Group's balance sheet for U.S. GAAP
presentation. The effect of recording these asset and liabilities is a debit to
expense of CHF 8 million and CHF nil for the years ended 31 December 1999 and 31
December 1998, respectively.
j. Software capitalization
Costs associated with the acquisition or development of internal use software
are recorded as Operating expenses as incurred by the Group.
Under U.S. GAAP, effective 1 January 1999, certain costs associated with the
acquisition or development of internal use software are required to be
capitalized. Once the software is ready for its intended use, the costs
capitalized are amortized to the Income statement over estimated lives.
For purposes of the U.S. GAAP reconciliation, costs associated with the
acquisition or development of internal use software that meet U.S. GAAP software
capitalization criteria have been reversed from Operating expenses and amortized
over a period of 2 years.
k. Credit loss expense
The allowance for credit losses provides for risks of losses inherent in the
credit extension process. Counterparties are individually rated and continuously
reviewed and analyzed. The allowance is adjusted for impairments identified on a
loan-by-loan basis. If there are indications that there are significant probable
losses in the portfolio that have not specifically been identified allowances
would also be provided for on a portfolio basis. As described in Note 1(j),
"Loans and allowance for credit losses," the allowance for credit losses has
three components: counterparty-specific, country-specific, and specific reserve
pools.
Specific reserve pools were established in 1996 to absorb losses not
specifically identified at that time but which experience indicated were present
in the portfolio. These pools have been applied to specific loans based on the
analysis of individual credit exposures. The utilization of the unallocated
specific
--------------------------------------------------------------------------------
F- 64
<PAGE> 280
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
reserve pools was periodically reviewed by the Group. At 31 December 1999 there
were no specific reserve pools and none were required.
Under U.S. GAAP, the allowance for loan losses also is an accounting estimate of
credit losses inherent in a company's loan portfolio that have been incurred as
of the balance-sheet date. The practice of using a procedural discipline in
determining all components of the allowance for loan losses to be reported is
followed under U.S. GAAP. The Group's evaluation of the specific reserve pools
at 30 September 1999 did not follow a procedural discipline and therefore is not
in full compliance with U.S. GAAP. An adjustment to the U.S. GAAP reconciliation
was made at 30 September 1999 but not required at 31 December 1999.
l. Recently issued US accounting standards
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the US Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which, as
amended, is required to be adopted for financial statements as of 1 January
2001. The standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. While the specific impact on earnings and
financial position of SFAS No. 133 has not been determined, the activities that
will be most affected by the new Standard have been identified. Specifically,
UBS Warburg and Corporate Center use derivatives to hedge loans, deposits, and
issuance of debt, primarily to hedge interest rate risk. The Group's lending
activities use credit derivatives to hedge credit risk, and to a lesser extent,
use other derivatives to hedge interest rate risk. Management is currently
evaluating the impact of SFAS No. 133 on the Group's hedging strategies. The
actual assessment of the impact on the Group's earnings and financial position
will be based on the 1 January 2001 positions in accordance with the Standard.
--------------------------------------------------------------------------------
F- 65
<PAGE> 281
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)}
----------------------- ------------------------
31.12.1999 31.12.1998 31.12.1999 31.12.1998
CHF MILLION ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AMOUNTS DETERMINED IN ACCORDANCE WITH IAS:...... 30,608 28,794 6,153 2,972
Adjustments in respect of:
a. SBC purchase accounting:
Goodwill................................... 19,765 21,612 (1,729) (864)
Other purchase accounting adjustments...... (858) (895) 37 (2,415)
b. Harmonization of accounting policies....... 0 20 (20) (751)
c. Restructuring provision.................... 350 1,948 (1,598) (3,982)
d. Derivative instruments held or issued for
non-trading purposes....................... 507 1,052 (545) (405)
f. Financial investments...................... 52 108 36 23
g. Retirement benefit plans................... 1,839 1,858 (19) 88
h. Other employee benefits.................... (24) (26) 2 (20)
i. Equity participation plans................. (113) (40) (47) (1)
j. Software capitalization.................... 389 0 389 0
k. Credit loss expense........................ 0 0 0 0
l. Tax adjustments............................ (682) 330 178 1,690
------ ------ ------ ------
Total adjustments............................... 21,225 25,967 (3,316) (6,637)
------ ------ ------ ------
AMOUNTS DETERMINED IN ACCORDANCE WITH U.S.
GAAP:......................................... 51,833 54,761 2,837 (3,665)
====== ====== ====== ======
</TABLE>
--------------------------------------------------------------------------------
F- 66
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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
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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> 284
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
positions relating to trading activities are revalued to fair value and any
unrealized profits and losses are recognized in Net profit.
Under U.S. GAAP, trade date accounting is required for purchases and sales of
securities. For purposes of U.S. GAAP presentation, all purchases and sales of
securities previously recorded on settlement date have been recorded as of trade
date for balance sheet purposes. Trade date accounting has resulted in
receivables and payables to broker-dealers and clearing organizations recorded
in Other assets and Other liabilities.
3. Repurchase, resale and securities lending transactions
Under IAS, the Group's repurchase agreements and securities borrowed are
accounted for as collateralized borrowings. Reverse repurchase agreements and
securities lending are accounted for as collateralized lending transactions.
Cash collateral is reported on the balance sheet at amounts equal to the
collateral advanced or received.
Under U.S. GAAP, securities lending and repurchase transactions are also
generally accounted for as collateralized borrowing and lending transactions.
However, certain such transactions may be deemed sale or purchase transactions
under specific circumstances. Additionally, under U.S. GAAP, the Group is
required to recognize securities collateral controlled and an offsetting
obligation to return such securities collateral on certain financing
transactions, when specific control conditions exist.
