ab Financial Report 2000 Our Information Portfolio This Financial Report 2000 contains our audited financial statements for the year 2000 and accom- panying detailed analysis. It is available in English and German (SAP-80531-0101). It is supplemented by the following documents: Annual Review 2000 Our Annual Review provides brief descriptions of our business groups and a summary review of the year 2000. It is available in English, German, French, Italian and Spanish (SAP-80530-0101). Handbook 2000/2001 Our Handbook contains detailed descriptions of our business groups and other in-depth information about UBS, including risk management and control, asset and liability management, corporate gover- nance and our financial disclosure principals. It is available in English and German (SAP-80532-0101). Environmental reporting: The Handbook also contains information on UBS and the environment. Quarterly Reports UBS provides detailed quarterly financial reporting and analysis, including comment on the progress of its businesses and key strategic initiatives. Our Commitment 1999/2000 The Report “Our Commitment 1999/2000” illustrates how we create value for our clients, employees, shareholders and the community and how we meet our responsibility to all our stakeholder groups. It is available in English, German and French (SAP-81011-0001). Each of these reports is available on the internet at: www.ubs.com/investor-relations. Alternatively, printed copies of these reports can be ordered, quoting the SAP number and language preference, from: UBS AG, Information Center, CA50-XMB, P.O. Box, CH-8098 Zurich, Switzerland. “Excellence” As sponsor of the UBS Verbier Festival Youth Orchestra, we provide support and encour- agement for talented young musicians from all over the world as they rise to the top of their profession. Our Annual Review 2000 carries portraits of some of these young musicians, who are also shown on the front cover of this document. Table of Contents Introduction Information for Readers UBS Group Financial Highlights Group Financial Review Review of Business Group Performance Principles UBS Switzerland UBS Asset Management UBS Warburg Corporate Center UBS Group Financial Statements Table of Contents Financial Statements Notes to the Financial Statements Report of the Group Auditors UBS AG (Parent Bank) Financial Statements Table of Contents Parent Bank Review Financial Statements Notes to the Financial Statements Report of the Statutory Auditors Information for Shareholders 2 3 7 9 23 24 26 32 38 52 55 56 58 63 143 145 146 147 148 151 155 156 1 Introduction The UBS Financial Report 2000, published for the first time in this format, forms an essential part of UBS’s reporting portfolio. It includes the audited consolidated financial statements of UBS Group for 2000 and 1999, prepared according to International Accounting Standards and recon- ciled to U.S. GAAP, and the audited financial statements of the UBS Parent Bank for 2000, pre- pared according to Swiss Banking Law require- ments. It contains the discussion and analysis of the results of UBS Group required for the US Se- curities and Exchange Commission’s Form 20-F. The UBS Financial Report 2000 is comple- mented by another new publication, the UBS Handbook 2000 / 2001, which describes the Group’s strategy and organization, the business- es it operates, the way it manages risk and its arrangements for corporate governance. In addition, UBS publishes Quarterly Finan- cial Reports, analyzing its performance during each quarter of the year, and an Annual Review, which provides a brief summary of the Group and its financial performance in 2000. We hope that you will find the information in these documents useful and informative. We be- lieve that UBS is among the leaders in corporate disclosure, but we would be very interested to hear your views on how we might improve the content and presentation of our information portfolio. Please contact UBS Investor Relations with any enquiries: UBS AG Investor Relations G41B P.O. Box, CH-8098 Zurich Phone +41-1-234 41 00 Fax +41-1-234 34 15 E-mail SH-investorrelations@ubs.com www.ubs.com/investor-relations Introduction 2 Information for Readers Information for Readers The discussion and analysis in the Group Finan- cial Review and Review of Business Group Performance should be read in conjunction with the UBS Group’s consolidated financial state- ments and the related notes, which are shown in pages 58 to 142 of this document. Parent Bank Pages 147 to 154 contain the financial statements for the UBS AG Parent Bank – the Swiss com- pany, including branches worldwide, which owns all the UBS Group companies, directly or indi- rectly. Except in those pages, or where otherwise explicitly stated, all references to “UBS” refer to the UBS Group and not to the Parent Bank. Accounting standards The UBS Group’s consolidated financial state- ments have been prepared in accordance with In- ternational Accounting Standards (IAS). As a US listed company, UBS provides a description in Note 41 to its consolidated financial statements of the significant differences which would arise were our accounts to be presented under U.S. GAAP, and a specific reconciliation of the two methods of calculating shareholders’ equity and net profit. Unless otherwise stated, all of UBS Group’s financial information presented in this document is presented on a consolidated basis under IAS. The Parent Bank’s financial statements have been prepared in accordance with Swiss Banking Law requirements. All references to 2000, 1999 and 1998 refer to the UBS Group and the Parent Bank’s fiscal years ended 31 December 2000, 1999 and 1998, re- spectively. The financial statements for the UBS Group and the Parent Bank for each of these pe- riods have been audited by Ernst & Young Ltd., as described in the Reports of the Independent Auditors on pages 143 and 155. Accounting changes and restatements For comparative purposes, UBS Group’s 1999 and 1998 figures have been restated to conform to the 2000 presentation, reflecting certain changes in accounting standards and methods of presen- tation, including – the removal from net trading income of profit on UBS ordinary shares held for trading pur- poses; – the treatment of these shares as treasury shares, reducing both the number of shares and the shareholders’ equity used in ratio cal- culations; – the reclassification of trading-related interest and dividend revenues from net trading in- come to net interest income; and – the removal of the credit to net interest income and matching debit to net trading income for the cost of funding trading positions. Note 1 of UBS’s consolidated financial state- ments includes a complete explanation of these and other accounting changes. PaineWebber Except where otherwise stated, all 2000 figures for UBS Group throughout this report, include the impact of the merger with Paine Webber Group, Inc., which was completed on 3 Novem- ber 2000. Under purchase accounting rules, the results reflect PaineWebber’s income and ex- penses for two months only, from 3 November 2000 until year end. Restructuring provision The 1998 merger of Swiss Bank Corporation and Union Bank of Switzerland, which was com- pleted on 29 June 1998, was accounted for under the “pooling-of-interests” method of accounting. Under the pooling-of-interests method, a single uniform set of accounting policies was adopted and applied retrospectively for the restatement of comparative information. After the merger was effected, UBS began integrating the operations of the two banks. This process included streamlining operations, eliminat- ing duplicate information technology infrastruc- ture, and consolidating banking premises. At the time of the merger, UBS established a restructuring provision of CHF 7 billion to cover its expected costs associated with the integration process. An additional pre-tax restructuring charge of CHF 300 million in respect of the merger, repre- 3 Information for Readers Restructuring Provision Used CHF million Personnel UBS Switzerland UBS Asset Management UBS Warburg Corporate Center Group total 176 7 0 5 188 IT 32 0 0 31 63 Initial restructuring provision in 1997 Additional provision in 1999 Used in 1998 Used in 1999 Used in 2000 Total used through 31.12.2000 Restructuring provision remaining at 31.12.2000 senting about 4% of the original CHF 7 billion provision, was recognized in December 1999. The majority of the additional provision was due to revised estimates of the cost of lease breaks and property disposals. UBS has now largely completed the integra- tion and restructuring process relating to the merger and, at 31 December 2000, had used ap- proximately CHF 6.6 billion of the CHF 7.3 bil- lion restructuring provision. UBS expects to have utilized the entire provision by the end of 2001. Significant financial events UBS analyses its performance on a reported basis determined in accordance with International Accounting Standards, and on a normalized basis which excludes from the reported amounts cer- tain items UBS calls significant financial events. Figures adjusted for significant financial events are used to illustrate the underlying operational performance of the business, insulated from the impact of one off gains or losses outside the nor- mal run of business. In particular, UBS’s financial targets have been set in terms of adjusted results, excluding significant financial events. A policy approved by the Group Executive Board defines which items may be classified as significant financial events. Premises Other 31.12.00 31.12.99 31.12.98 For the year ended 916 15 348 565 1,844 821 22 2,423 761 4,027 4 0 0 395 399 16 0 0 33 49 228 7 0 464 699 7,000 300 4,027 1,844 699 6,570 730 accompanying illustrative tables. All segmental reporting includes tables showing both reported figures and adjusted ones, if applicable. All adjusted figures are clearly identified as such, and the pre-tax amount of each individual significant financial event is clearly disclosed, as is the net tax benefit or loss associated with all the significant financial events in each period. UBS introduced the concept of significant financial events for the first time in its 1999 Reporting, and did not define significant finan- cial events for 1998. The comparison of results for 1999 against 1998 therefore considers only unadjusted figures. Significant financial events during 1999 and 2000 are shown in the table opposite and de- scribed in more detail below. – During 2000, UBS recorded restructuring charges and provisions of CHF 290 million integration of to pre-tax PaineWebber into UBS. relating the – During 1999, UBS recognized pre-tax gains of CHF 1,490 million on the sale of its 25% stake in Swiss Life / Rentenanstalt; CHF 110 million on the disposal of Julius Baer regis- tered shares; CHF 200 million on the sale of its international Global Trade Finance business; and CHF 38 million from its residual holding in Long Term Capital Man- agement. The use of numbers which have been adjusted for significant financial events is restricted to UBS’s business unit reporting and to the discus- sion and analysis of the Group’s results and the – In fourth quarter 1999, UBS recognized a one- time credit of CHF 456 million in connection with excess pension fund employer pre-pay- ments. 4 Information for Readers Significant Financial Events CHF million Operating income as reported Julius Baer registered shares divestment International Global Trade Finance divestment Swiss Life / Rentenanstalt divestment LTCM gain Adjusted operating income Operating expenses as reported US Global Settlement Fund provision Pension Fund accounting credit UBS / SBC Restructuring provision PaineWebber integration costs Adjusted operating expenses Adjusted operating profit before tax and minority interests Tax expense Tax effect of significant financial events Adjusted tax expense Minority interests Adjusted net profit For the year ended 31.12.00 36,402 36,402 26,203 (150) (290) 25,763 10,639 2,320 100 2,420 (87) 8,132 31.12.99 28,425 1 (110) (200) (1,490) (38) 26,587 20,532 (154) 456 (300) 20,534 6,053 1,686 (352) 1,334 (54) 4,665 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). – In fourth quarter 1999, UBS recognized an ad- ditional pre-tax restructuring charge of CHF 300 million in respect of the 1998 merger be- tween Union Bank of Switzerland and Swiss Bank Corporation. – During 1998, UBS established a provision of CHF 842 million in connection with the US Global Settlement of World War II related claims. UBS recognized additional pre-tax provisions relating to this claim of CHF 154 million in 1999 and CHF 150 million in 2000. Risk factors As a global financial services firm, UBS’s busi- nesses are affected by the external environment in the markets in which UBS operates. In particular, the results of UBS’s business in Switzerland, and notably the results of its credit-related activities, would be adversely affected by any deterioration in the state of the Swiss economy because of the impact this would have on UBS’s customers’ creditworthiness. More generally, global eco- nomic and political conditions can impact UBS’s results and financial position by affecting the de- mand for UBS’s products and services, and the credit quality of UBS’s borrowers and counter- parties. Similarly, any prolonged weakness in international securities markets would affect UBS’s business revenues through its effect on UBS’s clients’ investment activity and the value of portfolios under management, which would in turn reduce UBS’s revenues from its private bank- ing and asset management businesses. Competitive forces UBS faces intense competition in all aspects of its business. UBS competes with asset managers, retail and commercial banks, private banking firms, investment banking firms, brokerage firms and other investment services firms. In addition, the trend toward consolidation in the global fi- nancial services industry is creating competitors with broader ranges of product and service offer- ings, increased access to capital, and greater effi- ciency and pricing power. Fluctuations in currency exchange rates and interest rates Because UBS prepares its accounts in Swiss francs, changes in currency exchange rates, par- ticularly between the Swiss franc and the US dol- lar, may have an effect on the earnings that it reports. UBS’s approach to managing this risk is explained in the Currency Management section 5 of the discussion of Asset and Liability Manage- ment in the UBS Handbook 2000 / 2001. In addition, changes in financial market struc- tures can affect UBS’s earnings. For example, the establishment of the euro during 1999 affected foreign exchange markets in Europe by reducing the extent of foreign exchange dealings among member countries and generating more harmo- nized financial products. Movements in interest rates can also affect UBS’s results. UBS’s interest income is affected by changes in interest rates, al- though the precise mechanisms are complicated. Interest rate movements can also affect UBS’s fixed income trading portfolio and the investment performance of its asset management businesses. For further discussion of the effect of interest rate changes on UBS’s business see the Interest Rate Risk Management section of the discussion of Asset and Liability Management in the UBS Handbook 2000 / 2001. 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 con- trolled, but UBS recognizes that any weaknesses in these systems could have a negative impact on its results of operations. As a result of these and other factors beyond its control, UBS’s revenues and operating profit have been and are likely to continue to be subject to a measure of variability from period to period. Therefore UBS’s revenues and operating profit for any particular fiscal period may not be indicative of sustainable results, may vary from year to year and may impact UBS’s ability to achieve its strategic objectives. For a discussion of UBS’s risk management and control procedures see the Risk Manage- ment and Control section of the UBS Handbook 2000/2001. Information for Readers 6 UBS Group Financial Highlights UBS Group Financial Highlights CHF million, except where indicated For the year ended Income statement key figures Operating income Operating expenses Operating profit before tax Net profit Cost / income ratio (%) 2 Cost / income ratio before goodwill (%) 2, 3 Per share data (CHF) Basic earnings per share 4, 7 Basic earnings per share before goodwill 3, 4, 7 Diluted earnings per share 4, 7 Diluted earnings per share before goodwill 3, 4, 7 Return on shareholders’ equity (%) Return on shareholders’ equity 5 Return on shareholders’ equity before goodwill 3, 5 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 36,402 26,203 10,199 7,792 72.2 70.4 19.33 20.99 19.04 20.67 21.5 23.4 28,425 20,532 7,893 6,153 69.9 68.7 15.20 16.04 15.07 15.90 22.4 23.6 22,247 18,376 3,871 2,972 79.2 77.7 7.33 8.18 7.20 8.03 10.7 12.0 28 28 29 27 27 31 26 30 CHF million, except where indicated As of 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 21 46 22 0 42 45 Balance sheet key figures Total assets Shareholders’ equity Market capitalization BIS capital ratios Tier 1 (%) Total BIS (%) Risk-weighted assets Total assets under management (CHF billion) Headcount (full time equivalents) 6 Long-term ratings Fitch, London Moody’s, New York Standard & Poor’s, New York 1,087,552 44,833 112,666 11.7 15.7 273,290 2,469 71,076 AAA Aa1 AA+ 896,556 30,608 92,642 10.6 14.5 273,107 1,744 49,058 AAA Aa1 AA+ 861,282 28,794 90,720 9.3 13.2 303,719 1,573 48,011 AAA Aa1 AA+ Earnings adjusted for significant financial events 8 CHF million, except where indicated For the year ended 31.12.00 31.12.99 1 % change from 31.12.99 Operating income Operating expenses Operating profit before tax Net profit Cost / income ratio before goodwill (%) 2, 3 Basic earnings per share before goodwill (CHF) 3, 4, 7 Diluted earnings per share before goodwill (CHF) 3, 4, 7 Return on shareholders’ equity before goodwill (%) 3, 5 36,402 25,763 10,639 8,132 69.2 21.83 21.50 24.3 26,587 20,534 6,053 4,665 73.3 12.37 12.26 18.2 37 25 76 74 76 75 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Ac- counting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 Operating expenses / operating in- come before credit loss recovery / (expense). 3 The amortization of goodwill and other intangible assets is excluded from the calculation. 4 For EPS calculation, see Note 10 to the Financial Statements. 5 Net profit / average shareholders’ equity excluding dividends. 6 The Group headcount does not include the Klinik Hirslanden AG headcount of 1,839 and 1,853 for 31 December 2000 and 31 December 1999, respectively. 7 1999 and 1998 share figures are restated for the two-for-one share split, effective 8 May 2000. 8 Details of Significant Financial Events can be found on pages 4 and 5. Except where otherwise stated, all 31 December 2000 figures throughout this report include the impact of the acquisition of PaineWebber, which occurred on 3 November 2000. 7 Group Financial Review Group Financial Review Group Performance Group Performance Introduction UBS is a global integrated investment services firm and the leading bank in Switzerland. We are the world’s leading provider of private banking services and one of the largest asset managers globally. In the investment banking and securities businesses we are among the select bracket of major global houses. In Switzerland we are the clear market leader in corporate and retail bank- ing. As an integrated group, not merely a holding company, we create added value for clients by drawing on the combined resources and expertise of all our businesses. UBS operates through three Business Groups and its Corporate Center. The three Business Groups are: – UBS Switzerland, which is made up of two business units: Private and Corporate Clients and Private Banking; – UBS Asset Management, which, until January 2001, consisted of two business units: Institu- tional Asset Management and Investment Funds / GAM; and, – UBS Warburg, which, until January 2001, was composed of five business units: Corporate & Institutional Clients, UBS Capital, US Private Clients, International Private Clients and e-services. Within each Business Group, business units share senior management, infrastructure and other resources. A full description of UBS and its Business Groups can be found in the UBS Handbook 2000/ 2001. The financial impact on UBS of the PaineWebber merger Restructuring costs UBS has incurred a total of CHF 746 million (USD 431 million) of restructuring costs and other one-off merger-related costs as a result of the PaineWebber merger. In accordance with IAS purchase accounting rules, CHF 456 million of these costs have been accounted for as a pre-acquisition liability of PaineWebber and were therefore added to the goodwill amount for the transaction. The remaining expenses, of CHF 290 million, were charged in fourth quarter 2000, and treated as a significant financial event. CHF 152 million was charged in UBS Warburg’s e-services business unit, representing the costs of closure of tele- phone call centers and the write-down of capital- ized software no longer required in light of changes in the strategy due to the PaineWebber acquisition. CHF 106 million was charged in the Corporate and Institutional Clients business unit, principally covering severance and other person- nel costs. The remaining CHF 32 million was charged in Corporate Center. Goodwill The amount of goodwill and intangible assets resulting from the merger was USD 10.0 billion, or CHF 17.5 billion. Within this total USD 2.7 billion relates to identified intangible assets, including the value of PaineWebber’s brand and infrastructure. The goodwill and intangible assets will be amortized over 20 years. Amortization costs amounted to CHF 138 million in the fourth quarter 2000. Retention payments As part of the merger, UBS agreed to make retention payments to PaineWebber financial ad- visors, senior executives, and other staff, subject to these employees’ continued employment and other restrictions. The value of these payments is expected to amount to a total of USD 875 mil- lion (CHF 1,541 million), the vast majority of which will be paid in the form of UBS shares. The payments will vest over periods of up to four years from the merger. USD 76 million (CHF 128 million) was charged in fourth quarter 2000, and approximately USD 280 million (approximately CHF 458 million at year end 2000 exchange rates) is expected to be charged in 2001. Cash consideration The cash portion of the merger consideration was USD 6.0 billion, or CHF 10.6 billion. UBS took advantage of the focus on the company in US markets as a result of the PaineWebber trans- action to make its inaugural US public offering, issuing USD 1.5 billion of 8.622% Trust Pre- ferred Securities on 10 October 2000. 10 Group Financial Review Group Performance Issue of shares to finance the PaineWebber merger At an Extraordinary General Meeting on 7 Sep- tember 2000, UBS shareholders approved a reso- lution to create 38 million shares of authorized capital in connection with the PaineWebber merger. UBS shareholders also granted the Board of Directors a “green shoe option” giving them the flexibility to issue some of these shares at the time of the merger, and then to issue addi- tional shares as required during the three months following completion of the merger, up to the 38 million shares limit. As announced at the completion of the merger, 40.6 million shares were delivered to PaineWebber shareholders as part of the merger consideration. UBS chose to fund this amount by issuing 12 million new ordinary shares, re-issuing 7 million shares held in Treasury and borrowing the remaining 21.6 million ordinary shares that were required. On 6 November 2000, following completion of the merger, UBS launched a new treasury share buy-back program in Switzerland, designed principally to repurchase shares to cover the bor- rowings. When the program was completed on 2 March 2000, a total of 30 million shares had been repurchased at an average price of CHF 266. By 31 December 2000, 14.2 million shares had been purchased through this program, and 13.8 million of them had been delivered to cover the borrowed shares, leaving 7.8 million bor- rowed shares still outstanding. UBS completed the repurchase of sufficient shares to cover all the borrowed shares on 24 January 2001, having paid an average price of CHF 262 per share. With no requirement to issue further shares in connection with the PaineWebber merger, the green shoe option lapsed. UBS has met its com- mitment to minimize the dilution of earnings and voting power, by keeping the final number of new UBS shares issued as small as possible. The weighted average number of shares in the fourth quarter was 5% higher than if the PaineWebber transaction had not occurred. The Annual General Meeting on 26 April 2001 will be asked to give formal approval for the elimination of the remaining 26 million shares of authorized capital which were not re- quired for the transaction. It will also be asked to reduce the conditional capital created to cover future exercise of options held by PaineWebber staff from 16.3 million to the 5.6 million required to cover the remaining outstanding options. 11 Group Financial Review Group Performance RoE1 annualized UBS Group Performance against Targets 35% 30% 25% 20% 15% 10% 5% 0% 9 9 M 3 9 9 M 6 9 9 M 9 9 9 M 2 1 0 0 M 3 0 0 M 6 0 0 M 9 0 0 M 2 1 Basic EPS2,3 (CHF) 7 6 5 4 3 2 1 0 9 9 Q 1 9 9 Q 2 9 9 Q 3 9 9 Q 4 0 0 Q 1 0 0 Q 2 0 0 Q 3 0 0 Q 4 Cost/Income Ratio2 80% 60% 40% 20% 0% 9 9 Q 1 9 9 Q 2 9 9 Q 3 9 9 Q 4 0 0 Q 1 0 0 Q 2 0 0 Q 3 0 0 Q 4 For the year ended 31.12.00 31.12.99 1 RoE (%) as reported before goodwill and adjusted for significant financial events 2 Basic EPS (CHF) as reported 3 before goodwill and adjusted for significant financial events 2, 3 Cost / income ratio (%) as reported before goodwill and adjusted for significant financial events 2 Assets under Management CHF billion UBS Group UBS Switzerland Private and Corporate Clients Private Banking UBS Asset Management Institutional Asset Management 5 Investment Funds / GAM UBS Warburg US Private Clients 6 International Private Clients 31.12.00 31.12.99 2,469 1,744 440 681 496 219 794 33 439 671 574 225 36 21.5 24.3 19.33 21.83 72.2 69.2 22.4 18.2 15.20 12.37 69.9 73.3 Net new money 4 2000 Net new money 4 1999 0 (1) (67) 4 8 10 1 (50) 1 4 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 The amortization of goodwill and other intangible assets is excluded from the calculation. 3 1999 share figures are restated for the two-for-one share split, effective 8 May 2000. 4 Excludes interest and dividend income. 5 Includes non-institutional assets also reported in the Investment Funds / GAM business unit. Assets were CHF 890 billion at 3 November 2000. 6 Client Net New Money, Private Client Units4 Group results 2000 (CHF bn) 9 9 Q 1 9 9 Q 2 9 9 Q 4 0 0 Q 1 0 0 Q 2 0 0 Q 3 0 0 Q 4 9 9 Q 3 9 8 7 6 5 4 3 2 1 0 –1 –2 –3 –4 1 Annualized, before goodwill amortization and adjusted for significant financial events. 2 Before goodwill amortization and adjusted for significant financial events. 3 1999 figures are restated for the two-for- one share split, effective 8 May 2000. 4 Includes Private Banking, International Private Clients and US Private Clients. 12 Group targets UBS focuses on four key performance targets, designed to drive us to deliver continually im- proving returns to our shareholders. – UBS seeks to achieve a sustainable, after-tax return on equity of 15–20%, across periods of varying market conditions. – UBS aims to increase shareholder value through double-digit average annual earnings per share (EPS) growth, across periods of varying market conditions. – Through cost reduction and earnings enhance- ment initiatives, UBS aims to reduce the Group’s cost/income ratio to a level that com- pares positively with best-in-class competitors. – UBS aims to achieve a clear growth trend in net new money in its private client busi- nesses. The first three targets are all measured pre- goodwill amortization, and adjusted for signifi- cant financial events. Adjusted for significant financial events, our pre-goodwill return on equity for the year 2000 was 24.3%, clearly above our target range of 15–20%. Pre-goodwill earnings per share, again on an adjusted basis, were CHF 21.83 in 2000, representing an increase of 76% over 1999, well in excess of our target of double-digit growth over the cycle. Continued focus on cost control has brought the pre-goodwill cost/income ratio, adjusted for significant financial events, down to 69.2% in 2000, from 73.3% in 1999. Group Financial Review Group Performance Net new money in the private client business- es (Private Banking, US Private Clients and Inter- national Private Clients) was CHF 18 billion for the year, compared to CHF 4 billion in 1999, and including CHF 8 billion of net new money in PaineWebber in only two months. PaineWebber’s net new money growth since completion of the merger demonstrates the strength of its franchise and the momentum that it brings to UBS’s asset gathering performance. Net profit Full year net profit was CHF 7,792 million, up 27% from the CHF 6,153 million reported in 1999. When adjusted for significant financial events, net profit for 2000 was CHF 8,132 mil- lion, up 74% from the CHF 4,665 million achieved in 1999. These results reflect the very strong and consistent performance recorded by the Group in every quarter of 2000. Operating income and expense includes in- come and expense of the former PaineWebber businesses from 3 November 2000, the date of the completion of the merger with PaineWebber. Operating income Total operating income increased 28% from 1999, to CHF 36,402 million, from CHF 28,425 million. Adjusted for significant financial events, total operating income increased 37%, to CHF 36,402 million, from CHF 26,587 million in 1999. This strong performance relative to 1999, was driven by excellent trading results, improved credit conditions in the Swiss market, much high- er fee and commission income, and a successful year for the Group’s investment banking busi- ness. The principal significant financial events af- fecting the income comparison were from the one-off sales of businesses and investments in 1999, including pre-tax gains of CHF 1,490 mil- lion on the sale of UBS’s 25% stake in Swiss Life / Rentenanstalt and CHF 110 million on the dis- posal of Julius Baer registered shares, recorded in Net gains from disposal of associates and sub- sidiaries, and CHF 200 million on the sale of UBS’s international Global Trade Finance busi- ness, which was recorded in Other income. In addition UBS recognized a CHF 38 million gain in 1999 from its residual holdings in Long Term Capital Management, L.P., which was also recorded in Other income. Net interest income before credit loss increased by CHF 2,221 million, or 38%, from CHF 5,909 million in 1999 to CHF 8,130 million in 2000. This was principally the result of much stronger Net Interest Income CHF million For the year ended 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 Interest income Interest earned on loans and advances to banks Interest earned on loans and advances to customers Interest from finance leasing Interest earned on securities borrowed and reverse repurchase agreements Interest and dividend income from financial investments Interest and dividend income from trading portfolio Other Total Interest expense Interest on amounts due to banks Interest on amounts due to customers Interest on securities lent and repurchase agreements Interest and dividend expense from trading portfolio Interest on medium and long term debt Total 5,615 14,692 36 19,088 202 11,842 270 51,745 6,155 9,505 14,915 5,309 7,731 43,615 6,105 12,077 49 11,422 160 5,598 193 35,604 5,515 8,330 8,446 2,070 5,334 7,687 14,111 60 10,380 372 3,901 931 37,442 8,205 9,890 7,543 1,741 5,045 29,695 32,424 Net interest income 8,130 5,909 5,018 (8) 22 (27) 67 26 112 40 45 12 14 77 156 45 47 38 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 13 Group Financial Review Group Performance 14 Net Fee and Commission Income CHF million For the year ended 31.12.00 31.12.99 31.12.98 % change from 31.12.99 Credit-related fees and commissions 310 372 559 Security trading and investment activity fees Underwriting fees 1 Corporate finance fees 1 Brokerage fees Investment fund fees Fiduciary fees Custodian fees Portfolio and other management and advisory fees 1 Other Total Commission income from other services Total fee and commission income Fee and commission expense Brokerage fees paid Other Total 1,434 1,772 5,792 2,821 351 1,439 3,677 50 17,336 802 18,448 1,084 661 1,745 905 1,298 3,934 1,915 317 1,583 2,612 57 12,621 765 13,758 795 356 1,151 1,122 1,016 3,670 1,778 349 1,386 2,891 110 12,322 776 13,657 704 327 1,031 Net fee and commission income 16,703 12,607 12,626 (17) 58 37 47 47 11 (9) 41 (12) 37 5 34 36 86 52 32 1 In prior periods, Corporate finance related advisory fees were included in Portfolio and other management and advisory fees. These fees are now reported in the new disclosure line Corporate finance fees together with merger and acquisition fees which were previously reported in Underwriting and corporate finance fees. All previous periods have been restated accordingly. trading-related performance, as a result of buoy- ant markets, and the return of the balance sheet to more normal proportions after the contraction implemented as part of the Group’s precautions against potential Year 2000 related problems. Net interest income from loans and advances to banks and amounts due to banks fell from CHF 590 million in 1999 to a net expense of CHF 540 million in 2000 due to increased average liabilities as UBS used its unsecured funding power to take advantage of opportunities for investments in low risk assets such as collateralized lending. Net in- terst income from collateralized lending – repos, reverse repos, securities borrowing and lending – increased 40%, or CHF 1,197 million to CHF 4,173 million in 2000. Interest paid on medium and long term debt (including commercial paper) increased 45% or CHF 2,397million from CHF 5,334 million in1999 to CHF 7,731 million in 2000 as interest rates rose and UBS’s funding requirements increased, due to balance sheet growth in more active mar- kets. UBS also changed the mix of its debt to in- clude a higher proportion of short-term financing. Credit loss expense. As a result of the signifi- cant recovery of the Swiss economy in 2000 and especially its effect on the real estate and con- struction markets, UBS was able to write back CHF 695 million of credit loss provisions in UBS Switzerland in 2000. These write-backs were off- set by additional provisions for the UBS Warburg portfolio of CHF 565 million, leading to an over- all net credit recovery of CHF 130 million for 2000, compared to an expense of CHF 956 mil- lion in 1999. Net fee and commission income increased by CHF 4,096 million, or 32%, from CHF 12,607 million in 1999 to CHF 16,703 million in 2000. This was principally the result of high levels of brokerage fees, due to increased client activity in strong markets, especially in the first quarter of 2000, and the addition of PaineWebber. In addi- tion, two other new businesses, Global Asset Management (GAM), acquired at the end of 1999, and O’Connor, created in June 2000, con- tributed to the increase, as did the strong per- formance of UBS’s investment banking business during 2000. Credit-related fees and commissions decreased CHF 62 million in 2000 mainly as a result of the sale of UBS’s international Global Trade Finance business in 1999. Group Financial Review Group Performance Underwriting fees increased by 58% over 1999 with strong results in both fixed income and equity underwriting, despite UBS’s relatively limited involvement in the Technology, Media and Telecoms (TMT) sector, which led to lower equity league table rankings in 2000 than in 1999. Corporate Finance fees grew 37%, or CHF 474 million, from CHF 1,298 million in 1999 to CHF 1,772 million in 2000, reflecting good re- sults in Europe and a strong performance in Mergers and Acquisitions, where our league table rankings improved compared to 1999. Net brokerage fees were 50% higher in 2000 than in 1999 as a result of high levels of client activity in the exuberant markets of the early part of the year, and the inclusion of two months of results from PaineWebber. The increase of 47% in Investment fund fees from 1999 to 2000 resulted from higher average volumes in 2000 and a shift in the product mix, with a higher proportion of as- sets under management invested in higher margin equity funds. In addition, Investment fund fees in 2000 benefited from the inclusion of GAM and PaineWebber’s contribution last two months. Custodian fees and portfolio and other management and advisory fees increased by a total of CHF 921 million, or 22%, from 1999, due to higher asset-related fees in 2000 and the inclusion of PaineWebber and the new O’Connor business. Net trading income increased CHF 2,234 mil- lion, or 29%, to CHF 9,953 million for 2000, compared to CHF 7,719 million for 1999, driv- en by strong growth in equity trading income as a result of increased global market activity, espe- cially in the first quarter of 2000, and the in- creasing strength of UBS Warburg’s secondary client franchise. in the Net trading income from foreign exchange increased CHF 179 million, or 16%, from 1999 to 2000 despite difficult trading conditions at the start of the year, with lower levels of market activity and narrowing margins on derivative products, compared to 1999. This income statement line does not fully capture the revenues of UBS Group’s foreign exchange business, which is amongst the largest in the world. The revenues generated by all business areas of the UBS Group from sales and trading of foreign exchange, precious metals, and banknotes products in 2000 were CHF 1,519 million as compared to CHF 1,155 million in 1999. Net trading income from fixed income de- creased CHF 1,691 million, or 65%, from CHF 2,603 million in 1999 to CHF 912 million in 2000. Fixed income net trading income does not reflect the full picture of trading-related income in the Fixed Income business, which also includes a considerable contribution from coupon in- come, which is managed as an integral part of the trading portfolio and is reported as part of net in- terest income. The relative revenue contributions of mark-to-market gains, coupon income and other factors are somewhat volatile, because they depend on trading strategies and the instrument composition of the portfolio. In 2000, while fixed income trading income fell, net coupon income, which is reported in net interest income, rose from CHF 2,918 million to CHF 5,545 million. Net trading income from equities increased CHF 3,746 million, or 93%, from 1999 to 2000. Positive markets led to an exceptionally good first quarter of 2000, with record client volumes. Performance in subsequent quarters of 2000 fell slightly in more varied market conditions, but was still well ahead of the same periods in 1999. Net gains from disposal of associates and sub- sidiaries fell 95% from CHF 1,821 million to CHF 83 million. 1999 included gains from the sales of our holdings in SwissLife / Rentenanstalt and Julius Baer registered shares. Net Trading Income CHF million For the year ended Foreign exchange Fixed income Equities Net trading income 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 1,287 912 7,754 9,953 1,108 2,603 4,008 7,719 1,992 162 1,159 3,313 16 (65) 93 29 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 15 Group Financial Review Group Performance Other income increased CHF 78 million, or 6%, from CHF 1,325 million in 1999 to CHF 1,403 million in 2000, with income from invest- ments in associates lower, following sales in 1999, more than offset by higher income from the sale of private equity investments and a reduction of losses on property sales. Operating expenses Total operating expenses increased 28% from CHF 20,532 million to CHF 26,203 million in 2000. Adjusted for significant financial events, total operating expenses increased 25% to CHF 25,763 million from CHF 20,534 million in 1999. The increase was principally due to increased per- sonnel expenses, reflecting higher performance- related pay driven by UBS’s excellent results in 2000, the inclusion of PaineWebber and the cost of retention payments for PaineWebber staff. The principal significant financial events af- fecting the comparison of operating expenses are the CHF 150 million additional provision for the US Global Settlement of World War II related claims, recorded in 2000 in General and admin- istrative expenses, and CHF 290 million of costs from the integration of PaineWebber, also record- ed in 2000. Of this CHF 290 million, CHF 118 million were charged to Personnel expenses and amortization, CHF 93 million to General and administrative expenses and CHF 79 million to Depreciation. The various significant financial events affect- ing expenses in 1999, described on pages 4 and 5, resulted in an increase in expense of CHF 2 mil- lion, made up of a CHF 456 million increase to personnel expenses and a decrease of CHF 454 million in General and administrative expenses. Personnel expenses increased CHF 4,586 mil- lion, or 36%, from CHF 12,577 million in 1999 to CHF 17,163 million in 2000. This increase was driven by increased bonus compensation, in line with the Group’s excellent results, and CHF 1,083 million resulting from the inclusion of PaineWebber. Approximately 48% of the annual total represented bonus and other variable com- pensation. As part of the merger, UBS agreed to make retention payments to PaineWebber financial ad- visors, senior executives and other staff, subject to these employees’ continued employment and other restrictions. These payments are expected to amount to a total of USD 875 million (CHF 1,541 million), the vast majority of which will be paid in the form of UBS shares. The payments will vest over periods of up to four years from the merger. USD 76 million (CHF 128 million) was charged in fourth quarter 2000, and approxi- mately USD 280 million (CHF 458 million at year-end 2000 rates) is expected to be charged in 2001. Because they are a regular and continuing cost of the business, these payments are not treat- ed as significant financial events. UBS’s headcount grew 45% over the year from 31 December 1999, to 71,076. The vast majority of this change was due to the inclusion of 23,000 PaineWebber staff. Headcount 1 (Full-time equivalents) UBS Switzerland Private and Corporate Clients Private Banking UBS Asset Management Institutional Asset Management Investment Funds / GAM UBS Warburg Corporate and Institutional Clients UBS Capital US Private Clients e-services International Private Clients Corporate Center Group total 31.12.00 31.12.99 Change in % 28,785 21,100 7,685 2,860 1,728 1,132 38,445 15,262 129 21,490 410 1,154 986 71,076 31,354 24,098 7,256 2,576 1,653 923 14,266 12,694 116 70 1,386 862 49,058 (8) (12) 6 11 5 23 169 20 11 486 (17) 14 45 1 The Group headcount does not include the Klinik Hirslanden AG headcount of 1,839 as of 31 December 2000 and 1,853 as of 31 December 1999. 