For purposes of U.S. GAAP presentation, securities collateral recognized under
financing transactions is reflected in Due from banks or Due from customers,
depending on the counterparty. The related obligation to return the securities
collateral is reflected in the Balance sheet in Due to banks or Due to
customers, as appropriate.
4. Financial investments
Under IAS, the Group's private equity investments, real estate held for sale and
non-marketable equity financial investments have been included in Financial
investments.
Under U.S. GAAP, private equity investments, real estate held for sale and
non-marketable financial investments generally are reported in Other assets or
reported as a separate caption in the Balance sheet.
For purposes of U.S. GAAP presentation, private equity investments are reported
as a separate caption in the Balance sheet and real estate held for sale and
non-marketable equity financial investments are reported in Other assets.
5. Net trading income
The Group has implemented a change in accounting policy for interest and
dividend income and expenses on trading related assets and liabilities (see Note
1(t)). For the years ended 31 December 1999 and 31 December 1998, figures have
been retroactively restated. As a result of this change, there is no longer a
difference between IAS and U.S. GAAP.
6. Equity participation plans
Certain of the Group's equity participation plans provide for deferral of the
awards, and the instruments are held in trusts for the participants. Certain of
these trusts are recorded on the Group's balance sheet for U.S. GAAP
presentation, the effect of which is to increase assets by CHF 655 million and
CHF 197 million, liabilities by CHF 717 million and CHF 236 million, and
decrease shareholders'
--------------------------------------------------------------------------------
F- 69
<PAGE> 285
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
equity by CHF 62 million and CHF 39 million (for UBS AG shares held by the
trusts which are treated as treasury shares) at 31 December 1999 and 31 December
1998, respectively.
7. Own bonds -- trading
Under IAS, the Group's own bonds held for trading are carried at fair value
similar to other trading assets and liabilities. Changes in fair value and
interest on own bonds held for trading are recognized as Net trading income
Under U.S. GAAP, all own bonds are treated as Long-term debt and a reduction to
the amount of own bonds outstanding.
For purposes of U.S. GAAP presentation, own bond positions included in the
Trading portfolio and Trading portfolio liabilities have been reclassified to
Long-term debt.
42.5 CONSOLIDATED INCOME STATEMENT
The following is a Consolidated Income Statement of the Group, for the years
ended 31 December 1999 and 31 December 1998, restated to reflect the impact of
valuation and income recognition differences and presentation differences
between IAS and U.S. GAAP.
<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
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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> 287
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
42.6 CONDENSED CONSOLIDATED BALANCE SHEET
The following is a Condensed Consolidated Balance Sheet of the Group, as of 31
December 1999 and 31 December 1998, restated to reflect the impact of valuation
and income recognition principles and presentation differences between IAS and
U.S. GAAP.
<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> 288
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> 289
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 43 ADDITIONAL DISCLOSURES REQUIRED UNDER U.S. GAAP
In addition to the differences in valuation and income recognition and
presentation, disclosure differences exist between IAS and U.S. GAAP. The
following are additional U.S. GAAP disclosures that relate to the basic
financial statements.
43.1 BUSINESS COMBINATIONS
On 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation
consummated a merger of the banks, resulting in the formation of UBS. New shares
totaling 428,746,982 were issued exclusively for the exchange of the existing
shares of Union Bank of Switzerland and Swiss Bank Corporation. Under the terms
of the merger agreement, Union Bank of Switzerland shareholders received 5
registered shares for each bearer share held and 1 registered share for each
registered share held, totaling 257,500,000 shares of UBS AG. Swiss Bank
Corporation shareholders received 1 1/13 registered shares of the Group for each
Swiss Bank Corporation registered share held, totaling 171,246,982 shares. The
combined share capital amounted to CHF 5,754 million. As a result of the
exchange of shares, CHF 1,467 million were transferred from share capital to the
share premium account. The merger was accounted under the pooling of interests
method and, accordingly, the information included in the financial statements
presents the combined results of Union Bank of Switzerland and Swiss Bank
Corporation as if the merger had been in effect for all periods presented.
Summarized results of operations of the separate companies for the period from 1
January 1998 through 29 June 1998, the date of combination, are as follows:
<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> 290
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
At the time of the merger announcement in December 1997, it was announced that
the merged bank's operations in various locations would be combined, resulting
in vacant properties, reductions in personnel, elimination of redundancies in
the IT platforms, exit costs and other costs. As a result, restructuring
provisions of CHF 7,300 million (of which CHF 7,000 million was recognized as a
restructuring expense in 1997 and CHF 300 million was recognized as a component
of general and administrative expense in the fourth quarter of 1999) were
established, to be used over a period of four years. At 31 December 1999, the
Group had utilized CHF 5,871 million of the provisions.
The restructuring provisions, included CHF 3,000 million for employee
termination benefits, CHF 1,500 million for sale and lease breakage costs
associated with the closure of premises, CHF 1,650 for IT integration projects
and write-offs of equipment which management had committed to dispose of; and
CHF 1,150 million for other costs, including professional fees, miscellaneous
transfer taxes and statutory fees. For income statement purposes, these costs
would normally be classified as personnel expense, general and administrative
expense or other income.
<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> 291
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Private Banking offers a broad portfolio of financial products and services to
offshore and Swiss high net worth clients who bank in Switzerland or other
offshore centers, and to the financial intermediaries advising them. The
business unit's products and services are aimed at encompassing the complete
life cycle of the client, including succession planning and the generational
change. Private Banking provides a number of asset-based, transaction-based and
other services. Asset-based services include custodial services, deposit
accounts, loans and fiduciary services while transaction-based services include
trading and brokerage and investment fund services. The business unit also
provides financial planning and consulting and offers financial planning
instruments to clients. These services include establishing proprietary trusts
and foundations, the execution of wills, corporate and tax structuring and tax
efficient investments.
Private and Corporate Clients is the leading retail bank in Switzerland and
targets individual clients with assets of up to approximately CHF 1 million and
business and corporate clients in Switzerland. Private and Corporate Clients
provides a broad range of products and services to these clients, including
retail banking, investment services and lending.
UBS Warburg is made up of four business units, Corporate and Institutional
Clients, UBS Capital, Private Clients and e-services.
Corporate and Institutional Clients is one of the leading global investment
banks and is headquartered in London. It provides wholesale financial and
investment products and services globally to a diversified client base, which
includes institutional investors (including institutional asset managers and
broker-dealers), corporations, sovereign governments and supranational
organizations. Corporate and Institutional Clients also manages cash and
collateral trading on behalf of the Group and executes the vast majority of the
Group's retail securities, derivatives and foreign currency exchange
transactions.
UBS Capital is the Group's global private equity business. UBS Capital invests
in unlisted companies, managing these investments over a medium term time
horizon to increase their value and "exiting" the investment in a manner that
will maximize the capital gain. The business unit seeks to make both majority
and minority equity investments in established and emerging unlisted companies,
either with the Group's own capital or through sponsored investment funds. UBS
Capital endeavors to create investment value by working together with management
to develop the businesses it invests in over the medium term in order to
optimize their performance.
Private Clients provides onshore private banking services for high net worth
individuals in key markets world-wide, providing a similar range of services to
Private Banking, but specializing in combining traditional private banking
services with investment banking innovation. For example, Private Clients offers
innovative products allowing clients to release value from own-company
shareholdings or options.
e-services is a new business, currently working towards a client launch in
Germany in the Autumn of 2000. e-services will provide personalized investments
and advisory services at competitive fees for affluent clients in Europe,
delivered via a multi-channel structure which integrates internet, call centers
and investment centers. e-services will deliver a distinctive set of services,
including advanced financial planning and asset allocation, and investment
products such as UBS and third-party funds, securities and pension products.
UBS Asset Management is made up of two business units: Institutional Asset
Management and Investment Funds/GAM.
Institutional Asset Management is responsible for the Group's institutional
asset management business, and for the investment management of the Groups
mutual funds. Its diverse institutional client base located throughout the world
consists of corporate and public pension plans, endowments and private
--------------------------------------------------------------------------------
F- 76
<PAGE> 292
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
foundations, insurance companies, central banks and supranationals,
quasi-institutions, and financial advisers.
Investment Funds/GAM is the mutual funds business of UBS. Investment Funds is
one of the leading mutual funds providers in Europe and the seventh largest in
the world. GAM is a diversified asset management group with assets composed
primarily of private client accounts, institutional and mutual funds. Global
Asset Management operates under its established brand name within UBS Asset
Management and employs its own distinctive investment style. UBS Asset
Management will increasingly leverage Global Asset Management's range of mutual
funds and its multi-manager selection process, in which it selects the top 90
out of about 6,000 third-party fund providers, to enhance the range of its
investment styles and products.
The Corporate Center encompasses Group level functions which cannot be devolved
to the operating divisions. Additionally, the Corporate Center plays an active
role with regard to funding, capital and balance sheet management and management
of foreign currency earnings.
43.4 NET TRADING INCOME
See Note 6 for information on net trading income. Foreign exchange net trading
income include gains and losses from spot and forward contracts, options,
futures, and translation of foreign currency assets and liabilities, bank notes,
precious metals, and commodities. Fixed income net trading income includes the
results of making markets in both developed and emerging countries in government
securities, corporate debt securities, money market instruments, interest rate
and currency swaps, options, and other derivatives. Equities net trading income
includes the results of making markets in global equity securities and equity
derivatives such as swaps, options, futures, and forward contracts.
43.5 LOANS
See Note 12 for information on loans. The following table summarizes the Group's
impaired loans at and for the years ended 31 December 1999 and 31 December 1998:
<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> 293
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
43.6 FINANCIAL INVESTMENTS
See Note 16 for information on financial investments. The following table
summarizes the Group's financial investments as of 31 December 1999 and 31
December 1998:
<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> 294
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The following presents an analysis of the contractual maturities of the
investments in debt securities as of 31 December 1999:
<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> 295
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the fair value, average fair value and notional
amounts for each class of derivative financial instrument for the years ended 31
December 1999 and 31 December 1998 distinguished between held or issued for
trading purposes and held or issued for non-trading purposes. See Note 27 for
information on derivative instruments including a discussion of the distinction
between trading and non-trading. Positive replacement values ("PRV") and
negative replacement values ("NRV") represent the fair values of derivative
instruments. Average balances for the years ended 31 December 1999 and 31
December 1998 are calculated from quarterly data.
<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> 296
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
43.8 RETIREMENT BENEFIT PLANS AND OTHER EMPLOYEE BENEFITS
See Note 35 for information on retirement benefit plans and other employee
benefits. Under U.S. GAAP, a reconciliation of beginning and ending balances of
the plan benefit obligation is required. The following is the reconciliation of
the plan benefit obligation for the Swiss and foreign pension plans:
<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> 297
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> 298
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Stock award and stock purchase plans
The following table shows the shares awarded and the weighted-average
fair-market value per share for these plans. The fair values for the stock
purchase awards reflect the purchase price paid. For 1999, in addition to the
1998 plan-year awards, the stock bonus awards include 1,405,000 shares issued in
an exchange for previously issued non-share awards and for special bonuses and
the stock purchase awards include 666,000 shares issued for the current year.