16 Group Financial Review Group Performance General and administrative expenses increased CHF 667 million, or 11%, from CHF 6,098 mil- lion in 1999 to CHF 6,765 million in 2000. General and administrative expenses in 2000 included a final provision of CHF 150 million related to the US Global Settlement of World War II related claims, and CHF 93 million of PaineWebber integration costs, which were both treated as significant financial events. General and administrative expenses in 1999 included a provision of CHF 154 million related to the US global settlement of World War II related claims, and CHF 300 million of additional provisions in respect of the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation. Adjusting for these effects, General and ad- ministrative costs rose 16%, reflecting the incre- mental costs from the inclusion of PaineWebber offset by the success of UBS’s continued efforts to control non-revenue driven costs. Depreciation and amortization expenses in- creased CHF 418 million, or 23%, from CHF 1,857 million in 1999 to CHF 2,275 million in 2000, mainly due to the PaineWebber merger. Tax expense increased CHF 634 million, or 38%, from CHF 1,686 million in 1999 to CHF 2,320 million in 2000, principally due to in- creased operating profit. The effective tax rate of 22.8% in 2000 is slightly higher than the 21.4% effective tax rate in 1999, reflecting increased income in higher taxation jurisdictions. UBS Group’s performance without the impact of PaineWebber There are limitations to our ability to track the effect of the PaineWebber merger on the Group’s performance. Principally this is because of the full integration of PaineWebber’s capital markets business into the Corporate and Institutional Clients unit. This was carried out very soon after the merger was completed on 3 November 2000, with staff and revenues completely integrated into the existing UBS Warburg structure. It is therefore not possible to identify clearly the specific impact of the capital markets business on results. However, the remaining PaineWebber businesses are reported as a separate business unit: US Private Clients. It is possible therefore to distinguish their contribution to Group profits. If additional adjustments are made for – goodwill amortization, – funding costs, – the share issuance, borrowing and subsequent repurchase, – restructuring costs, and – retention payments, it is possible to make an approximate estimate of the underlying performance of UBS for 2000. Although this analysis should not be relied on as a definitive indication of the performance of the continuing UBS businesses during the year, it demonstrates the very positive underlying per- formance of the Group in 2000. Dividend and distribution by par value reduction In October 2000, UBS paid a dividend of CHF 4.50 per share in respect of the first three quar- ters of 2000, as part of the arrangements for the merger with PaineWebber. The Board of Direc- tors recommended a distribution in respect of the fourth quarter of 2000 of CHF 1.60 per share, in the form of a par value reduction. This brings the total distribution for the year to CHF 6.10 per share, compared to the dividend of CHF 5.50 per share for 1999. Earnings Adjusted for Significant Financial Events and the Estimated Impact of the PaineWebber Merger CHF million, except where indicated For the year ended 31.12.00 31.12.99 % change from 31.12.99 Operating income Operating expenses Operating profit before tax Net profit Cost / income ratio before goodwill (%) Basic earnings per share before goodwill (CHF) Diluted earnings per share before goodwill (CHF) Return on shareholders’ equity before goodwill (%) 35,309 24,319 10,990 8,403 67.6 22.44 22.16 27.5 26,587 20,534 6,053 4,665 73.3 12.37 12.26 18.2 33 18 82 80 81 81 17 Group Financial Review Group Performance 18 Until this year, the minimum par value al- lowed under law for a Swiss share was CHF 10. The share split that UBS implemented in May last year brought the par value of its share down to this level, removing any further opportunity to split the share. Under new regulations, which are currently passing through the Swiss legislative process and are expected to become effective on 1 May 2001, the minimum par value is expected to be reduced to CHF 0.01. UBS intends to utilize this change to lower the market price per share to a level more in line with that of its global peer group, and to make a payment to its shareholders in the form of a reduction in the nominal value of its shares. If shareholder approval is granted, and the legislation becomes effective, the distribution of CHF 1.60 per share, in respect of the fourth quar- ter 2000, will be paid in the form of a par value reduction. This is treated in Switzerland as a re- turn of capital to shareholders, not as income, and is therefore tax efficient for shareholders who pay tax in Switzerland. Treatment in other jurisdictions will vary, although under US tax regulations the distribution will be treated as in- come. However, the par value reduction does still have advantages for shareholders outside Switzerland, as no Swiss withholding tax is payable. Each shareholder should consult with a tax advisor for applicable tax implications of this distribution. The distribution will reduce the par value of the share to CHF 8.40. UBS then intends to split its share 3 for 1, resulting in a new par value of 2.80 per share. Because of the legal and regulatory processes involved, the distribution is expected to take place on 18 July 2001, for holders of record on 13 July 2001. The shares are expected to start trading at the new par value on 16 July 2001. Balance sheet Total assets increased CHF 191 billion, or 21%, from CHF 897 billion at 31 December 1999 to CHF 1,088 billion at 31 December 2000, includ- ing CHF 99 billion as a result of the merger with PaineWebber. The remainder of the increase was principally a result of the unwinding of precau- tionary measures taken at the end of 1999 in preparation for the millennium, and the currency impact of the weakness of the Swiss franc. The in- crease in cash collateral on securities borrowed, reverse repurchase agreements and trading port- folio assets was partially offset by decreases in cash and balances with central banks and money market paper, as liquidity levels were adjusted following Y2K, and a reduction in positive re- placement values due to netting, thanks to im- proved systems and new reporting practices. Goodwill and intangible assets increased CHF 16 billion, due to goodwill and intangible assets re- sulting from the PaineWebber merger. Total liabilities increased 20%, from CHF 866 billion at 31 December 1999, to CHF 1,040 billion at 31 December 2000, reflecting the unwinding of millennium related precautions. The increase in amounts due under repurchase agreements, cash collateral on securities lent and trading port- folio liabilities and an increase in money market paper issued, was offset in part by a decrease in negative replacement values, again principally due to netting. UBS’s long-term debt portfolio decreased from CHF 56.3 billion at 31 December 1999 to CHF 54.8 billion at 31 December 2000. During this year CHF 14.9 billion of long-term securities were issued while CHF 24.6 billion matured. UBS believes the maturity profile of the long-term debt portfolio is well balanced with a slight bias to- wards shorter-term maturities to match the ma- turity profile of UBS’s assets. Shareholders’ equity increased CHF 14 bil- lion, or 46%, from 31 December 1999 to 31 De- cember 2000, reflecting the increase in capital re- quired for the PaineWebber merger, increased re- tained earnings and the reduced holding of treas- ury shares. UBS maintains a significant percentage of liq- uid assets, including collateralized receivables and trading portfolios that can be converted into cash on relatively short notice and without ad- versely affecting UBS’s ability to conduct its on- going businesses, in order to meet short-term funding needs. Collateralized receivables include reverse repurchase agreements and cash collater- al on securities borrowed, and marketable corpo- rate debt and equity securities and a portion of UBS’s loans and due from banks which are se- cured primarily by real estate. The value of UBS’s collateralized receivables and trading portfolio will fluctuate depending on market conditions and client business. The individual components of UBS’s total assets, including the proportion of liquid assets, may vary significantly from period Group Financial Review Group Performance to period due to changing client needs, economic and market conditions and trading strategies. Consolidated cash flows In the twelve-month period to December 2000, cash equivalents decreased by CHF 8,907 mil- lion, principally as a result of investment activi- ties, which generated negative cash flow of CHF 19,135 million. This was mainly due to CHF 10,722 million of cash required for the Paine- Webber merger and the purchase of CHF 8,770 million of financial investments. The positive cash flow of CHF 11,697 million from operating activities principally resulted from net profit of CHF 7,792 million, a net in- crease in amounts due to customers and amounts due from customers of CHF 12,381 million, CHF 11,553 million from an increase in the size of the trading portfolio and a net cash inflow of CHF 10,236 million from other assets and liabilities and accrued income and expenses. These were partially offset by a net cash outflow of CHF 30,292 million for repurchase and reverse repur- chase agreements and cash collateral on securities borrowed and lent. Financing activities generated net cash out- flow of CHF 1,581 million. CHF 10,125 million from the issuance of money market paper. CHF 14,884 million from long-term debt and CHF 2,594 million from the issuance of trust perferred securities was offset by CHF 24,640 million for repayment of long-term debt and CHF 3,928 mil- lion for dividend payments. Group results 1999 UBS’s current performance targets were first im- plemented at the beginning of 2000. Performance against targets is not therefore discussed in rela- tion to 1999. Operating income Net interest income before credit loss expense increased by CHF 891 million, or 18%, from CHF 5,018 million in 1998 to CHF 5,909 million in 1999. Increased trading-related interest in- come and higher interest margins in the domestic loan portfolio in 1999 derived from more consis- tent application of UBS’s risk-adjusted pricing model were partially offset by the sale of business activities which had contributed to net interest income in 1998, as well as the impact of lower returns on invested equity and the reduction of the international loan portfolio. Credit loss expense recorded a slight increase of CHF 5 million from CHF 951 million in 1998 to CHF 956 million in 1999. During 1999, UBS experienced general improvements in the econo- my and in the credit performance of its loan portfolio, and a reduction in impaired loans in the aggregate. Although impaired loans de- creased, additional provisions were required for some of the impaired domestic loans remaining in the portfolio. Net fee and commission income decreased by CHF 19 million from CHF 12,626 million in 1998 to CHF 12,607 million in 1999. Excluding the effect of divestments in 1998, the decrease was roughly 1%. Credit-related fees and commissions decreased in 1999 in line with reduced emerging market exposures and the sale of UBS’s international Global Trade Finance operations. Underwriting and corporate finance fees increased 3% relative to exceptionally strong performance in 1998. Brokerage fees were higher in 1999 than in 1998 mainly due to strong volumes in the UK, US and Asia. A CHF 137 million increase in investment fund fees was attributable to higher volumes and pricing adjustments from the integration of the two pre-1998 merger product platforms. Strong increases in custodian fees reflected higher custo- dian assets and a new pricing model. Net trading income increased CHF 4,406 mil- lion, or 133%, from CHF 3,313 million in 1998 to CHF 7,719 million in 1999. Net trading income from foreign exchange decreased CHF 884 million, or 44%, from 1998 to 1999 mostly as a result of lower volumes in key markets. The reduced levels of activity resulted from the introduction of the euro and narrowing margins from increased competition in global markets. Net trading income from fixed income in- creased CHF 2,441 million from CHF 162 million in 1998 to CHF 2,603 million in 1999. During 1998, net trading income from fixed in- come was negatively impacted by the pre-tax CHF 793 million write-down of UBS’s trading position in Long Term Capital Management, L.P. and approximately CHF 690 million in losses in UBS’s emerging markets trading portfolios. Ex- cluding those write-downs from the 1998 re- 19 Group Financial Review Group Performance 20 sults, net trading income from fixed income in- creased approximately 58% in 1999 over 1998. Fixed income trading revenues were strong across all major products during 1999, led by swaps and options and investment grade debt. Net trading income from equities increased CHF 2,849 million or 246% from 1998, to CHF 4,008 million in 1999. During 1998, net trading income was negatively impacted by pre-tax CHF 762 million in losses from the Global Equities De- rivatives business area. In 1999, net trading in- come benefited from very strong customer vol- umes in equity products globally. Other income, including net gains from dis- posal of associates and subsidiaries, increased CHF 905 million, or 40%, from CHF 2,241 mil- lion in 1998 to CHF 3,146 million in 1999. Total net gains on disposal of associates and sub- sidiaries were CHF 1,821 million in 1999 com- pared to disposal-related pre-tax gains of CHF 1,119 million in 1998. The first-time consolida- tion of Klinik Hirslanden in 1999, resulting in Other income of CHF 395 million, was partially offset by lower income from investments in asso- ciates as a result of the divestments as well as lower income from other properties. The CHF 367 million portion of the Long Term Capital Management write-down negatively impacted other income in 1998. Operating expenses Personnel expenses increased CHF 2,761 million, or 28%, from CHF 9,816 million in 1998 to CHF 12,577 million in 1999, despite only a minor in- crease 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 short- fall 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 pay- ments to personnel in excess of amounts deter- mined by normal compensation methodologies. An amount of approximately CHF 1 billion was recorded as part of the merger-related restructur- ing reserve for this purpose. By the end of 1998, this shortfall had materialized, and CHF 1,007 million of accrued payments to personnel were charged against the restructuring reserve in 1998 as planned. The shortfall in profits noted above was aggravated by losses associated with Long Term Capital Management and the Global Equity Derivatives portfolio. Adjusting the prior year for the CHF 1,007 million, personnel expenses in 1999 increased by 16%, which was primarily at- tributable to higher performance-related compen- sation based on the good investment banking re- sult in 1999. Personnel expense in 1999 was re- duced by the recognition of CHF 456 million in pre-paid employer pension contributions. General and administrative expenses decreased CHF 637 million, or 9%, from CHF 6,735 million in 1998 to CHF 6,098 million in 1999. General and administrative expenses in 1998 include the provision of CHF 842 million for the US Global Settlement of World War II related claims. In 1999, the following were included: – the additional restructuring provision of CHF 300 million; – an additional provision of CHF 154 million for the US Global Settlement of World War II related claims; and – CHF 130 million from the first-time consoli- dation of Klinik Hirslanden. Excluding the impact of these items in 1998 and 1999, General and administrative expenses decreased 6% year-on-year, reflecting stringent cost reduction programs. Depreciation and amortization increased CHF 32 million, or 2%, from CHF 1,825 million in 1998 to CHF 1,857 million in 1999. Excluding the impact of the first-time consolidation of Klinik Hirslanden in 1999, depreciation and amortization remained flat. Tax expense increased CHF 782 million, or 87%, from CHF 904 million in 1998 to CHF 1,686 million in 1999, principally due to in- creased operating profit. The effective tax rate of 21.4% is lower than 23.4%, the effective rate in 1998, primarily due to the utilization of tax loss carry forwards. Outlook for 2001 The year 2000 was an outstanding one for UBS, and a good one overall for the markets. Moving into 2001, the prospects for markets and for the international credit environment are particularly difficult to predict. The recent upswing in the eco- nomic cycle in Switzerland may, however, afford UBS some protection. We believe that our credit business is well positioned, thanks to our avoidance of balance Group Financial Review Group Performance sheet-led earnings growth, although we do not ex- pect to see the net credit loss write-backs we ex- perienced this year. UBS Asset Management is cautiously optimistic about prospects for growth as its core price/value investment style demon- strates its strengths in less bullish markets, and UBS Warburg has already demonstrated the quality and sustainability of its earnings in the less positive conditions of the second half of 2000. The biggest opportunity for UBS in 2001 lies in realizing the full transforming value of the PaineWebber merger, not only in the US, but through leveraging the marketing and client skills, product innovation and energy of our new partners to build the best wealth management firm in the world. 21 Review of Business Group Performance Review of Business Group Performance Principles Principles Management accounting principles The following discussion reviews the 1999 and 2000 results by Business Group and business unit. UBS’s management reporting system and poli- cies determine the revenues and expenses directly attributable to each business unit. Internal charges and transfer pricing adjustments are reflected in the performance of each business unit. Inter-business unit revenues and expenses include transfers between business units and between geographical locations. Revenue sharing agreements are used to allocate external customer revenues to Business Groups on a reasonable basis. Transactions between Business Groups are conducted at arms length. Inter-business unit charges are recorded as a reduction to expenses in the business unit providing the service. Corpo- rate Center expenses are allocated to the operat- ing business units, to the extent possible. Interest revenues are apportioned to business units based on the opportunity costs of funding their activities. Accordingly, all assets and liabili- ties are refinanced with the Group Treasury based on market rates. Revenues relating to bal- ance sheet products are calculated on a fully- funded basis. As a result, business units are addi- tionally credited with the risk-free return on the average equity used. Commissions are credited to the business unit with the corresponding customer relationship. Regulatory equity is allocated to business units based on the average regulatory capital requirement during the period. Only utilized equity is taken into account, and a buffer of 10% is added. The re- maining equity, mainly covering real estate, and any unallocated equity, remains in Corporate Center. Assets under management are defined as third- party on- and off-balance sheet assets for which the Group has investment responsibility. This in- cludes both discretionary assets, where the Group has a mandate to invest and manage the assets, as well as assets where the Group advises clients on their investment decisions. Where two business units share responsibility for management of funds (such as UBS investment funds held within private client portfolios), the assets under man- agement are included in both business segments. Wholesale custody-only assets are excluded. During 2001, UBS expects to introduce a new way of defining and measuring the client assets it has responsibility for, replacing assets under management with a new concept, distinguishing those assets held with UBS for investment purposes. Net new money is defined as the net inflow or outflow of assets under management during a period, excluding interest and dividend income and the effects of market or currency movements. includes trainees and staff in management development programs, but not contractors. Headcount Credit loss expense Credit loss expense represents the charges to the profit and loss account relating to amounts due to UBS from loans and advances or other off-bal- ance sheet products, including OTC derivatives, that have had to be written-down because they are impaired or uncollectable. UBS determines the amounts of Credit loss expense in its financial accounts and in the business unit reporting on different bases. In the Group financial accounts, UBS reports its results according to International Accounting Standards (IAS) definitions. Under these rules, Credit loss expense is the total of net new al- lowances and direct write-offs less recoveries. Losses are recognized and charged to the finan- cial accounts in the period when they arise. In contrast, in its segment and business unit reporting, UBS applies a different approach to the measurement of credit risk which reflects the average annual cost that UBS anticipates will arise from transactions that become impaired. In order to manage exposure to credit risk more effectively, UBS prices transactions with a view to earning – over time – sufficient income to compensate for the losses that are expected to be caused by value adjustments for impaired assets. The basis for measuring these inherent risks in the credit portfolios is the concept of “Expected Loss” (see the Credit Risk section of the UBS Handbook 2000 / 2001). UBS therefore quanti- fies the Credit loss expense at business unit level based on the Expected Loss rather than the actual loss reported in its financial accounts. As each business unit is ultimately responsible for its credit decisions, the difference between the actual credit losses and the annual expected cred- it loss calculated for managment reporting pur- poses will be charged or credited back to the busi- ness units over a three-year period, so that the risks and rewards of credit decisions are fully re- flected in their results. 24 Review of Business Group Performance Principles Credit Loss CHF million UBS Switzerland UBS Asset Management UBS Warburg Corporate Center Total Expected credit loss IAS Actual credit expense 31.12.00 31.12.99 31.12.98 31.12.00 31.12.99 31.12.98 784 0 247 1,071 0 333 1,186 0 510 1,031 1,404 1,696 (695) 0 565 0 (130) 965 0 0 (9 ) 956 445 0 506 0 951 Balancing item in Corporate Center (1,161) (448 ) (745 ) UBS reconciles the difference between the Credit loss expense in its financial accounts and the Expected Loss shown in business unit reporting with a balancing item in the Corporate Center. UBS also shows the allocation of actual Credit loss expense to the business units in the footnotes to Note 3a of the financial statements. Key performance indicators UBS reports carefully chosen key performance in- dicators for each of its business units. These do not carry explicit targets, but are intended as indica- tors of the business units’ success in creating value for shareholders. They include both financial met- rics, such as the cost / income ratio, and non-finan- cial metrics, such as Assets under management. The key performance indicators are used for in- ternal performance measurement as well as exter- nal reporting. This ensures that management have a clear responsibility to lead their businesses to- wards achieving success in the Group’s key value drivers and reduces any risk of managing to pure- ly internal performance measures. prepared through the application of UBS’s man- agement accounting policies to the results of the entities through which they operate. Indicative business unit tax rates are calculat- ed on an annual basis based on the results and statutory tax rates of the previous financial year. These rates are approximate calculations, based upon the application to the year’s adjusted earn- ings of statutory tax rates for the locations in which the Business Groups operated. These tax rates therefore give guidance on the tax cost to each Business Group of doing business during 2000 and on a standalone basis, without the ben- efit of tax losses brought forward from earlier years: UBS Switzerland Private and Corporate Clients Private Banking UBS Asset Management Institutional Asset Management Investment Funds / GAM UBS Warburg Corporate and Institutional Clients UBS Capital US Private Clients International Private Clients e-services 21% 21% 22% 22% 23% 22% 22% 23% 26% 37% 32% 30% Business Group tax rates The Business Groups of UBS do not represent separate legal entities. Business Group results are These tax rates are not necessarily indicative of future tax rates for the businesses or UBS Group as a whole. 25 Review of Business Group Performance UBS Switzerland UBS Switzerland Business Group Reporting CHF million, except where indicated For the year ended Income Credit loss expense 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Additional information Assets under management (CHF billion) Cost / income ratio (%) 3 Cost / income ratio before goodwill (%) 3, 4 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 14,182 (784) 13,398 4,759 2,394 508 62 7,723 5,675 12,761 (1,071 ) 11,690 4,691 2,308 460 23 7,482 4,208 13,958 (1,186 ) 12,772 4,448 2,226 771 4 7,449 5,323 11 (27) 15 1 4 10 170 3 35 1,121 1,110 1,013 1 54 54 59 58 53 53 As of 31.12.00 31.12.99 31.12.98 % change from 31.12.99 Regulatory equity used (avg) Headcount (full time equivalents) 10,500 28,785 10,059 31,354 9,519 30,589 4 (8) 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Ac- counting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 In management accounts, statistically derived adjusted expected loss rather than net IAS credit loss (expense) / recovery is reported in the business units (see Note 3a). 3 Operating expenses / operating income before credit loss expense. 4 The amortization of goodwill and other intangible assets is excluded from this calculation. Components of Operating Income Private and Corporate Clients derives its operating income principally from – net interest income from its loan portfolio and customer deposits; – fees for investment management services; and – transaction fees. As a result, Private and Corporate Clients’ operating income is affected by movements in interest rates, fluctuations in assets under management, client activity levels, invest- ment performance and changes in market conditions. Private Banking derives its operating income from – fees for financial planning and wealth management services; – fees for investment management services; and – transaction-related fees. Private Banking’s fees are based on the market value of as- sets under management and the level of transaction-re- lated activity. As a result, Private Banking’s operating in- come is affected by such factors as fluctuations in assets under management, changes in market conditions, in- vestment performance and inflows and outflows of client funds. 26 Review of Business Group Performance UBS Switzerland Private and Corporate Clients Business Unit Reporting CHF million, except where indicated For the year ended Individual clients Corporate clients Risk transformation and capital management Operations Other Income Credit loss expense 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax KPI’s Assets under management (CHF billion) 3 Net new money (CHF billion) Cost / income ratio (%) 4 Cost / income ratio before goodwill (%) 4, 5 Non-performing loans / Gross loans outstanding (%) 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 5,026 1,975 307 205 (70) 7,443 (759) 6,684 3,187 1,058 419 27 4,691 1,993 440 0.4 63 63 5.0 4,553 1,855 330 313 142 7,193 (1,050 ) 6,143 3,363 1,123 384 2 4,872 1,271 439 68 68 6.6 4,785 1,728 0 448 64 7,025 (1,170 ) 5,855 3,238 1,025 680 4 4,947 908 434 70 70 10 6 (7) (35) 3 (28) 9 (5) (6) 9 (4) 57 0 Additional information As of Regulatory equity used (avg) Headcount (full time equivalents) 31.12.00 31.12.99 31.12.98 % change from 31.12.99 8,550 21,100 8,550 24,098 8,250 24,043 0 (12) 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Ac- counting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 In management accounts, statistically derived adjusted expected loss rather than net IAS credit loss (expense) / recovery is reported in the business units (see Note 3a). 3 Bank trans- action accounts are included. 4 Operating expenses / operating income before credit loss expense. 5 The amortization of goodwill and other intangible assets is excluded from this calculation. 2000 There were no significant financial events that affected this business unit in 1999 or 2000. Key performance indicators Assets under management increased slightly by CHF 1 billion from CHF 439 billion in 1999 to CHF 440 billion during 2000, including net new money of CHF 0.4 billion. Market performance was slightly positive over the year, offsetting transfers of CHF 5 billion to other business units. The pre-goodwill cost / income ratio in 2000, at 63%, improved significantly from 68% in 1999. This was principally due to lower operat- ing expenses resulting from continuing strict cost control, as the benefits of the 1998 merger be- tween Union Bank of Switzerland and Swiss Bank Corporation continued to be realized. The quality of the Private and Corporate Clients’ loan portfolio improved considerably during the year, resulting in a non-performing loans / total loans ratio of 5.0% at 31 December 2000, compared to 6.6% at the end of 1999. This improvement was due in part to the unexpected strengthening of the Swiss economy, and also to Private and Corporate Clients’ efforts to fur- ther enhance the risk / return profile of its loan 27 Review of Business Group Performance UBS Switzerland 28 portfolio through selective origination, second- ary market transactions, the disposal of sub- sidiaries, and the continued work-out of the recovery portfolio, which decreased from CHF 21 billion to CHF 15 billion during the year. Although UBS Switzerland’s non-performing loans ratio is somewhat higher than some com- parable banks particularly in the US, the com- parison reflects different structural practices rather than underlying asset quality. In general, Swiss practice is to write off loans entirely only on final settlement of bankruptcy proceedings, the sale of the underlying assets or a formal debt forgiveness. In contrast, US practice is to write off non-performing loans much sooner, reducing the amount of such loans and corresponding provi- sions recorded at any given date. Results Record pre-tax profit for the year, at CHF 1,993 million, was an increase of CHF 722 million, or 57%, over 1999, clearly demonstrating the sub- stantial benefits of the merger between UBS and SBC for the combined domestic banking fran- chise. Operating income Private and Corporate Clients’ operating income in 2000 was CHF 6,684 million, CHF 541 mil- lion, or 9%, higher than in 1999. This improved performance primarily reflected higher fee in- come, particularly in the first half of the year, and reduced expected loss as the quality of the loan portfolio improved. Both of Private and Corporate Clients’ two main operating business areas recorded increases in their operating income in 2000 as compared to 1999. – Individual Clients: Operating income in 2000 was CHF 5,026 million, an increase of CHF 473 million, or 10%, from CHF 4,553 million in 1999. This was primarily due to increases in brokerage and investment fund fees resulting from increased investment activity, and minor gains on sales of subsidiaries and partici- pations. – Corporate Clients: Operating income in 2000 was CHF 1,975 million, an increase of CHF 120 million, or 6%, from CHF 1,855 million in 1999, primarily due to higher interest in- come resulting from improved margins as well as increased fee and commission income. On the other hand, the two support areas saw their incomes reduce. – Risk Transformation and Capital Manage- ment: Income was CHF 307 million in 2000. This was a decrease of CHF 23 million, or 7%, from the CHF 330 million recorded in 1999, primarily as a result of the reduced average size of the recovery loan portfolio, managed by this unit. – Operations: Revenues in 2000 were CHF 205 million, a decrease of CHF 108 million, or 35%, from CHF 313 million in 1999. Opera- tions revenues were affected by lower interest revenues as a result of reduced correspondent bank overdraft balances, partially offset by small one-off revenues from the revaluation of minority holdings in other companies. Operating expenses Full year operating expenses in 2000 were CHF 4,691 million, down 4%, or CHF 181 million, from 1999. This was primarily due to falling per- sonnel costs as headcount was reduced. Personnel expense fell by CHF 176 million, or 5%, from CHF 3,363 million in 1999 to Operating Income Before Credit Loss Expense by Business Area CHF million For the year ended Individual Clients Corporate Clients Risk transformation and Capital Management Operations Other Total 31.12.00 31.12.99 31.12.98 5,026 1,975 307 205 (70) 7,443 4,553 1,855 330 313 142 7,193 4,785 1,728 448 64 7,025 Review of Business Group Performance UBS Switzerland CHF 3,187 million in 2000. Increased perform- ance-related compensation, reflecting the good re- sults, was more than offset by a substantial reduc- tion in headcount during the year. General and administrative expenses fell 6% over the year, despite our continued investments in online services, reflecting continued cost con- trol efforts. Depreciation expense increased by CHF 35 million, or 9%, to CHF 419 million, primarily due to the implementation of IAS 38, relating to the capitalization of software costs. Amortization of goodwill and other intangible assets increased CHF 25 million, from CHF 2 million in 1999 to CHF 27 million in 2000. This increase was primarily due to the acquisition of a credit card portfolio during second quarter 2000. Headcount Private and Corporate Clients’ headcount de- clined by almost 3,000 in 2000 from 24,098 at the end of 1999 to 21,100 at 31 December 2000. This reduction includes 948 staff transferred with Sys- tor, which became an independent company at the start of 2000, 413 staff of Solothurner Bank, which was sold during 2000, and the transfer of 148 financial planning and wealth management staff to Private Banking. The remaining reduction of 1,489 staff demonstrates UBS’s continued success in realizing UBS / SBC merger-related synergies. 1999 Operating income Operating income before credit loss expense in- creased CHF 168 million, or 2%, from CHF 7,025 million in 1998 to CHF 7,193 million in 1999. This improvement was primarily due to higher margins on interest-related business, such as mortgages, as well as the first full-year impact of the amalgamation and repricing of products from the two former banks. In conjunction with the creation of the Risk Transformation and Cap- ital Management business area in October 1999, the business areas within Private and Corporate Clients were realigned in 1999. These realign- ments 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 in- creased from 1998 to 1999, primarily due to the transfer in of the Business Client segment, the transfer in of the Swiss Global Trade Fi- nance business from UBS Warburg, and im- proving interest margins. The transfer out of the Recovery portfolio to Risk Transforma- tion and Capital Management partially offset these increases. – Operating income from Operations decreased compared to 1998. This was the net effect of the transfer of emerging market bank activities from UBS Warburg into UBS Private and Cor- porate Clients and the transfer of industrialized bank activities to UBS Warburg during 1999. Private and Corporate Clients’ expected loss de- creased CHF 120 million, or 10%, from CHF 1,170 million in 1998 to CHF 1,050 million in 1999 as a result of the accelerated reduction of impaired positions and the movement to higher quality businesses. This was partially offset by in- creased expected loss primarily resulting from the transfer of the remainder of the Swiss Global Trade Finance business from UBS Warburg during 1999. Operating expenses Personnel, general and administrative expenses increased CHF 223 million, or 5%, from CHF 4,263 million in 1998 to CHF 4,486 million in 1999. This increase was due primarily to merger related IT integration work, work relating to the Year 2000 transition and the costs associated with the shift of the Swiss Global Trade Finance business from UBS Warburg. This business, with approximately 400 professionals, was trans- ferred from UBS Warburg in early 1999. These increases were partially offset by cost savings re- sulting from the closure of redundant branches. Depreciation and amortization expense de- creased CHF 298 million, or 44%, from CHF 684 million in 1998 to CHF 386 million in 1999, primarily due to reduced assets employed subse- quent to the 1998 merger. 29 Review of Business Group Performance UBS Switzerland 30 Private Banking Business Unit Reporting CHF million, except where indicated For the year ended Income Credit loss expense 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax KPI’s Assets under management (CHF billion) Net new money (CHF billion) 3 Gross AuM margin (bps) Cost / income ratio (%) 4 Cost / income ratio before goodwill (%) 4, 5 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 6,739 (25) 6,714 1,572 1,336 89 35 3,032 3,682 681 (0.7) 98 45 44 5,568 (21 ) 5,547 1,328 1,185 76 21 2,610 2,937 671 0.7 90 47 46 6,933 (16 ) 6,917 1,210 1,201 91 0 2,502 4,415 579 36 36 21 19 21 18 13 17 67 16 25 1 9 Additional information As of Regulatory equity used (avg) Headcount (full time equivalents) 31.12.00 31.12.99 31.12.98 % change from 31.12.99 1,950 7,685 1,509 7,256 1,269 6,546 29 6 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Ac- counting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 In management accounts, statistically derived adjusted expected loss rather than net IAS credit loss (expense) / recovery is reported in the business units (see Note 3a). 3 Excludes dividend and interest income. 4 Operating expenses / operating income before credit loss expense. 5 The amortization of goodwill and other intangible assets is excluded from this calculation. 