<TABLE>
<CAPTION>
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> 299
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma amounts in the table above reflect the vesting periods of all
options granted. The effects of applying the guidance contained in SFAS 123 for
recognizing compensation expense and providing pro forma disclosures are not
likely to be representative of the effects on reported Net profit for future
years.
The weighted-average fair-value of options granted in 1999 and 1998 was CHF 59
and CHF 54 per share, respectively. The fair value of options granted was
determined as of the date of issuance using a proprietary option pricing model,
substantially similar to the Black-Scholes, with the following assumptions:
<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> 300
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UBS GROUP
SIX-MONTH PERIODS ENDED 30 JUNE 2000 AND 1999
(UNAUDITED)
--------------------------------------------------------------------------------
F- 85
<PAGE> 301
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> 302
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> 303
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> 304
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> 305
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF ACCOUNTING
The consolidated interim financial statements have been prepared in accordance
with and comply with International Accounting Standard ("IAS") 34, "Interim
Financial Reporting."
In the first half of 2000, the Group reorganized its business divisions. The
segment reporting for the six-month period ended 30 June 2000, as well as the
comparative segment reporting for the first six-month period ended 30 June 1999,
have been restated to reflect the new Group structure.
At the Annual General Meeting of shareholders held on 18 April 2000, a
two-for-one stock split was approved to be effective 8 May 2000. Share and per
share information have been adjusted to retroactively reflect the stock split.
In preparing the consolidated interim financial statements, the same accounting
policies and methods of computation are followed as in the consolidated
financial statements as of 31 December 1999 and for the year then ended, with
the exception of the following changes in accounting policies:
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
In July 1998, the IASC issued IAS 37, Provisions, Contingent Liabilities and
Contingent Assets, which has been adopted for the Group's financial statements
as of 1 January 2000. The Standard provides recognition and measurement
requirements for provisions. IAS 37 also provides accounting and disclosure
requirements for contingent liabilities and contingent assets.
IAS 38 Intangible Assets
In July 1998, the IASC issued IAS 38 Intangible Assets, which the Group adopted
prospectively as of 1 January 2000. The standard requires the capitalization and
amortization of certain intangible assets, if it is probable that the future
economic benefits that are attributable to the assets will flow to the
enterprise and the cost can be measured reliably.
IAS 10 (revised), Events after the Balance Sheet Date
In May 1999, the IASC issued IAS 10 (revised), Events after the Balance Sheet
Date, which has been adopted for the Group's financial statements as of 1
January 2000. IAS 10 (revised) establishes requirements for the recognition and
disclosure of events after the balance sheet date. The adoption of IAS 10
(revised) had no impact on any comparative financial information.
Interpretation SIC 16, Share Capital -- Reacquired Own Equity Instruments
(Treasury Shares)
In May 1999, the IASC issued Interpretation SIC 16, Share Capital -- Reacquired
Own Equity Instruments (Treasury Shares), which the Group adopted as of 1
January 2000. The interpretation provides guidance for the recognition,
presentation and disclosure of treasury shares. SIC 16 applies to own shares and
derivatives on own shares held for trading and non-trading purposes. SIC 16
requires own shares and derivatives on own shares to be presented as treasury
shares and deducted from shareholders' equity. Gains and losses relating to the
sale of own shares and derivatives on own shares are recognized as a change in
shareholders' equity.
As a result of the adoption of Interpretation SIC 16, prior periods presented
have been retroactively restated. Net trading income and income tax expense were
reduced by CHF 138 million and CHF 35 million, respectively, for the six-month
period ended 30 June 1999. Shareholders' equity and total assets were reduced by
CHF 4,277 million for 31 December 1999. Of the CHF 4,227 million
--------------------------------------------------------------------------------
F- 90
<PAGE> 306
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
reduction to total assets, CHF 4,561 million was a reduction in trading
portfolio assets and the remaining CHF 334 million was a reduction to negative
replacement values. In addition, the opening balance in shareholders' equity was
adjusted as of 1 January 1998.
Offsetting of Amounts Related to Certain Contracts
In order to improve comparability with its main competitors, the Group has
offset positive and negative replacement values and reverse repurchase
agreements and repurchase agreements with the same counter-party for
transactions covered by legally enforceable master netting agreements. This
change became effective as of 1 January 2000 and all prior periods presented
have been restated. Positive and negative replacement values have been reduced
by CHF 66,136 million as of 31 December 1999. Reverse repurchase and repurchase
agreements have been reduced by CHF 12,322 million as of 31 December 1999.
Interest and Dividend Income and Expenses on Trading Assets and Liabilities
In prior periods, interest and dividend income and expense on trading assets and
liabilities were included in net trading income. In order to improve
comparability with its main competitors, the Group has included interest and
dividend income on trading assets and interest expense on trading liabilities in
interest income and interest expense, respectively, and has discontinued the
allocation of funding costs to net trading income. This change in presentation
became effective as of 1 January 2000. The comparative financial information for
1999 has been restated to comply with this change.
Interest income and interest expense was increased by CHF 8,144 million and CHF
8,756 million, respectively, for the six-month period ended 30 June 1999. In
addition, net trading income was increased by CHF 612 million for the six-month
period ended 30 June 1999.
Tax Expense
In prior periods, capital taxes were included in tax expense. The Group has
reclassified capital taxes from tax expense to general and administrative
expenses for the six-month period ended 30 June 1999.
NOTE 2 REPORTING BY BUSINESS GROUP
The business group results have been presented on a management reporting basis.