2000 There were no significant financial events that affected this business unit in 1999 or 2000. basis points recorded in 1999, as we introduce more value-added products to our client base. Key performance indicators Assets under management increased slightly by CHF 10 billion, or 1%, from CHF 671 billion to CHF 681 billion during 2000, primarily reflect- ing market performance and currency effects. Net new money during the year was disappointing, with net outflows of CHF 0.7 billion. Gross margin for the year, at 98 basis points, partly reflects the very strong performance in the exceptional markets of the first quarter. The more recent rates of 95 basis points in second and fourth quarters, and 94 basis points in third quarter, rep- resent a solid improvement over the average of 90 The pre-goodwill cost / income ratio of 44% improved slightly from 46% in 1999, principally due to significantly higher revenues. Results Net profit before tax for the year increased signif- icantly, by CHF 745 million, or 25%, to CHF 3,682 million, from CHF 2,937 million in 1999. This reflects strong markets in the early part of 2000, and the margin-enhancing benefits of intro- ducing more added-value products during the year. Operating income The increase in gross margin to 98 basis points re- sulted in operating income of CHF 6,714 million, Review of Business Group Performance UBS Switzerland which was 21%, or CHF 1,167 million, higher than in 1999. Revenue quality has also improved with asset-based fees growing faster over the year than transaction-based fees. Depreciation expense increased by CHF 13 million, or 17%, due to increased investments in both software and the refurbishment of premises. Operating expenses Full year operating expenses were CHF 3,032 mil- lion, CHF 422 million or 16% higher than in 1999. Personnel expenses increased CHF 244 mil- lion, or 18%, partly due to increased hiring in client-focused areas, the transfer of financial planning and wealth management staff from the Private and Corporate Clients unit, as well as higher performance-related compensation. General and administrative expenses in- creased CHF 151 million, or 13%, primarily due to recruitment and training expenses, volume- driven transaction processing costs, as well as project-related technology costs. Headcount Headcount at year end 2000 was 7,685, repre- senting an increase of 429 during the year. This was mainly the result of the transfer of 148 finan- cial planning and wealth management staff from the Private and Corporate Clients business unit and the completion in first quarter 2000 of previ- ous initiatives to strengthen product capabilities. It is Private Banking’s policy to shift the balance of its staff towards client-facing roles, reducing the number of support staff. During the year there were net increases of 302 staff in client- focused market areas and 127 in product areas, such as financial planning, Active Advisory, and portfolio management. 1999 Operating income Operating income decreased CHF 1,370 million, or 20%, from CHF 6,917 million in 1998 to CHF 5,547 million in 1999. This significant de- crease principally reflected lower transaction- based revenues due to lower levels of client transaction activity. CHF 1,058 million gains from the divestitures of Banca della Svizzera Ita- liana (BSI) and Adler, as well as CHF 268 million of operating income relating to BSI’s operations, are included in operating income for 1998 and did not recur in 1999. Notwithstanding the decrease in operating in- come, assets under management increased during 1999 by CHF 92 billion, or 16%. Strong mar- kets, especially in Europe, in the United States, and in the technology sector, as well as the stronger US dollar, led to a performance increase of CHF 80 billion for 1999. In addition, the ac- quisition of the international private banking op- erations of Bank of America accounted for an ad- ditional CHF 5 billion, while inter-business unit transfers resulted in another CHF 6 billion. This increase was partially offset, however, by de- creased volumes from existing clients during the second half of 1999. Operating expenses Operating expenses, adjusted for CHF 125 mil- lion in divestiture-related operating expenses, in- creased 4%, or CHF 108 million, to CHF 2,610 million in 1999, to a large extent as a result of UBS’s expansion in the front-line staff as well as infrastructure related investments. Personnel, general and administrative expens- es increased CHF 102 million, or 4%, from CHF 2,411 million in 1998 to CHF 2,513 million 1999. Personnel costs increased 10%, or CHF 118 million, to CHF 1,328 million in 1999 due to an increase in headcount of 710 from 6,546 at 31 December 1998 to 7,256 at 31 December 1999. Headcount growth resulted from the acquisition in 1999 of Bank of America’s international private banking operations, enhancement of UBS’s logistics capabilities and support for the introduction of new portfolio monitoring and advisory capabilities. Operating expenses in 1998 also included CHF 125 million related to BSI that did not occur in 1999. As a result of the acquisition of the interna- tional private banking operations of Bank of America, goodwill amortization increased to CHF 21 million in 1999. Depreciation decreased CHF 15 million, or 16%, from CHF 91 million in 1998 to CHF 76 million in 1999. 31 Review of Business Group Performance UBS Asset Management UBS Asset Management Business Group Reporting CHF million, except where indicated For the year ended Income Credit loss expense Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Additional information Assets under management (CHF billion) Cost / income ratio (%) 2 Cost / income ratio before goodwill (%) 2, 3 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 1,953 0 1,953 880 439 49 263 1,631 322 522 84 70 1,369 0 1,369 516 271 32 113 932 437 598 68 60 1,358 0 1,358 515 228 35 78 856 502 532 63 57 43 43 71 62 53 133 75 (26) (13) As of 31.12.00 31.12.99 31.12.98 % change from 31.12.99 Regulatory equity used (avg) Headcount (full time equivalents) 1,250 2,860 162 2,576 102 1,863 672 11 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Ac- counting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 Operating expenses / operating in- come before credit loss expense. 3 The amortization of goodwill and other intangible assets is excluded from this calculation. Components of Revenue UBS Asset Management generates most of its revenue from the asset management services it provides to institutional clients, and from the distribution of investment funds. Fees charged to institutional clients and on investment funds are based on the market value of assets under management. As a result, UBS Asset Management’s revenues are affected by changes in market levels as well as flows of client funds. 32 Review of Business Group Performance UBS Asset Management Institutional Asset Management Business Unit Reporting CHF million, except where indicated For the year ended Institutional Non-institutional Income Credit loss expense Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax KPI’s Assets under management (CHF billion) Net new money (CHF billion) 2 Gross AuM margin (bps) 3 Cost / income ratio (%) 4 Cost / income ratio before goodwill (%) 4, 5 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 1,103 198 1,301 0 1,301 631 243 27 173 1,074 227 496 (66.6) 33 83 69 906 193 1,099 0 1,099 458 178 25 113 774 325 574 (50.1 ) 25 70 60 968 195 1,163 0 1,163 465 154 29 78 726 437 531 62 56 22 3 18 18 38 37 8 53 39 (30) (14) 32 Additional information As of Regulatory equity used (avg) Headcount (full time equivalents) 31.12.00 31.12.99 31.12.98 % change from 31.12.99 500 1,728 160 1,653 100 1,497 213 5 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Ac- counting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 Excludes dividend and interest in- come. 3 Revenues divided by average assets under management, for the institutional portion of the business only. 4 Operating expenses / op- erating income before credit loss expense. 5 The amortization of goodwill and other intangible assets is excluded from this calculation. 2000 There were no significant financial events that affected this business unit in 1999 or 2000. in US and to a lesser degree UK mandates, re- flecting past investment performance issues. Key performance indicators Assets under management decreased 14%, or CHF 78 billion, from CHF 574 billion at 31 De- cember 1999 to CHF 496 billion at 31 December 2000, with the majority of the decline due to client losses in the institutional business, particu- larly in the earlier part of the year. Net new money for the year saw a net outflow of CHF 66.6 billion. Net new money outflows moderated as the year progressed, as losses of eq- uity mandates continued to decline. Client loss- es continued to be concentrated primarily with- The gross margin in 2000 was 33 basis points, an increase of 8 basis points over 1999. This rise reflects the contributions from two new higher margin businesses: O’Connor, created in June 2000, and UBS Realty Investors (formerly Al- legis), purchased in December 1999. The cost / income ratio before goodwill in- creased to 69% in 2000 from 60% in 1999, prin- cipally as a result of the inclusion of O’Connor and UBS Realty Investors (which generate higher gross margins than the rest of the business, but at higher cost), spending on strategic initiatives to expand global reach, and lower asset-based rev- enues towards the end of the year. 33 Review of Business Group Performance UBS Asset Management 34 Investment performance in 2000 The return of global equity markets towards fun- damental values was the predominant develop- ment during 2000. This trend accelerated during the fourth quarter as the US economy began to slow, and many companies within the Technolo- gy, Media and Telecommunications (TMT) sec- tor posted disappointing earnings. Within this challenging environment, strategic positions ben- efiting from the decline in the TMT sector, the as- sociated drop in equity markets, the under-per- formance of the very largest capitalization equi- ties, and the year-end turnaround in the euro, helped Institutional Asset Management deliver the best relative annual investment performance in its history. US equity strategies outperformed bench- marks by wide margins. Global, international and UK equity strategies were also significantly positive. Phillips & Drew was ranked the top- performing pension fund manager in Britain for the year 2000 by Combined Actuarial Perfor- mance Services (CAPS), the leading UK perform- ance measurement consultancy. Phillips & Drew’s flagship Managed Exempt fund (equities mixed with property) outperformed the average fund manager by more than 10% for the full year. Phillips & Drew’s strong performance in 2000 also benefited their balanced fund’s three and five year records, moving its ranking up from fourth quartile at the end of 1999 to second quartile at the end of 2000. Results The full year pre-tax profit of CHF 227 million was 30% lower than 1999. Despite asset losses in the core institutional business, income increased as a result of the launch of the O’Connor business and the acquisition of Allegis; but this was more than offset by higher performance-related per- sonnel expenses, goodwill amortization relating to Allegis and increased general and administra- tive expenses. Operating income Operating income increased CHF 202 million, or 18%, from CHF 1,099 million in 1999 to CHF 1,301 million in 2000. Despite the decrease in as- sets under management, operating income in- creased as a result of the acquisition of Allegis and the creation of the new O’Connor alternative asset management business, partially offset by lost revenue from client losses. Operating expenses Full year expenses increased by CHF 300 million, to CHF 1,074 million. Personnel expenses in- creased 38%, or CHF 173 million, from CHF 458 million in 1999 to CHF 631 million in 2000 and General and administrative expenses in- creased 37%, or CHF 65 million, over 1999 to CHF 243 million in 2000. Both categories of ex- pense increased as a result of the acquisition of Allegis, the addition of the new O’Connor busi- ness and currency movements. Depreciation and amortization expense in- creased CHF 62 million, or 45%, from CHF 138 million in 1999 to CHF 200 million in 2000, in- cluding CHF 46 million from the acquisition of Allegis. Headcount Headcount increased 5% from 1,653 at 31 De- cember 1999 to 1,728 at 31 December 2000, primarily as a result of the creation of the new O’Connor business in June 2000. 1999 Operating income Operating income decreased CHF 64 million, or 6%, from CHF 1,163 million in 1998 to CHF 1,099 million in 1999. Assets under management increased 8%, or CHF 43 billion, to CHF 574 bil- lion at 31 December 1999 from CHF 531 at 31 December 1998, with increases in both insti- tutional and non-institutional categories year-on- year. Despite the 4% increase in institutional assets under management, which primarily re- sulted from investment performance, the acquisi- tion of Allegis and growth in private client man- dates, institutional revenues decreased. This de- crease from CHF 968 million in 1998 to CHF Review of Business Group Performance UBS Asset Management 906 million in 1999 reflects a slight decline in av- erage 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. Av- erage non-institutional assets increased by 16% during 1999; however, non-institutional revenues declined slightly to CHF 193 million as a result of new interbusiness unit fee arrangements with UBS Private Banking. Operating expenses Personnel, general and administrative expenses in- creased CHF 17 million, or 3%, from CHF 619 million in 1998 to CHF 636 million in 1999. Head- count increased from 1,497 as of 31 December 1998 to 1,653 as of 31 December 1999, primarily as a result of the acquisition of Allegis in December 1999. Personnel expenses decreased slightly from CHF 465 million in 1998 to CHF 458 million in 1999 reflecting decreased incentive compensation. General and administrative expenses increased 16% from CHF 154 million in 1998 to CHF 178 million in 1999 as a result of revisions in cost-shar- ing arrangements between Institutional Asset Man- agement and other business units of UBS. Depreciation and amortization expense in- creased CHF 31 million, or 29%, from CHF 107 million in 1998 to CHF 138 million in 1999, re- flecting increased goodwill amortization related to the buy-out of UBS’s joint venture with the Long-Term Credit Bank of Japan. 35 Review of Business Group Performance UBS Asset Management 36 Investment Funds /GAM Business Unit Reporting CHF million, except where indicated For the year ended Income Credit loss expense Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax KPI’s Assets under management (CHF billion) Net new money (CHF billion) 2 Gross AuM margin (bps) 3 Cost / income ratio (%) 4 Cost / income ratio before goodwill (%) 4, 5 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 652 0 652 249 196 22 90 557 95 219 4.4 38 85 72 270 0 270 58 93 7 0 158 112 225 1.3 24 59 59 195 0 195 50 74 6 0 130 65 176 67 67 141 141 329 111 214 253 (15) (3) 58 Additional information As of Regulatory equity used (avg) Headcount (full time equivalents) 31.12.00 31.12.99 31.12.98 % change from 31.12.99 750 1,132 2 923 2 366 23 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Ac- counting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 Excludes dividend and interest in- come. 3 All non-institutional revenues, including those booked in Institutional Asset Management, divided by average assets under management. 4 Operating expenses / operating income before credit loss expense. 5 The amortization of goodwill and other intangible assets is excluded from this calculation. 2000 There were no significant financial events that affected this business unit in 1999 or 2000. The gross margin for the year, at 38 basis points, is significantly higher than the 24 basis points recorded in 1999, principally due to the contribution from GAM. Key performance indicators Results Assets under management decreased 3% from CHF 225 billion at 31 December 1999 to CHF 219 billion at year end 2000, largely a result of currency and market movements, partly offset by net new money of CHF 4.4 billion. The cost / income ratio before goodwill in- creased from 59% to 72% mainly as a result of the inclusion of Global Asset Management (GAM), but also reflecting spending on new business initiatives, chiefly targeted at market- ing investment funds outside UBS’s own client base. Net profit for 2000 fell 15%, or CHF 17 million, to CHF 95 million in 2000, reflecting the addi- tional costs of spending on new business initia- tives, chiefly targeted at marketing investment funds outside UBS. Operating income Operating income increased CHF 382 million, or 141%, from CHF 270 million in 1999 to CHF 652 million in 2000, primarily as a result of the GAM acquisition. Review of Business Group Performance UBS Asset Management Operating expenses Personnel expenses increased 329%, or CHF 191 million, from CHF 58 million in 1999 to CHF 249 million in 2000 due to the acquisition of GAM, and increased headcount for growth ini- tiatives in the Investment Funds area. General and administrative expenses increased 111%, from CHF 93 million in 1999 to CHF 196 mil- lion in 2000, as a result of the acquisition of GAM and marketing and distribution initiatives in the Investment Funds area. Depreciation and amortization expense in- creased CHF 105 million, from CHF 7 million in 1999 to CHF 112 million in 2000, reflecting goodwill amortization following the acquisition of GAM. Headcount Headcount increased 23% from 923 at 31 De- cember 1999 to 1,132 at 31 December 2000, pri- marily a result of an increase of staff to support distribution initiatives in the Investment Funds area. 1999 Operating income Operating income increased CHF 75 million, or 38%, from CHF 195 million in 1998 to CHF 270 million in 1999. This was principally due to high- er Investment Funds assets and the transfer from Private Banking of some client responsibility and related income. The acquisition of GAM did not significantly impact income or expenses in 1999. Assets under management increased 28%, or CHF 49 billion, to CHF 225 billion at 31 December 1999 from CHF 176 billion at 31 De- cember 1998. CHF 24 billion of this increase was due to the acquisition of GAM in December 1999. The remainder was mainly due to positive investment performance. Operating expenses Personnel, general and administrative expenses increased CHF 27 million, or 22%, from CHF 124 million in 1998 to CHF 151 million in 1999. Headcount increased from 366 as of 31 Decem- ber 1998 to 923 as of 31 December 1999, prima- rily as a result of the acquisition of GAM in De- cember 1999. Excluding GAM, headcount in- creased by 69, as a result of efforts to build the In- vestment Funds business, including the launching of new funds and expansion of distribution ef- forts. Personnel expenses increased 16% from CHF 50 million in 1998 to CHF 58 million in 1999 in line with the increase in headcount. Gen- eral and administrative expenses increased 26% to CHF 93 million in 1999 reflecting increased in- vestment 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 in- creased CHF 1 million, or 17%, from CHF 6 mil- lion 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. 37 Review of Business Group Performance UBS Warburg UBS Warburg Business Group Reporting CHF million, except where indicated For the year ended Income Credit loss expense 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Additional information Assets under management (CHF billion) 6 Cost / income ratio (%) 7 Cost / income ratio before goodwill (%) 7, 8 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 19,779 4 (247) 19,532 11,002 3,501 731 298 4 15,532 4,000 827 79 77 13,241 (333 ) 12,908 7,278 2,680 659 154 10,771 2,137 36 81 80 7,691 (510 ) 7,181 4,641 2,625 549 173 7,988 (807 ) 27 104 102 49 (26) 51 51 31 11 94 44 87 As of 31.12.00 31.12.99 31.12.98 % change from 31.12.99 Regulatory equity used (avg) Headcount (full time equivalents) 24,900 38,445 10,679 14,266 13,779 14,638 133 169 Business Group Reporting Adjusted for Significant Financial Events CHF million, except where indicated For the year ended 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 Income Credit loss expense 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax Additional information Cost / income ratio (%) 7 Cost / income ratio before goodwill (%) 7, 8 19,779 4 (247) 19,532 10,916 3 3,408 3 652 3 298 4 15,274 4,258 13,041 5 (333 ) 12,708 7,278 2,680 659 154 10,771 1,937 7,691 (510 ) 7,181 4,641 2,625 549 173 7,988 (807 ) 52 (26) 54 50 27 (1) 94 42 120 77 76 83 81 104 102 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Ac- counting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 In management accounts, statisti- cally derived adjusted expected loss rather than net IAS credit loss (expense) / recovery is reported in the business units (see Note 3a). 3 The year ended 31 December 2000 Personnel, General and administrative expenses and Depreciation were adjusted for the significant financial events in 4 Goodwill funding costs of respect of the PaineWebber integration costs by CHF 86 million, CHF 93 million and CHF 79 million, respectively. CHF 132 million and amortization of goodwill and other intangible assets of CHF 138 million in respect of the PaineWebber acquisition are in- cluded in UBS Warburg results but are not reflected in any of the individual business units. 5 Year ended 31 December 1999 has been adjusted for the Significant Financial Event of CHF 200 million for the sale of the international Global Trade Finance business. 6 US Private Clients’ Client Assets at 3 November 2000 were CHF 890 billion. 7 Operating expenses / operating income before credit loss expense. 8 The amortization of goodwill and other intangible assets is excluded from this calculation. 38 Review of Business Group Performance UBS Warburg Goodwill costs UBS Warburg’s Business Group operating expens- es include CHF 138 million amortization of good- will and intangible assets and CHF 132 million of goodwill funding costs relating to the merger with PaineWebber which are recorded at the Business Group level, but are not allocated to the individ- ual business units. Components of Operating Income In particular, the results of the US Private Clients business unit, which includes the former PaineWebber private client businesses, do not reflect goodwill amortization or funding costs relating to the merger. The Corporate and Institutional Clients unit generates op- erating income from – commissions on agency transactions and spreads or markups on principal transactions; – fees from debt and equity capital markets transactions, leveraged finance, and the structuring of derivatives and complex transactions; – mergers and acquisitions and other advisory fees; – interest income on principal transactions and from the loan portfolio; and – gains and losses on market making, proprietary, and ar- bitrage positions. UBS Capital’s primary source of operating income is capital gains from the disposal or sale of its investments, which are recorded at the time of ultimate divestment. As a re- sult, appreciation in fair market value is recognized as op- erating income only at the time of sale. The level of annual operating income from UBS Capital is directly affected by the level of investment disposals that take place during the year. The private clients business units, US Private Clients and International Private Clients, principally derive their opera- ting income from – fees for financial planning and wealth management As a result, Corporate and Institutional Clients’ operating income is affected by movements in market conditions, interest rate swings, the level of trading activity in primary and secondary markets and the extent of merger and acquisition activity. These and other factors have had and may in the future have a significant impact on results of operations from year to year. services; – fees for discretionary services; and – transaction-related fees. These fees are based on the market value of assets under management and the level of transaction-related activity. As a result, operating income is affected by such factors as fluctuations in assets under management, changes in mar- ket conditions, investment performance and inflows and outflows of client funds. 39 Review of Business Group Performance UBS Warburg 40 Corporate and Institutional Clients Business Unit Reporting CHF million, except where indicated For the year ended Corporate Finance Equities Fixed income Treasury products Non-core business Income Credit loss expense 3 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax KPI’s Compensation / income (%) Cost / income ratio (%) 6 Cost / income ratio before goodwill (%) 6, 7 Non-performing loans / Gross loans outstanding (%) Average VaR (10-day 99%) League table rankings 9 For the year ended Global Mergers and Acquisitions completed 10 Rank Market share International Equity New Issues 11 Rank Market share International Bonds 11 Rank Market share Eurobonds 11 Rank Market share 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 31 82 20 (8) (42) 44 (26) 46 35 14 (12) 11 27 134 1,665 3,253 (267 ) 2,351 (96 ) 6,906 (500 ) 6,406 4,333 2,483 535 157 7,508 (1,102 ) 63 109 106 1.5 295 8 2,701 10,429 2,969 1,653 281 18,033 (243) 17,790 9,2844, 5 2,779 4 555 4 149 12,767 5,023 51 71 70 3.4 242 2,054 5,724 2,464 1,805 482 2 12,529 2 (330 ) 12,199 6,861 2,429 629 134 10,053 2,146 55 80 79 2.2 213 31.12.00 31.12.99 6 16.7 7 5.1 5 7.9 1 8.8 6 20.3 11 3.8 5 8.0 1 8.7 Additional information As of Regulatory equity used (avg) Headcount (full time equivalents) 31.12.00 31.12.99 31.12.98 % change from 31.12.99 10,000 15,262 10,050 12,694 13,300 13,794 0 20 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 Year ended 31 December 1999 income was adjusted for the Significant Financial Event of CHF 200 million related to the sale of the international Global Trade Finance business. 3 In management accounts, statistically derived adjusted expected loss rather than net IAS credit loss (expense) / recovery is reported in the business units (see Note 3a). 4 The year ended 31 December 2000 Personnel, General and administrative expenses and Depreciation were adjusted for the Significant Financial Events in respect of the PaineWebber integration by CHF 86 million, CHF 13 million and CHF 7 million, respectively. 5 The year ended 31 December 2000 Personnel expenses include CHF 11 million of the CHF 128 million retention payments in respect of the Paine- Webber acquisition. 6 Operating expenses / operating income before credit loss expense. 7 The amortization of goodwill and other intangible assets is excluded from this calculation. 8 VaR average for 1998 is from the date of the UBS / SBC merger, 26 June 1998, until 31 December 1998. 9 The league table rankings reflect recent industry consolidation. 10 Source: Thomson Financial Securities data. 11 Source: Capital Data Bondware. Review of Business Group Performance UBS Warburg 2000 The results for Corporate and Institutional Clients include the costs and revenues for No- vember and December 2000 of the former PaineWebber capital markets businesses, which were integrated into this business unit from the completion of the merger on 3 November 2000. PaineWebber integration costs were treated as a significant financial event, and are not shown in the table. The amounts involved were: personnel expenses CHF 86 million, general and adminis- trative expenses CHF 13 million and depreciation CHF 7 million. In addition, a CHF 200 million gain on the sale of UBS’s international Global Trade Finance business in 1999 was treated as a significant fi- nancial event and is not reflected in the operating income shown in the table. reflecting the weaker credit environment in the US. At the same time, the gross loans outstanding rose from CHF 72,717 million at 31 December 1999 to CHF 74,253 million at 31 December 2000. As a result, the ratio of non-performing loans to total loans increased to 3.4% at the end of 2000 from 2.2% at the end of 1999. UBS Warburg does not believe that extensive lending is critical to the ex- pansion of its client franchise and does not intend to engage in balance sheet led earnings growth. Market risk utilization, as measured by aver- age Value at Risk, continued to remain well with- in the limit of CHF 450 million, although in- creasing from an average of CHF 213 million in 1999 to an average of CHF 242 million in 2000, reflecting the exceptional trading opportunities in the early part of 2000. Key performance indicators Results UBS Warburg measures its expense base primari- ly in terms of percentage of revenues, looking at both personnel costs and non-personnel costs on this basis. Continued strong revenue performance and active cost management led to a pre-goodwill cost / income ratio of 70%, from 79% in the pre- vious year, representing the result of significant cost management efforts on both personnel and non-personnel expenses. Corporate and Institutional Clients’ ratio of personnel cost to income fell to 51% in 2000, from 55% last year. UBS Warburg continues to invest in top quality professionals to help expand its capabilities and client reach and aims to compensate its employees at similar levels to its global competitors. Changes in non-personnel costs are less directly related to changes in income than personnel costs. As a percentage of income, non-personnel costs decreased to 19% in 2000, from 25% in 1999. Improvements in overall cost management were offset by increased expenditure on technolo- gy and professional fees and the incremental costs of the PaineWebber capital markets business. The value of Corporate and Institutional Clients’ non-performing loans rose CHF 933 million, or 59%, from CHF 1,586 million at 31 December 1999 to CHF 2,519 million at 31 December 2000, UBS Warburg’s Corporate and Institutional Clients business unit delivered record financial results in 2000, with each quarter performing sig- nificantly above the levels in the comparable quarter of 1999. Pre-tax profit of CHF 5,023 million was more than double the CHF 2,146 million achieved in 1999, itself a good year. Operating income Corporate and Institutional Clients generated revenues of CHF 18,033 million in 2000, an in- crease of 44% over 1999. Equities revenues during 2000 were CHF 10,429 million, or 82% higher than 1999’s rev- enues of CHF 5,724 million reflecting the strength of UBS Warburg’s global client franchise and increased market share in significantly stronger secondary markets, and strong market- making and trading revenues. UBS Warburg’s secondary equity sales business continues to be ranked as one of the global leaders, and the lead- ing non-US equities house. Fixed Income experienced an exceptionally strong 2000, driven by strong markets, significant principal finance activity and a strong government bond and derivatives business, contributing to overall revenues for the year 2000 of CHF 2,969 million, an improvement of 20%, or CHF 505 mil- lion over 1999’s revenues of CHF 2,464 million. 41 Review of Business Group Performance UBS Warburg 42 Operating Income Before Credit Loss Expense by Business Area CHF million Equities Fixed income Corporate finance Treasury products Non-core business Total For the year ended 31.12.00 31.12.99 31.12.98 10,429 2,969 2,701 1,653 281 18,033 5,724 2,464 2,054 1,805 482 12,529 3,253 (267) 1,665 2,351 (96) 6,906 Despite commoditization of products and the continuing pressure on margins across its busi- nesses, the Treasury Products business area recorded a slight increase in underlying revenues, reflecting the recovery of euro trading as the cur- rency strengthened, and a growing client fran- chise. The business area also increased market share through extensive use of e-channels to ex- tend client reach. Revenues for 1999 included revenues relating to exchange-traded derivatives and alternative asset management, which were transferred to the Equities business area in 2000. Full year performance reflected this transfer, with revenues of CHF 1,653 million in 2000, down 8% on the previous year. Market conditions for mergers and acquisi- tions, advisory work and primary underwriting continued to be strong, driving Corporate Fi- nance’s excellent performance. UBS Warburg’s corporate client franchise continued to develop, with strong performance in critical sectors in 2000, particularly Telecommunications and Con- sumer Goods. Productivity per head also in- creased in comparison to prior years. Overall, 2000 was a year of very strong growth in this area for UBS Warburg, with revenues of CHF 2,701 million, 31% ahead of 1999. The Corporate Finance business area within Corporate and Institutional Clients provides both advisory services and financing services. Fi- nancing services include both equity and fixed- income offerings undertaken in cooperation with the Equities and Fixed income business areas. Ac- cordingly, a portion of operating income associ- ated with these services is allocated to those areas. Non-core revenues in 2000, which include in- come from the work-out of the Global Equity De- rivatives portfolio and the non-core loan portfo- lio (described below) fell 42% compared to 1999, to CHF 281 million. Operating expenses Corporate and Institutional Clients continues to carefully manage its cost base, with the pre-good- will cost/income ratio remaining well below 1999 levels at 70%. Personnel expenses increased 35% from 1999, to CHF 9,284 million, reflecting in- creased headcount and growth in performance- related compensation in line with the excellent re- sults. Personnel expenses include CHF 11 million of retention payments made to former PaineWeb- ber staff. in- General and administrative expenses creased 14% compared to 1999, as a result of in- creased expenditure on technology outsourcing, professional fees and the incremental costs of the PaineWebber capital markets business. Overall costs grew at a significantly slower rate than revenues, delivering continued strong pre-tax profit growth. Headcount Corporate and Institutional Clients headcount rose 20% during the year, to 15,262, mainly due to business growth in the Corporate Finance and Equities areas, including the impact of the inte- gration of 1,628 staff from the PaineWebber cap- ital markets businesses. Review of Business Group Performance UBS Warburg 1999 In October and November 1998, UBS’s Board of Directors mandated and undertook a review of UBS’s risk profile and risk management as well as UBS’s control processes and procedures. The re- view placed particular emphasis on the Fixed In- come business area, which had experienced loss- es on credit exposures in certain emerging market assets. Each of the business areas selected for re- view 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 busi- ness. Corporate and Institutional Clients used the review to define its core and non-core business areas, and decided to wind down over time the identified non-core businesses. The businesses identified as non-core in late 1998 were – Lease Finance; – Commodities Trading (energy, base metals, electricity); – Non-structured Asset-Backed Finance; – Distressed Debt Trading; – Global Trade Finance, with the exception of the Swiss Corporate business; – Conduit Finance; – Non-core loans – loans and commitments that are not part of UBS’s tradeable asset portfolio, that are not issued in conjunction with UBS’s Leveraged Finance business or that are credit exposures UBS wishes to reduce; and – Project Finance. The identified non-core businesses are being wound down over time and will be disposed of as appropriate. While UBS considers all of its non- core businesses to be held for sale (including those listed above), none of these businesses con- stitutes a segment to be treated as a discontinued operation, as defined by U.S. GAAP. Businesses designated as non-core businesses remain consol- idated 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 interna- tional Global Trade Finance business was sold during the first quarter of 1999 and its Conduit Finance business was sold during the third quar- ter of 1999. UBS’s non-core loan portfolio de- creased approximately CHF 65 billion, or 61%, from approximately CHF 106 billion as of 31 December 1998 to CHF 41 billion as of 31 De- cember 1999. Negotiations for the sale of the Project Fi- nance portfolio and residual Global Trade Fi- nance positions were completed in December 1999 for proceeds approximating their carrying values. As a result, no material losses were real- ized. Certain aspects of UBS’s Global Equities De- rivatives 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 segre- gate this activity from the rest of its Equities busi- ness. UBS accrued CHF 154 million as a restruc- turing reserve for this portion of the portfolio. Operating income In 1999, Corporate and Institutional Clients’ op- erating income before credit loss expense from core businesses amounted to CHF 12,047 million and its operating income before credit loss ex- pense from non-core businesses was CHF 482 million. Operating income from Equities increased CHF 2,471 million, or 76%, from CHF 3,253 million in 1998 to CHF 5,724 million in 1999. This increase was primarily due to continued strong growth throughout 1999 compared to weaker results and losses in 1998 that did not recur. Equities performed well during the six months ended 30 June 1998, but experienced a more difficult trading environment in the second half of 1998 as a result of higher volatility levels in equity markets. In 1999, Equities performed strongly in all major markets. Continuing strong secondary cash and derivatives business with in- stitutional and corporate clients contributed sig- nificantly to the positive results. Operating income from Fixed income in- creased CHF 2,731 million from CHF (267) mil- lion in 1998 to CHF 2,464 million in 1999. The improvement in Fixed income largely reflected particularly strong performance in swaps and op- tions and investment grade corporate debt prod- ucts during 1999. Strong client flows drove both investor and issuer activities, resulting in in- creased revenues. Weaker than expected results in Fixed income in 1998 were due primarily to sig- nificant losses in the Group’s emerging market portfolio, which were largely attributable to Cor- 43 porate and Institutional Clients and a write-down of CHF 793 million in the business unit’s Long Term Capital Management trading position. Operating income from Corporate Finance in- creased CHF 389 million, or 23%, from CHF 1,665 million in 1998 to CHF 2,054 million in 1999. Strong performance in mergers and acqui- sitions in 1999, resulting in higher advisory fees, and contributions from UBS’s Equity and Debt Capital Management Groups were the primary drivers of the increase. Operating income from Treasury Products de- creased CHF 546 million, or 23%, from CHF 2,351 million in 1998 to CHF 1,805 million in 1999. Foreign exchange trading, while continu- ing to be profitable, was adversely affected by di- minished volumes in key markets in 1999. The re- duced levels of activity resulted from the intro- duction of the euro and narrowing margins from increased competition in the global markets. Cor- porate 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- es identified above increased CHF 578 million, from CHF (96) million in 1998 to CHF 482 mil- lion in 1999. In 1998, Equities recognized losses of CHF 762 million from the Global Equity De- rivatives portfolio, as compared to 1999, during which this portfolio generated CHF 74 million in positive revenues. The losses recognized in 1998 were partially offset by CHF 498 million in rev- enues generated by Global Trade Finance. In 1999, the Global Trade Finance business was sold for a CHF 200 gain after generating approxi- mately CHF 160 million in revenues in 1999. Credit loss expense decreased CHF 170 mil- lion, or 34%, from CHF 500 million in 1998 to CHF 330 million in 1999. This reflected a de- crease in Expected Losses due primarily to the continued wind-down of the non-core loan port- folio and the sale of the international Global Trade Finance business in mid-1999. The section entitled “UBS Switzerland – Private and Corpo- rate Clients” includes a discussion of the impact of the transfer of UBS’s Swiss Global Trade Fi- nance business to Private and Corporate Clients. The non-core loan portfolio will continue to be wound-down. Operating expenses Personnel, general and administrative expenses increased CHF 2,474 million, or 36%, from CHF 6,816 million in 1998 to CHF 9,290 million in 1999. Despite a reduction in headcount of 1,100, or 8%, from 13,794 at 31 December 1998 to 12,694 at 31 December 1999, personnel expens- es increased CHF 2,528 million, or 58%, to CHF 6,861 in 1999, due primarily to performance- related compensation tied directly to the strong business unit results for the year. In addition, in 1998, CHF 1,007 million of accrued payments to personnel was charged against the restructuring reserve relating to the 1998 merger of Union Bank of Switzerland and Swiss Bank Corpora- tion. The shortfall in profits in 1998 was aggra- vated by losses associated with Long Term Capi- tal Management and the Global Equity Deriva- tives portfolio. After adjusting 1998 for the amount charged to the restructuring reserve, per- sonnel expenses in 1999 increased 28% against the comparative prior period. General and administrative expenses re- mained relatively flat from 1998 to 1999. Depreciation and amortization increased CHF 71 million, or 10%, from CHF 692 million in 1998 to CHF 763 million in 1999, primarily re- flecting accelerated amortization of the goodwill on a Latin-American subsidiary. Review of Business Group Performance UBS Warburg 44 Review of Business Group Performance UBS Warburg UBS Capital Business Unit Reporting CHF million, except where indicated For the year ended Income Credit loss expense Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax KPI’s 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 368 0 368 142 49 2 2 195 173 315 0 315 105 46 2 5 158 157 585 0 585 121 35 0 1 157 428 17 17 35 7 0 (60) 23 10 Value creation (CHF billion) 0.6 0.6 0.8 As of 31.12.00 31.12.99 31.12.98 Portfolio book value (CHF billion) 5.5 3.0 1.8 Additional information Regulatory equity used (avg) Headcount (full time equivalents) 600 129 340 116 250 122 % change from 31.12.99 83 76 11 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2000 There were no significant financial events that af- fected this business unit in 1999 or 2000. Key performance indicators The book value of UBS Capital’s private equity in- vestments has grown from CHF 3.0 billion at the end of 1999 to CHF 5.5 billion at 31 December 2000. New investments of CHF 2.1 billion were made during the full year, including new share- holdings across a diverse range of sectors. In ad- dition, CHF 0.8 billion of investments made by PaineWebber were added to UBS Capital’s private equity portfolio in December 2000. The portfolio value was reduced by certain write-downs in in- vestments in second and fourth quarters 2000. UBS Capital accounts for its private equity in- vestments at cost less permanent impairments, showing only realized gains or losses in the prof- it and loss statement. The portfolio review and valuation at 31 December 2000 resulted in an ap- proximate current fair value of CHF 6.9 billion, compared to CHF 4.2 billion at 31 December 1999. This equates to unrealized gains of ap- proximately CHF 1.3 billion, compared to CHF 1.2 billion at year-end 1999. The value creation during the year 2000, including realized gains since 1 January 2000, and the increase in the portfolio’s unrealized gains, is approximately CHF 0.6 billion. Results In 2000, net profit was CHF 173 million, up CHF 16 million or 10% from CHF 157 million in 1999. 45 Operating income Operating income increased 17% to CHF 368 million in 2000, from CHF 315 million in 1999. This reflects the realized gains from sales of in- vestments in the year, partially offset by write- downs of the value of several under-performing companies in different sectors of the portfolio. Operating expenses Personnel, general and administrative expenses were CHF 191 million in 2000, an increase from the previous year of CHF 40 million, or 26%, driv- en mainly by bonus expenses. Bonuses are accrued when an investment is successfully exited, so per- sonnel expenses move in line with divestments. 1999 Operating income Operating income decreased CHF 270 million, or 46%, from CHF 585 million in 1998 to CHF 315 million in 1999. This reflects a decrease in realized gains resulting from a reduced number of sales of investments in 1999 as compared to 1998. Operating expenses Personnel, general and administrative expenses decreased slightly by CHF 5 million, or 3%, from CHF 156 million in 1998 to CHF 151 million 1999. These expenses remained stable despite the business unit’s expansion into new regions and sectors, the recruitment of new professionals, the high level of investment activity during 1999 and the associated investment costs. As part of the re- structuring related to the 1998 merger, one team from UBS Capital moved to Corporate and Insti- tutional Clients unit effective 1 January 1999. This resulted in a lower headcount during most of 1999 when compared to 1998, and therefore personnel costs decreased 13% from CHF 121 million in 1998 to CHF 105 million in 1999. General and administrative expenses increased CHF 11 million, or 31%, to CHF 46 million in 1999 mainly due to deal-related expenses. UBS Capital made approximately CHF 1.4 bil- lion of new investments and add-ons during 1999. Review of Business Group Performance UBS Warburg 46 Review of Business Group Performance UBS Warburg 31.12.00 1 1,225 0 1,225 955 258 30 1 1,244 (19) 794 8.3 86 102 101 92 430 8,871 31.12.00 2,450 21,490 US Private Clients Business Unit Reporting CHF million, except where indicated For the year ended Income Credit loss expense Total operating income Personnel expenses 2 General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax KPI’s Client assets (CHF billion) 3 Net new money (CHF billion) 4 Gross AuM margin (bps) Cost / income ratio (%) 5 Cost / income ratio before goodwill (%) 5, 6 Cost / income ratio before goodwill and retention payments (%) 5, 6 Recurring fees 7 Financial advisors (full time equivalents) Additional information As of Regulatory equity used (avg) Headcount (full time equivalents) 1 The US Private Clients results cover the period from the date of acquisition of PaineWebber, 3 November 2000. 2 Includes CHF 117 million of the CHF 128 million retention payments in respect of the PaineWebber acquisition. 3 Corresponds to UBS’s current definition of Assets under management. Client assets at 3 November 2000 were CHF 890 billion. 4 Excludes interest and dividend income. 5 Operating expenses / operating income before credit loss expense. 6 The amortization of goodwill and other intangible assets is excluded from this calculation. 7 Asset based and advisory revenues including fees from mutual funds, wrap fee products, insurance products and institutional asset management products. The merger between UBS and PaineWebber was completed on 3 November 2000 and was ac- counted for using purchase accounting. Accord- ingly, the results shown for US Private Clients are for the period from that date until 31 December 2000. Results for prior periods are not shown. The business unit represents the former PaineWebber businesses, excluding the Paine- Webber capital markets business transferred to the Corporate and Institutional Clients business unit. Although the US businesses of the former UBS Warburg Private Clients business unit were integrated into PaineWebber’s management structure soon after completion of the merger, their results are still included in the International Private Clients unit for 2000. 2000 There were no significant financial events that af- fected this business unit in 2000. Key performance indicators At the end of the fourth quarter 2000, US Private Clients had CHF 794 billion of client assets. This represents a fall of CHF 96 billion from the level at completion of the merger on 3 November 2000, reflecting the decline in equity markets, particularly in the US, and the effect of the fall of the US dollar against the Swiss franc. PaineWebber’s asset gathering continues suc- cessfully, with net new money flows averaging 47 CHF 202.3 million (USD 119.0 million) per day in November and December 2000, comparing very favorably to the average rate for the third quarter of CHF 172.5 million (USD 103.3 mil- lion) per day, despite the effects of the holiday season. Results US Private Clients recorded a net loss for No- vember and December 2000 of CHF 19 million. Adjusting for the effect of retention payments of CHF 117 million, this represents a pre-tax oper- ating profit of CHF 98 million for the two months. PaineWebber’s strong asset gathering perform- ance during November and December was in contrast to the seasonal slow down in transac- tional business, compounded this year by the delay in the results of the US Presidential election, which had a negative effect on client confidence and investment activity. As a result, net profit per month was about 39% lower than the rate in PaineWebber’s individual client segment in third quarter 2000, after adjusting for the benefit of PaineWebber’s invested equity. (Within UBS’s management accounts, the net benefit of invested equity is reflected in Corporate Center.) Operating income Total revenues for November and December were CHF 1,225 million, including approximate- ly CHF 430 million of recurring fee revenue. This represents an overall decline of 2% from the run- rate recorded in PaineWebber’s individual client business in the third quarter, reflecting the effects of the seasonal slow-down. Operating expenses Total expenses for November and December were CHF 1,244 million. Personnel expenses were CHF 955 million, including CHF 117 mil- lion of retention payments for PaineWebber staff. Excluding these payments, overall expenses rose slightly from prior levels, reflecting investments in the development of wrap fee products and the new Corporate Employee Financial Services busi- ness. Headcount Total headcount at 31December 2000 was 21,490, including 8,871 financial advisors, up from 8,688 financial advisors at 30 September 2000. Review of Business Group Performance UBS Warburg 48 Review of Business Group Performance UBS Warburg International Private Clients Business Unit Reporting CHF million, except where indicated For the year ended Income Credit loss expense 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax KPI’s Assets under management (CHF billion) Net new money (CHF billion) 3 Gross AuM margin (bps) Additional information As of Regulatory equity used (avg) Headcount (full time equivalents) 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 286 (4) 282 385 188 30 7 610 (328) 33 10.4 75 197 (3 ) 194 294 187 25 15 521 (327 ) 36 3.6 67 200 (10 ) 190 187 107 14 15 323 (133 ) 27 45 33 45 31 1 20 (53) 17 0 (8) 12 31.12.00 31.12.99 31.12.98 % change from 31.12.99 350 1,154 289 1,386 229 722 21 (17) 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Ac- counting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 In management accounts, statistically derived adjusted expected loss rather than net IAS credit loss (expense) / recovery is reported in the business units (see Note 3a). 3 Excludes interest and dividend income. 2000 There were no significant financial events that af- fected this business unit in 1999 or 2000. Key performance indicators Assets under management decreased from CHF 36 billion at the end of 1999 to CHF 33 billion at 31 December 2000, reflecting poor performance in world equity markets during the year, particu- larly in the technology sector. Net new money of CHF 10.4 billion and the increase in the gross margin from 67 bps in 1999 to 75 bps in 2000 reflect the successful efforts to build International Private Clients client fran- chise. Results Operating income Operating income increased CHF 88 million, or 45%, from CHF 194 million in 1999 to CHF 282 million in 2000. Revenues have increased as aver- age assets under management have grown, a wider range of products and services has been of- fered to clients and new staff and offices have built their client franchises. International Private Clients’ businesses are generally in a relatively early stage of development and its client relation- ships will continue to build towards their full rev- enue potential. Operating expenses Operating expenses increased 17%, or CHF 89 million, from CHF 521 million in 1999 to CHF 610 million in 2000, mainly due to the expansion of offices early in 2000. This total included restructuring costs of CHF 93 million related to integration of the International Private Clients businesses into UBS Warburg in February 2000. Excluding this restructuring charge, expenses fell 1% compared to 1999. 49 Headcount Headcount fell from 1,386 to 1,154, as a result of the restructuring undertaken in 2000, match- ing staffing levels more exactly to market oppor- tunities. 1999 Operating income Results for the year ended 31 December 1998 were driven by a business that consisted primari- ly of the private banking operations of Schroder Munchmeyer Hengst, a German private bank ac- quired by the former Union Bank of Switzerland in August 1997, domestic private banking activi- ties in Australia, and limited onshore private banking activities conducted in the United States and Italy, established by the former Union Bank of Switzerland. Operating income increased CHF 4 million, or 2%, from CHF 190 million in 1998 to CHF 194 million in 1999. Assets under management increased during 1999 by CHF 9 billion, or 33%. Operating expenses Operating expenses increased 61%, or CHF 198 million, to CHF 521 million in 1999 from CHF 323 million in 1998, as a result of expansion in front-line and support staff, office locations, and infrastructure related investments. Personnel, general and administrative expens- es 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 Decem- ber 1999. General and administrative expenses increased CHF 80 million, or 75%, from 1998 to CHF 187 million in 1999, due to increases in in- formation technology, property and other infra- structure costs to support the new offices and in- creased headcount. Review of Business Group Performance UBS Warburg 50 Review of Business Group Performance UBS Warburg e-services Business Unit Reporting CHF million, except where indicated For the year ended Income Credit loss expense Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business unit performance before tax 31.12.00 31.12.99 % change from 31.12.99 (1) 0 (1) 150 134 1 35 1 1 320 (321) 0 0 0 18 18 3 0 39 (39 ) 733 644 721 (723) Additional information As of Headcount (full time equivalents) 31.12.00 410 31.12.99 70 % change from 31.12.99 486 1 The year ended 31 December 2000 General and administrative expenses and Depreciation were adjusted for Significant Financial Events in re- spect of the PaineWebber integration by CHF 80 million and CHF 72 million, respectively. 2000 UBS Group established the e-services project in the third quarter of 1999. Following the merger with PaineWebber, the e-services strategy was re- assessed and focus shifted to more upscale clients than those originally targeted. The multi-currency and multi-entity core bank- ing systems developed by the e-services initiative will be integrated into the core of UBS’s new wealth management strategy in Europe. Those parts of the infrastructure that were relevant to the mass affluent market, such as tele- phone call-centers, have been closed and the investment in them has been written off. This has resulted in a charge of CHF 80 million to Gener- al and administrative expenses. In addition, capitalized software costs relating to parts of the systems which will not now be used have been written off, resulting in a CHF 72 million charge to depreciation. These two amounts form part of the PaineWebber integration costs, treated as a significant financial event, and as a result these costs do not appear in the adjusted business unit results above. Operating expenses Operating expenses were CHF 320 million in 2000, mainly related to infrastructure-related in- vestments in core technologies. Personnel ex- penses were CHF 150 million in 2000 and CHF 18 million in 1999. General and administrative expenses were CHF 134 million in 2000 and CHF 18 million in 1999. These increases were primarily the result of the establishment of operations infrastructure, the installation and testing of systems platforms, and the testing of marketing concepts. As explained above, the restructuring costs as- sociated with the end of the e-services initiative were treated as a significant financial event and are therefore not included in these figures. 51 Review of Business Group Performance Corporate Center Corporate Center Business Group Reporting CHF million, except where indicated For the year ended Income Credit loss recovery 3 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax 31.12.00 31.12.99 2 31.12.98 2 % change from 31.12.99 358 1,161 1,519 522 431 320 44 1,317 202 2,010 448 2,458 92 839 366 50 1,347 1,111 191 745 936 212 1,656 128 87 2,083 (1,147 ) (82) 159 (38) 467 (49) (13) (12) (2) (82 ) Additional information As of Regulatory equity used (avg) Headcount (full time equivalents) 31.12.00 31.12.99 31.12.98 % change from 31.12.99 8,450 986 7,850 862 6,350 921 8 14 Business Group Reporting Adjusted for Significant Financial Events 1 CHF million, except where indicated For the year ended 31.12.00 31.12.99 2 31.12.98 2 % change from 31.12.99 Income Credit loss recovery 3 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses Business Group performance before tax 358 1,161 1,519 490 281 320 44 1,135 384 372 448 820 548 385 366 50 1,349 (529 ) 191 745 936 212 1,656 128 87 2,083 (1,147 ) (4) 159 85 (11) (27) (13) (12) (16) 1 Figures have been adjusted for the significant financial events. Year ended 31 December 1999 income has been adjusted for the CHF 38 million income from the Long Term Capital Management (LTCM) fund, CHF 1,490 million for the sale of our 25% stake in Swiss Life / Rentenanstalt and CHF 110 million for the sale of Julius Baer registered shares. Year ended 31 December 2000 Personnel expenses were adjusted for the PaineWebber integration costs of CHF 32 million. Year ended 31 December 2000 General and administrative expenses have been adjusted for the net additional CHF 150 million provision relating to the US Global Settlement. Year ended 31 December 1999 Personnel expenses have been adjusted for CHF 456 million for the Pension Fund Accounting Credit. Year ended 31 December 1999 General and administrative expenses have been adjusted for CHF 300 million for the UBS / SBC Restructuring Provision and CHF 154 million for the increase in the provi- 2 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising sion for the US Global Settlement. from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 3 In management accounts, statistically derived adjusted expected loss rather than net IAS credit loss (expense) / recovery is reported in the business units (see Note 3a). 52 Review of Business Group Performance Corporate Center 2000 Significant financial events booked in Corporate Center in 1999 and 2000 were: – Personnel expenses of CHF 32 million relating to the integration of PaineWebber into UBS in 2000. – Operating income of CHF 1,490 million from the sale of UBS’s 25% stake in Swiss Life / Rentenanstalt, CHF 110 million from the sale of Julius Baer registered shares, and CHF 38 million from UBS’s residual holding in Long Term Capital Management L.P., all in 1999. – A credit to Personnel expenses in 1999 of CHF 456 million in connection with excess pension fund employer pre-payments. – Costs of CHF 154 million in 1999 and CHF 150 million in 2000 in General and adminis- trative expenses in connection with the US Global Settlement of World War II related claims. – Costs of CHF 300 million in General and ad- ministrative expenses in respect of an addi- tional restructuring charge relating to the 1998 merger between UBS and SBC. Results Operating income Adjusted for significant financial events, operat- ing income before credit loss expense decreased CHF 14 million, or 4%, from CHF 372 million in 1999 to CHF 358 million in 2000. Gains and loss- es attributable to Corporate Center arise from funding, capital and balance sheet management, the management of corporate real estate and the management of foreign currency activities. Credit loss expense in Corporate Center rec- onciles the difference between management ac- counting and financial accounting, that is be- tween the adjusted statistically calculated expect- ed losses charged to the business units and the ac- tual credit loss expense recognized in the Group financial accounts. The Swiss economy has been strong in 2000, leading to credit loss expenses below the statistically calculated expected level, and to a net write back of credit loss provisions of CHF 695 million, resulting in a credit of CHF 130 million at the Group level. Corporate Cen- ter’s credit loss expense of CHF 1,161 million re- flects the balancing item between this amount and the CHF 1,031 million Expected Loss charged to the business units. Operating expenses Operating expenses decreased from CHF 1,349 million to CHF 1,135 million. Headcount Headcount in Corporate Center increased 124 during the year, reflecting the addition of staff from PaineWebber, and expansion in our Corpo- rate Language Services subsidiary. 1999 Operating income Operating income before credit loss expense in- creased CHF 1,819 million, or 952%, from CHF 191 million in 1998 to CHF 2,010 million in 1999, primarily due to the following: – Gains on the divestments of UBS’s 25% inter- est in Swiss Life / Rentenanstalt of CHF 1,490 million and of UBS’s interest in Julius Baer reg- istered shares of CHF 110 million included in 1999. – The negative impact on 1998 operating in- come due to the loss of CHF 367 million from Long Term Capital Management. In addition, revenues attributable to Corpo- rate Center arise from funding, capital and bal- ance sheet management, and the management of foreign currency earnings activities undertaken by Group Treasury. – Approximately CHF 380 million due to the consolidation of Klinik Hirslanden AG for the first time in 1999. Operating expenses Personnel, general and administrative expenses decreased CHF 937 million, or 50%, from CHF 53 1,868 million in 1998 to CHF 931 million in 1999. Personnel costs decreased 57% to CHF 92 million in 1999 from CHF 212 million in 1998, primarily as a result of the recognition in 1999 of pre-paid employer pension contributions of CHF 456 million. This represents the difference between previously recorded and actuarially determined pension expenses and was recognized in 1999 after the resolution of certain legal and regulatory is- sues. Excluding the recognition of this benefit, per- sonnel expenses increased from 1998 to 1999 de- spite a slight decrease in headcount from 921 in 1998 to 862 in 1999. This increase year-on-year is largely attributable to the consolidation of Klinik Hirslanden AG for the first time in 1999. General and administrative expenses de- creased CHF 817 million, or 49%, to CHF 839 million in 1999 from CHF 1,656 million in 1998, primarily as a result of a charge of CHF 842 mil- lion for the US global settlement of World War II- related claims in 1998. In addition, the following items were included in general and administrative expenses for 1999: – An additional charge of CHF 154 million re- lated to the settlement of World War II-related claims in the United States. – An additional pre-tax restructuring charge of CHF 300 million in respect of the 1998 merg- er. – Expenses of Klinik Hirslanden AG as a result of the consolidation of this entity for the first time in 1999. In addition, total operating expenses in Cor- porate Center were reduced from 1998 to 1999 mainly due to a further refinement of service level agreements with the Business Groups. Depreciation and amortization increased CHF 201 million, or 93%, from CHF 215 million in 1998 to CHF 416 million in 1999, principally as a result of a reclassification of certain items which appeared in General and administrative expenses in 1998. Review of Business Group Performance Corporate Center 54 UBS Group Financial Statements UBS Group Financial Statements Table of Contents Financial Statements Table of Contents Financial Statements UBS Group Income Statement UBS Group Balance Sheet UBS Group Statement of Changes in Equity UBS Group Statement of Cash Flows Notes to the Financial Statements 58 58 59 60 61 63 1 2 3a 3b Summary of Significant Accounting Policies 63 69 Acquisition of Paine Webber Group, Inc. Segment Reporting by Business Group 70 Segment Reporting by Geographic Location 73 Income Statement 4 5 6 7 Net Interest Income Net Fee and Commission Income Net Trading Income Net Gains from Disposal of Associates and Subsidiaries Other Income Operating Expenses Earnings per Share 8 9 10 Balance Sheet: Assets 11 Money Market Paper 12a Due from Banks and Loans to Customers 12b Allowance and Provision for Credit Losses 12c Impaired Loans 12d Non-Performing Loans 13 Securities Borrowing, Securities Lending, Repurchase, Reverse Repurchase and Other Collateralized Transactions Trading Portfolio Financial Investments Investments in Associates Property and Equipment Goodwill and other Intangible Assets Other Assets 14 15 16 17 18 19 56 74 74 74 75 75 76 76 77 78 78 78 79 79 80 81 82 83 83 84 84 85 UBS Group Financial Statements Table of Contents 86 Balance Sheet: Liabilities Due to Banks and Customers 86 20 Long-Term Debt 86 21 93 Other Liabilities 22 Provisions, including Restructuring Provision 93 23 95 24 Income Taxes 96 25 Minority Interests 97 26 Derivative Instruments Off-Balance Sheet and other Information 27 28 29 30 31 32 Pledged Assets Fiduciary Transactions Commitments and Contingent Liabilities Operating Lease Commitments Litigation Financial Instruments Risk Position a) b) Credit Risk Interest Rate Risk (b)(i) On-balance sheet assets (b)(ii) Off-balance sheet financial 102 102 102 103 104 104 105 105 107 107 instruments 108 (b)(iii) Credit risk mitigation techniques 108 109 110 111 112 c) Currency Risk d) Liquidity Risk e) Capital Adequacy Fair Value of Financial Instruments Retirement Benefit Plans and other Employee Benefits Equity Participation Plans Related Parties Post-Balance Sheet Events Significant Subsidiaries and Associates Significant Currency Translation Rates Swiss Banking Law Requirements Reconciliation to U.S. GAAP Additional U.S. GAAP Disclosures 33 34 35 36 37 38 39 40 41 42 Selected Financial Data Report of the Group Auditors 115 119 122 122 123 126 126 128 140 142 143 57 UBS Group Financial Statements Financial Statements Financial Statements UBS Group Income Statement CHF million, except where indicated For the year ended Note 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 Operating income Interest income Interest expense Net interest income Credit loss recovery / (expense) Net interest income after credit loss recovery / (expense) Net fee and commission income Net trading income Net gains from disposal of associates and subsidiaries Other income Total operating income Operating expenses Personnel General and administrative Depreciation and amortization Total operating expenses Operating profit before tax and minority interests Tax expense Net profit before minority interests Minority interests Net profit Basic earnings per share (CHF) 3 Basic earnings per share before goodwill (CHF) 2, 3 Diluted earnings per share (CHF) 3 Diluted earnings per share before goodwill (CHF) 2, 3 4 4 5 6 7 8 9 9 9 24 25 10 10 10 10 51,745 (43,615) 8,130 130 8,260 16,703 9,953 83 1,403 36,402 17,163 6,765 2,275 26,203 10,199 2,320 7,879 (87) 7,792 19.33 20.99 19.04 20.67 35,604 (29,695) 5,909 (956) 4,953 12,607 7,719 1,821 1,325 28,425 12,577 6,098 1,857 20,532 7,893 1,686 6,207 (54) 6,153 15.20 16.04 15.07 15.90 37,442 (32,424 ) 5,018 (951 ) 4,067 12,626 3,313 1,119 1,122 22,247 9,816 6,735 1,825 18,376 3,871 904 2,967 5 2,972 7.33 8.18 7.20 8.03 45 47 38 67 32 29 (95) 6 28 36 11 23 28 29 38 27 61 27 27 31 26 30 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 The amortization of goodwill and other intangible assets is excluded from this calculation. 3 1999 and 1998 share figures are restated for the two-for-one share split, effective 8 May 2000. 58 UBS Group Financial Statements Financial Statements UBS Group Balance Sheet CHF million Note 31.12.00 31.12.99 1 % change from 31.12.99 Assets Cash and balances with central banks Money market paper Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Positive replacement values Loans, net of allowance for credit losses Financial investments Accrued income and prepaid expenses Investments in associates Property and equipment Goodwill and other intangible assets Other assets Total assets Total subordinated assets Liabilities Money market paper issued Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Due to customers Accrued expenses and deferred income Long-term debt Other liabilities Total liabilities Minority interests Shareholders’ equity Share capital Share premium account Foreign currency translation Retained earnings Treasury shares Total shareholders’ equity Total liabilities, minority interests and shareholders’ equity Total subordinated liabilities 11 12 13 13 14 26 12 15 16 17 18 19 20 13 13 14 26 20 21 22, 23, 24 2,979 66,454 29,147 177,857 193,801 253,296 57,875 244,842 16,405 7,062 880 8,910 19,537 8,507 1,087,552 475 74,780 82,240 23,418 295,513 82,632 75,923 310,679 21,038 54,855 18,756 1,039,834 25 2,885 4,444 20,885 (687) 24,191 (4,000) 44,833 1,087,552 14,508 5,073 69,717 29,907 113,162 132,391 211,932 62,957 234,858 7,039 5,167 1,102 8,701 3,543 11,007 896,556 600 64,655 76,365 12,832 196,914 54,638 95,786 279,960 12,040 56,332 15,992 865,514 434 4,309 14,437 (442 ) 20,327 (8,023 ) 30,608 896,556 14,801 (41) (5) (3) 57 46 20 (8) 4 133 37 (20) 2 451 (23) 21 (21) 16 8 82 50 51 (21) 11 75 (3) 17 20 565 3 45 (55) 19 (50) 46 21 (2) 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 59 UBS Group Financial Statements Financial Statements UBS Group Statement of Changes in Equity CHF million For the year ended Issued and paid up share capital Balance at the beginning of the year Issue of share capital Balance at the end of the year 2 Share premium Balance at the beginning of the year Change in accounting policy Balance at the beginning of the year (restated) Premium on shares issued and warrants exercised 3 Net premium / (discount) on treasury share and own equity derivative activity 3 Share premium increase due to PaineWebber acquisition Borrow of own shares to be delivered 4 Settlement of own shares to be delivered Balance at the end of the year Foreign currency translation Balance at the beginning of the year Movements during the year Balance at the end of the year Retained earnings Balance at the beginning of the year Change in accounting policy Balance at the beginning of the year (restated) Net profit for the year Dividends paid 5, 6 Balance at the end of the year Treasury shares, at cost Balance at the beginning of the year Change in accounting policy Balance at the beginning of the year (restated) Acquisitions Disposals Balance at the end of the year 7 Total shareholders’ equity Reconciliation of shares issued 31.12.00 31.12.99 1 31.12.98 1 4,309 135 4,444 13,929 508 14,437 139 (391) 4,198 5,895 (3,393) 20,885 (442) (245) (687) 20,501 (174) 20,327 7,792 (3,928) 24,191 (3,462) (4,561) (8,023) (16,330) 20,353 (4,000) 44,833 4,300 9 4,309 13,740 (123 ) 13,617 45 4,296 4 4,300 13,260 1,406 14,666 111 775 (1,160) 14,437 13,617 (456 ) 14 (442 ) 16,293 (69 ) 16,224 6,153 (2,050 ) 20,327 (1,482 ) (3,409 ) (4,891 ) (6,595 ) 3,463 (8,023 ) 30,608 (111) (345) (456) 15,464 0 15,464 2,972 (2,212) 16,224 (1,982) (2,345) (4,327) (3,860) 3,296 (4,891) 28,794 Number of shares % change from As of 31.12.00 31.12.99 31.12.98 31.12.99 Balance at the beginning of the year Issue of share capital Issue of share capital due to PaineWebber 8 430,893,162 804,502 12,682,065 429,952,612 940,550 428,724,700 1,227,912 0 (14) Total ordinary shares issued, at the end of the year 444,379,729 430,893,162 429,952,612 3 In addition to treasury shares, a maximum of 42,571,341 shares (1,057,908 at 31 December 1999 and 1,998,458 at 31 December 1998) can be issued without further approval of the shareholders. The amount of shares consists of 26,000,000 authorized shares contingently issuable by the Board of Directors in reference to the PaineWebber share exchange until February 2001 at the latest. The option to issue authorized shares expired unused. Additionally 16,571,341 shares out of conditional capital had been set aside by the Extraordinary General Meeting on 7 September 2000. Those shares are issuable against the exercise of options from former PaineWebber employee option plans. The Board of Directors will propose to the shareholders at the Annual General Meeting on 26 April 2001 a reduction of the issuable amount to 5,643,205 shares which is the number of shares required to settle the outstanding PaineWebber employee options at year end. 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 Comprising 444,379,729 ordinary shares as of 31 December 2000, 430,893,162 ordi- nary shares as of 31 December 1999 and 429,952,612 ordinary shares as of 31 De- cember 1998, at CHF 10 each, fully paid. 3 In prior periods, a portion of income on own equity derivative contract activity was included in Premium / (discount) on treas- ury shares issued and treasury share con- tract activity. This amount is now included in Net premium / (discount) on treasury share and own equity derivative activity for all periods. 4 In January 2001, all remaining shares borrowed to complete the acquisition of PaineWebber were settled resulting in a net CHF 103 million decrease in share premium. 5 Includes interim dividend paid in respect of the period from 1 January 2000 to 30 September 2000 of CHF 1,764 million. 6 The Board of Directors is proposing to repay CHF 1.60 of the par value of each CHF 10.00 share, instead of distributing a final dividend in respect of the period from 1 October 2000 to 31 December 2000. 7 Comprising 18,421,783 ordinary shares as of 31 December 2000, 36,873,714 ordi- nary shares as of 31 December 1999 and 24,456,698 ordinary shares as of 31 December 1998. 8 Includes shares issued for employee option plans. 60 UBS Group Financial Statements Financial Statements 31.12.00 31.12.99 1 31.12.98 1 7,792 6,153 2,972 UBS Group Statement of Cash Flows CHF million For the year ended Cash flow from / (used in) operating activities Net profit Adjustments to reconcile to cash flow from / (used in) operating activities Non-cash items included in net profit and other adjustments: Depreciation and amortization Provision for credit losses Income from associates Deferred tax expense Net gain from investing activities Net increase / (decrease) in operating assets: Net due from / to banks Reverse repurchase agreements, cash collateral on securities borrowed Trading portfolio including net replacement values Loans due to / from customers Accrued income, prepaid expenses and other assets Net increase / (decrease) in operating liabilities: Repurchase agreements, cash collateral on securities lent Accrued expenses and other liabilities Income taxes paid Net cash flow from / (used in) operating activities Cash flow (used in) / from investing activities Investments in subsidiaries and associates Disposal of subsidiaries and associates Purchase of property and equipment Disposal of property and equipment Net (investment) / divestment in financial investments 2,275 (130) (58) 544 (730) (915) (81,054) 11,553 12,381 6,923 50,762 3,313 (959) 11,697 (9,729) 669 (1,640) 335 (8,770) Net cash flow (used in) / from investing activities (19,135) Cash flow (used in) / from financing activities Money market paper issued Net movements in treasury shares and treasury share contract activity Capital issuance Dividends paid Issuance of long-term debt Repayment of long-term debt Issuance of minority interests Repayment of minority interests Net cash flow (used in) / from financing activities Effects of exchange rate differences Net increase / (decrease) in cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year Cash and cash equivalents comprise: Cash and balances with central banks Money market paper Due from banks maturing in less than three months Total 10,125 (647) 15 (3,928) 14,884 (24,640) 2,683 (73) (1,581) 112 (8,907) 102,277 93,370 2,979 66,454 23,937 93,370 1,857 956 (211 ) 479 (2,282 ) (5,298 ) (12,656 ) (49,956 ) 17,222 2,545 52,958 (7,366 ) (1,063 ) 3,338 (1,720 ) 3,782 (2,820 ) 1,880 356 1,478 13,128 (2,312 ) 9 (2,050 ) 12,661 (7,112 ) (689 ) 13,635 148 18,599 83,678 102,277 5,073 69,717 27,487 102,277 1,825 951 (377) 491 (1,803) (65,172) 66,031 45,089 (5,626) 2,107 (49,145) 1,686 (733) (1,704) (1,563) 1,858 (1,813) 1,134 6,134 5,750 (4,073) (2,552) 4 (2,212) 5,566 (9,068) 0 (12,335) (386) (8,675) 92,353 83,678 3,267 18,390 62,021 83,678 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 61 UBS Group Financial Statements Financial Statements Additional Information on the Cash Flow Statement Cash and cash equivalents increased by CHF 1,311 million as a result of acquisitions and disposals of subsidiaries in 2000 (see Note 38). The principal assets and liabilities of PaineWebber upon consolidation are made up as follows: CHF billion Loans, net of allowances for credit losses Trading portfolio assets Cash collateral on securities borrowed / reverse repurchase agreements Cash collateral on securities lent / repurchase agreements Due to customers Long-term debt 03.11.00 20 42 45 58 26 9 For more information relating to the PaineWebber acquisition please see Note 2: Acquisition of Paine Webber Group, Inc. 62 UBS Group Financial Statements Notes to the Financial Statements Notes to the Financial Statements Note 1 Summary of Significant Accounting Policies a) Basis of accounting UBS AG and subsidiaries (the “Group”) pro- vides a broad range of financial services such as advisory services, underwriting, financing, mar- ket making, asset management, brokerage, and retail banking on a global level. The Group was formed on 29 June 1998 when Swiss Bank Corporation and Union Bank of Switzerland merged. The merger was accounted for using the pooling of interests method of accounting. The consolidated financial statements are stated in Swiss francs (CHF), the currency of the country in which UBS AG is incorporated. They are prepared in accordance with International Accounting Standards. In preparing the consoli- dated 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 sub- sidiaries and certain special purpose entities, pre- sented as a single economic entity. Subsidiaries and special purpose entities which are directly or indirectly controlled by the Group are consoli- dated. Subsidiaries acquired are consolidated from the date control passes. Subsidiaries where control is temporary because they are acquired and held with a view to their subsequent dispos- al are recorded as Financial investments. The effects of intra-group transactions are elim- inated in preparing the Group financial statements. Equity and net income attributable to minor- ity interests are shown separately in the Balance sheet and Income statement respectively. c) Trade date / settlement date accounting When the Group becomes party to a contract in its trading activities it recognizes from that date (trade date) any unrealized profits and losses arising from revaluing that contract to fair value. These unrealized profits and losses are recog- nized 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 considera- tion given or received. d) Foreign currency translation Foreign currency transactions are recorded at the rate of exchange on the date of the transaction. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are reported using the closing exchange rate. Exchange differences arising on the settlement of transactions at rates different from those at the date of the transaction, and unrealized foreign exchange differences on unsettled foreign cur- rency monetary assets and liabilities, are recog- nized in the income statement. Assets and liabilities of foreign entities are trans- lated 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. e) Business and geographical segments The Group is organized on a worldwide basis into three major Business Groups and the Corporate Center. This organizational structure is the basis upon which the Group reports its pri- mary segment information. Segment revenue, segment expenses and seg- ment performance include transfers between business segments and between geographical segments. Such transfers are accounted for at competitive prices in line with charges to unaffil- iated customers for similar services. f) Securities borrowing and lending Securities borrowed and lent that are collateral- ized by cash are included in the balance sheet at amounts equal to the collateral advanced or received. Income arising from the securities lending and borrowing business is recognized in the income statement on an accrual basis. g) Repurchase and reverse repurchase transactions The Group enters into purchases of securities under agreements to resell and sales of securities 63 UBS Group Financial Statements Notes to the Financial Statements 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 pol- icy for trading balances or financial investments as appropriate. The proceeds from sale of these securities are treated as liabilities and included in repurchase agreements. Securities purchased subject to commitments to resell at a future date are treated as loans col- lateralized by the security and are included in reverse repurchase agreements. Interest earned on reverse repurchase agree- ments and interest incurred on repurchase agreements is recognized as interest income and interest expense respectively over the life of each agreement. The Group offsets reverse repur- chase agreements and repurchase agreements with the same counterparty for transactions covered by legally enforceable master netting agreements when net or simultaneous settlement is intended. h) Trading portfolio The trading portfolio consists of debt and equity securities as well as of precious metals. The trad- ing portfolio is carried at fair value and marked to market daily. Short positions in securities are reported as Trading portfolio liabilities. Realized and unrealized gains and losses, net of related transaction expenses, are recognized as Net trad- ing income. i) Loans and allowance for credit losses Loans are initially recorded at cost. For loans originated by the Group, the cost is the amount lent to the borrower. For loans acquired from a third party the cost is the fair value at the time of acquisition. Interest income on performing loans, includ- ing amortization of premiums and discounts, is recognized on an accrual basis. Loans are stated at their principal amount net of any allowance for credit losses. The allowance and provisions for credit losses provides for probable losses in the credit portfolio, including loans and lending-related commitments. Such commitments include letters of credit, guaran- tees and commitments to extend credit. The carrying amounts of impaired loans are reduced to their estimated realizable value through allowances. Increases or decreases in allowances are charged or credited, respectively, to the income statement. A write-off is made when all or part of a loan is deemed uncollectible or in the case of debt forgiveness. Write-offs are charged against previously established allowances and reduce the principal amount of a loan. Recoveries are credited to the allowances for credit losses. A loan is considered impaired when it becomes probable that the bank will not be able to collect all amounts due according to the con- tractual terms. The reason for impairment includes both counterparty-specific and country- specific elements. The evaluation is based on the following principles: Counterparty-specific: Individual credit expo- sures 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 polit- ical 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 econo- my. Specific country allowances are estab- lished based on this assessment, and exclude exposures addressed in counterparty-specific allowances. All impaired loans are periodically reviewed and analyzed and the allowance for credit losses is reassessed on a loan-by-loan basis at least annually and if necessary adjusted for further impairments identified. If there are indications that there are significant probable losses in the portfolio that have not been specifically identi- fied, allowances would also be provided for on a portfolio basis. A loan is classified as non-performing when the contractual payments of principal and/or interest are in arrears for 90 days or more. After the 90-day period the recognition of interest income ceases and a charge is recognized for the unpaid and accrued interest receivable. 