Consequently, internal charges and transfer pricing adjustments have been
reflected in the performance of each business. The basis of the reporting
reflects the management of the business within the Group. Total revenue includes
income, which is directly attributable to a business group whether from sales to
external customers or from transactions with other segments. Revenue sharing
agreements are used to allocate external customer revenues to a business group
on a reasonable basis. Transactions between business groups are conducted at
arms length.
--------------------------------------------------------------------------------
F- 91
<PAGE> 307
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> 308
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> 309
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> 310
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> 311
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> 312
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> 313
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> 314
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 10 DIFFERENCES BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND UNITED
STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Group have been prepared in
accordance with IAS. The principles of IAS differ in certain respects from U.S.
GAAP. A summary of the significant accounting valuation and presentation
differences between IAS and U.S. GAAP can be found at Notes 42.1 and 42.4 of the
31 December 1999 financial statements. The following is provided to supplement
those discussions for the six month period ended 30 June 2000.
10.1 Valuation, income recognition and presentation differences between
International Accounting Standards and United States Generally Accepted
Accounting Principles
10.1.1 Goodwill
For the six month period ended 30 June 2000, goodwill was reduced by CHF 178
million due to the recognition of deferred tax assets of Swiss Bank Corporation
which had previously been subject to valuation reserves.
10.1.2 Restructuring provision
For the six-month period ended 30 June 2000, a CHF 130 million additional
restructuring expense was recognized for U.S. GAAP. The usage of the U.S. GAAP
restructuring provision was as follows:
<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> 315
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> 316
UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
10.3 Earnings per share
Under IAS and U.S. GAAP, basic earnings per share ("EPS") is computed by
dividing income available to common shareholders' by the weighted-average number
of common shares outstanding. Diluted EPS includes the determinants of basic EPS
and, in addition, gives effect to dilutive potential common shares that were
outstanding during the period.
The computation of basic and diluted EPS for the six-month period ended 30 June
2000 is presented in the following table:
<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> 317
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.
--------------------------------------------------------------------------------
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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.
--------------------------------------------------------------------------------
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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.
--------------------------------------------------------------------------------
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UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Private and Corporate Clients provides a broad range of products and services to
these clients, including retail banking, investment services and lending.
UBS Warburg is made up of four business units; Corporate and Institutional
Clients, UBS Capital, Private Clients and e-services.
Corporate and Institutional Clients is one of the leading global investment
banks and is headquartered in London. It provides wholesale financial and
investment products and services globally to a diversified client base, which
includes institutional investors (including institutional asset managers and
broker-dealers), corporations, sovereign governments and supranational
organizations. Corporate and Institutional Clients also manages cash and
collateral trading on behalf of the Group and executes the vast majority of the
Group's retail securities, derivatives and foreign currency exchange
transactions.
UBS Capital is the Group's global private equity business. UBS Capital invests
in unlisted companies, managing these investments over a medium-term time
horizon to increase their value and "exiting" the investment in a manner that
will maximize the capital gain. The business unit seeks to make both majority
and minority equity investments in established and emerging unlisted companies,
either with the Group's own capital or through sponsored investment funds. UBS
Capital endeavors to create investment value by working together with management
to develop the businesses it invests in over the medium term in order to
optimize their performance.
Private Clients provides onshore private banking services for high net worth
individuals in key markets world-wide, providing a similar range of services to
Private Banking, but specializing in combining traditional private banking
services with investment banking innovation. For example, Private Clients offers
innovative products allowing clients to release value from own-company
shareholdings or options.
e-services is a new business, currently working towards a client launch in
Germany in the Autumn of 2000. e-services will provide personalized investment
and advisory services at competitive fees for affluent clients in Europe,
delivered via a multi-channel structure which integrates internet, call centers
and investment centers. e-services will deliver a distinctive set of services,
including advanced financial planning and asset allocation, and investment
products such as UBS and third-party funds, securities and pension products.
UBS Asset Management is made up of two business units: Institutional Asset
Management and Investment Funds/GAM.
Institutional Asset Management is responsible for the Group's institutional
asset management business, and for the investment management of the Groups
mutual funds. Its diverse institutional client base located throughout the world
consists of corporate and public pension plans, endowments and private
foundations, insurance companies, central banks and supranationals,
quasi-institutions, and financial advisers.
Investment Funds/GAM is the mutual funds business of UBS. Investment Funds is
one of the leading mutual funds providers in Europe and the seventh largest in
the world. GAM is a diversified asset management group with assets composed
primarily of private client accounts, institutional and mutual funds. Global
Asset Management operates under its established brand name within UBS Asset
Management and employs its own distinctive investment style. UBS Asset
Management will increasingly leverage Global Asset Management's range of mutual
funds and its multi-manager selection process, in which it selects the top 90
out of about 6,000 third-party fund providers, to enhance the range of its
investment styles and products.
--------------------------------------------------------------------------------
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UBS GROUP
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The Corporate Center encompasses Group level functions which cannot be devolved
to the operating divisions. Additionally, the Corporate Center plays an active
role with regard to funding, capital and balance sheet management and management
of foreign currency earnings.
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[UBS AG LOGO]
<PAGE> 323
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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........ $ 396,000
Luxembourg Stock Exchange listing fees...................... 30,000(1)
Printing and engraving expenses............................. 250,000(1)
Blue Sky fees and expenses.................................. 1,000(1)(2)
Legal fees and expenses..................................... 650,000(1)
Accountants' fees and expenses.............................. 50,000(1)
Trustee and Transfer Agent fees and expenses................ 15,000(1)
----------
TOTAL..................................................... $1,392,000
==========
</TABLE>
------------
(1) Estimates.