64 UBS Group Financial Statements Notes to the Financial Statements j) Financial investments Financial investments are debt and equity securi- ties held for the accretion of wealth through dis- tributions, 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 rec- ognized on an accrual basis and reported as Net interest income. Financial investments held for sale are carried at the lower of cost or market value. Reductions to market value and reversals of such reductions as well as gains and losses on disposal are includ- ed in Other income. Interest earned and dividends received are included in Net interest income. Private equity investments are carried at cost less write-downs for impairments in value. Reductions of the carrying amount and reversals of such reductions as well as gains and losses on disposal are included in Other income. k) Investments in associates Investments in associates in which the Group has a significant influence are accounted for by the equity method. Investments in which the Group has a temporary significant influence because they are acquired and held with a view to their subsequent disposal, are included in Financial investments (see private equity above). Investments in companies in which the Group does not hold a significant influence are record- ed at cost less value adjustments for other than temporary declines in value. l) Property and equipment Property and equipment includes bank occupied properties, investment properties, software, IT and communication and other machines and equipment. Property and equipment is carried at cost less accumulated depreciation and is period- ically reviewed for impairment. Property and equipment is depreciated on a straight-line basis over its estimated useful life as follows: Properties Not exceeding 50 years IT, software and communication Not exceeding 3 years Other machines and equipment Not exceeding 5 years m) Goodwill and other intangible assets Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of net identifiable assets of the acquired entity at the date of acquisition. Other intangible assets are comprised of sep- arately identifiable intangible items arising from acquisitions and certain purchased trademarks and similar items. Goodwill and other intangible assets are rec- ognized as assets and are amortized using the straight-line basis over their estimated useful economic life, not exceeding 20 years. At each balance sheet date, goodwill and other intangible assets are reviewed for indications of impair- ment. If such indications exist an analysis is per- formed to assess if a write-down is necessary. Goodwill and fair value adjustments arising on the acquisition of foreign subsidiaries are treated as local currency balances and are trans- lated into Swiss francs at the closing rate at sub- sequent balance sheet dates. Software develop- ment costs are capitalized when they meet cer- tain criteria relating to identifiability and future economic benefits can be reasonably estimated. Internally developed software is classified in Property and equipment in the balance sheet. n) Income taxes Income tax payable on profits, based on the applicable tax laws in each jurisdiction, is recog- nized as an expense in the period in which prof- its arise. The tax effects of income tax losses available for carry-forward are recognized as an asset when it is probable that future taxable profit will be available against which those losses can be utilized. Deferred tax liabilities are recognized for tem- porary differences between the carrying amounts of assets and liabilities in the Group balance sheet and their amounts as measured for tax pur- poses, which will result in taxable amounts in future periods. Deferred tax assets are recog- nized 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 dif- ferences can be utilized. Deferred tax assets and liabilities are meas- ured at the tax rates that are expected to apply to the period in which the asset will be realized or the liability will be settled based on enacted rates. 65 UBS Group Financial Statements Notes to the Financial Statements 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. Current and deferred taxes are recognized as tax income or expense except for deferred taxes recognized or disposed of on the acquisition or disposal of a subsidiary. o) Treasury shares UBS AG shares held by the Group are classified in the Shareholders’ equity as Treasury shares and accounted for at weighted average cost. The difference between the proceeds from sales of treasury shares and their cost (net of tax) is clas- sified as Share premium. Contracts that require physical settlement or net share settlement are classified as Share- holders’ equity and reported as Share premium. The difference between the proceeds from the settlement of the contract and its cost (net of tax) are reported as Share premium. p) Retirement benefits The Group sponsors a number of retirement benefit plans for its employees worldwide. These plans include both defined benefit and defined contribution plans and various other retirement benefits such as post-employment medical bene- fits. Group contributions to defined contribution plans are expensed when employees have ren- dered services in exchange for such contribu- tions, generally in the year of contribution. The Group uses the projected unit credit actu- arial method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost. The principal actuarial assumptions used by The Group recognizes a portion of its actuar- ial gains and losses as income or expenses if the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceeded the greater of: a) 10% of present value of the defined benefit obligation at that date (before deducting plan assets); and b) 10% of the fair value of any plan assets at that date. The unrecognized actuarial gains and losses exceeding the greater of the two values are rec- 66 ognized in the income statement over the expect- ed average remaining working lives of the employees participating in the plans. q) Derivative instruments Derivative instruments are carried at fair value. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate. The fair values of derivative instruments are shown in the balance sheet as Positive and Negative replacement val- ues. Realized and unrealized gains and losses are recognized in Net trading income. 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. Transactions The Group offsets positive and negative replacement values with the same counterparty for transactions covered by legally enforceable master netting agreements. r) Comparability Certain amounts have been reclassified from previous years to conform to the 2000 presen- tation. The prior year financial statements reflect the requirements of the following revised or new International Accounting Standards or changes in accounting policies which the Group imple- mented in 2000: IAS 10 (revised) Events after the balance sheet date IAS 37 IAS 38 Provisions, contingent liabilities and contingent assets Intangible assets Interpretation SIC 12 Consolidation – Interpretation SIC 24 special purpose entities Share capital – reacquired own equity instruments (treasury shares) Earnings per share – financial instruments and other contracts that may be settled in shares Offsetting of amounts related to certain contracts Interest and dividend income on trading assets The implementation of the above standards or accounting policies had no material impact for the Group except for the following: the actuary are set out in Note 34. Interpretation SIC 16 UBS Group Financial Statements Notes to the Financial Statements 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 intan- gible assets, if it is probable that the future eco- nomic benefits that are attributable to the assets will flow to the enterprise and the cost can be measured reliably. Capitalized costs relating to internally devel- oped software amounted to CHF 248 million as of 31 December 2000 and are reported within Note 17 Property and equipment as IT, software and communication, and operating expenses were reduced accordingly. Interpretation SIC 16, Share Capital – Reacquired Own Equity Instruments (Treasury Shares) In May 1999, the IASC issued Interpretation SIC 16, Share Capital – Reacquired Own Equity Instruments (Treasury Shares), which the Group adopted as of 1 January 2000. The interpreta- tion provides guidance for the recognition, pres- entation and disclosure of treasury shares. SIC 16 applies to own shares and derivatives on own shares held for trading and non-trading purpos- es. SIC 16 requires own shares and derivatives on own shares to be presented as Treasury shares and deducted from Shareholders’ equity. Gains and losses relating to the sale of own shares are recognized as a change in shareholders’ equity. As a result of the adoption of Interpretation SIC 16, financial information has been retroac- tively restated. Net trading income was reduced by CHF 196 million for the year ended 31 December 1999. Shareholders’ equity and Total assets were reduced by CHF 4,227 million as of 31 December 1999 and CHF 3,601 million as of 31 December 1998. Offsetting of amounts related to certain contracts In order to improve comparability with its com- petitors, the Group has decided to offset positive and negative replacement values and reverse repurchase agreements and repurchase agree- ments with the same counterparty for trans- actions covered by legally enforceable master netting agreements. This change became effec- tive as of 1 January 2000 and all prior periods represented have been restated. Positive and negative replacement values have been reduced by CHF 66,136 million for the year ended 31 De- cember 1999. Reverse repurchase and repur- chase agreements have been reduced by CHF 12,322 million for the year ended 31 Decem- ber 1999. Interest and dividend income and expense on trading assets In prior periods, interest and dividend income and expense on trading assets and liabilities were included in Net trading income. In order to improve comparability with its competitors, the Group has included interest and dividend income and expense on trading assets and liabil- ities in interest income and interest expense respectively. This change in presentation became effective 1 January 2000. The comparative financial information for 1999 has been restated to comply with this change. Interest income was increased by CHF 17,281 million for the year ended 31 December 1999. Interest expense was increased by CHF 17,728 million for the year ended 31 December 1999. In addition, Net trad- ing income was increased by CHF 447 million for the year ended 31 December 1999. In addition to the above, other changes have been made to prior years to conform to current presentation. s) Recent accounting standards not yet adopted IAS 12 IAS 39 IAS 40 Revised, income taxes Recognition and measurement of financial instruments Investment property The implementation of the above standards will have no material impact for the Group except for the following: IAS 39, Recognition and measurement of financial instruments In December 1998, the IASC issued IAS 39, Recognition and Measurement of Financial Instruments, which is required to be adopted for the Group’s financial statements as of 1 January 2001 on a prospective basis. The Standard provides comprehensive guidance on accounting for financial instruments. Financial 67 instruments include conventional financial assets and liabilities and derivatives. IAS 39 requires that all financial instruments should be recognized on the balance sheet. The Group will disclose its financial assets either as loans originated by the bank and not held for trading, financial assets held for trading, investments held to maturity or finan- cial assets available for sale. Loans originated by the bank are initially measured at cost, which is the fair value of the consideration given to originate the loan, includ- ing any transaction costs. Loans will subsequent- ly be measured at amortized cost minus any write-down for impairment or uncollectibility. Financial assets held for trading are valued at fair value and changes in the fair value are rec- ognized in trading income. Held-to-maturity investments are recognized at cost and interest is accrued using the effective interest method. Held-to-maturity investments are subject to review for impairment. Financial assets available for sale are recog- nized at fair value on the balance sheet. Changes in fair value are booked to equity and disclosed in the statement of changes in equity until the finan- cial asset is sold, collected or otherwise disposed of, or until the financial asset is determined to be impaired, at which time the cumulative profit or loss previously recognized in equity should be included in net profit or loss for the period. In a qualifying hedge of exposures to changes in fair value, the change in fair value of the hedg- ing instrument is recognized as an adjustment to its carrying amount and in net profit and loss. The change in fair value of the hedged item attributable to the hedged risks adjusts the car- rying value of the hedged item and is also recog- nized in net profit or loss. In a qualifying cash flow hedge, the effective portion of the gain or loss on the hedging instrument is recognized as an adjustment to its carrying amount and in equity. The ineffective portion of the gain or loss on the hedging trans- action also adjusts the hedging instrument’s car- rying amount, but is reported in net profit or loss. If the forecasted transaction is no longer expected to occur, the cumulative gain or loss on the hedging instrument is recognized in net prof- it or loss. A qualifying hedge of a net investment in a foreign entity is accounted for similar to a cash flow hedge. The gain or loss on the hedging instrument relating to the effective portion of the hedge is classified in the same manner as the for- eign currency translation gain or loss. The adoption of IAS 39 is expected to have a material impact on certain financial assets and liabilities including long-term debt. An opening adjustment to Other comprehensive income will also be required, representing unrealized gains and losses on financial assets recorded as avail- able for sale and derivatives designated as cash flow hedges. IAS 40 Investment property In April 2000, the IASC issued IAS 40 Investment property, which is required to be adopted for the Group’s financial statements as of 1 January 2001. The Standard prescribes the accounting treatment and disclosure require- ments for investment property. Investment prop- erties are measured at cost less accumulated depreciation and any accumulated impairment losses. As of 1 January 2001 investment proper- ties amounted to CHF 1,280 million. UBS Group Financial Statements Notes to the Financial Statements 68 UBS Group Financial Statements Notes to the Financial Statements Note 2 Acquisition of Paine Webber Group, Inc. On 3 November 2000, UBS completed its acquisition of 100% of the outstanding common stock of the Paine Webber Group, Inc., a full-service broker-dealer and one of the largest securities and com- modities firms in the United States servicing both individual and institutional clients. The transac- tion was accounted for using the purchase method of accounting, making PaineWebber a wholly owned subsidiary of UBS. Results of operations of PaineWebber are included in the consolidated results beginning on the date of acquisition. Under International Accounting Standards, the valua- tion of shares and options issued is measured as of the date the acquisition was completed, 3 November 2000. Purchase consideration of CHF 22.0 billion (USD 12.5 billion) consists of the following: Value of shares issued (40,580,570 shares issued) Value of options issued (options on 6,325,270 shares issued) Cash consideration Direct costs of the acquisition Total purchase price Fair value of net assets acquired Total intangible assets 1 Intangible assets other than goodwill Goodwill arising from acquisition Purchased goodwill Total goodwill at 3 November 2000 Effect of translation adjustments Amortization from 3 November 2000 Balance of goodwill at 31 December 2000 1 Excluding purchased goodwill. CHF million 10,246 992 10,607 115 21,960 (5,630) 16,330 (4,695) 11,635 1,202 12,837 (898) (103) 11,836 USD million 5,817 563 6,021 65 12,466 (3,196) 9,270 (2,665) 6,605 682 7,287 (61) 7,226 The resulting goodwill and intangible assets will be amortized using the straight-line method over their estimated useful lives of 20 years. In addition, UBS has entered into employee retention agreements that provide for payments to key PaineWebber employees which are subject to the employee’s continued employment and other restrictions. The estimated cost to the Group for the agreements is approximately CHF 1.5 billion (USD 875 million) over a four-year period. 69 UBS Group Financial Statements Notes to the Financial Statements Note 3a Segment Reporting by Business Group UBS is organized into three Business Groups: UBS Switzerland, UBS Warburg and UBS Asset Management, and our Corporate Center. UBS Switzerland UBS Switzerland encompasses two business units, Private Banking and Private and Corporate Clients. The Private Banking business unit offers com- prehensive wealth management services for pri- vate clients globally, who bank in Switzerland and other financial centers worldwide. Within Switzerland, the Private and Cor- porate Clients business unit provides a complete set of banking and securities services for individ- ual and corporate clients, focused foremost on customer service excellence, profitability and growth via multichannel distribution. The two business units share technological and physical infrastructure, and have joint departments supporting major functions such as e-commerce, financial planning and wealth management, and investment policy and strat- egy. UBS Asset Management UBS Asset Management is organized into two business units, Institutional Asset Management and Investment Funds / GAM. Institutional Asset Management offers a diverse range of institutional investment man- agement capabilities, in every major asset class, from the traditional to the alternative. Investment Funds provides retail investment fund products, marketed principally through UBS Switzerland. Investment management for these funds is generally undertaken by Institu- tional Asset Management, with the Investment Funds unit concentrating on product develop- ment and distribution. Global Asset Management (GAM), acquired in late 1999, is a diversified asset management group, offering a wide range of investment styles. Dedicated to giving its clients access to the world’s best investment talent, GAM’s funds are managed by its own staff and by about 80 care- fully selected external managers. GAM products are marketed both independently and through Private Banking. UBS Warburg UBS Warburg is a client-driven securities, invest- ment banking and wealth management firm. It is made up of five business units. The Corporate and Institutional Clients busi- ness unit is one of the leading global investment banking and securities firms. For both its own cor- porate and institutional clients and the other parts of the UBS Group, UBS Warburg provides product innovation, top-quality research and advice, and complete access to the world’s capital markets. UBS Capital is the private equity business unit of UBS Warburg, investing UBS and third-party funds primarily in unlisted companies. US Private Clients, operating under the brand of UBS PaineWebber, provides a full range of wealth management services. The International Private Clients business unit provides private banking products and services for high net worth clients outside the US and Switzerland who bank in their country of resi- dence. During 2001 the European part of this business will become part of UBS Switzerland’s Private Banking business unit and the Asia-Pacific part will be merged with US Private Clients. call The e-services business unit was created in fourth quarter 1999. During 2000, e-services progressed successfully towards its goal of creat- ing a new business providing wealth manage- ment for affluent European clients, through inter- net, centers and investment centers. Following the merger with PaineWebber, UBS’s European wealth management strategy has evolved. As a result, key components of the e- services business unit’s infrastructure will become part of Private Banking’s new European wealth management strategy and e-services will no longer be reported separately. Corporate Center The Corporate Center encompasses Group level functions which cannot be devolved to the oper- ating divisions, and ensures that the Business Groups operate as a coherent and effective whole with a common set of values and princi- ples. Corporate Center’s remit covers areas such as risk management, financial reporting, market- ing and communications, funding, capital and balance sheet management and management of foreign currency earnings. 70 UBS Group Financial Statements Notes to the Financial Statements Note 3a Segment Reporting by Business Group (continued) The Business Group results have been presented on a management reporting basis. Consequently, internal charges and transfer pricing adjustments have been reflected in the performance of each business. The basis of the reporting reflects the management of the business within the Group. Revenue sharing agreements are used to allocate external customer revenues to a Business Group on a reasonable basis. Transactions between Business Groups are conducted at arms length. For the year ended 31 December 2000 UBS Switzerland UBS Asset Management CHF million Income Credit loss recovery / (expense) 1 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses 14,182 (784 ) 13,398 4,759 2,394 508 62 7,723 Business Group performance before tax 5,675 Tax expense Net profit before minority interests Minority interests Net profit Other information as of 31 December 2000 2 Total assets Total liabilities 281,780 272,134 1,953 0 1,953 880 439 49 263 1,631 322 UBS Warburg 19,779 (247 ) 19,532 11,002 3,501 731 298 15,532 4,000 Corporate Center 358 1,161 1,519 522 431 320 44 1,317 202 UBS Group 36,272 130 36,402 17,163 6,765 1,608 667 26,203 10,199 2,320 7,879 (87) 7,792 6,727 5,513 870,608 846,451 (71,563 ) (81,379 ) 1,087,552 1,042,719 1 In order to show the relevant Business Group performance over time, adjusted expected loss figures rather than the net credit expense / recovery are reported for all Business Groups. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the respective portfolios. The difference between the statistically derived adjusted expected loss figures and the net IAS credit loss expenses recorded at Group level for financial reporting purposes is reported in the Corporate Center. The divisional breakdown of the net credit recovery / (expense) for financial reporting purposes of CHF 130 million for the year ended 31 December 2000 is as follows: UBS Switzerland CHF 695 million, UBS Warburg CHF (565) million. 2 The funding surplus or requirement is reflected in each Business Group and adjusted in Corporate Center. 71 UBS Group Financial Statements Notes to the Financial Statements Note 3a Segment Reporting by Business Group (continued) For the year ended 31 December 1999 1 UBS Switzerland UBS Asset Management UBS Warburg Corporate Center 1,369 0 1,369 516 271 32 113 932 437 13,241 (333 ) 12,908 7,278 2,680 659 154 10,771 2,137 2,010 448 2,458 92 839 366 50 1,347 1,111 CHF million Income Credit loss recovery / (expense) 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses 12,761 (1,071 ) 11,690 4,691 2,308 460 23 7,482 Business Group performance before tax 4,208 Tax expense Net profit before minority interests Minority interests Net profit Other information as of 31 December 1999 3 Total assets Total liabilities 254,577 270,137 10,451 4,614 719,568 693,633 (88,040 ) (102,436 ) 896,556 865,948 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 In order to show the relevant Business Group performance over time, adjusted expected loss figures rather than the net credit loss expense are reported for all Business Groups. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the respective portfolios. The difference between the statistically derived adjusted expected loss figures and the net credit loss expenses recorded at Group level for financial reporting purposes is reported in the Corporate Center. The divisional breakdown of the net credit loss recovery / (expense) for financial reporting purposes of CHF (956) million for the year ended 31 December 1999 is as follows: UBS Switzerland CHF (965) million, Corporate Center CHF 9 million. 3 The funding surplus / requirement is reflected in each Business Group and adjusted in Corporate Center. For the year ended 31 December 1998 1 UBS Switzerland UBS Asset Management UBS Warburg Corporate Center CHF million Income Credit loss recovery / (expense) 2 Total operating income Personnel expenses General and administrative expenses Depreciation Amortization of goodwill and other intangible assets Total operating expenses 13,958 (1,186 ) 12,772 4,448 2,226 771 4 7,449 Business Group performance before tax 5,323 Tax expense Net profit before minority interests Minority interests Net profit 1,358 0 1,358 515 228 35 78 856 502 7,691 (510 ) 7,181 4,641 2,625 549 173 7,988 (807) 191 745 936 212 1,656 128 87 2,083 (1,147) UBS Group 29,381 (956) 28,425 12,577 6,098 1,517 340 20,532 7,893 1,686 6,207 (54) 6,153 UBS Group 23,198 (951) 22,247 9,816 6,735 1,483 342 18,376 3,871 904 2,967 5 2,972 1 The 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 In order to show the relevant Business Group performance over time, adjusted expected loss figures rather than the net credit loss expense are reported for all Business Groups. The statistically derived adjusted expected losses reflect the inherent counterparty and country risks in the respective portfolios. The difference between the statistically derived adjusted expected loss figures and the net credit loss expenses recorded at Group level for financial reporting purposes is reported in the Corporate Center. The divisional breakdown of the net credit loss recovery / (expense) for financial reporting purposes of CHF (951) million for the year ended 31 December 1998 is as follows: UBS Switzerland CHF (445) million and UBS Warburg CHF (506) million. 72 UBS Group Financial Statements Notes to the Financial Statements Note 3b Segment Reporting by Geographic Location The geographic analysis of total assets is based on customer domicile whereas operating income and capital investment is based on the location of the office in which the transactions and assets are recorded. Because of the global nature of financial markets the Group’s business is managed on an integrated basis worldwide, with a view to profitability by product line. The geographical analysis of operating income, total assets, and capital investment is provided in order to comply with International Accounting Standards, and does not reflect the way the Group is managed. Management believes that analysis by Business Group, as shown in Note 3a to these financial state- ments, is a more meaningful representation of the way in which the Group is managed. For the year ended 31 December 2000 Switzerland Rest of Europe Americas Asia / Pacific Africa / Middle East Total For the year ended 31 December 1999 1 Switzerland Rest of Europe Americas Asia / Pacific Africa / Middle East Total For the year ended 31 December 1998 1 Total operating income Total assets Capital investment CHF million Share % CHF million Share % CHF million Share % 15,836 10,907 6,976 2,626 57 36,402 44 30 19 7 0 211,851 305,342 474,617 87,831 7,911 19 28 44 8 1 100 1,087,552 100 1,135 311 1,169 36 8 2,659 43 12 44 1 0 100 Total operating income Total assets Capital investment CHF million Share % CHF million Share % CHF million Share % 14,976 7,626 3,861 1,945 17 28,425 52 27 14 7 0 207,702 303,365 281,974 96,469 7,046 23 34 31 11 1 100 896,556 100 1,990 356 386 87 1 2,820 70 13 14 3 0 100 Switzerland Rest of Europe Americas Asia / Pacific Africa / Middle East Total Total operating income CHF million Share % 16,757 1,655 2,548 1,251 36 22,247 75 8 11 6 0 100 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 73 UBS Group Financial Statements Notes to the Financial Statements Income Statement Note 4 Net Interest Income CHF million For the year ended 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 Interest income Interest earned on loans and advances to banks Interest earned on loans and advances to customers Interest from finance leasing Interest earned on securities borrowed and reverse repurchase agreements Interest and dividend income from financial investments Interest and dividend income from trading portfolio Other Total Interest expense Interest on amounts due to banks Interest on amounts due to customers Interest on securities lent and repurchase agreements Interest and dividend expense from trading portfolio Interest on medium and long-term debt Total 5,615 14,692 36 19,088 202 11,842 270 51,745 6,155 9,505 14,915 5,309 7,731 43,615 6,105 12,077 49 11,422 160 5,598 193 35,604 5,515 8,330 8,446 2,070 5,334 7,687 14,111 60 10,380 372 3,901 931 37,442 8,205 9,890 7,543 1,741 5,045 29,695 32,424 Net interest income 8,130 5,909 5,018 (8) 22 (27) 67 26 112 40 45 12 14 77 156 45 47 38 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). Note 5 Net Fee and Commission Income CHF million For the year ended 31.12.00 31.12.99 31.12.98 % change from 31.12.99 Credit-related fees and commissions 310 372 559 Security trading and investment activity fees Underwriting fees 1 Corporate finance fees 1 Brokerage fees Investment fund fees Fiduciary fees Custodian fees Portfolio and other management and advisory fees 1 Other Total Commission income from other services Total fee and commission income Fee and commission expense Brokerage fees paid Other Total 1,434 1,772 5,792 2,821 351 1,439 3,677 50 17,336 802 18,448 1,084 661 1,745 905 1,298 3,934 1,915 317 1,583 2,612 57 12,621 765 13,758 795 356 1,151 1,122 1,016 3,670 1,778 349 1,386 2,891 110 12,322 776 13,657 704 327 1,031 Net fee and commission income 16,703 12,607 12,626 (17) 58 37 47 47 11 (9) 41 (12) 37 5 34 36 86 52 32 1 In prior periods, Corporate finance related advisory fees were included in Portfolio and other management and advisory fees. These fees are now reported in the new disclosure line Corporate finance fees together with merger and acquisition fees which were previously reported in Underwriting and corporate finance fees. All previous periods have been restated accordingly. 74 UBS Group Financial Statements Notes to the Financial Statements Note 6 Net Trading Income Foreign exchange net trading income include gains and losses from spot and forward contracts, options, futures, and translation of foreign currency assets and liabilities, bank notes, precious met- als, and commodities. Fixed income net trading income includes the results of making markets in instruments of both developed and emerging countries in government securities, corporate debt secu- rities, money market instruments, interest rate and currency swaps, options, and other derivatives. Equities net trading income includes the results of making markets globally in equity securities and equity derivatives such as swaps, options, futures, and forward contracts. CHF million For the year ended Foreign exchange Fixed income Equities Net trading income 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 1,287 912 7,754 9,953 1,108 2,603 4,008 7,719 1,992 162 1,159 3,313 16 (65) 93 29 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). Note 7 Net Gains from Disposal of Associates and Subsidiaries CHF million For the year ended 31.12.00 31.12.99 31.12.98 % change from 31.12.99 Net gains from disposal of consolidated subsidiaries Net gains / (losses) from disposal of investments in associates Net gains from disposal of associates and subsidiaries 57 26 83 8 1,813 1,821 1,149 (30 ) 1,119 613 (99) (95) While the 1999 figure represents mainly the disposal gains from our investments in Swiss Life / Rentenanstalt and Julius Baer registered shares, the 1998 figure is mainly attributable to the disposal of the BSI – Banca della Svizzera Italiana. 75 UBS Group Financial Statements Notes to the Financial Statements Note 8 Other Income CHF million For the year ended 31.12.00 31.12.99 31.12.98 % change from 31.12.99 Investments in financial assets (debt and equity) Net gain from disposal of private equity investments Net gain from disposal of other financial assets Impairment charges in private equity investments and other financial assets 919 162 (507) Total Investments in property Net gain from disposal of properties held for resale Net loss from revaluation of properties held for resale Net income from other properties Total Equity income from investments in associates Other 574 85 (108) 96 73 58 698 374 180 (102 ) 452 78 (49 ) (20 ) 9 211 653 587 398 (556 ) 429 33 (106 ) 328 255 377 61 Total other income 1,403 1,325 1,122 146 (10) 397 27 9 120 711 (73) 7 6 Note 9 Operating Expenses CHF million For the year ended 31.12.00 31.12.99 31.12.98 % change from 31.12.99 Personnel expenses Salaries and bonuses Contractors Insurance and social contributions Contribution to retirement benefit plans Employee share plans Other personnel expenses Total General and administrative expenses Occupancy Rent and maintenance of machines and equipment Telecommunications and postage Administration Marketing and public relations Travel and entertainment Professional fees IT and other outsourcing Other Total Depreciation and amortization Property, equipment and software Goodwill and other intangible assets Total 13,523 725 959 475 97 1,384 17,163 979 520 914 750 480 656 660 1,246 560 6,765 1,608 667 2,275 9,872 886 717 8 151 943 12,577 847 410 756 784 335 552 526 1,289 599 6,098 1,517 340 1,857 7,082 535 542 614 201 842 9,816 822 390 820 759 262 537 532 1,260 1,353 6,735 1,483 342 1,825 Total operating expenses 26,203 20,532 18,376 37 (18) 34 (36) 47 36 16 27 21 (4) 43 19 25 (3) (7) 11 6 96 23 28 76 UBS Group Financial Statements Notes to the Financial Statements Note 10 Earnings per Share For the year ended 31.12.00 31.12.99 1 31.12.98 1 % change from 31.12.99 Basic earnings per share calculation Net profit for the period (CHF million) Net profit for the period before goodwill amortization (CHF million) 2 Weighted average shares outstanding: Registered ordinary shares Own shares to be delivered Treasury shares 7,792 8,459 6,153 6,493 2,972 3,314 433,486,003 2,058,212 (32,514,906) 430,497,026 429,710,128 (25,754,544)3 (24,487,833)3 Weighted average shares for basic earnings per share 403,029,309 404,742,482 405,222,295 Basic earnings per share (CHF) Basic earnings per share before goodwill amortization (CHF) 2 19.33 20.99 15.20 16.04 7.33 8.18 Diluted earnings per share calculation Net profit for the period (CHF million) Net profit for the period before goodwill amortization (CHF million) 2 Weighted average shares for basic earnings per share Potential dilutive ordinary shares resulting from outstanding options, warrants and convertible debt securities 6 7,778 5 8,445 5 403,029,309 6,153 6,493 404,742,482 2,972 3,314 405,222,295 5,496,591 3,632,670 4 7,658,746 4 Weighted average shares for diluted earnings per share 408,525,900 408,375,152 412,881,041 Diluted earnings per share (CHF) Diluted earnings per share before goodwill amortization (CHF) 2 19.04 20.67 15.07 15.90 7.20 8.03 27 30 1 26 0 27 31 26 30 0 51 0 26 30 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 The amortization of goodwill and other intangible assets is excluded from this calculation. 3 Treasury shares have increased by 11,371,720 and by 18,372,661 for the periods ended 31 December 1999 and 31 December 1998, due to a change in accounting policy (see Note 1: Summary of Significant Accounting Policies). 4 Share amount has been adjusted by 1,414,114 and by 5,371,922 representing other potentially dilutive instruments for the periods ended 31 December 1999 and 31 December 1998, due to 5 Net profit has been adjusted for the dilutive impact of own equity derivative activity in accordance with a change in accounting policy (see Note 1: Summary of Significant Accounting Policies). International Accounting Standards. 6 Total equivalent shares outstanding on options that were not dilutive for the respective periods but could potentially dilute earnings per share in the future were 9,174,760, 24,045,261 and 11,367,184 for the years ended 31 December 2000, 31 December 1999 and 31 December 1998, respectively. 1999 and 1998 share figures are restated for the two-for-one share split, effective 8 May 2000. 77 UBS Group Financial Statements Notes to the Financial Statements Balance Sheet: Assets Note 11 Money Market Paper CHF million Government treasury notes and bills Money market placements Other bills and cheques Total money market paper thereof eligible for discount at central banks 31.12.00 31.12.99 22,551 43,477 426 66,454 60,689 32,724 36,540 453 69,717 64,671 Note 12a Due from Banks and Loans to Customers The composition of Due from banks, the Loan portfolio and the Allowance for credit losses by type of exposure at the end of the year was as follows: CHF million Banks Allowance for credit losses Net due from banks Loans to customers Mortgages Other loans Subtotal Allowance for credit losses Net loans to customers Net due from banks and loans to customers thereof subordinated 31.12.00 31.12.99 30,064 (917) 29,147 120,554 133,898 254,452 (9,610) 244,842 273,989 393 30,785 (878) 29,907 127,987 119,242 247,229 (12,371) 234,858 264,765 86 The composition of Due from banks and Loans to customers by geographical region based on the location of the borrower at the end of the year was as follows: CHF million Switzerland Rest of Europe Americas Asia / Pacific Africa / Middle East Subtotal Allowance for credit losses Net due from banks and loans to customers 31.12.00 164,645 46,882 52,939 16,504 3,546 284,516 (10,527) 273,989 31.12.99 183,944 44,796 31,285 13,451 4,538 278,014 (13,249) 264,765 The composition of Due from banks and Loans to customers by type of collateral at the end of the year was as follows: CHF million Secured by real estate Collateralized by securities Guarantees and other collateral Unsecured Subtotal Allowance for credit losses Net due from banks and loans to customers 31.12.00 122,898 37,714 28,373 95,531 284,516 (10,527) 273,989 31.12.99 130,835 19,061 28,725 99,393 278,014 (13,249) 264,765 78 UBS Group Financial Statements Notes to the Financial Statements Note 12b Allowance and Provision for Credit Losses The allowance and provision for credit losses developed as follows: CHF million Country risk Specific allowance and provision allowance Total 31.12.00 Total 31.12.99 Balance at the beginning of the year Write-offs Recoveries Increase / (decrease) in credit loss allowance and provision Net foreign exchange and other adjustments Balance at the end of the year 12,022 (2,963) 150 (49) 129 9,289 1,376 (32) 13 (81) 16 1,292 13,398 (2,995) 163 (130) 145 10,581 14,978 (3,275) 65 956 674 13,398 At the end of the year the aggregate allowances and provisions were apportioned and displayed as follows: CHF million As a reduction of Due from banks As a reduction of Loans to customers Subtotal Included in other liabilities related to commitments and contingent liabilities Total allowance and provision for credit losses 31.12.00 31.12.99 917 9,610 10,527 54 10,581 878 12,371 13,249 149 13,398 Note 12c Impaired Loans UBS classifies a loan as impaired when there is a probability of incurring a partial or full loss. A pro- vision is then made with respect to the loan in question. The impaired loans were as follows: CHF million Impaired loans 1, 2 Amount of allowance for credit losses related to impaired loans Average impaired loans 3 31.12.00 31.12.99 18,494 9,685 20,804 22,456 12,471 24,467 1 All impaired loans have a specific allowance for credit losses. calculated from quarterly data. 2 Interest income on impaired loans is immaterial. 