(2) Legal Fees and expenses of Registrants are presented on a non-consolidated
basis.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
UBS AG
Under Swiss law, directors and senior officers acting in violation of their
statutory duties - whether dealing with bona fide third parties or performing
any other acts on behalf of the corporation - may become liable to the
corporation, its shareholders and (in bankruptcy) its creditors for damages. The
directors' liability is joint and several but only to the extent the damage is
attributable to each director based on willful or negligent violation of duty.
If the board of directors lawfully delegated the power to carry out day-to-day
management to a different corporate body, e.g., the executive board, the board
of directors is not vicariously liable for the acts of the members of the
executive board. Instead, the directors can be held liable for their failure to
properly select, instruct or supervise the executive board members. If directors
and officers enter into a transaction on behalf of the corporation with bona
fide third parties in violation of their statutory duties, the transaction is
nevertheless valid as long as it is not excluded by the corporation's business
purpose.
Under Swiss law, a corporation may indemnify a director or officer of the
corporation against losses and expenses (unless arising from his gross
negligence or willful misconduct), including attorney's fees, judgments, fines
and settlement amounts actually and reasonably incurred in a civil or criminal
action, suit or preceding by reason of being of having been the representative
of or serving at the request of the corporation.
Because UBS AG is a Swiss company headquartered in Switzerland, many of the
directors and officers of UBS AG are residents of Switzerland and not the U.S.
As a result, U.S. investors may find it difficult in a lawsuit based on the
civil liability provisions of the U.S. federal securities laws to:
- effect service within the U.S. upon UBS AG and the directors and
officers of UBS AG located outside the U.S.,
- enforce in U.S. courts or outside the U.S. judgments obtained against
those persons in U.S. courts,
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- enforce in U.S. courts judgments obtained against those persons in
courts in jurisdictions outside the U.S., and
- enforce against those persons in Switzerland, whether in original
actions or in actions for the enforcement of judgments of U.S. courts,
civil liabilities based solely upon the U.S. federal securities laws.
Neither the UBS articles of association nor Swiss statutory law contain
provisions regarding the indemnification of directors and officers.
According to general principles of Swiss employment law, an employer may, under
certain circumstances, be required to indemnify an employee against losses and
expenses incurred by him in the execution of his duties under the employment
agreement, unless the losses and expenses arise from the employee's gross
negligence or willful misconduct.
UBS maintains directors' and officers' insurance for its directors and officers.
UBS PREFERRED FUNDING TRUST
The Amended and Restated Trust Agreement of UBS Preferred Funding Trust provides
that, to the fullest extent permitted by applicable law, UBS Preferred Funding
Company and UBS AG, jointly and severally, indemnify and defend the trustee, the
registrar and any paying agent and their directors, officers, employees and
agents against, and hold each of them harmless from, any liability, costs and
expenses (including reasonable attorneys' fees) that may arise out of or in
connection with its acting as the trustee or the registrar, transfer agent or
paying agent, respectively, under the Amended and Restated Trust Agreement and
the trust preferred securities, except for any liability arising out of gross
negligence, bad faith or willful misconduct on the part of any such person or
persons.
UBS PREFERRED FUNDING COMPANY
The Amended and Restated LLC Agreement of UBS Preferred Funding Company provides
that, to the fullest extent permitted by applicable law, each director and
officer shall be entitled to indemnification from UBS Preferred Funding Company
for any loss, damage, claim or expense (including reasonable attorney's fees)
incurred by such director or officer by reason of any act or omission performed
or omitted by such director or officer in good faith on behalf of UBS Preferred
Funding Company and in a manner reasonably believed to be within the scope of
authority conferred on such Director or Officer by this Agreement, except with
respect to any act or omission determined by a court of competent jurisdiction
to have constituted gross negligence or wilful misconduct of such director or
officer; provided, however, that any such indemnity shall be provided out of and
to the extent of the assets of UBS Preferred Funding Company only, and no holder
of company preferred securities, company common securities, company parity
preferred securities or company junior securities shall have any personal
liability on account thereof. UBS Preferred Funding Company may purchase and
maintain insurance to protect any director or officer against liability asserted
against him or her, or incurred by him or her, arising out of his or her status
as such.
Without limiting the foregoing, UBS Preferred Funding Company's directors shall
have no personal liability to UBS Preferred Funding Company or any holder of
company preferred securities, company common securities, company parity
preferred securities or company junior securities for monetary damages:
- for not voting to take enforcement action with respect to the
subordinated notes or other eligible investments owned by UBS Preferred
Funding Company, if any, prior to the occurrence of a bankruptcy event,
or
- at any time for breach of any such director's fiduciary duty (if any)
except for such director's gross negligence or willful misconduct.
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ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, UBS AG
has sold the following securities that were not registered under the Securities
Act. UBS Warburg LLC or another affiliate thereof was the principal underwriter
for each of the following issuances and, except as otherwise described below,
the securities were offered to, and purchased by, institutional investors. The
following issuances were not subject to the registration requirements of the
Securities Act of 1933 because the securities were offered and sold either
outside the United States in a manner not requiring registration under the
Securities Act or within the United States in reliance upon the exemption
provided by Section 4(2) of the Securities Act of 1933 and/or Regulation D
thereunder.
1998
February, 1998: XEU 110,000,000 1.00% convertible debt on FTSI Index.
March, 1998: USD 250,000,000 5.75% debt.
March-December, 1998: convertible debt and reverse convertible debt that
combines a bond and a put option on a stock or stock index issued under the
"cash or share delivery" ("Geld-Oder-Aktien-Lieferung" or "GOAL") plan
through 14 separate GOALs, offered on various dates, at various interest rates,
with maturities at the time of initial issuance ranging from 2 to 10 years, and
denominated in CHF, DEM, USD, ITL and NLG. The aggregate amount issued over this
period was CHF 3,357,000,000, USD 275,000,000, DEM 300,000,000,
ITL 350,000,000,000 and NLG 275,000,000. One of the issuances was offered to,
and purchased by, retail clients and institutional investors, the other 13
issuances were offered to, and purchased by, only institutional investors.
July-December, 1998: 20,614 ordinary shares of UBS AG in accordance with the
management stock plan (management aktien programm).
July-December, 1998: 1,729 ordinary shares of UBS AG pursuant to exercise of
17,290 outstanding options (with 5,434,600 options remaining unexercised) in
accordance with the management stock option plan (optionen wahldividende).
1999
January-December, 1999: convertible debt and reverse convertible debt that
combines a bond and a put option on a stock or stock index issued under the GOAL
plan through 26 separate GOALs, offered on various dates, at various interest
rates, with maturities at the time of initial issuance ranging from 1 to 7
years, and denominated in CHF, EUR, USD and GBP. The aggregate amount issued
over this period was CHF 1,210,000,000, EUR 492,000,000, USD 451,000,000 and
GBP 95,000,000.
January-December, 1999: convertible and ordinary debt issued by the Jersey
branch of UBS AG under a medium term note program (the "European MTN Program")
through 9 separate issuances, offered on various dates, at various interest
rates, with maturities at the time of initial issuance ranging from 1 to 7
years, and denominated in EUR, USD, JPY, SEK and CHF. The aggregate amount
issued over this period was EUR 900,000,000, USD 150,000,000,
JPY 25,388,000,000, SEK 233,000,000 and CHF 250,000,000. Three of the issuances
were offered to, and purchase by, retail clients and institutional investors,
the other 6 issuances were offered to, and purchased by, only institutional
investors.
July, 1999: USD 100,000,000 1.50% convertible into AT&T shares issued by the
Stamford branch of UBS AG under a medium term note program.
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January-December, 1999: 329,139 ordinary shares of UBS AG in accordance with
the management stock plan (management aktien programm).
January-December, 1999: 141,136 ordinary shares of UBS AG pursuant to exercise
of 1,411,360 outstanding options (with 4,023,240 options remaining unexercised)
in accordance with the management stock option plan (optionen wahldividende).
2000
January-June, 2000: convertible debt and reverse convertible debt that combines
a bond and a put option on a stock or stock index issued under the GOAL plan
issued through 19 separate GOALs, offered on various dates, at various interest
rates with maturities at the time of initial issuance ranging from 1 to 5 years,
and denominated in CHF, EUR and USD. The aggregate amount issued over this
period was CHF 340,000,000, EUR 430,000,000 and USD 75,000,000.
January-June, 1999: convertible and ordinary debt issued by the Jersey branch
of UBS AG under the European MTN Program through 12 separate issuances, offered
on various dates, at various interest rates with maturities at the time of
initial issuance ranging from 2 years to 5 years and 41 days, and denominated in
CHF, EUR, USD and JPY. The aggregate amount issued over this period was
CHF 13,000,000, EUR 57,000,000, USD 177,000,000 and JPY 15,000,000,000.
January-May, 2000: 101,826 ordinary shares of UBS AG (on a pre-split basis, in
respect of the 2 for 1 stock split in May, 2000) pursuant to exercise of
1,018,216 outstanding options (with 3,004,980 options remaining unexercised) in
accordance with the management stock option plan (optionen wahldividende).
May-July, 2000: 600,026 ordinary shares of UBS AG (on a post-split basis, in
respect of the 2 for 1 stock split in May, 2000) pursuant to exercise of
3,000,130 outstanding options (with 4,850 options remaining unexercised) in
accordance with the management stock option plan (optionen wahldividende).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement
3.1 Articles of Association for UBS AG
3.2 By-Laws of UBS AG
3.3 Form of Amended and Restated Trust Agreement of UBS
Preferred Funding Trust I
3.4 Form of Amended and Restated Limited Liability Company
Agreement of UBS Preferred Funding Company I
3.5 By-Laws of UBS Preferred Funding Company I (included in
exhibit 3.4)
4.1 Form of UBS AG Subordinated Guarantee Agreement (included in
exhibit 3.4)
4.2 Form of Subordinated Notes of UBS AG (included in exhibit
3.4)
5.1 Opinion of Richards, Layton & Finger, P.A. as to the
validity of the trust preferred securities and the company
preferred securities
5.2 Opinion of Sullivan & Cromwell as to the validity of the UBS
AG subordinated guarantee
5.3 Opinion of Bar & Karrer as to certain matters of Swiss law
8.1 Opinion of Sullivan & Cromwell as to U.S. federal tax
matters (included in exhibit 5.2)
8.2 Opinion of ATAG Ernst and Young AG, Switzerland, as to Swiss
tax matters
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------------------------------------------------------
<C> <S>
10 Agreement and Plan of Merger, dated as of July 12, 2000, by
and among Paine Webber Group Inc., UBS AG and Neptune Merger
Subsidiary Inc.
12 Statement regarding ratio of earnings to fixed charges
21 Subsidiaries of UBS AG
23.1 Consent of Richards, Layton & Finger, P.A. (included in
Exhibit 5.1)
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.2)
23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1)
23.4 Consent of ATAG Ernst & Young AG, Switzerland
23.5 Consent of ATAG Ernst and Young Ltd.
24.1 Power of Attorney
25 Statement of Eligibility of Trustee
</TABLE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
UBS AG, UBS Preferred Funding Trust and UBS Preferred Funding Company hereby
undertake that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrants pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act will be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus will be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time will be deemed to be the initial bona fide offering
thereof.