3 Average balances were 79 UBS Group Financial Statements Notes to the Financial Statements 80 Note 12d Non-Performing Loans When principal, interest or commission are overdue by 90 days, loans are classified as non-per- forming, the recognition of interest or commission income ceases and a charge is recognized against income for the unpaid interest or commission receivable. Allowances are provided for non-perform- ing loans to reflect their net estimated recoverable amount. Unrecognized interest related to such loans totalled CHF 182 million for the year ended 31 December 2000 and CHF 409 million for the year ended 31 December 1999. The non-performing loans were as follows: CHF million Non-performing loans Amount of allowance for credit losses related to non-performing loans Average non-performing loans 1 1 Average balances were calculated from quarterly data. 31.12.00 31.12.99 10,452 6,850 11,884 13,073 8,661 14,615 An analysis of changes in non-performing loans is presented in the following table: CHF million Non-performing loans at the beginning of the year Net reductions Write-offs and disposals Non-performing loans at the end of the year The non-performing loans by type of exposure were as follows: CHF million Banks Loans to customers Mortgages Other Total loans to customers Total non-performing loans 31.12.00 31.12.99 13,073 (290) (2,331) 10,452 16,113 (638) (2,402) 13,073 31.12.00 172 4,586 5,694 10,280 10,452 31.12.99 499 7,105 5,469 12,574 13,073 The non-performing loans by geographical region based on the location of the borrower were as follows: CHF million Switzerland Rest of Europe Americas Asia / Pacific Africa / Middle East Total non-performing loans 31.12.00 31.12.99 7,588 342 1,865 307 350 10,452 11,435 223 697 373 345 13,073 UBS Group Financial Statements Notes to the Financial Statements Note 13 Securities Borrowing, Securities Lending, Repurchase, Reverse Repurchase and Other Collateralized Transactions The Group enters into collateralized reverse repurchase and repurchase agreements and securities borrowing and securities lending transactions that may result in credit exposure in the event the counterparty to the transaction is unable to fulfill its contractual obligations. The Group minimizes credit risk associated with these activities by monitoring counterparty credit exposure and collater- al values on a daily basis and requiring additional collateral to be deposited with or returned to the Group when deemed necessary. The following table presents cash collateral received and paid under securities lending, repurchase agreements, securities borrowing and reverse repurchase agreements. CHF million Cash collateral by counterparties Banks Customers Total cash collateral on securities borrowed and lent CHF million Agreements by counterparties Banks Customers Total repurchase and reverse repurchase agreements Securities borrowed 31.12.00 Securities lent 31.12.00 Securities borrowed 31.12.99 Securities lent 31.12.99 159,619 18,238 18,291 5,127 99,810 13,352 8,926 3,906 177,857 23,418 113,162 12,832 Reverse repurchase agreements 31.12.00 Repurchase agreements 31.12.00 Reverse repurchase agreements 31.12.99 1 Repurchase agreements 31.12.99 1 144,505 49,296 175,421 120,092 93,104 39,287 125,054 71,860 193,801 295,513 132,391 196,914 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). Under reverse repurchase, securities borrowing, and other collateralized arrangements, the Group obtains securities on terms which permit it to repledge or resell the securities to others. At 31 De- cember 2000, the Group held CHF 478 billion of securities on such terms, CHF 407 billion of which have been either pledged or otherwise transferred to others in connection with its financing activi- ties or to satisfy its commitments under short sale transactions. 81 Note 14 Trading Portfolio Trading assets and liabilities are carried at fair value. The following table presents the carrying value of trading assets and liabilities at the end of the reporting period. CHF million 31.12.00 31.12.99 1 Trading portfolio assets Debt instruments Swiss government and government agencies US Treasury and government agencies Other government Corporate listed instruments Other unlisted instruments Total Equity instruments Listed instruments Unlisted instruments Total Precious metals Total trading portfolio assets Trading portfolio liabilities Debt instruments Swiss government and government agencies US Treasury and government agencies Other government Corporate listed instruments Other unlisted instruments Total Listed equity instruments Total trading portfolio liabilities 1,104 19,769 33,222 64,514 26,583 7,391 21,816 65,804 13,420 8,322 145,192 116,753 102,571 2,320 104,891 3,213 253,296 439 13,645 5,070 31,905 192 51,251 31,381 82,632 87,089 2,963 90,052 5,127 211,932 0 24,535 11,917 6,502 9 42,963 11,675 54,638 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). The Group trades debt, equity, precious metals, foreign currency and derivatives to meet the finan- cial needs of its customers and to generate revenue through its trading activities. Note 26 provides a description of the various classes of derivatives together with the related volumes used in the Group’s trading activities, whereas Note 13 provides further details about cash collateral on securities bor- rowed and lent and repurchase and reverse repurchase agreements. Included in total trading portfolio assets above are CHF 59 billion of securities pledged to others under terms which permit the counterparty to sell or repledge and CHF 12 billion of securities pledged to others under terms which do not permit the counterparty to resell or repledge. UBS Group Financial Statements Notes to the Financial Statements 82 UBS Group Financial Statements Notes to the Financial Statements Note 15 Financial Investments CHF million Debt instruments Listed Unlisted Total Equity investments Listed Unlisted Total Private equity investments Properties held for resale Total financial investments thereof eligible for discount at central banks 31.12.00 31.12.99 1,403 4,803 6,206 1,119 1,438 2,557 6,658 984 16,405 381 1,357 609 1,966 356 557 913 3,001 1,159 7,039 563 The following table gives additional disclosure in respect of the valuation methods used. CHF million Valued at amortized cost Debt instruments Book value 31.12.00 Fair value 31.12.00 Book value 31.12.99 Fair value 31.12.99 5,851 5,853 677 687 Valued at the lower of cost or market value Debt instruments Equity instruments Properties held for resale Total Valued at cost less adjustments for impairments Private equity investments Total financial investments 355 2,557 984 3,896 6,658 16,405 367 3,031 1,150 4,548 7,940 18,341 1,289 913 1,159 3,361 3,001 7,039 1,314 939 1,194 3,447 4,146 8,280 Note 16 Investments in Associates Carrying amount at CHF million 31.12.99 Additions Disposal 1 Income Write-offs Carrying amount at 31.12.00 Change in equity Total investments in associates 1,102 65 (287) 62 (4) (58) 880 1 The figure of CHF 287 million for disposals for the year ended 31 December 2000 primarily consists of disposal of a stake in National Versicherung AG. 83 UBS Group Financial Statements Notes to the Financial Statements Note 17 Property and Equipment CHF million Historical cost Balance at the beginning of the year Additions Additions from acquired companies Disposals Reclassifications 1 Foreign currency translation Balance at the end of the year Accumulated depreciation Balance at the beginning of the year Depreciation 2 Disposals Reclassifications 1 Foreign currency translation Balance at the end of the year Bank occupied Investment properties properties IT, soft- ware and communi- Other machines and cation equipment 31.12.00 31.12.99 9,085 233 0 (224 ) (287 ) 0 8,807 3,625 395 (84 ) (97 ) 1 3,840 2,006 138 0 (176 ) (145 ) 7 1,830 539 119 (31 ) (79 ) 2 550 3,321 1,032 201 (279 ) 0 (18 ) 4,257 2,416 952 (268 ) 0 (26 ) 3,074 1,183 2,798 237 818 (90 ) 0 (26 ) 3,737 1,929 419 (70 ) 0 (21 ) 2,257 1,480 17,210 1,640 1,019 (769) (432) (37) 18,631 8,509 1,885 (453) (176) (44) 9,721 8,910 18,505 1,813 755 (4,333) 0 470 17,210 8,619 2,105 (2,500) 0 285 8,509 8,701 Net book value at the end of the year 3 4,967 1,280 1 Properties held for sale of CHF 256 million (CHF 432 million acquisition costs and CHF 176 million accumulated depreciation) have been reclassi- fied to Note 15 Financial Investments. 2 Depreciation of CHF 1,885 million includes CHF 277 million that was charged against the restructur- ing provision. 3 Fire insurance value of property and equipment is CHF 14,570 million (1999: CHF 15,004 million). Note 18 Goodwill and other Intangible Assets CHF million Goodwill Other intangible assets 31.12.00 31.12.99 Historical cost Balance at the beginning of the year Additions Write-offs Reclassifications Foreign currency translation Balance at the end of the year Accumulated amortization Balance at the beginning of the year Amortization Write-offs Reclassifications Foreign currency translation Balance at the end of the year 4,229 12,939 (16) (41) (839) 16,272 951 533 (16) (16) (7) 1,445 305 4,902 0 41 (354) 4,894 40 134 0 16 (6) 184 4,534 17,841 (16) 0 (1,193) 21,166 991 667 (16) 0 (13) 1,629 3,000 1,467 (192) (88) 347 4,534 790 340 (183) (2) 46 991 Net book value at the end of the year 14,827 4,710 19,537 3,543 84 UBS Group Financial Statements Notes to the Financial Statements Note 19 Other Assets CHF million Deferred tax assets Settlement and clearing accounts VAT and other tax receivables Prepaid pension costs Other receivables Total other assets Note 24 31.12.00 31.12.99 2,208 3,153 419 405 2,322 8,507 742 4,911 702 456 4,196 11,007 85 UBS Group Financial Statements Notes to the Financial Statements Balance Sheet: Liabilities Note 20 Due to Banks and Customers CHF million Due to banks Due to customers in savings and investment accounts Amounts due to customers on demand and time Total due to customers Total due to banks and customers 31.12.00 82,240 68,213 242,466 310,679 392,919 31.12.99 76,365 78,640 201,320 279,960 356,325 Note 21 Long-Term Debt The Group issues both CHF and non-CHF denominated fixed and floating rate debt. Publicly placed fixed rate debt pays interest at rates up to 21.5% including structured note issues. Floating rate debt pays interest based on the three-month or six-month London Interbank Offered Rate “LIBOR”. Subordinated debt securities are unsecured obligations of the Group and are subordinated in right of payment to all present and future senior indebtedness and certain other obligations of the Group. At 31 December 2000 and 31 December 1999, the Group had CHF 13,018 million and CHF 13,106 million, respectively, in subordinat- ed debt excluding convertible and exchangeable debt and notes with warrants which have been included in the following paragraph. Sub- ordinated debt usually pays interest annually and provides for single principal payments upon maturity. At 31 December 2000 and 31 Decem- ber 1999, the Group had CHF 40,428 million and CHF 41,093 million, respectively, in unsub- ordinated debt. The Group issues convertible obligations that can be exchanged for common stock of UBS AG and notes with warrants attached on UBS AG shares. Furthermore, the Group issues notes exchangeable into common stock or preferred stock of other companies, or repaid based on the performance of an index or group of securities. At 31 December 2000 and 31 December 1999, the Group had CHF 1,409 million and CHF 2,133 million, respectively, in convertible and exchangeable debt and notes with warrants attached outstanding. The Group, as part of its interest-rate risk management process, utilizes derivative instru- ments to modify the repricing characteristics of the notes / bonds issued. The Group also utilizes other derivative instruments to manage the for- eign exchange impact of certain long-term debt obligations. The Group issues credit-linked notes general- ly through private placements. The credit-linked notes are usually senior unsecured obligations of UBS AG, acting through one of its branches, and can be subject to early redemption in the event of a defined credit event. Payment of interest and/or principal is dependent upon the performance of a reference entity or security. The rate of interest on each credit-linked note is either floating and determined by reference to LIBOR plus a spread or fixed. Medium-term and credit-linked notes have been included in the amounts disclosed above as unsubordinated debt. CHF million Total bond issues Shares in bond issues of the Swiss Regional or Cantonal Banks’ Central Bond Institutions Medium-term notes Total long-term debt 31.12.00 31.12.99 48,179 1,305 5,371 54,855 48,305 2,055 5,972 56,332 86 UBS Group Financial Statements Notes to the Financial Statements Note 21 Long-Term Debt (continued) Contractual maturity date CHF million 2001 2002 2003 2004 2005 2006–2010 Thereafter Total UBS AG (parent) Subsidiaries Fixed rate 13,021 7,645 4,232 1,327 3,463 5,888 3,150 38,726 Floating rate 251 153 135 8 81 107 55 790 Fixed rate 2,033 2,407 1,275 1,261 664 1,923 1,214 10,777 Floating rate Total 31.12.00 373 889 19 1,836 249 1,173 23 4,562 15,678 11,094 5,661 4,432 4,457 9,091 4,442 54,855 Publicly placed bond issues of UBS AG (parent company) outstanding at 31.12.2000 Year of issue Interest rate in % Remarks Maturity Premature redemption possible Currency Amount in millions 1999 1996 1999 1999 1999 1999 1999 1996 1991 1998 1998 1998 1999 1999 1999 2000 1999 1998 1998 2000 1993 1997 2000 1998 2000 2000 1998 1998 2000 2000 2000 1991 2000 1994 2000 2000 2000 1999 2000 2000 2000 10.250 3.000 10.000 12.250 14.100 12.000 11.000 3.625 5.000 7.500 7.500 7.000 12.500 5.250 10.750 17.750 11.000 7.500 7.500 21.500 5.125 1.750 17.000 8.000 15.500 14.250 8.000 8.000 15.500 17.500 15.750 7.000 15.000 5.375 17.000 16.500 16.250 8.500 14.500 8.750 15.000 12.01.2001 07.02.2001 12.02.2001 15.02.2001 27.02.2001 29.03.2001 30.03.2001 10.04.2001 15.04.2001 11.05.2001 11.05.2001 18.05.2001 06.06.2001 14.06.2001 15.06.2001 05.07.2001 06.07.2001 10.07.2001 10.07.2001 12.07.2001 15.07.2001 25.07.2001 30.07.2001 03.08.2001 06.08.2001 10.08.2001 17.08.2001 17.08.2001 24.08.2001 24.08.2001 03.09.2001 04.09.2001 06.09.2001 07.09.2001 10.09.2001 25.09.2001 04.10.2001 05.10.2001 11.10.2001 11.10.2001 19.10.2001 subordinated EUR USD CHF GBP SEK GBP USD CHF CHF CHF CHF CHF GBP CHF EUR EUR EUR CHF CHF EUR CHF USD EUR CHF EUR USD CHF CHF EUR EUR EUR CHF USD CHF EUR EUR EUR CHF EUR CHF USD 160 1 100 375 2 20 3 193 4 10 5 10 6 400 60 60 7 801 7 738 8 10 9 410 10 50 11 100 12 40 13 372 10 40 10 45 14 30 96 15 80 16 920 17 60 18 25 19 50 20 450 20 145 21 95 22 105 23 250 45 24 200 10 25 15 26 15 27 120 28 135 29 50 10 20 30 87 Footnotes 1 GOAL on Royal Dutch shares 2 GOAL on Swisscom shares 3 GOAL on Lloyds TSB shares 4 Convertible into Omvand Konvertible Svensk Basportfolj 5 GOAL on British Telecom shares 6 GOAL on S&P Index 7 GOAL on Credit Suisse shares 8 GOAL on Novartis shares 9 GOAL on BP Amoco shares 10 GOAL on Roche GS 11 GOAL on SAP shares 12 GOAL on Philips shares 13 GOAL on Bank Austria shares 14 GOAL on Sonera shares 15 Convertible into Nikkei 225 Index 16 GOAL on Sony ADR’s 17 GOAL on UBS AG shares 18 GOAL on Telefonica shares 19 GOAL on Cisco shares 20 GOAL on Zurich Fin. Services shares 21 GOAL on Nokia shares 22 GOAL on Vivendi shares 23 GOAL on Ericsson shares 24 GOAL on Lucent shares 25 GOAL on Kyocera shares 26 GOAL on Telecom Italia Mobile shares 27 GOAL on ICI shares 28 GOAL on ABB shares 29 GOAL on Siemens shares 30 GOAL on Telmex shares 31 GOAL on Deutsche Telekom shares 32 GOAL on Intel shares 33 GOAL on Texas Instruments shares 34 GOAL on Nortel shares 35 GOAL on Granada Group shares 36 GOAL on IBM shares 37 GOAL on Nasdaq 100 Index 38 GOAL on Banco Bilbao shares 39 GOAL on Carrefour shares 40 GOAL on Bayer shares 41 GOAL on Motorola shares 42 GOAL on Glaxo shares 43 GOAL on Swiss Re shares 44 Convertible into European Insurance Shares Basket 45 GOAL on Daimler Chrysler shares 46 Convertible into FTSE Index 47 Indexed to UBS Currency Portfolio 48 Convertible into UBS Dutch Corporate Basket 49 Convertible into Sony shares 50 Convertible into UBS Oil Basket 51 Convertible into UBS Global Equity Arbitrage 52 Convertible into SMI Index 53 Convertible into NTT shares 54 Convertible into Blue Chip Basket 55 Convertible into Nasdaq 100 Index 56 Convertible into STOXX 50 Index 57 PEP on Internet Perf. Basket 58 Convertible into AT&T shares 59 PIP on Worldbasket PIP Protected Index Participation Protected Equity Participation PEP GOAL Geld- oder Aktien-Lieferung (cash or share delivery) UBS Group Financial Statements Notes to the Financial Statements Note 21 Long-Term Debt (continued) Publicly placed bond issues of UBS AG (parent company) outstanding at 31.12.2000 Year of issue Interest rate in % Remarks Maturity Premature redemption possible Currency Amount in millions 2000 2000 2000 2000 2000 1999 2000 2000 2000 2000 2000 2000 1992 2000 1998 2000 1996 2000 1999 1990 2000 2000 1992 1997 1997 2000 1996 2000 1992 1996 1995 1996 2000 1991 1998 1993 1997 1998 1993 1993 1999 1998 1991 1995 2000 2000 2000 1996 2000 1993 1994 1992 2000 2000 1991 1999 1997 16.500 16.000 11.750 18.750 20.250 11.625 16.500 14.250 12.250 13.250 12.500 0.100 7.000 9.000 5.750 10.000 4.000 18.500 11.000 7.500 18.250 6.500 7.500 6.500 1.000 8.375 2.000 9.000 7.000 6.750 4.375 3.250 8.000 7.500 1.000 4.875 1.500 1.000 4.000 3.500 1.000 1.625 7.000 5.250 0.000 0.000 5.200 1.500 1.850 3.000 6.250 7.250 0.500 1.000 4.250 3.500 7.375 29.10.2001 02.11.2001 09.11.2001 19.11.2001 27.11.2001 06.12.2001 21.12.2001 28.12.2001 11.01.2002 18.01.2002 18.01.2002 28.01.2002 06.02.2002 14.03.2002 18.03.2002 10.04.2002 18.04.2002 28.05.2002 06.06.2002 07.06.2002 27.06.2002 28.06.2002 10.07.2002 18.07.2002 07.08.2002 07.08.2002 23.08.2002 02.10.2002 16.10.2002 18.10.2002 07.11.2002 20.12.2002 11.02.2003 15.02.2003 25.02.2003 03.03.2003 14.03.2003 20.03.2003 31.03.2003 31.03.2003 05.05.2003 14.05.2003 16.05.2003 20.06.2003 14.07.2003 14.07.2003 28.08.2003 20.11.2003 25.11.2003 26.11.2003 06.01.2004 10.01.2004 10.02.2004 07.06.2004 25.06.2004 01.07.2004 26.11.2004 subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated EUR USD CHF USD USD GBP USD USD EUR EUR EUR JPY CHF CHF USD CHF CHF USD GBP CHF USD CHF CHF USD DEM EUR CHF CHF CHF USD CHF CHF USD CHF EUR CHF DEM NLG CHF CHF USD USD CHF CHF USD USD CHF CHF CHF CHF USD CHF USD USD CHF EUR GBP 75 31 40 32 110 7 30 33 20 34 10 35 20 36 10 37 30 38 20 39 20 40 10,000 15 200 256 28 250 100 17 200 75 41 15 42 300 50 32 50 43 200 300 19 44 45 45 301 220 17 200 250 250 350 15 300 60 46 200 80 47 125 48 200 200 80 49 100 50 200 200 10 51 10 51 26 27 52 13 200 300 150 75 53 25 54 300 250 250 15.02.2001 16.05.2001 10.01.2002 Footnotes 1 GOAL on Royal Dutch shares 2 GOAL on Swisscom shares 3 GOAL on Lloyds TSB shares 4 Convertible into Omvand Konvertible Svensk Basportfolj 5 GOAL on British Telecom shares 6 GOAL on S&P Index 7 GOAL on Credit Suisse shares 8 GOAL on Novartis shares 9 GOAL on BP Amoco shares 10 GOAL on Roche GS 11 GOAL on SAP shares 12 GOAL on Philips shares 13 GOAL on Bank Austria shares 14 GOAL on Sonera shares 15 Convertible into Nikkei 225 Index 16 GOAL on Sony ADR’s 17 GOAL on UBS AG shares 18 GOAL on Telefonica shares 19 GOAL on Cisco shares 20 GOAL on Zurich Fin. Services shares 21 GOAL on Nokia shares 22 GOAL on Vivendi shares 23 GOAL on Ericsson shares 24 GOAL on Lucent shares 25 GOAL on Kyocera shares 26 GOAL on Telecom Italia Mobile shares 27 GOAL on ICI shares 28 GOAL on ABB shares 29 GOAL on Siemens shares 30 GOAL on Telmex shares 31 GOAL on Deutsche Telekom shares 32 GOAL on Intel shares 33 GOAL on Texas Instruments shares 34 GOAL on Nortel shares 35 GOAL on Granada Group shares 36 GOAL on IBM shares 37 GOAL on Nasdaq 100 Index 38 GOAL on Banco Bilbao shares 39 GOAL on Carrefour shares 40 GOAL on Bayer shares 41 GOAL on Motorola shares 42 GOAL on Glaxo shares 43 GOAL on Swiss Re shares 44 Convertible into European Insurance Shares Basket 45 GOAL on Daimler Chrysler shares 46 Convertible into FTSE Index 47 Indexed to UBS Currency Portfolio 48 Convertible into UBS Dutch Corporate Basket 49 Convertible into Sony shares 50 Convertible into UBS Oil Basket 51 Convertible into UBS Global Equity Arbitrage 52 Convertible into SMI Index 53 Convertible into NTT shares 54 Convertible into Blue Chip Basket 55 Convertible into Nasdaq 100 Index 56 Convertible into STOXX 50 Index 57 PEP on Internet Perf. Basket 58 Convertible into AT&T shares 59 PIP on Worldbasket PIP Protected Index Participation Protected Equity Participation PEP GOAL Geld- oder Aktien-Lieferung (cash or share delivery) 88 UBS Group Financial Statements Notes to the Financial Statements Note 21 Long-Term Debt (continued) Publicly placed bond issues of UBS AG (parent company) outstanding at 31.12.2000 Year of issue Interest rate in % Remarks Maturity 1993 1995 1995 2000 2000 1995 2000 1995 2000 1995 1995 1995 2000 1995 1999 1999 1996 1996 1999 1999 1996 1996 1995 1996 1997 1997 1998 1997 1986 1995 1995 1997 1990 1995 1995 1996 4.750 4.000 5.500 1.000 1.000 5.625 0.000 8.750 0.000 6.750 5.250 5.000 7.300 4.500 0.000 3.500 4.250 4.000 2.500 1.500 7.250 7.250 5.000 6.250 8.000 5.750 3.500 5.875 5.000 7.375 7.000 7.375 0.000 7.500 8.750 7.750 subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated subordinated 08.01.2005 07.02.2005 10.02.2005 18.02.2005 21.03.2005 13.04.2005 31.05.2005 20.06.2005 14.07.2005 15.07.2005 18.07.2005 24.08.2005 06.09.2005 21.11.2005 08.12.2005 26.01.2006 06.02.2006 14.02.2006 29.03.2006 12.07.2006 17.07.2006 01.09.2006 07.11.2006 06.12.2006 08.01.2007 12.03.2007 27.08.2008 18.08.2009 10.02.2011 15.07.2015 15.10.2015 15.06.2017 31.03.2020 15.07.2025 18.12.2025 01.09.2026 Premature redemption possible 08.01.2003 10.02.2001 Currency Amount in millions CHF CHF CHF USD EUR CHF JPY GBP USD USD CHF CHF HKD CHF USD EUR CHF CHF CHF USD USD USD CHF DEM GBP DEM CHF FRF CHF USD USD USD CHF USD GBP USD 200 150 150 30 55 50 56 150 5,000 15 250 10 51 200 200 250 200 300 50 57 650 250 200 250 100 58 500 150 250 500 450 350 300 2,000 250 150 300 300 59 350 150 300 89 Footnotes 1 GOAL on Royal Dutch shares 2 GOAL on Swisscom shares 3 GOAL on Lloyds TSB shares 4 Convertible into Omvand Konvertible Svensk Basportfolj 5 GOAL on British Telecom shares 6 GOAL on S&P Index 7 GOAL on Credit Suisse shares 8 GOAL on Novartis shares 9 GOAL on BP Amoco shares 10 GOAL on Roche GS 11 GOAL on SAP shares 12 GOAL on Philips shares 13 GOAL on Bank Austria shares 14 GOAL on Sonera shares 15 Convertible into Nikkei 225 Index 16 GOAL on Sony ADR’s 17 GOAL on UBS AG shares 18 GOAL on Telefonica shares 19 GOAL on Cisco shares 20 GOAL on Zurich Fin. Services shares 21 GOAL on Nokia shares 22 GOAL on Vivendi shares 23 GOAL on Ericsson shares 24 GOAL on Lucent shares 25 GOAL on Kyocera shares 26 GOAL on Telecom Italia Mobile shares 27 GOAL on ICI shares 28 GOAL on ABB shares 29 GOAL on Siemens shares 30 GOAL on Telmex shares 31 GOAL on Deutsche Telekom shares 32 GOAL on Intel shares 33 GOAL on Texas Instruments shares 34 GOAL on Nortel shares 35 GOAL on Granada Group shares 36 GOAL on IBM shares 37 GOAL on Nasdaq 100 Index 38 GOAL on Banco Bilbao shares 39 GOAL on Carrefour shares 40 GOAL on Bayer shares 41 GOAL on Motorola shares 42 GOAL on Glaxo shares 43 GOAL on Swiss Re shares 44 Convertible into European Insurance Shares Basket 45 GOAL on Daimler Chrysler shares 46 Convertible into FTSE Index 47 Indexed to UBS Currency Portfolio 48 Convertible into UBS Dutch Corporate Basket 49 Convertible into Sony shares 50 Convertible into UBS Oil Basket 51 Convertible into UBS Global Equity Arbitrage 52 Convertible into SMI Index 53 Convertible into NTT shares 54 Convertible into Blue Chip Basket 55 Convertible into Nasdaq 100 Index 56 Convertible into STOXX 50 Index 57 PEP on Internet Perf. Basket 58 Convertible into AT&T shares 59 PIP on Worldbasket PIP Protected Index Participation Protected Equity Participation PEP GOAL Geld- oder Aktien-Lieferung (cash or share delivery) UBS Group Financial Statements Notes to the Financial Statements Footnotes 1 GOAL on Royal Dutch shares 2 GOAL on Swisscom shares 3 GOAL on Lloyds TSB shares 4 Convertible into Omvand Konvertible Svensk Basportfolj 5 GOAL on British Telecom shares 6 GOAL on S&P Index 7 GOAL on Credit Suisse shares 8 GOAL on Novartis shares 9 GOAL on BP Amoco shares 10 GOAL on Roche GS 11 GOAL on SAP shares 12 GOAL on Philips shares 13 GOAL on Bank Austria shares 14 GOAL on Sonera shares 15 Convertible into Nikkei 225 Index 16 GOAL on Sony ADR’s 17 GOAL on UBS AG shares 18 GOAL on Telefonica shares 19 GOAL on Cisco shares 20 GOAL on Zurich Fin. Services shares 21 GOAL on Nokia shares 22 GOAL on Vivendi shares 23 GOAL on Ericsson shares 24 GOAL on Lucent shares 25 GOAL on Kyocera shares 26 GOAL on Telecom Italia Mobile shares 27 GOAL on ICI shares 28 GOAL on ABB shares 29 GOAL on Siemens shares 30 GOAL on Telmex shares 31 GOAL on Deutsche Telekom shares 32 GOAL on Intel shares 33 GOAL on Texas Instruments shares 34 GOAL on Nortel shares 35 GOAL on Granada Group shares 36 GOAL on IBM shares 37 GOAL on Nasdaq 100 Index 38 GOAL on Banco Bilbao shares 39 GOAL on Carrefour shares 40 GOAL on Bayer shares 41 GOAL on Motorola shares 42 GOAL on Glaxo shares 43 GOAL on Swiss Re shares 44 Convertible into European Insurance Shares Basket 45 GOAL on Daimler Chrysler shares 46 Convertible into FTSE Index 47 Indexed to UBS Currency Portfolio 48 Convertible into UBS Dutch Corporate Basket 49 Convertible into Sony shares 50 Convertible into UBS Oil Basket 51 Convertible into UBS Global Equity Arbitrage 52 Convertible into SMI Index 53 Convertible into NTT shares 54 Convertible into Blue Chip Basket 55 Convertible into Nasdaq 100 Index 56 Convertible into STOXX 50 Index 57 PEP on Internet Perf. Basket 58 Convertible into AT&T shares 59 PIP on Worldbasket PIP Protected Index Participation Protected Equity Participation PEP GOAL Geld- oder Aktien-Lieferung (cash or share delivery) 90 Note 21 Long-Term Debt (continued) Publicly placed bond issues of UBS subsidiaries outstanding at 31.12.2000 Year of issue Interest rate in % Remarks Maturity Premature redemption possible Currency Amount in millions UBS Americas Inc. (former PaineWebber) 1999 1999 2000 2000 1999 2000 1998 1999 2000 1999 1998 1997 1997 1997 1999 1997 1991 2000 1997 1999 1999 1995 2000 1999 1999 2000 2000 1992 1997 1997 1992 1997 1997 1999 1999 1999 1998 1998 2000 1993 1998 2000 1998 1998 1998 1993 1999 1993 2000 1994 1994 1996 1998 1998 1994 2000 7.460 5.830 6.924 6.820 7.060 7.500 6.185 5.810 7.540 7.060 6.870 6.585 6.520 6.440 7.090 6.580 9.250 6.910 6.990 6.015 6.020 8.250 7.590 7.060 7.030 1.010 7.358 8.390 7.035 7.010 7.750 7.010 6.650 7.210 7.259 7.160 7.140 6.250 7.020 7.875 7.110 1.270 6.320 6.331 6.980 6.785 1.340 7.130 7.250 6.900 6.930 7.300 6.450 8.010 6.730 6.730 subordinated subordinated subordinated subordinated 11.01.2001 25.01.2001 26.01.2001 05.04.2001 16.05.2001 17.05.2001 21.05.2001 08.06.2001 18.06.2001 20.06.2001 26.06.2001 23.07.2001 26.09.2001 28.09.2001 19.11.2001 14.12.2001 17.12.2001 19.02.2002 18.03.2002 28.03.2002 22.04.2002 01.05.2002 02.05.2002 14.05.2002 20.05.2002 01.07.2002 15.07.2002 24.07.2002 14.08.2002 27.08.2002 02.09.2002 19.09.2002 15.10.2002 30.10.2002 18.11.2002 18.12.2002 03.02.2003 04.02.2003 14.02.2003 17.02.2003 13.03.2003 13.03.2003 18.03.2003 20.05.2003 23.06.2003 01.07.2003 01.07.2003 02.07.2003 23.07.2003 15.08.2003 15.08.2003 15.10.2003 01.12.2003 01.12.2003 20.01.2004 26.01.2004 USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD JPY USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD JPY USD USD USD USD JPY USD USD USD USD USD USD USD USD USD 15 20 50 30 8 49 25 10 49 8 7 25 22 22 12 10 154 20 10 20 45 128 25 25 12 900 101 6 25 15 178 25 25 10 40 11 12 25 12 103 10 900 45 25 10 30 900 7 7 10 28 20 340 26 21 20 UBS Group Financial Statements Notes to the Financial Statements Note 21 Long-Term Debt (continued) Publicly placed bond issues of UBS subsidiaries outstanding at 31.12.2000 Year of issue Interest rate in % Remarks Maturity Premature redemption possible Currency Amount in millions subordinated UBS Americas Inc. (former PaineWebber) (continued) 1999 1997 1994 1999 1999 2000 1999 1999 1999 1997 1996 1997 1999 1996 1997 2000 2000 1995 1999 1998 2000 1993 1999 1996 1999 1999 1997 1997 1998 1998 1998 1998 1998 1996 1999 1999 1998 1998 1999 1997 1994 1997 1997 1997 1997 1997 1997 1997 1997 1998 1996 1997 7.580 6.900 6.680 7.510 7.015 7.660 7.360 6.375 7.280 7.060 7.550 6.790 7.260 7.490 7.010 7.410 7.410 8.875 7.380 6.520 7.678 6.500 7.460 6.750 7.330 7.330 7.220 7.110 6.720 6.730 6.550 6.520 7.180 7.625 6.640 7.625 6.650 6.640 6.760 7.740 7.625 8.060 7.930 7.810 7.910 7.990 7.605 7.633 7.390 7.310 8.300 8.080 28.01.2004 09.02.2004 10.02.2004 10.02.2004 10.02.2004 12.02.2004 11.05.2004 17.05.2004 27.05.2004 18.08.2004 04.10.2004 04.10.2004 13.10.2004 15.10.2004 25.10.2004 27.01.2005 11.02.2005 15.03.2005 15.03.2005 06.04.2005 15.07.2005 01.11.2005 14.11.2005 01.02.2006 01.05.2006 01.05.2006 20.02.2007 22.10.2007 01.04.2008 03.04.2008 15.04.2008 21.04.2008 31.07.2008 15.10.2008 05.02.2009 01.12.2009 13.04.2010 14.04.2010 16.05.2011 30.01.2012 17.02.2014 17.01.2017 06.02.2017 13.02.2017 17.03.2017 09.06.2017 17.07.2017 11.09.2017 16.10.2017 07.05.2018 12.01.2036 03.01.2037 subordinated subordinated USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD 10 15 21 13 14 11 46 534 12 25 25 14 31 12 20 26 12 125 57 31 26 208 32 102 10 11 10 26 36 44 257 10 10 157 27 290 26 31 11 21 212 28 11 17 22 11 21 11 27 14 198 203 91 12.03.2001 03.01.2002 Footnotes 1 GOAL on Royal Dutch shares 2 GOAL on Swisscom shares 3 GOAL on Lloyds TSB shares 4 Convertible into Omvand Konvertible Svensk Basportfolj 5 GOAL on British Telecom shares 6 GOAL on S&P Index 7 GOAL on Credit Suisse shares 8 GOAL on Novartis shares 9 GOAL on BP Amoco shares 10 GOAL on Roche GS 11 GOAL on SAP shares 12 GOAL on Philips shares 13 GOAL on Bank Austria shares 14 GOAL on Sonera shares 15 Convertible into Nikkei 225 Index 16 GOAL on Sony ADR’s 17 GOAL on UBS AG shares 18 GOAL on Telefonica shares 19 GOAL on Cisco shares 20 GOAL on Zurich Fin. Services shares 21 GOAL on Nokia shares 22 GOAL on Vivendi shares 23 GOAL on Ericsson shares 24 GOAL on Lucent shares 25 GOAL on Kyocera shares 26 GOAL on Telecom Italia Mobile shares 27 GOAL on ICI shares 28 GOAL on ABB shares 29 GOAL on Siemens shares 30 GOAL on Telmex shares 31 GOAL on Deutsche Telekom shares 32 GOAL on Intel shares 33 GOAL on Texas Instruments shares 34 GOAL on Nortel shares 35 GOAL on Granada Group shares 36 GOAL on IBM shares 37 GOAL on Nasdaq 100 Index 38 GOAL on Banco Bilbao shares 39 GOAL on Carrefour shares 40 GOAL on Bayer shares 41 GOAL on Motorola shares 42 GOAL on Glaxo shares 43 GOAL on Swiss Re shares 44 Convertible into European Insurance Shares Basket 45 GOAL on Daimler Chrysler shares 46 Convertible into FTSE Index 47 Indexed to UBS Currency Portfolio 48 Convertible into UBS Dutch Corporate Basket 49 Convertible into Sony shares 50 Convertible into UBS Oil Basket 51 Convertible into UBS Global Equity Arbitrage 52 Convertible into SMI Index 53 Convertible into NTT shares 54 Convertible into Blue Chip Basket 55 Convertible into Nasdaq 100 Index 56 Convertible into STOXX 50 Index 57 PEP on Internet Perf. Basket 58 Convertible into AT&T shares 59 PIP on Worldbasket PIP Protected Index Participation Protected Equity Participation PEP GOAL Geld- oder Aktien-Lieferung (cash or share delivery) Note 21 Long-Term Debt (continued) Publicly placed bond issues of UBS subsidiaries outstanding at 31.12.2000 Remarks Maturity Premature redemption possible Currency Amount in millions Year of issue Interest rate in % UBS Finance (Curaçao) N.V. 1996 1996 1997 1990 1992 1997 1998 2.500 2.500 2.500 9.125 FRN 0.000 0.000 UBS Australia Ltd. 1997 1999 1999 3.250 5.000 5.000 S.G.W. Finance plc. 1991 13.250 S.G. Warburg Group plc. 1994 9.000 30.10.2001 30.10.2001 30.10.2001 08.02.2002 13.11.2002 29.01.2027 03.03.2028 02.10.2001 25.02.2002 25.02.2004 30.03.2001 03.03.2003 subordinated perpetual UBS Finance (Cayman Islands) Ltd. 0.000 1991 0.000 2000 28.02.2001 10.02.2005 DEM DEM DEM USD USD LIT DEM USD AUD AUD AUD GBP STG USD 100 150 100 225 250 226’955 136 101 104 104 60 12 200 22 59 UBS Group Financial Statements Notes to the Financial Statements Footnotes 1 GOAL on Royal Dutch shares 2 GOAL on Swisscom shares 3 GOAL on Lloyds TSB shares 4 Convertible into Omvand Konvertible Svensk Basportfolj 5 GOAL on British Telecom shares 6 GOAL on S&P Index 7 GOAL on Credit Suisse shares 8 GOAL on Novartis shares 9 GOAL on BP Amoco shares 10 GOAL on Roche GS 11 GOAL on SAP shares 12 GOAL on Philips shares 13 GOAL on Bank Austria shares 14 GOAL on Sonera shares 15 Convertible into Nikkei 225 Index 16 GOAL on Sony ADR’s 17 GOAL on UBS AG shares 18 GOAL on Telefonica shares 19 GOAL on Cisco shares 20 GOAL on Zurich Fin. Services shares 21 GOAL on Nokia shares 22 GOAL on Vivendi shares 23 GOAL on Ericsson shares 24 GOAL on Lucent shares 25 GOAL on Kyocera shares 26 GOAL on Telecom Italia Mobile shares 27 GOAL on ICI shares 28 GOAL on ABB shares 29 GOAL on Siemens shares 30 GOAL on Telmex shares 31 GOAL on Deutsche Telekom shares 32 GOAL on Intel shares 33 GOAL on Texas Instruments shares 34 GOAL on Nortel shares 35 GOAL on Granada Group shares 36 GOAL on IBM shares 37 GOAL on Nasdaq 100 Index 38 GOAL on Banco Bilbao shares 39 GOAL on Carrefour shares 40 GOAL on Bayer shares 41 GOAL on Motorola shares 42 GOAL on Glaxo shares 43 GOAL on Swiss Re shares 44 Convertible into European Insurance Shares Basket 45 GOAL on Daimler Chrysler shares 46 Convertible into FTSE Index 47 Indexed to UBS Currency Portfolio 48 Convertible into UBS Dutch Corporate Basket 49 Convertible into Sony shares 50 Convertible into UBS Oil Basket 51 Convertible into UBS Global Equity Arbitrage 52 Convertible into SMI Index 53 Convertible into NTT shares 54 Convertible into Blue Chip Basket 55 Convertible into Nasdaq 100 Index 56 Convertible into STOXX 50 Index 57 PEP on Internet Perf. Basket 58 Convertible into AT&T shares 59 PIP on Worldbasket PIP Protected Index Participation Protected Equity Participation PEP GOAL Geld- oder Aktien-Lieferung (cash or share delivery) 92 UBS Group Financial Statements Notes to the Financial Statements Note 22 Other Liabilities CHF million Provisions, including restructuring provision Provisions for commitments and contingent liabilities Current tax liabilities Deferred tax liabilities VAT and other tax payables Settlement and clearing accounts Other payables Note 23 24 31.12.00 31.12.99 3,024 54 2,423 1,565 1,071 4,906 5,713 3,611 149 1,747 994 888 4,789 3,814 Total other liabilities 18,756 15,992 Note 23 Provisions, including Restructuring Provision Business risk provisions Business risk provisions consist mainly of provisions for operational risks and reserves for litigation. CHF million Balance at the beginning of the year New provisions charged to income Provisions applied Recoveries and adjustments Balance at the end of the year 31.12.00 31.12.99 2,182 746 (1,316) 682 2,294 4,121 539 (705) (1,773) 1 2,182 1 Includes reclassification of valuation adjustments of CHF 2,384 million to related trading assets and liabilities. UBS / SBC merger restructuring provision At the announcement of the UBS / SBC merger in December 1997, it was communicated that the merged firm’s operations in various locations would be combined, resulting in vacant properties, reductions in personnel, elimination of redundancies in the information technology platforms, exit costs and other costs. As a result, a restructuring provision of CHF 7,300 million (of which CHF 7,000 million was recognized as a restructuring expense in 1997 and CHF 300 million was recog- nized as a component of general and administrative expense in the fourth quarter of 1999) was established, to be used over a period of four years. At 31 December 2000, the Group had utilized CHF 6,570 million of the provisions. The restructuring provision included approximately CHF 3,000 million for employee termination benefits, CHF 1,500 million for sale and lease breakage costs associated with the closure of premis- es, CHF 1,650 for IT integration projects and write-offs or equipment which management had com- mitted to dispose of and CHF 1,150 million for other costs classified as Personal expenses, General and administrative expense or Other income. The employee terminations affected all functional levels and all operating Business Groups. CHF 2,000 million of the provision related to employee termination benefits reflects the costs of elimi- nating approximately 7,800 positions, after considering attrition and redeployment within the Company. CHF 1,000 million of the provision related to payments to maintain stability in the work- force during the integration period. As of 31 December 2000, approximately 6,200 employees had been made redundant or retired early and the remaining personnel restructuring provision balance was CHF 410 million. 93 UBS Group Financial Statements Notes to the Financial Statements Note 23 Provisions, including Restructuring Provision (continued) CHF million Balance at the beginning of the year Addition Applied 1 Personnel IT Premises Other Total utilized during the year Balance at the end of the year 31.12.00 31.12.99 1,429 0 (188) (63) (399) (49) (699) 730 3,024 2,973 300 (378) (642) (673) (151) (1,844) 1,429 3,611 Total provisions, including restructuring provision 1 The expense categories refer to the nature of the expense rather than the income statement expense line. Cumulative utilization, since establishment of UBS / SBC merger restructuring provision through 31 December 2000 CHF million Personnel UBS Switzerland UBS Asset Management UBS Warburg Corporate Center Group total Total provision Future utilization 476 32 1,983 99 2,590 IT 1,086 9 373 34 1,502 Premises Other 184 1 1,154 1,339 220 3 413 503 1,139 Total 1,966 44 2,770 1,790 6,570 7,300 730 94 UBS Group Financial Statements Notes to the Financial Statements Note 24 Income Taxes CHF million For the year ended Federal and cantonal Current payable Deferred Foreign Current payable Deferred Total income tax expense 31.12.00 31.12.99 31.12.98 1,325 233 451 311 2,320 849 511 359 (33 ) 1,686 213 463 200 28 904 The Group made net tax payments, including domestic federal, cantonal and foreign taxes, of CHF 959 million, CHF 1,063 million and CHF 733 million for the full years of 2000, 1999 and 1998, respectively. The components of operating profit before tax, and the differences between income tax expense reflected in the financial statements and the amounts calculated at the Swiss statutory rate of 25% are as follows: CHF million For the year ended Operating profit before tax Domestic Foreign Income taxes at Swiss statutory rate of 25% Increase / (decrease) resulting from: Applicable tax rates differing from Swiss statutory rate Tax losses not recognized Previously unrecorded tax losses now recognized Lower taxed income Non-deductible goodwill amortization Other non-deductible expenses Adjustments related to prior years Change in deferred tax valuation allowance 31.12.00 31.12.99 31.12.98 10,199 7,079 3,120 2,550 (336) 164 (655) (401) 159 432 245 162 7,893 6,957 936 1,973 55 39 (215 ) (278 ) 98 34 (112 ) 92 3,871 10,287 (6,416) 968 88 1,436 (142) (1,849) 117 55 7 224 904 Income tax expense 2,320 1,686 As of 31 December 2000 the Group had accumulated unremitted earnings from foreign subsidiaries on which deferred taxes had not been provided as the undistributed earnings of these foreign sub- sidiaries are indefinitely reinvested. 