UBS Preferred Funding Trust hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
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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 29 September 2000.
UBS AG
By: /s/ ROBERT MILLS
------------------------------------
Name: Robert Mills
Title: Chief Financial
Officer -- Americas
and Regional Chief
Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement or amendment has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
------------------------------------------------------------------------------------------------------
<C> <S> <C>
* President and Group Chief 29 September 2000
--------------------------------------------------- Executive Officer
Marcel Ospel
* Chief Financial Officer 29 September 2000
---------------------------------------------------
Luqman Arnold
* Group Controller and Member of 29 September 2000
--------------------------------------------------- Group Managing Board
Hugo Schaub
* Chairman and Member of Board 29 September 2000
--------------------------------------------------- of Directors
Alex Krauer
* First Vice Chairman and Member 29 September 2000
--------------------------------------------------- of Board of Directors
Alberto Togni
* Second Vice Chairman and 29 September 2000
--------------------------------------------------- Member of Board of Directors
Markus Kundig
* Member of Board of Directors 29 September 2000
---------------------------------------------------
Peter Bockli
* Member of Board of Directors 29 September 2000
---------------------------------------------------
Rolf A. Meyer
* Member of Board of Directors 29 September 2000
---------------------------------------------------
Hans Peter Ming
* Member of Board of Directors 29 September 2000
---------------------------------------------------
Andreas Reinhart
* Member of Board of Directors 29 September 2000
---------------------------------------------------
Eric Honegger
/s/ ROBERT MILLS 29 September 2000
---------------------------------------------------
*By Robert Mills as attorney-in-fact
</TABLE>
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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 Registration Statement to be
signed on its behalf by the undersigned, solely in its capacity as the duly
authorized representative of UBS AG, in the United States, in The City of New
York, State of New York, on 29 September, 2000.
By: /s/ ROBERT MILLS
------------------------------------
Name: Robert Mills
Title: Chief Financial
Officer -- Americas
and Regional Chief
Operating Officer
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Signatures
Pursuant to the requirements of the Securities Act of 1933, UBS Preferred
Funding Trust I certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form F-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on 29 September
2000.
UBS Preferred Funding Trust I
By: UBS Preferred Funding Company LLC
I
By: /s/ ROBERT MILLS
----------------------------------
Name: Robert Mills
Title: President and Managing
Director
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
------------------------------------------------------------------------------------------------------
<S> <C> <C>
UBS Preferred Funding Grantor 29 September 2000
Company LLC I
By: /s/ ROBERT MILLS 29 September 2000
----------------------------------------------
Name: Robert Mills
Title: President and Managing Director
</TABLE>
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Signatures
Pursuant to the requirements of the Securities Act of 1933, UBS Preferred
Funding Company LLC I certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form F-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on 29 September
2000.
UBS Preferred Funding Company LLC I
By: /s/ ROBERT MILLS
------------------------------------
Name: Robert Mills
Title: President and Managing
Director
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement or amendment has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
------------------------------------------------------------------------------------------------------
<C> <S> <C>
/s/ ROBERT MILLS President and Managing 29 September 2000
--------------------------------------------------- Director
Robert Mills
* Treasurer and Director 29 September 2000
---------------------------------------------------
Per Dyrvik
* Secretary and Director 29 September 2000
---------------------------------------------------
Robert Dinerstein
/s/ ROBERT MILLS 29 September 2000
---------------------------------------------------
* By Robert Mills as attorney-in-fact
</TABLE>
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II- 9
<PAGE> 332
Index to Exhibits
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------------------------------------------------------------------------------------
<C> <S> <C>
1 Form of Underwriting Agreement
3.1 Articles of Association for UBS AG
3.2 By-Laws of UBS AG
3.3 Form of Amended and Restated Trust Agreement of UBS
Preferred Funding Trust
3.4 Form of Amended and Restated Limited Liability Company
Agreement of UBS Preferred Funding Company I
3.5 By-Laws of UBS Preferred Funding Company I (included in
exhibit 3.4)
4.1 Form of UBS AG Subordinated Guarantee Agreement (included in
exhibit 3.4)
4.2 Form of Subordinated Notes of UBS AG (included in exhibit
3.4)
5.1 Opinion of Richards, Layton & Finger, P.A. as to the
validity of the trust preferred securities and the company
preferred securities
5.2 Opinion of Sullivan & Cromwell as to the validity of the UBS
AG subordinated guarantee
5.3 Opinion of Bar & Karrer as to certain matters of Swiss law
8.1 Opinion of Sullivan & Cromwell as to U.S. federal tax
matters (included in exhibit 5.2)
8.2 Opinion of ATAG Ernst and Young AG, Switzerland, as to Swiss
tax matters
10 Agreement and Plan of Merger, dated as of July 12, 2000, by
and among Paine Webber Group Inc., UBS AG and Neptune Merger
Subsidiary Inc.
12 Statement regarding ratio of earnings to fixed charge
21 Subsidiaries of UBS AG
23.1 Consent of Richards, Layton & Finger, P.A. (included in
Exhibit 5.1)
23.2 Consent of Sullivan & Cromwell (included in Exhibit 5.2)
23.3 Consent of Sullivan & Cromwell (included in Exhibit 8.1)
23.4 Consent of ATAG Ernst & Young AG, Switzerland
23.5 Consent of ATAG Ernst and Young Ltd.
24.1 Power of Attorney
25 Statement of Eligibility of Trustee
</TABLE>
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