95 UBS Group Financial Statements Notes to the Financial Statements 96 Note 24 Income Taxes (continued) Significant components of the Group’s deferred income tax assets and liabilities (gross) are as follows: CHF million Deferred tax assets Compensation and benefits Restructuring provision Allowance for credit losses Net operating loss carry forwards Others Total Valuation allowance Net deferred tax assets Deferred tax liabilities Property and equipment Investment in associates Other provisions Unrealized gains on investment securities Others Total 31.12.00 31.12.99 1,705 160 148 1,690 1,069 4,772 (2,564) 2,208 457 86 133 306 583 1,565 316 316 138 2,194 237 3,201 (2,459) 742 342 153 142 93 264 994 The change in the balance of the net deferred tax assets does not equal the deferred tax expense. This is due to the effect of foreign currency rate changes on tax assets and liabilities denominated in cur- rencies other than CHF and also due to the integration of PaineWebber. Certain foreign branches and subsidiaries of the Group have deferred tax assets related to net operating loss carry forwards and other items. Because recognition of these assets is uncertain, the Group has established valuation allowances of CHF 2,564 million and CHF 2,459 million at 31 De- cember 2000 and 31 December 1999, respectively. Net operating loss carry forwards totalling CHF 6,520 million at 31 December 2000 are avail- able to reduce future taxable income of certain branches and subsidiaries. The carry forwards have lives as follows: One year 2 to 4 years More than 4 years Total Note 25 Minority Interests CHF million Balance at the beginning of the year Issuances and increases 1 Decreases and dividend payments Foreign currency translation Minority interest in profit Balance at the end of the year 31.12.00 5 170 6,345 6,520 31.12.00 31.12.99 434 2,596 (73) (159) 87 2,885 990 17 (689) 62 54 434 1 Thereof issuance of Trust Preferred securities USD 1,500 million (CHF 2,594 million at issuance) in connection with the PaineWebber acquisition. UBS Group Financial Statements Notes to the Financial Statements Note 26 Derivative Instruments Derivatives held or issued for trading purposes Most of the Group’s derivative transactions relate to sales and trading activities. Sales activi- ties 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 in- volves 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 expec- tation of profiting from favourable movements in prices, rates or indices. Arbitrage activities involve identifying and profiting from price dif- ferentials between markets and products. Derivatives held or issued for non-trading purposes The Group also uses derivatives as part of its asset and liability management activities. The majority of derivative positions used in UBS’s asset and liability management activities are established via intercompany transactions with independently managed units within the Group. When the Group purchases assets and issues liabilities at fixed interest rates it subjects itself to fair value fluctuations as market interest rates change. These fluctuations in fair value are managed by entering into interest rate contracts, mainly interest rate swaps which change the fixed rate instrument into a variable rate instru- ment. When the Group purchases foreign currency denominated assets, issues foreign currency denominated debt or has foreign net invest- ments, 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 finan- cial instruments for both trading and non-trad- ing purposes: Swaps: Swaps are transactions in which two parties exchange cash flows on a specified no- tional amount for a predetermined period. Interest rate swap contracts generally repre- sent the contractual exchange of fixed and float- ing rate payments of a single currency, based on a notional amount and an interest reference rate. Cross currency interest rate swaps generally involve the exchange of payments which are based on the interest reference rates available at the inception of the contract on two different currency principal balances that are exchanged. The principal balances are re-exchanged at an agreed upon rate at a specified future date. Forwards and futures: Forwards and futures are contractual obligations to buy or sell a finan- cial 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 con- tracts that are transacted on regulated ex- changes. Options: Options are contractual agreements under which the seller (writer) grants the pur- chaser the right, but not the obligation, either to buy (call option) or sell (put option) by or at a set date, a specified amount of a financial instrument at a predetermined price. The seller receives a premium from the purchaser for this right. Notional amounts and replacement values The following table provides the notional amounts and the positive and negative replace- ment values of the Group’s derivative trans- actions. The notional amount is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. It provides an indication of the volume of business transacted by the Group but does not provide any measure of risk. Some derivatives are standardized in terms of their nominal amounts and settlement dates, and these are designed to be bought and sold in active markets (exchange traded). Others are packaged specifically for individual customers and are not exchange traded although they may be bought and sold between counterparties at negotiated prices (OTC instruments). Positive replacement value represents the cost to the Group of replacing all transactions with a 97 UBS Group Financial Statements Notes to the Financial Statements Note 26 Derivative Instruments (continued) receivable amount if all the Group’s counterpar- ties were to default. This measure is the industry standard for the calculation of current credit exposure. Negative replacement value is the cost to the Group’s counterparties of replacing all the Group’s transactions with a commitment if the Group were to default. The total positive and negative replacement values after netting are included in the balance sheet separately. 98 UBS Group Financial Statements Notes to the Financial Statements Note 26 Derivative Instruments (continued) As at 31 December 2000 Term to maturity Within 3 months NRV 2 PRV 1 3–12 months NRV PRV 1–5 years NRV PRV Over 5 years NRV PRV Total PRV Total NRV Total notional amount CHF bn CHF million Interest rate contracts Over the counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts 3 Futures Options Total Foreign exchange contracts Over the counter (OTC) contracts Forward contracts Interest and currency swaps Options Exchange-traded contracts 3 Futures Options Total Precious metals contracts Over the counter (OTC) contracts Forward contracts Options Exchange-traded contracts 3 Futures Options Total Equity / Index contracts Over the counter (OTC) contracts Forward contracts Options Exchange-traded contracts 3 Futures Options Total Commodity contracts Over the counter (OTC) contracts Forward contracts Options Total Total derivative instruments Replacement value netting Replacement values after netting 517 1,879 542 791 4,231 541 167 5,398 865 360 1,785 2,969 284 16,846 1,512 256 9,246 6,862 28,248 701 20,993 4,541 968 52,371 3,620 1,407 36,255 14,913 1,066.3 3,033.2 864.6 0 6 10 0 16 454.6 24.1 2,938 5,569 6,430 5,124 18,642 16,364 28,949 25,534 56,959 52,591 5,442.8 22,652 2,563 2,958 20,140 1,621 2,726 8,098 2,921 2,896 9,410 2,507 3,031 939 8,715 821 1,084 7,031 438 35 3,019 28 27 2,098 35 31,724 17,218 6,703 30,661 13,257 6,230 1,250.3 345.9 786.8 4 1 21 4 25 5 1.0 1.2 28,177 24,488 13,936 14,952 10,475 8,553 3,082 2,160 55,670 50,153 2,385.2 176 128 1 305 187 80 2 269 211 206 6 423 181 201 12 394 369 934 394 936 2 85 17 119 758 1,353 779 1,336 7 14 15.3 75.2 0.7 1.3 1,303 1,330 87 136 2,118 2,129 92.5 1,417 1,751 3,186 3,867 1,170 6,977 2,271 12,358 2,424 4,752 3,019 17,985 1,715 311 2,948 2,648 6,726 13,791 11,424 36,858 32.2 283.8 1,771 4,939 1,647 8,700 819 1,051 400 446 2 3 2,992 3,147 15.3 45.2 8,966 15,680 7,576 21,450 2,028 5,599 23,509 51,429 376.5 1 1 2 1 1 3 3 1 3 4 0 4 4 2 4 6 0.0 0.0 0.0 36,359 39,028 29,756 36,150 37,999 47,701 34,146 33,429 138,260 156,308 80,385 80,385 57,875 75,923 1 PRV: Positive replacement value. 2 NRV: Negative replacement value. 3 Exchange-traded products include proprietary trades only. 99 UBS Group Financial Statements Notes to the Financial Statements Note 26 Derivative Instruments (continued) As at 31 December 1999 1 Term to maturity CHF million Interest rate contracts Over the counter (OTC) contracts Forward contracts Swaps Options Exchange-traded contracts 4 Futures Options Total Foreign exchange contracts Over the counter (OTC) contracts Forward contracts Interest and currency swaps Options Exchange-traded contracts 4 Futures Options Total Precious metals contracts Over the counter (OTC) contracts Forward contracts Options Exchange-traded contracts 4 Futures Options Total Equity / Index contracts Over the counter (OTC) contracts Forward contracts Options Exchange-traded contracts 4 Futures Options Total Commodity contracts Over the counter (OTC) contracts Forward contracts Options Total Total derivative instruments Replacement value netting Replacement values after netting Within 3 months NRV 3 PRV 2 3–12 months NRV PRV 1–5 years NRV PRV Over 5 years NRV PRV Total PRV Total NRV Total notional amount CHF bn 34 5,248 108 55 2,100 27 68 3,125 47 19 2,871 742 6 22,565 268 1 24,168 12 35,557 4 30,301 2,018 108 66,495 427 75 59,440 2,799 554.0 2,650.9 1,877.0 5,390 2,182 3,240 3,632 22,839 24,181 35,561 32,319 67,030 62,314 5,910.4 774.1 54.4 9,657 622 3,344 14,264 520 2,708 3,628 2,036 3,934 7,008 1,826 3,138 411 529 8,883 851 6,076 411 13 2,567 30 37 1,518 10 13,709 5,754 16,191 22,160 9,940 6,267 1,077.1 252.3 813.5 0 0 1 1 4 1 0 4 1 2 3.5 3.7 13,623 17,494 9,602 11,973 9,823 7,338 2,610 1,565 35,658 38,370 2,150.1 1,092 277 1,047 215 5 1,369 1,267 44 594 5 643 62 466 70 1,168 60 1,059 0 117 0 130 1,206 2,156 1,169 1,870 8 10 5 23 30.0 82.9 0.8 4.9 536 1,238 1,129 117 130 3,367 3,062 118.6 526 1,840 1,721 1,611 1,148 3,814 2,044 10,021 503 9,766 5,325 27,182 1,762 350 2,787 2,985 3,939 15,770 11,877 41,799 149.4 264.7 74 1,395 3,835 46 304 1,744 4,047 72 63 74 3,211 46 4,414 25.1 79.8 3,682 6,706 16,112 10,341 32,570 2,112 5,772 22,994 58,136 519.0 29 15 44 25 15 40 24,261 24,665 20,191 32,253 44,241 65,218 40,400 29 15 44 25 15 40 0.2 0.1 0.2 39,786 129,093 161,922 66,136 66,136 62,957 95,786 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 PRV: Positive replacement value. 3 NRV: Negative replacement value. 4 Exchange-traded products include proprietary trades only. 100 UBS Group Financial Statements Notes to the Financial Statements Note 26 Derivative Instruments (continued) The Group uses derivative instruments for trading and non-trading purposes as explained in the previous paragraphs. All derivatives instruments held or issued for trading or used to hedge another financial instrument carried at fair value are accounted for at fair value with changes in fair value recorded in Net trading income. The Group uses interest rate swaps in its asset / liability management. These interest rate swaps are accounted for on the accrual basis of accounting as an adjustment of Net interest income. They are disclosed under ”non-trading” in the table below. Gains and losses on terminations of non-trading interest rate swaps are deferred and amor- tized to Net interest income over the remaining original maturity of the contract. All other derivatives used in asset/liability manage- ment are accounted for on a fair value basis of accounting due to the short term nature of these derivatives. The following table presents the fair value, average fair value and notional amounts for each class of derivative financial instrument, before netting, for the years ended 31 December 2000 and 31 December 1999 distinguished between held or issued for trading purposes and held or issued for non-trading purposes. Average balances for the years ended 31 December 2000 and 31 December 1999 are cal- culated from quarterly data. CHF million Trading Interest Rate contracts Foreign Exchange contracts Precious Metal contracts Equity/Index contracts Commodity contracts Total Non-Trading Interest Rate contracts Foreign Exchange contracts Precious Metal contracts Equity/Index contracts Commodity contracts Total Total Trading and Non-Trading Interest Rate contracts Foreign Exchange contracts Precious Metal contracts Equity/Index contracts Commodity contracts 31 December 2000 31 December 1999 1 total PRV average PRV total NRV total average notional CHF bn NRV total PRV average PRV total NRV average NRV total notional CHF bn 52,626 55,299 2,118 23,509 4 55,447 42,820 2,809 22,224 18 49,202 49,314 2,129 51,429 6 54,803 37,138 2,659 46,591 18 5,244 2,374 92 377 0 62,082 34,632 3,367 22,994 44 75,923 35,843 4,630 18,366 383 58,107 37,479 3,062 58,136 40 75,129 37,075 4,501 42,984 213 5,775 2,137 119 519 0 133,556 123,318 152,080 141,209 123,119 135,145 156,824 159,902 4,333 371 0 0 0 4,704 3,997 364 0 0 0 4,361 3,389 839 0 0 0 4,228 3,400 1,057 0 0 0 4,457 199 11 0 0 0 4,948 1,026 0 0 0 5,974 5,014 669 0 0 0 5,683 4,207 891 0 0 0 5,098 4,212 622 0 0 0 4,834 135 13 0 0 0 56,959 55,670 2,118 23,509 4 59,444 43,184 2,809 22,224 18 52,591 50,153 2,129 51,429 6 58,203 38,195 2,659 46,591 18 5,443 2,385 92 377 0 67,030 35,658 3,367 22,994 44 80,937 36,512 4,630 18,366 383 62,314 38,370 3,062 58,136 40 79,341 37,697 4,501 42,984 213 5,910 2,150 119 519 0 Total 138,260 127,679 156,308 145,666 129,093 140,828 161,922 164,736 1 The 1999 figures have been restated to reflect retroactive changes in presentation. 101 Off-Balance Sheet and other Information Note 27 Pledged Assets Assets pledged or assigned as security for liabilities and assets subject to reservation of title CHF million Money market paper Mortgage loans Securities 1 Property and equipment Other Total pledged assets Carrying amount 31.12.00 28,395 1,639 87,871 137 1 118,043 Related liability 31.12.00 5 1,121 62,611 66 0 63,803 Carrying amount 31.12.99 35,578 2,536 23,837 170 2,110 64,231 Related liability 31.12.99 707 1,736 585 91 0 3,119 1 For the year ended 31 December 2000 includes securities pledged in respect of securities lending and repurchase agreements. Assets are pledged as collateral for collateralized credit lines with central banks, loans from central mortgage institutions, deposit guarantees for savings banks, security deposits relating to stock exchange membership and mortgages on the Group’s property. Note 28 Fiduciary Transactions Fiduciary placement represents funds which customers have instructed the Group to place in foreign banks. The Group is not liable to the customer for any default by the foreign bank nor do creditors of the Group have a claim on the assets placed. CHF million Placements with third parties Fiduciary credits and other fiduciary financial transactions Total fiduciary transactions 31.12.00 31.12.99 69,300 1,234 70,534 60,221 1,438 61,659 UBS Group Financial Statements Notes to the Financial Statements 102 UBS Group Financial Statements Notes to the Financial Statements Note 29 Commitments and Contingent Liabilities Commitments and contingencies represent potential future liabilities of the Group resulting from credit facilities available to clients, but not yet drawn upon by them. They are subject to expiration at fixed dates. The Group engages in providing open credit facilities to allow clients quick access to funds required to meet their short-term obligations as well as their long-term financing needs. The credit facilities can take the form of guarantees, whereby the Group might guarantee repayment of a loan taken out by a client with a third party; standby letters of credit, which are credit enhancement facilities enabling the client to engage in trade finance at lower cost; documentary letters of credit, which are trade finance- related payments made on behalf of a client; commitments to enter into repurchase agreements; note issuance facilities and revolving underwriting facilities, which allow clients to issue money market paper or medium-term notes when needed without engaging in the normal underwriting process each time. The figures disclosed in the accompanying tables represent the amounts at risk should clients draw fully on all facilities and then default, and there is no collateral. Determination of the creditworthiness of the clients is part of the normal credit risk management process, and the fees charged for maintenance of the facilities reflect the various credit risks. CHF million 31.12.00 31.12.99 Contingent liabilities Credit guarantees and similar instruments 1 Sub-participations Total Performance guarantees and similiar instruments 2 Sub-participations Total Irrevocable commitments under documentary credits Gross contingent liabilities Sub-participations Net contingent liabilities Irrevocable commitments Undrawn irrevocable credit facilities Sub-participations Total Liabilities for calls on shares and other equities Gross irrevocable commitments Sub-participations Net irrevocable commitments Gross commitments and contingent liabilities Sub-participations Net commitments and contingent liabilities 18,651 (5,669) 12,982 6,337 (62) 6,275 2,798 27,786 (5,731) 22,055 53,510 (788) 52,722 133 53,643 (788) 52,855 81,429 (6,519) 74,910 18,822 (3,665) 15,157 6,782 (42) 6,740 2,704 28,308 (3,707) 24,601 65,693 (1,836) 63,857 57 65,750 (1,836) 63,914 94,058 (5,543) 88,515 1 Credit guarantees in the form of bill of exchange and other guarantees, including guarantees in the form of irrevocable letters of credit, endorsement liabilities from bills rediscounted, advance payment guarantees and similar facilities. 2 Bid bonds, performance bonds, builders’ guarantees, letters of indemnity, other performance guarantees in the form of irrevocable letters of credit and similar facilities. CHF million Overview of collateral Gross contingent liabilities Gross irrevocable commitments Liabilities for calls on shares and other equities Total 31.12.2000 Total 31.12.1999 Mortgage collateral Other collateral Unsecured Total 154 1,124 0 1,278 577 12,703 7,455 0 20,158 20,130 14,929 44,931 133 59,993 73,351 27,786 53,510 133 81,429 94,058 103 UBS Group Financial Statements Notes to the Financial Statements 104 Note 30 Operating Lease Commitments Our minimum commitments for non-cancellable leases of premises and equipment are as follows: CHF million Operating leases due 2001 2002 2003 2004 2005 2006 and thereafter Total commitments for minimum payments under operating leases 31.12.00 686 652 634 580 503 3,958 7,013 Operating expenses include CHF 816 million and CHF 742 million in respect of operating lease rentals for the year ended 31 December 2000 and 31 December 1999, respectively. Note 31 Litigation In the United States, several class actions, in rela- tion to the business activities of Swiss Companies during World War II, have been brought against the bank (as legal successor to Swiss Bank Corporation and Union Bank of Switzerland) in the United States District Court for the Eastern District of New York (Brooklyn). These lawsuits were initially filed in October 1996. Another Swiss bank was designated as a defendant along- side us. On 12 August 1998, however, a settle- ment was reached between the parties. This set- tlement provides for a payment by the defendant banks to the plaintiffs, under certain terms and conditions, of an aggregate amount of USD 1.25 billion. UBS agreed to contribute up to two-thirds of this amount. As a result of contributions by Swiss industrial companies to the settlement, UBS’ share was reduced by CHF 50 million. A number of persons have elected to opt out of the settlement and not to participate in the class action. Based on our estimates of forthcoming contributions, we provided USD 610 million in 1998, an additional USD 95 million in 1999 and USD 123 million in 2000. Several payments have been made approximating the reserved amount. The settlement agreement was approved by the competent judge on 26 July 2000, and on 22 No- vember 2000 the distribution plan was approved. Appeals against these decisions are still pending, but we do not believe they should have a finan- cial impact on the Group. In addition, UBS AG and other companies within the UBS Group are subject to various claims, disputes and legal proceedings, as part of the normal course of business. The Group makes provision for such matters when, in the opinion of management and its professional advisors, it is probable that a payment will be made by the Group, and the amount can be reasonably esti- mated. All litigation provisions are included within Business risk provisions. In respect of the further claims asserted against the Group of which management is aware (which, according to the principles out- lined above, have not been provided for), it is the opinion of management that such claims are either without merit, can be successfully defend- ed or will result in exposure to the Group which is immaterial to both financial position and results of operations. UBS Group Financial Statements Notes to the Financial Statements Note 32 Financial Instruments Risk Position Overall risk position The Group manages risk in a number of ways, including the use of a Value-at-Risk model com- bined 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 val- ues 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 analy- sis, is set out below. Interest rate sensitivity is one of the inputs to the Value-at-Risk (VaR) model used by the Group to manage its overall market risk, of which interest rate risk is a part. The following table sets out the extent to which the Group was exposed to interest rate risk at 31 December 2000. The table shows the potential impact of a one basis point (0.01%) increase in market interest rates which would influence the fair values of both assets and liabil- ities 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. 105 UBS Group Financial Statements Notes to the Financial Statements Note 32 Financial Instruments Risk Position (continued) a) Interest Rate Risk (continued) Interest rate sensitivity position CHF thousand per basis point CHF USD EUR GBP JPY Others CHF thousand per basis point CHF USD EUR GBP JPY Others Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Trading Non-trading Interest sensitivity by time bands as of 31.12.2000 3 to 12 months 1 to 3 months 1 to 5 years Within 1 month 41 (39 ) (493 ) 13 (82 ) 0 (227 ) 0 293 0 (2 ) 0 (471 ) 49 2,007 58 (152 ) 9 152 0 (1,532 ) 0 (41 ) 0 854 (49 ) 293 11 114 1 145 (36 ) 1,088 0 124 0 63 (6,802 ) (2,293 ) (342 ) 1,190 82 (229 ) 270 62 (1) (50 ) 0 Interest sensitivity by time bands as of 31.12.1999 3 to 12 months 1 to 3 months 1 to 5 years Within 1 month 171 (30 ) (411 ) 3 (39 ) 0 1 0 484 0 (34 ) 0 (902 ) (8) 1,018 (33 ) (239 ) (3) 43 5 (1,708 ) 0 46 0 466 (398 ) 386 (10 ) 113 3 10 (39 ) 927 0 50 0 506 (6,204 ) (109 ) 83 600 30 (34 ) 77 (101 ) (1) (195 ) 0 Over 5 years (478 ) (3,018 ) 380 (183 ) (1,801 ) 177 521 585 (450 ) (4) (44 ) 0 Over 5 years (417 ) (1,220 ) (908 ) 1,207 (1,406 ) 210 (77 ) 815 135 (4) 24 0 Total 9 (9,859) (106) (443) (731) 269 362 819 (539) (5) (13) 0 Total (176) (7,860) (24) 1,250 (971) 240 (57) 858 (263) (5) (109) 0 Trading The major part of trading-related interest rate risk is generated in fixed income securities trad- ing, fixed income derivatives trading, trading in currency forward contracts and money market trading and is managed within the Value at Risk model. Interest rate sensitivity arising from trad- ing activities is quite sizeable in USD, EUR, GBP and JPY as these are still the predominantly trad- ed currencies in the global interest rate markets. It should be noted that it is management’s view that an interest sensitivity analysis at a particular point in time has limited relevance with respect to trading positions, which can vary significant- ly on a daily basis. 106 UBS Group Financial Statements Notes to the Financial Statements Note 32 Financial Instruments Risk Position (continued) a) Interest Rate Risk (continued) Non-trading The interest rate risk related to client business with undefined maturities and non-interest bearing business including the strategic manage- ment of overall balance sheet interest rate expo- sure is managed by the Corporate Center. Significant contributors to the overall USD and GBP interest rate sensitivity were strategic long- term subordinated notes issues which are inten- tionally unhedged since they are regarded as constituting a part of the Group’s equity for asset and liability management purposes as well as funding transactions related to the acquisi- tion of PaineWebber. At 31 December 2000, the Group’s equity was invested in a portfolio of fixed rate CHF deposits with an average dura- tion of 2.5 years. As this equity investment is the most significant component of the CHF book, this results in the entire book having an interest rate sensitivity of CHF (9.9) million, which is reflected in the table above. This is in line with the duration and sensitivity targets set by the Group Executive Board. Investing in shorter- term or variable rate instruments would mean exposing the earnings stream (interest income) to higher fluctuations. b) Credit Risk Credit risk represents the loss which UBS would suffer if a counterparty or issuer failed to per- form its contractual obligations in all forms. It is inherent in traditional banking products – loans, commitments to lend, and contracts to support counterparties’ obligations to third parties such as letters of credit – and in foreign exchange and derivatives contracts, such as swaps and options (“traded products”). Positions in tradeable assets such as bonds and equities, including both direct holdings and synthetic positions through derivatives, also carry credit risk. This risk is managed primarily based on reviews of the financial status of each specific counterparty, which are rated on a 14 point rat- ing scale, based on probability of default. Credit risk is higher when counterparties are concen- trated in a single industry or geographical region. This is because a group of otherwise unrelated counterparties could be adversely affected in their ability to honor their obligations because of economic developments affecting their common industry or region. Concentrations of credit risk exist if a number of clients are engaged in similar activities, or are located in the same geographic region or have comparable economic characteristics such that their ability to meet contractual obligations would be similarly affected by changes in eco- nomic, political or other conditions. Concen- trations of credit risk indicate the relative sensi- tivity of the bank’s performance to developments affecting a particular industry or geographic location. (b)(i) On-balance sheet assets As of 31 December 2000, due from banks and loans to customers amounted to CHF 285 bil- lion. 57.9% of the gross loans were with clients domiciled in Switzerland. Please refer to Note 12 for a breakdown by region. The issuer default risk of securities positions reported at fair value in the trading portfolio assets amounted to CHF 253 billion as of 31 De- cember 2000. Please refer to Note 14 for a fur- ther breakdown by type of issuer. 107 Note 32 Financial Instruments Risk Position (continued) b) Credit Risk (continued) (b)(ii) Off-balance sheet financial instruments Credit commitments and contingent liabilities Of the CHF 81 billion in credit commitment and contingent liabilities as at 31 December 2000, 15% related to clients domiciled in Switzerland, 30% Europe (excluding Switzerland) and 45% North America. Derivatives Credit risk represents the current replacement value of all outstanding derivative contracts with an unrealized gain by taking into consideration legally enforceable master netting agreements. Positive replacement values amounted to CHF 58 billion as at 31 December 2000. Based on the location of the ultimate counterparty, 6% of this credit risk amount related to Switzerland, 45% to Europe (excluding Switzerland) and 32% to North America. 42% of the positive replacement values are with other banks. (b)(iii) Credit risk mitigation techniques Credit risk associated with derivative instru- ments is mitigated by the use of master netting agreements. A further method of reducing credit exposure arising from derivative transactions is to use collateralization arrangements. Master netting agreements eliminate risk to the extent that only the net claim is due to be settled in the case of a default of the counter- party. The impact of master netting agreements as at 31 December 2000 is to mitigate credit risk on derivative instruments by approximately CHF 80 billion. The impact can change substan- tially 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, diversi- fication and maturity structure of the portfolio. Credit utilization for all products is compared against established limits on a continual basis and is subject to a standard exception reporting process. UBS Group Financial Statements Notes to the Financial Statements 108 UBS Group Financial Statements Notes to the Financial Statements Note 32 Financial Instruments Risk Position (continued) 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 CHF billion CHF USD Assets Cash and balances with central banks Money market paper Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Positive replacement values Loans, net of allowance for credit losses Financial investments Accrued income and prepaid expenses Investments in associates Property and equipment Goodwill and other intangible assets Other assets Total assets Liabilities Money market paper issued Due to banks Cash collateral on securities Repurchase agreements Trading portfolio liabilities Negative replacement values Due to customers Accrued expenses and deferred income Long-term debt Other liabilities Minority interests Shareholders’ equity Total liabilities, minority interests and shareholders’ equity 1.9 0.5 5.8 0.5 5.3 16.0 11.7 154.2 7.1 1.6 0.7 6.9 0.3 2.2 214.7 0.2 6.5 0.1 10.0 2.0 8.6 118.8 3.0 18.1 9.9 0.2 44.8 0.2 51.5 10.4 169.2 83.7 134.5 6.9 52.3 6.4 4.4 0.0 1.4 19.1 3.3 543.3 67.2 46.5 12.6 194.6 52.4 6.3 129.7 11.8 23.5 3.6 2.5 0.0 222.2 550.7 31.12.00 31.12.99 EUR 0.5 11.1 8.0 2.4 37.4 27.3 0.6 7.1 0.7 0.2 0.1 0.0 0.0 0.6 96.0 0.5 10.6 5.0 16.1 11.4 2.0 29.9 1.7 3.9 2.5 0.1 0.0 83.7 Other CHF USD 0.4 3.4 4.9 5.8 67.4 75.5 38.7 31.2 2.2 0.9 0.1 0.6 0.1 2.4 233.6 6.8 18.6 5.7 74.9 16.8 59.0 32.4 4.5 9.4 2.8 0.1 0.0 3.4 1.5 7.5 0.1 2.0 29.4 7.7 166.4 2.5 1.7 0.9 7.4 1.2 3.1 234.8 1.0 8.1 0.1 16.5 0.0 12.8 127.5 3.1 23.7 8.5 0.3 30.6 0.2 38.6 7.7 106.4 42.5 77.1 5.2 35.0 2.9 1.8 0.1 0.5 2.2 1.9 322.1 55.7 36.3 6.5 91.3 38.2 7.0 93.8 4.8 17.6 3.2 0.0 0.0 231.0 232.2 354.4 EUR 0.5 0.7 5.3 1.1 37.8 26.9 0.5 5.3 0.7 0.5 0.0 0.1 0.0 2.5 81.9 0.3 14.5 1.0 27.8 5.4 2.0 23.7 0.5 3.1 0.7 0.0 0.0 79.0 Other 1.0 28.9 9.4 5.6 50.1 78.5 49.6 28.2 0.9 1.2 0.1 0.7 0.1 3.5 257.8 7.7 17.5 5.2 61.3 11.0 74.0 35.0 3.6 11.9 3.7 0.1 0.0 231.0 109 Note 32 Financial Instruments Risk Position (continued) d) Liquidity Risk Maturity analysis of assets and liabilities CHF billion On demand Subject to notice 1 Due within 3 mths Due between 3 and 12 mths Due between 1 and 5 years Due after 5 years Assets Cash and balances with central banks Money market paper Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Positive replacement values Loans, net of allowance for credit losses Financial investments Accrued income and prepaid expenses Investments in associates Property and equipment Goodwill and other intangible assets Other assets Total 31.12.00 Total 31.12.99 3.0 0.0 12.0 0.0 0.0 253.3 57.9 0.0 10.1 7.0 0.0 0.0 0.0 8.5 351.8 309.5 Liabilities Money market paper issued 0.0 Due to banks 8.6 Cash collateral on securities lent 0.0 Repurchase agreements 0.0 Trading portfolio liabilities 82.6 Negative replacement values 75.9 76.2 Due to customers Accrued expenses and deferred income 21.0 0.0 Long-term debt 18.8 Other liabilities Total 31.12.00 Total 31.12.99 283.1 247.1 0.0 1.5 0.5 0.0 0.0 0.0 36.8 0.0 0.0 0.0 0.0 0.0 0.0 38.8 53.4 0.0 4.7 0.1 0.0 0.0 0.0 72.3 0.0 0.1 0.0 77.2 83.6 42.4 12.0 177.0 164.6 0.0 0.0 106.2 0.1 0.0 0.0 0.0 0.0 0.0 502.3 395.2 48.7 59.3 23.3 251.3 0.0 0.0 150.1 0.0 3.8 0.0 536.5 416.2 24.0 2.3 0.0 21.1 0.0 0.0 37.5 2.4 0.0 0.0 0.0 0.0 0.0 87.3 44.8 26.1 3.7 0.0 32.7 0.0 0.0 10.0 0.0 11.8 0.0 84.3 72.6 0.0 1.1 0.4 0.3 0.0 0.0 56.7 2.3 0.0 0.0 0.0 0.0 0.0 60.8 72.7 0.0 5.5 0.0 0.4 0.0 0.0 1.7 0.0 25.7 0.0 33.3 30.0 0.0 0.3 0.0 7.9 0.0 0.0 7.6 1.5 0.0 0.9 8.9 19.5 0.0 46.6 21.0 0.0 0.4 0.0 11.1 0.0 0.0 0.4 0.0 13.5 0.0 25.4 16.0 Total 3.0 66.4 29.2 177.9 193.9 253.3 57.9 244.8 16.4 7.0 0.9 8.9 19.5 8.5 1,087.6 896.6 74.8 82.2 23.4 295.5 82.6 75.9 310.7 21.0 54.9 18.8 1,039.8 865.5 1 Deposits without a fixed term, on which notice of withdrawal or termination has not been given. (Such funds may be withdrawn by the depos- itor or repaid by the borrower subject to an agreed period of notice.) UBS Group Financial Statements Notes to the Financial Statements 110 UBS Group Financial Statements Notes to the Financial Statements Note 32 Financial Instruments Risk Position (continued) e) Capital Adequacy Risk-weighted assets (BIS) CHF million Balance sheet assets Due from banks and other collateralized lendings Net positions on securities 1 Positive replacement values Loans, net of allowances for credit losses and other collateralized lendings Accrued income and prepaid expenses Property and equipment 2 Other assets Off-balance sheet and other positions Contingent liabilities Irrevocable commitments Forward and swap contracts 3 Purchased options 3 Market risk positions 4 Total risk-weighted assets Balance sheet / notional amount 31.12.00 333,270 83,739 57,875 312,376 7,062 13,620 8,507 27,786 53,643 5,743,239 380,411 Balance sheet / notional amount 31.12.99 229,737 77,858 62,957 292,902 5,167 8,701 11,007 28,308 65,693 4,881,483 406,208 Risk- weighted amount 31.12.00 7,409 10,979 18,763 162,539 4,653 14,604 2 4,581 12,548 12,599 10,933 2,922 10,760 273,290 Risk- weighted amount 31.12.99 9,486 5,806 18,175 159,835 3,164 9,860 2 7,686 14,459 17,787 13,213 2,823 10,813 273,107 1 Excluding positions in the trading book, included in market risk positions. 2 Including for the year 2000, intangible assets of CHF 4,710 mil- lion. The risk-weighted amount includes CHF 984 million (1999: CHF 1,159 million) foreclosed properties and properties held for disposal, which are recorded in the balance sheet under financial investments. 3 The risk-weighted amount corresponds to the security margin (add-on) of the contracts. 4 Value at Risk according to the internal model multiplied by a factor of 12.5 to create the risk-weighted amount of the market risk positions in the trading book. BIS capital ratios Tier 1 1 Tier 2 Total BIS Capital CHF million 31.12.00 Ratio % 31.12.00 Capital CHF million 31.12.99 31,892 10,968 42,860 11.7 15.7 28,952 10,730 39,682 Ratio % 31.12.99 10.6 14.5 1 The Tier 1 capital includes USD 1,500 million (CHF 2,456 million) Trust Preferred securities issued in connection with the PaineWebber acquisition. Among other measures UBS monitors the ade- quacy of its capital using ratios established by the Bank for International Settlements (BIS). The BIS ratio is required to be at least 8%. The Group has complied with all BIS and Swiss cap- ital adequacy rules for all periods presented. These ratios measure capital adequacy by com- paring 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 con- verted into their credit equivalents and market risk positions at a weighted amount to reflect their relative risk. The capital adequacy rules require a mini- mum amount of capital to cover credit and mar- ket risk exposures. For the calculation of the capital required for credit risk the balance sheet assets are weighted according to broad cate- gories of notional credit risk, being assigned a risk weighting according to the amount of capi- tal deemed to be necessary to support them. Four categories of risk weights (0%, 20%, 50%, 100%) are applied; for example cash, claims col- lateralized 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. 111 UBS Group Financial Statements Notes to the Financial Statements Note 32 Financial Instruments Risk Position (continued) e) Capital adequacy (continued) Uncollateralized loans granted to corporate or private customers carry a 100% risk weight- ing, 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 hold- ings and other related transactions in that secu- rity. For contingent liabilities and irrevocable facil- ities granted, the credit equivalent is calculated by multiplying the nominal value of each trans- action 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 cur- rent 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 trad- ing book as well as positions in foreign exchange and commodities throughout the Group, using an internal Value at Risk (VaR) model. This ap- proach was introduced in the BIS 1996 market risk amendment to the Basel Accord of July 1988 and incorporated in the Swiss capital adequacy rules of the Swiss Banking Ordinance. The BIS proposal requires that the regulators perform tests of the bank internal models before giving permission for these models to be used to calculate the market risk capital. Based on exten- sive checks, the use of the Group internal models was accepted by the Swiss Federal Banking Commission in July 1999. Tier 1 capital consists of permanent share- holders’ equity, trust preferred securities and retained earnings less goodwill and investments in unconsolidated subsidiaries. Tier 2 capital includes the Group’s subordinated long-term debt. Note 33 Fair Value of Financial Instruments The following table presents the fair value of on- and off-balance sheet financial instruments based on certain valuation methods and assump- tions. It is presented because not all financial instruments are reflected in the financial state- ments 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 fol- lowing table have been estimated using present value or other estimation and valuation tech- niques 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 transac- tions undertaken for trading purposes are measured at fair value by reference to quot- ed market prices when available. If quoted market prices are not available, then fair val- ues are estimated on the basis of pricing models, or discounted cash flows. Fair value is equal to the carrying amount for these items; 112 UBS Group Financial Statements Notes to the Financial Statements Note 33 Fair Value of Financial Instruments (continued) (b) the fair value of liquid assets and other assets maturing within 12 months is assumed to approximate their carrying amount. This as- sumption 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 sav- ings accounts with no specific maturity is assumed to be the amount payable on demand at the balance sheet date; (d) the fair value of variable rate financial instruments is assumed to approximate their carrying amounts; (e) the fair value of fixed rate loans and mort- gages 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 sepa- rately 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 dif- ferent methods and assumptions, such fair value disclosures cannot necessarily be compared from one financial institution to another. CHF billion Assets Cash and balances with central banks Money market paper Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Positive replacement values Loans, net of allowance for credit losses Financial investments Liabilities Money market paper issued Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Due to customers Long-term debt Fair value effect on income of hedging derivatives recorded on the accrual basis Net difference between carrying value and fair value Carrying value 31.12.00 Fair Unrealized value gain/(loss) 31.12.00 31.12.00 Carrying value 31.12.99 Fair Unrealized gain/(loss) 31.12.99 value 31.12.99 3.0 66.5 29.1 177.9 193.8 253.3 57.9 245.1 15.4 74.8 82.8 23.4 295.5 82.6 75.9 311.2 55.7 3.0 66.5 29.1 177.9 193.8 253.3 57.9 244.9 17.2 74.8 82.8 23.4 295.5 82.6 75.9 311.2 56.6 5.0 69.7 30.0 113.2 132.4 211.9 62.9 235.1 5.9 64.7 76.9 12.8 196.9 54.6 95.8 280.1 56.4 5.0 69.7 30.0 113.2 132.4 211.9 62.9 235.3 7.1 64.7 76.9 12.8 196.9 54.6 95.8 280.1 57.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.2) 1.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.9) (0.5) 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.2) 0.5 0.7 113 Note 33 Fair Value of Financial Instruments (continued) The table does not reflect the fair values of non-financial assets and liabilities such as prop- erty, equipment, goodwill, intangible assets, pre- payments, and non-interest accruals. The inter- est amounts accrued to date for financial instru- ments are included, for purposes of the above fair value disclosure, in the carrying value of the respective financial instruments. Substantially all of the Group’s commitments to extend credit are at variable rates. Ac- cordingly, the Group has no significant exposure to fair value fluctuations related to these com- mitments. Changes in the fair value of the Group’s fixed rate loans, long- and medium-term notes and bonds issued are hedged by derivative instru- ments, mainly interest rate swaps. The interest rate risk inherent in the balance sheet positions with no specific maturity is also hedged with derivative instruments based on the management view on the economic maturity of the products. The hedging derivative instruments are car- ried 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 val- uation gains and losses and the amortized amount is deferred and shown net in the table as Fair value effect on income of hedging deriva- tives recorded on the accrual basis. During 2000, the interest rate level of leading economies continued to increase. The moves in rates had a direct impact on the fair value calcu- lation of fixed term transactions. As the bank has an excess volume of fixed rate long-term assets over fixed rate long-term liabilities, the net fair value unrealized gain reduced substantially. In addition to fixed rate balance sheet positions, the bank has a number of retail products traditionally offered in Switzerland, such as variable rate mortgage loans and customer savings and deposits. These instruments have no maturity or have a contrac- tual 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 bank- ing products from the fair value calculation leads to certain fair value swings. If the calculation took into account the fair value differences based on the economic maturity of the non-maturity liabilities, such as savings and deposits, in an environment of rising interest rates, they would generate fair value gains which may offset most of the fair value loss reported for fixed term transactions and for hedging derivative trans- actions. UBS Group Financial Statements Notes to the Financial Statements 114 UBS Group Financial Statements Notes to the Financial Statements Note 34 Retirement Benefit Plans and other Employee Benefits The Group has established various pension plans inside and outside of Switzerland. The major plans are located in Switzerland, the UK, the US and Germany. Independent actuarial valuations are performed for the plans in these locations. Swiss pension plans until 30 June 1999 The pension funds of the Group were set up as trusts, domiciled in Basel and Zurich. All domes- tic employees were covered. The pension funds were defined benefit plans. The pension plan benefits exceeded the minimum benefits required under Swiss law. Contributions were paid for by the Group and the employees. The employee contributions were calculated as a percentage of the insured annual salary and were deducted monthly. The percentages deducted from salary were depend- ent on age and varied between 8% and 12%. The Group contributions were variable and amount to 125% to 250% of the employees con- tributions depending on the financial situation of the pension fund. The pension plan formula was based on years of contributions and final covered salary. The benefits covered included retirement benefits, disability, death and survivor pension. Swiss pension plans starting 1 July 1999 The pension plans of both former banks in Switzerland are in the process of being liquidat- ed and a new foundation with domicile in Zurich was created as of 21 January 1999. The new pension scheme became operational as of 1 July 1999. As a result of the merger of the plans of the former banks in Switzerland, on 1 July 1999 there was an increase of vested plan benefits for the beneficiaries of such plans due to the allocation of the excess of the fair value of plan assets over the benefit obligation. This had the effect of increas- ing the Defined benefit obligation by CHF 3,525 million. In accordance with IAS 19 (revised 1998) this resulted in a one-time charge to income which was offset by the recognition of assets previously unrecognized due to the paragraph 58 (b) limita- tion of IAS 19 (revised 1998) used to fund this increase in benefits. The pension plan covers practically all employees in Switzerland and exceeds the mini- mum benefit requirements under Swiss law. Contributions to the pension plan are paid for by employees and the Group. The employee contributions are calculated as a percentage of insured annual salary and are deducted monthly. The percentages deducted from salary for full benefit coverage (including risk benefits) depend on age and vary between 7% and 10%. The Group pays a variable contribution that ranges between 150% and 220% of the sum of employ- ees’ contributions. The pension plan formula is based on years of contributions and final covered salary. The ben- efits covered include retirement benefits, disabil- ity, death and survivor pension. In 1999, the Group recognized a prepaid pension asset of CHF 456 million representing excess employer contributions. In 2000, CHF 100 million of this asset was used to satisfy the benefit obligation. Foreign pension plans The foreign locations of UBS operate various pension schemes in accordance with local regula- tions and practices. Among these schemes are defined contribution plans as well as defined ben- efit plans. The locations with defined benefit plans of a material nature are in the UK, the US and Germany. These locations together with Switzerland cover nearly 90% of the active work- force. Certain of these schemes permit employees to make contributions and earn matching or other contributions from the Group. The retirement plans provide benefits in the event of retirement, death, disability or employ- ment termination. The plans’ retirement benefits depend on age, contributions and level of com- pensation. 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. 115 UBS Group Financial Statements Notes to the Financial Statements 116 Note 34 Retirement Benefit Plans and other Employee Benefits (continued) CHF million 31.12.00 31.12.99 31.12.98 Swiss pension plans Defined benefit obligation at the beginning of the year Service cost Interest cost Plan amendments Special termination benefits Actuarial gain (loss) Benefits paid Defined benefit obligation at the end of the year Fair value of plan assets at the beginning of the year Actual return on plan assets Employer contributions Plan participant contributions Benefits paid Special termination benefits Fair value of plan assets at the end of the year Plan assets in excess of benefit obligation Unrecognized net actuarial gains Unrecognized assets Prepaid pension cost Additional details to fair value of plan assets Own financial instruments and securities lent to UBS included in plan assets Any assets used by UBS included in plan assets Retirement benefits expense Current service cost Interest cost Expected return on plan assets Adjustment to limit prepaid pension cost Amortization of unrecognized prior service costs Employee contributions Actuarially determined net periodic pension cost Actual return on plan assets (%) Principal actuarial assumptions used (%) Discount rate Expected rate of return on plan assets Expected rate of salary increase Rate of pension increase (17,011) (545) (666) 0 (211) 0 721 (17,712) 18,565 535 490 205 (721) 0 19,074 1,362 (331) (675) 356 4,643 179 545 666 (928) 301 211 (204) 591 2.9 4.0 5.0 2.5 1.5 (14,944 ) (464 ) (636 ) (3,517 ) 1,000 571 979 (17,011 ) 17,885 2,136 515 180 (979 ) (1,172 ) 18,565 1,554 (724 ) (374 ) 456 6,785 187 464 636 (883 ) (150 ) 172 (180 ) 59 11.9 4.0 5.0 2.5 1.5 (14,431) (535) (726) (119) 0 (6) 873 (14,944) 17,224 856 493 185 (873) 0 17,885 2,941 (385) (2,556) 0 2,761 176 535 726 (856) 148 6 (185) 374 6.7 5.0 5.0 4.5 2.0 UBS Group Financial Statements Notes to the Financial Statements Note 34 Retirement Benefit Plans and other Employee Benefits (continued) CHF million 31.12.00 31.12.99 31.12.98 Pension plans abroad Defined benefit obligation at the beginning of the year Service cost Interest cost Plan amendments Special termination benefits Actuarial gain / (loss) Benefits paid Acquisition of PaineWebber Currency adjustment Other Defined benefit obligation at the end of the year Fair value of plan assets at the beginning of the year Actual return on plan assets Employer contributions Plan participant contributions Benefits paid Acquisition of PaineWebber Currency adjustment Other Fair value of plan assets at the end of the year Plan assets in excess of benefit obligation Unrecognized net actuarial gains Unrecognized transition amount Unrecognized past service cost Unrecognized assets (Unfunded accrued) / prepaid pension cost (2,444) (165) (162) 0 (3) (99) 84 (740) 123 0 (3,406) 2,880 0 13 23 (84) 676 (130) 0 3,378 (28) (81) 1 2 (47) (153) Movement of net (liability) or asset (Unfunded accrued) / prepaid pension cost at the beginning of the year Net periodic pension cost Employer contributions Acquisition of PaineWebber Currency adjustment (63) (55) 13 (63) 15 (Unfunded accrued) / prepaid pension cost at the end of the year (153) Retirement benefits expense Current service cost Interest cost Expected return on plan assets Amortization of net transition liability Adjustment to limit prepaid pension cost Immediate recognition of transition assets under IAS 8 Amortization of unrecognized prior service costs Amortization of unrecognized net (gain) / losses Effect of any curtailment or settlement Employee contributions Actuarially determined net periodic pension cost Actual return on plan assets (%) Principal actuarial assumptions used (weighted average %) Discount rate Expected rates of return on plan assets Expected rate of salary increase Rate of pension increase 165 162 (243) 0 0 0 3 (9) 0 (23) 55 (0.9) 6.3 8.1 4.4 1.6 (2,009 ) (118 ) (123 ) (2 ) 0 2 133 0 (269 ) (58 ) (2,444 ) 2,173 352 22 15 (133 ) 0 333 118 2,880 436 (474 ) 1 2 (28 ) (63 ) 43 (123 ) 22 0 (5 ) (63 ) 118 123 (195 ) 0 21 0 77 (6 ) 0 (15 ) 123 15.3 6.0 8.1 4.6 2.2 (1,950) (116) (140) (7) 40 32 60 0 5 67 (2,009) 2,188 267 43 9 (60) 0 0 (274) 2,173 164 (63) 2 0 (60) 43 36 (33) 43 0 (3) 43 116 140 (191) 2 2 (23) 7 (3) (8) (9) 33 5.2 7.3 8.6 6.8 3.3 117 UBS Group Financial Statements Notes to the Financial Statements 118 Note 34 Retirement Benefit Plans and other Employee Benefits (continued) Postretirement medical and life plans In the US and the UK the Group offers retiree medical benefits that contribute to the health care coverage of employees and beneficiaries after retirement. In addition to retiree medical benefits, the Group in the US also provides retiree life insurance benefits. The benefit obligation in excess of plan assets for those plans amounts to CHF 111 million as of 31 December 2000 (1999 CHF 113 million, 1998 CHF 93 million) and the total unfunded accrued postretirement liabilities to CHF 108 million as of 31 December 2000 (1999 CHF 83 million, 1998 CHF 62 million). The actuarially determined net postretirement cost amounts to CHF 22 million as of 31 December 2000 (1999 CHF 17 million, 1998 CHF 17 million). Postretirement medical and life plans CHF million 31.12.00 31.12.99 31.12.98 Postretirement benefit obligation at the beginning of the year Service cost Interest cost Plan amendments Actuarial gain / (loss) Benefits paid Acquisition of PaineWebber Currency adjustment Other Postretirement benefit obligation at the end of the year (117) (6) (8) (7) 27 5 (9) 0 0 (115) (96 ) (2 ) (6 ) 0 0 4 0 (16 ) (1 ) (117) (103) (7) (8) (5) (9) 4 0 5 27 (96) CHF million 31.12.00 31.12.99 31.12.98 Fair value of plan assets at the beginning of the year Actual return on plan assets Company contributions Benefits paid Fair value of plan assets at the end of the year 4 0 4 (4) 4 3 1 4 (4 ) 4 3 1 3 (4) 3 The assumed health care cost trend used in determining the benefit expense for 2000 is 5.33%. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in the assumed health care cost trend rates would change the US postretirement benefit obligation and the service and interest cost components of the net peri- odic postretirement benefit costs as follows: CHF million Effect on total service and interest cost Effect on the postretirement benefit obligation 1% increase 1% decrease 2.4 11.0 (1.7) (8.3) UBS Group Financial Statements Notes to the Financial Statements Note 35 Equity Participation Plans UBS AG has established various equity partici- pation plans in the form of stock plans and stock option plans to further align the long-term inter- ests of managers, staff and shareholders. Under the Equity Ownership Plan, selected personnel are awarded a portion of their per- formance-related compensation in UBS AG shares or warrants, which are restricted for a specified number of years. Under the Long Term Incentive Plan, key employees are granted long- term stock options to purchase UBS AG shares at a price not less than the fair market value of the shares on the date the option is granted. Participation in both plans is mandatory. Long- term stock options are blocked for three or five years, during which they cannot be exercised. One option gives the right to purchase one regis- tered UBS AG share at the option’s strike price. UBS AG has additional plans under which new recruits and members of senior management may be granted UBS AG shares, options and warrants. Under the Equity Investment Plan, employees have the choice to invest part of their annual bonus in UBS AG shares or in warrants or deriv- atives on UBS AG shares, which may be exer- cised or settled in cash. A number of awards under these plans are made in notional shares or instruments, which generally are settled in cash. A holding period, generally three years, applies during which the instruments cannot be sold or exercised. In addition, participants in the plan receive a restricted matching contribution of additional UBS AG shares or derivatives. Shares awarded under the plan are purchased or hedged in the market. Under the PAP plan, employees in Switzerland are entitled to purchase a specified number of UBS AG shares at a predetermined discounted price each year (the discount is recorded as compensation expense). The number of shares that can be purchased depends prima- rily on years of service and rank. Any such shares purchased must be held for a specified period of time. Information on shares available for issuance under these plans is included in the Group Statement of Changes in Equity. The Group has adopted the equity-based compensation plans of PaineWebber for its eli- gible employees. The PaineWebber Equity Plus Program allows eligible employees to purchase UBS AG shares at a price equal to fair market value on the purchase date and receive stock options to purchase UBS AG shares based upon the number of shares purchased under the Program. The non-qualified stock options have a price equal to the fair market value of the stock on the date the option is granted. Shares purchased under the Equity Plus Program are restricted from resale for two years from the time of purchase, and the options that are grant- ed under the Equity Plus Program have a three- year vesting requirement and expire seven years after the date of grant. PaineWebber has addi- tional plans under which new recruits, senior management and other key employees may receive option grants. Options granted under the plans of PaineWebber are denominated in US dollars. In addition, UBS has entered into employee retention agreements that provide for the pay- ment to key PaineWebber employees which are subject to the employees’ continued employment and other restrictions. The awards are primarily in the form of UBS stock and option grants. The estimated cost to the Group for the agreements is approximately CHF 1.5 billion (USD 875 mil- lion) over a four-year period. Generally, the Group’s policy is to recognize expense as of the date of grant for equity participation instruments (stocks, warrants, options and other derivatives for which the underlying is the Group’s own shares). The amount of expense recognized is equal to the intrinsic value (excess of the UBS AG share price over the instrument’s strike price, if any) of the instrument at such date. The accrued expense for the years ended 31 December 2000, 1999 and 1998 was CHF 1,749 million, CHF 1,684 million and CHF 996 million, respectively. The accruals include awards earned currently but issued in the following year. 119 UBS Group Financial Statements Notes to the Financial Statements Note 35 Equity Participation Plans (continued) Options on UBS AG shares Outstanding, at the beginning of the year Options due to acquisition of PaineWebber Granted during the year Exercised during the year Forfeited during the year Outstanding, at the end of the year Exercisable, at the end of the year Weighted- average exercise price (in CHF) 31.12.00 197 102 215 150 193 175 101 Number of options 31.12.00 10,138,462 6,325,270 1 7,082,682 2 (1,796,769) (646,811) 21,102,834 6,103,613 Number of options 31.12.99 7,202,786 0 3,439,142 (71,766 ) (431,700 ) 10,138,462 650,640 Weighted- average exercise price (in CHF) 31.12.99 177 0 237 179 190 197 186 Weighted- average exercise price (in CHF) 31.12.98 186 0 182 178 268 177 0 Number of options 31.12.98 1,899,924 0 5,811,778 (22,970 ) (485,946 ) 7,202,786 0 1 UBS AG issued options in exchange for vested options of PaineWebber, which have been included in the purchase price for PaineWebber at fair value (see Note 2: Acquisition of Paine Webber Group, Inc.). 2 Includes options granted to key employees of PaineWebber, vesting over a 3-year period, subject to the employee’s continued employment and other restrictions. Some of the options in the table above have exercise prices denominated in US dollars, which have been converted to Swiss francs for inclusion in the table. The following table summarizes information about stock options outstanding at 31 December 2000: Range of exercise prices per share Number of options outstanding Weighted-average exercise price Weighted-average remaining contractual life Number of Weighted-average exercise price options exercisable Options outstanding Options exercisable CHF 170.00–225.00 225.01–270.00 170.00–270.00 USD 14.65–25.00 25.01–50.00 50.01–75.00 75.01–100.00 100.01–125.00 125.01–143.07 14.65–143.07 120 9,755,040 3,436,805 13,191,845 1,129,643 1,236,743 1,194,960 1,880,768 – 2,468,875 7,910,989 CHF 186.81 237.80 200.09 USD 21.84 32.11 70.40 80.50 – 141.01 81.92 years 4.1 4.1 4.1 years 3.2 3.9 4.3 6.4 – 6.8 5.4 460,408 – 460,408 1,129,643 1,236,743 1,194,960 1,880,768 – 201,091 5,643,205 CHF 184.24 – 184.24 USD 21.84 32.11 70.40 80.50 – 142.96 58.24 During 1998, options that had been issued to Swiss Bank Corporation employees were revised to reflect the 11/13 SBC to UBS AG share conver- sion rate of the merger. Also, during 1998, because of a significant drop in the UBS AG share price in the third quarter, employees were given the opportunity to convert options received earlier in the year with a strike price of CHF 270 to a reduced number (2/3) of options with a strike price of CHF 170. Had the Group determined compensation cost for its stock-based compensation plans based on fair value at the award grant dates, the net income and earnings per share for 2000, 1999 and 1998 would approximate the amounts in the following table. UBS Group Financial Statements Notes to the Financial Statements Note 35 Equity Participation Plans (continued) CHF million, except per share data 31.12.00 31.12.99 31.12.98 Net income Basic EPS Diluted EPS As reported Pro forma As reported Pro forma As reported Pro forma 7,792 7,614 19.33 18.89 19.04 18.61 6,153 6,027 15.20 14.89 15.07 14.76 2,972 2,893 7.33 7.14 7.20 7.01 The pro forma amounts in the table above reflect the vesting periods of all options granted. The effects of recognizing compensation expense and providing pro forma disclosures are not likely to be representative of the effects on reported Net profit for future years. The weighted-average fair-value of options granted in 2000, 1999 and 1998 was CHF 48, CHF 59 and CHF 54 per share, respectively. The fair value of options granted was determined as of the date of issuance using a proprietary option pricing model, substantially similar to the Black- Scholes model, with the following assumptions: Expected volatility Risk free interest rate (CHF) Risk free interest rate (USD) Expected dividend rate Expected life 31.12.2000 31.12.1999 31.12.1998 30% 3.27% 5.66% 2.44% 4 years 33% 2.07% – 1.44% 6 years 40% 2.56% – 1.64% 6 years Stock bonus and stock purchase plans The following table shows the shares awarded and the weighted-average fair value per share for the Group’s equity-based compensation plans. The fair values for the stock purchase awards reflect the purchase price paid. The stock bonus awards for 2000 include approximately 6,622,000 shares granted under the retention agreements with key employees of PaineWebber and the bonus awards for 1999, in addition to the 1998 plan-year awards, include 1,405,000 shares issued in exchange for previously issued non-share awards and for special bonuses. The stock purchase awards for 1999 include 666,000 shares issued for the 1999 plan-year. Stock bonus plans Shares awarded Weighted-average fair market value per share (in CHF) 31.12.2000 12,780,000 228 31.12.1999 31.12.1998 3,469,000 220 2,524,000 210 Stock purchase plans 31.12.2000 31.12.1999 31.12.1998 Shares awarded Weighted-average fair market value per share (in CHF) 322,000 104 1,802,000 148 1,338,000 155 Shares awarded in 1998 under both types of plans included Swiss Bank Corporation shares issued to employees prior to the merger. For the above table, the number of these shares and their fair market value have been adjusted for the 11/13 Swiss Bank Corporation to UBS AG share con- version rate of the merger. 121 UBS Group Financial Statements Notes to the Financial Statements Note 36 Related Parties Related parties include the Board of Directors, the Group Executive Board, the Group Managing Board, close family members and enterprises which are controlled by these individuals as well as cer- tain persons performing similar functions. Total remuneration of related parties recognized in the income statement amounted to CHF 272.3 million in 2000 and CHF 193.1 million in 1999, including accrued pension benefits of approxi- mately CHF 30.0 million in 2000 and CHF 21.2 million in 1999. The number of long-term stock options outstanding from equity plans was 1,564,486 at 31 December 2000 and 274,616 at 31 December 1999. This scheme is further explained in Note 35 Equity Participation Plans. The external members of the Board of Directors do not have employment or service contracts with UBS, and thus are not entitled to benefits upon termination of their service on the Board of Directors. The full-time Chairman and Vice-Chairman have top-management employment contracts and receive pension benefits upon retirement. The total amounts of shares and warrants held by members of the Board of Directors, Group Executive Board and Group Managing Board were 2,527,728 and 69,504,577 as of 31 December 2000 and 2,456,092 and 11,424,514 as of 31 December 1999. Total loans and advances receivable (mortgages only) from related parties were as follows: CHF million Mortgages at the beginning of the year Additions Reductions Mortgages at the end of the year 2000 1999 28 9 (1) 36 27 6 (5) 28 Members of the Board of Directors, Group Executive Board and Group Managing Board are grant- ed mortgages at the same terms and conditions as other employees. Terms and conditions are based on third party conditions excluding credit margin. Loans and advances to significant associated companies were as follows: CHF million Loans and advances at the beginning of the year Additions Reductions Loans and advances at the end of the year Note 38 provides a list of significant associates. 2000 62 0 (62) 0 1999 165 42 (145) 62 Note 37 Post-Balance Sheet Events There have been no material post-balance sheet events which would require disclosure or adjust- ment to the December 2000 financial statements. Long-term debt, excluding medium-term notes, has decreased by CHF 582 million since the balance sheet date to 5 March 2001. On 14 February 2001, the Board of Directors reviewed the financial statements and authorised them for issue. These financial statements will be submitted to the Annual General Meeting of Shareholders to be held on 26 April 2001 for approval. 122 UBS Group Financial Statements Notes to the Financial Statements Note 38 Significant Subsidiaries and Associates The legal entity group structure of UBS is designed to support the Group’s businesses within an effi- cient legal, tax, regulatory and funding framework. Neither the Business Groups of UBS (namely UBS Warburg, UBS Switzerland and UBS Asset Management) nor Corporate Center are replicated in their own individual legal entities but rather they generally operate out of the parent bank, UBS AG, through its Swiss and foreign branches. The goal of the focus on the parent bank is to capitalize on the synergies offered by the use of a single legal platform, enable the flexible use of capital in an efficient manner and to provide a struc- ture where the activities of the Business Groups may be carried on without the need to set up sepa- rate subsidiaries beforehand. Where, usually due to local legal, tax or regulatory rules or due to additional legal entities join- ing the UBS Group via acquisition, it is either not possible or not efficient to operate out of the par- ent bank then local subsidiary companies host the appropriate businesses. The significant operating subsidiary companies in the Group are listed below: Significant subsidiaries Company Registered office Business Group Share capital in millions Equity interest accumul- ated in % CH1 Bern CH Zurich CH Basel CH Lugano Chicago AM2 George Town WA3 Zurich St. Helier Delaware Zurich CH CH WA CH Zurich Zurich Geneva Zurich Hamilton Armand von Ernst & Cie AG Aventic AG Bank Ehinger & Cie AG BDL Banco di Lugano Brinson Partners Inc Brunswick UBS Warburg Limited Cantrade Privatbank AG Cantrade Private Bank Switzerland (CI) Limited Correspondent Services Corporation Crédit Industriel SA EIBA ”Eidgenössische Bank” Beteiligungs- und Finanzgesellschaft Factors AG Ferrier Lullin & Cie SA Fondvest AG Global Asset Management Limited HYPOSWISS, Schweizerische Hypotheken- und Handelsbank Zurich IL Immobilien-Leasing AG Klinik Hirslanden AG Mitchell Hutchins Asset Management Inc 6 NYRE Holding Corporation PaineWebber Capital Inc PaineWebber Incorporated PaineWebber Incorporated of Puerto Rico PaineWebber Life Insurance Company PT UBS Warburg Indonesia PW Trust Company Schröder Münchmeyer Hengst AG SG Warburg & Co International BV SG Warburg Securities SA Thesaurus Continentale Effekten-Gesellschaft Zürich UBS (Bahamas) Ltd UBS (Cayman Islands) Ltd UBS (France) SA UBS (Italia) SpA UBS (Luxembourg) SA UBS (Monaco) SA UBS (Panama) SA UBS (Sydney) Limited Opfikon Zurich Delaware Delaware Delaware Delaware Puerto Rico California Jakarta New Jersey Hamburg Amsterdam Geneva Zurich Nassau George Town Paris Milan Luxembourg Monte Carlo Panama Sydney WA CH CH AM AM CH CH CC4 WA WA WA WA WA WA WA WA WA WA WA CH CH CH WA WA CH CH CH CH CHF CHF CHF CHF USD USD CHF GBP USD CHF CHF CHF CHF CHF USD CHF CHF CHF USD USD USD USD USD USD IDR USD DEM GBP CHF CHF USD USD EUR ITL CHF EUR USD AUD 5.0 30.0 6.0 50.0 1.9 5 25.0 5 10.0 0.7 26.8 5 10.0 14.0 5.0 30.0 4.3 2.0 26.0 5.0 22.5 35.1 5 30.3 5 25.5 5 1,625.6 5 24.2 5 29.3 5 11,000.0 4.4 5 100.0 40.5 14.5 30.0 4.0 5.6 10.0 43,000.0 150.0 9.2 6.0 12.7 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 91.2 100.0 100.0 100.0 100.0 100.0 100.0 85.0 99.6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 123 Footnotes 1 CH: UBS Switzerland 2 AM: UBS Asset Management 3 WA: UBS Warburg 4 CC: Corporate Center 5 Share Capital and Share Premium 6 Joined UBS Asset Management on 20 February 2001 and was renamed Brinson Advisors Inc UBS Group Financial Statements Notes to the Financial Statements Note 38 Significant Subsidiaries and Associates (continued) Significant subsidiaries (continued) Company UBS (Trust and Banking) Limited UBS (USA) Inc UBS Americas Inc UBS Asset Management (Australia) Ltd UBS Asset Management (France) SA UBS Asset Management (Japan) Ltd UBS Asset Management (New York) Inc UBS Asset Management (Singapore) Ltd UBS Asset Management (Taiwan) Ltd UBS Asset Management Holding Limited UBS Australia Holdings Ltd UBS Australia Limited UBS Bank (Canada) UBS Beteiligungs-GmbH & Co KG UBS Capital AG UBS Capital Asia Pacific Limited UBS Capital BV UBS Capital GmbH UBS Capital II LLC UBS Capital LLC UBS Capital Partners Limited UBS Capital SpA UBS Card Center AG UBS España SA UBS Finance (Cayman Islands) Limited UBS Finance (Curação) NV UBS Finance (Delaware) LLC UBS Finanzholding AG UBS Fund Holding (Luxembourg) SA UBS Fund Holding (Switzerland) AG UBS Fund Management (Switzerland) AG UBS Fund Services (Luxembourg) SA UBS Futures & Options Limited UBS Global Trust Corporation UBS Immoleasing AG UBS Inc UBS International Holdings BV UBS Invest Kapitalanlagegesellschaft mbH UBS Investment Management Pte Ltd UBS Lease Finance LLC UBS Leasing AG UBS Life AG UBS Limited UBS O’Connor Limited UBS Overseas Holding BV UBS Preferred Funding Company LLC I UBS Securities Limited UBS Services Limited UBS Trust (Canada) UBS Trustees (Singapore) Ltd UBS UK Holding Limited UBS UK Limited UBS Warburg Asia Limited UBS Warburg (France) SA UBS Warburg (Italia) SIM SpA UBS Warburg (Japan) Limited UBS Warburg (Malaysia) Sdn Bhd Registered office Business Group Share capital in millions Equity interest accumul- ated in % WA Tokyo WA New York WA Stamford AM Sydney AM Paris AM Tokyo AM New York AM Singapore AM Taipei AM London WA Sydney WA Sydney CH Toronto WA Frankfurt Zurich WA George Town WA WA The Hague WA Munich WA Delaware WA New York WA London WA Milan CH Glattbrugg WA Madrid CC George Town CC Willemstad WA Delaware CC Zurich AM Luxembourg AM Basel AM Basel AM Luxembourg WA London CH St. John CH Zurich WA New York CC Amsterdam AM Frankfurt WA Singapore WA Delaware CH Brugg CH Zurich WA London AM London WA Amsterdam WA Delaware WA London WA London CH Toronto CH Singapore WA London WA London WA Hong Kong WA Paris WA Milan George Town WA Kuala Lumpur WA JPY USD USD AUD EUR JPY USD SGD TWD GBP AUD AUD CAD EUR CHF USD EUR EUR USD USD GBP ITL CHF EUR USD USD USD CHF CHF CHF CHF CHF GBP CAD CHF USD CHF DEM SGD USD CHF CHF GBP GBP EUR USD GBP GBP CAD SGD GBP GBP HKD EUR EUR JPY MYR 10,500.0 315.0 3,562.9 5 8.0 0.8 2,200.0 72.7 5 4.0 340.0 8.0 5 11.7 15.0 20.7 398.8 0.5 5.0 104.1 5 – 2.6 5 18.5 5 6.7 50,000.0 40.0 55.3 0.5 0.1 37.3 5 10.0 42.0 18.0 1.0 2.5 2.0 0.1 3.0 375.3 5 5.5 15.0 0.5 16.7 10.0 25.0 10.0 8.8 18.1 – 10.0 – 12.5 0.8 5.0 609.0 20.0 22.9 1.9 30,000.0 0.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 82.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 90.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 70.0 Footnotes 1 CH: UBS Switzerland 2 AM: UBS Asset Management 3 WA: UBS Warburg 4 CC: Corporate Center 5 Share Capital and Share Premium 6 Joined UBS Asset Management on 20 February 2001 and was renamed Brinson Advisors Inc 124 Footnotes 1 CH: UBS Switzerland 2 AM: UBS Asset Management 3 WA: UBS Warburg 4 CC: Corporate Center 5 Share Capital and Share Premium 6 Joined UBS Asset Management on 20 February 2001 and was renamed Brinson Advisors Inc UBS Group Financial Statements Notes to the Financial Statements Note 38 Significant Subsidiaries and Associates (continued) Significant subsidiaries (continued) Company UBS Warburg (Nederland) BV UBS Warburg AG UBS Warburg Australia Corporation Pty Limited UBS Warburg Australia Limited UBS Warburg Derivatives Limited UBS Warburg Futures Inc UBS Warburg Hong Kong Limited UBS Warburg International Ltd UBS Warburg LLC UBS Warburg Ltd UBS Warburg Pte Limited UBS Warburg Real Estate Securities Inc UBS Warburg Securities (España) SV SA UBS Warburg Securities (South Africa) (Pty) Limited UBS Warburg Securities Co Ltd UBS Warburg Securities India Private Limited UBS Warburg Securities Ltd UBS Warburg Securities Philippines Inc Significant associates Company FSG Swiss Financial Services Group AG, Zurich Giubergia UBS Warburg SIM SpA, Milan Motor Columbus AG, Baden Telekurs Holding AG, Zurich Volbroker.com Limited, London Business Group Share capital in millions Equity interest accumul- ated in % WA WA WA WA WA WA WA WA WA WA WA WA WA WA WA WA WA WA EUR EUR AUD AUD HKD USD HKD GBP USD GBP SGD USD EUR ZAR THB INR GBP PHP 10.9 155.7 50.4 5 571.5 5 20.0 2.0 30.0 18.0 450.1 17.5 3.0 0.4 5 13.4 22.1 400.0 237.8 140.0 120.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 75.0 100.0 100.0 Registered office Amsterdam Frankfurt Sydney Sydney Hong Kong Delaware Hong Kong London Delaware London Singapore Delaware Madrid Sandton Bangkok Mumbai London Makati City Equity interest in % Share capital in millions 33.0 50.0 35.6 33.3 20.6 CHF 26 EUR 15 CHF 253 CHF 45 GBP 16 None of the above investments carry voting rights that are significantly different from the propor- tion of shares held. Consolidated companies: changes in 2000 Significant new companies Correspondent Services Corporation, Delaware Fondvest AG, Zurich Mitchell Hutchins Asset Management Inc, Delaware 6 PaineWebber Capital Inc, Delaware PaineWebber Incorporated of Puerto Rico, Puerto Rico PaineWebber Incorporated, Delaware PaineWebber Life Insurance Company, California PW Trust Company, New Jersey UBS Americas Inc, Stamford UBS Asset Management (Taiwan) Ltd, Taipei (formerly Fortune Securities Investment & Trust Co Ltd) UBS Global Trust Corporation, St. John UBS Life AG, Zurich UBS Preferred Funding Company LLC I, Delaware UBS Trustees (Singapore) Ltd, Singapore UBS Warburg Real Estate Securities Inc, Delaware 125 UBS Group Financial Statements Notes to the Financial Statements Note 38 Significant Subsidiaries and Associates (continued) Deconsolidated companies Significant deconsolidated companies IMPRIS AG, Zurich Solothurner Bank, Solothurn Reason for deconsolidation Sold Sold Note 39 Significant Currency Translation Rates The following table shows the significant rates used to translate the financial statements of foreign entities into Swiss francs. 1 USD 1 EUR 1 GBP 100 JPY 100 DEM Spot rate At Average rate Year-to-date 31.12.00 31.12.99 31.12.00 31.12.99 31.12.98 1.64 1.52 2.44 1.43 1.59 1.61 2.58 1.56 82.07 1.69 1.56 2.57 1.57 1.50 1.60 2.43 1.33 81.88 1.45 2.41 1.11 82.38 Note 40 Swiss Banking Law Requirements The significant differences between International Accounting Standards (IAS), which are the prin- ciples followed by the Group, and the account- ing requirements for banks under Swiss laws and regulations, are as follows: Securities borrowing and lending Under IAS only the cash collateral delivered or received is recognized in the balance sheet. There is no recognition or derecognition for the securi- ties received or delivered. Up to 31 December 1999, the Swiss requirement was to recognize the securities received or delivered in the balance sheet along with any collateral in respect of those securities for which control is transferred. For the year ended 31 December 2000 the Swiss regulators accepted the same treatment as for IAS and therefore there is no difference in the balance sheet. Treasury shares Treasury shares is the term used to describe the holding by an enterprise of its own equity instru- ments. 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 can- cellation of those shares. Consideration received is presented in the financial statement as a change in equity. Under Swiss requirements, treasury shares would be carried in the balance sheet (trading portfolio assets, financial investments or other liabilities) with gains and losses on the sale, issuance, or cancellation of treasury shares reflected in the income statement. Extraordinary income and expense Under IAS most items of income and expense arise in the course of ordinary business, and extraordinary items are expected to be rare. Under the Swiss requirements, income and expense items not directly related with the core business activities of the enterprise (e.g. sale of fixed assets or bank premises) are recorded as extraordinary income or expense. 126 UBS Group Financial Statements Notes to the Financial Statements Note 40 Swiss Banking Law Requirements (continued) CHF million 31.12.00 31.12.99 1 Differences in the balance sheet Securities borrowing and lending Assets Trading portfolio / Money market paper Due from banks / customers Liabilities Due to banks / customers Trading portfolio liabilities Treasury shares Assets Trading portfolio Financial investments Liabilities Other liabilities Differences in the income statement Treasury shares Reclassification of extraordinary income and expense Other income, including income from associates Differences in the shareholders’ equity Share premium Treasury shares 1 47,401 273,093 375,080 (54,586) 4,561 3,136 0 4,007 2,516 201 (182) (211) (1,726) (2,509) 4,000 8,023 1 The 1999 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 127 UBS Group Financial Statements Notes to the Financial Statements Note 41 Reconciliation of International Accounting Standards to United States Generally Accepted Accounting Principles Note 41.1 Valuation and income recognition differences between International Accounting Standards and United States Generally Accepted Accounting Principles The consolidated financial statements of the Group have been prepared in accordance with IAS. The principles of IAS differ in certain re- spects from United States Generally Accepted Ac- counting Principles (“U.S. GAAP”). The following is a summary of the relevant sig- nificant accounting and valuation differences be- tween IAS and U.S. GAAP. a. Purchase accounting (merger of Union Bank of Switzerland and Swiss Bank Corporation) Under IAS, the Group accounted for the 1998 merger of Union Bank of Switzerland and Swiss Bank Corporation under the pooling of interests method. The balance sheets and income state- ments of the banks were combined and no ad- justments to the carrying values of the assets and liabilities were made. Under U.S. GAAP, the business combination creating UBS AG is accounted for under the pur- chase method with Union Bank of Switzerland being considered the acquirer. Under the pur- chase method, the cost of acquisition is measured at fair value and the acquirer’s interests in identi- fiable tangible assets and liabilities of the ac- quiree are restated to fair values at the date of ac- quisition. Any excess consideration paid over the fair value of net tangible assets acquired is allo- cated, first to identifiable intangible assets based on their fair values, if determinable, with the re- mainder 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 ad- justments for any impairment. For purposes of the U.S. GAAP reconciliation, the excess of the consideration paid for Swiss Bank Corporation over the fair value of the net tangible assets received has been recorded as goodwill and is being amortized on a straight line basis over a weighted average life of 13 years be- ginning 29 June 1998. In 2000 and 1999, goodwill was reduced by CHF 211 million and CHF 118 million respec- tively, due to recognition of deferred tax assets of Swiss Bank Corporation which had previously been subject to valuation reserves. Other purchase accounting adjustments Under U.S. GAAP, the results of operations of Swiss Bank Corporation would have been in- cluded in the Group’s consolidated financial statements beginning 29 June 1998. For pur- poses of the U.S. GAAP reconciliation, Swiss Bank Corporation’s Net profit for the six-month period ended 29 June 1998 has been excluded from the Group’s Net profit. For purposes of the U.S. GAAP reconciliation, the restatement of Swiss Bank Corporation’s net assets to fair value resulted in decreasing net tangible assets by CHF 1,077 million. This amount will be amortized over a period ranging from two years to 20 years. b. Harmonization of accounting policies The business combination noted above was ac- counted for under the pooling of interests method under IAS. Under the pooling interest method of accounting, a single uniform set of accounting policies was adopted and applied to all periods presented. This resulted in a restatement of 1997 Shareholders’ equity and Net loss. U.S. GAAP requires that accounting changes be accounted for in the income statement in the period the change is made. For purposes of the U.S. GAAP reconciliation the accounting policy harmonization recorded in 1997 was reversed be- cause the business combination noted above is being accounted for under the purchase method and the impact of the accounting changes was recorded in 1998. 128 UBS Group Financial Statements Notes to the Financial Statements Harmonization of accounting policies The income statement effect of this conforming adjustment was as follows: CHF million For the year ended Depreciation policies Credit risk adjustments on derivatives Policies for other real estate Retirement benefit and equity participation plans Settlement-risk adjustments on derivatives Total There was no income statement effect after year 1999. 31.12.99 31.12.98 (20 ) 0 0 0 0 (20) (338 ) (193 ) (140 ) (47 ) (33 ) (751) c. Restructuring provision Under IAS, restructuring provisions are recog- nized when a legal or constructive obligation has been incurred. In 1997, the Group recognized a CHF 7,000 million restructuring provision to cover personnel, IT, premises and other costs as- sociated with combining and restructuring the merged Group. A further CHF 300 million pro- vision was recognized in 1999, reflecting the im- pact of increased precision in the estimation of certain leased and owned property costs. Under U.S. GAAP, the criteria for establishing restructuring provisions were more stringent than under IAS prior to 2000. For purposes of the U.S. GAAP reconciliation, the aggregate CHF 7,300 million restructuring provision was re- versed. 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 im- proving 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 re- structuring the operations and activities of Swiss Bank Corporation and that amount was record- ed as a liability of the acquired business. The re- maining CHF 816 million of estimated costs were charged to restructuring expense during 1998. The reserve is expected to be substantially uti- lized by 2001. The U.S. GAAP restructuring provision was adjusted in 1999 (increase of CHF 600 million) and 2000 (increase of CHF 130 million) as shown in the table below. During 2000, the IAS requirements for re- structuring provisions were changed such that they became substantially identical to the U.S. GAAP requirements. As of 31 December 2000, the remaining IAS provision was higher than the remaining U.S. GAAP provision by approximate- ly CHF 114 million. This amount represents an accrual permitted under IAS for lease costs on properties to be vacated. Under U.S. GAAP, such costs may not be recognized until the premises are actually vacated. Restructuring provision The usage of the U.S. GAAP restructuring provision was as follows: CHF million Personnel Premises IT Other Total Balance Revision 2000 31.12.00 Usage Balance 2000 31.12.99 Revision 1999 Usage Balance 1999 31.12.98 Usage 1998 Provision 1998 422 143 31 20 616 (71) 194 67 (60) 130 (188 ) (291 ) (63 ) (49 ) (591 ) 681 240 27 129 1,077 553 179 7 (139 ) 600 (254 ) (244 ) (5 ) (45 ) (548 ) 382 305 25 313 1,025 (374 ) (27 ) (68 ) (81 ) (550 ) 756 332 93 394 1,575 Additionally, for purposes of the U.S. GAAP reconciliation, CHF 138 million, CHF 150 million and CHF 273 million of restructuring costs were expensed as incurred in 2000, 1999 and 1998, respectively. 129 UBS Group Financial Statements Notes to the Financial Statements d. Derivatives instruments held or issued for non-trading purposes f. Retirement benefit plans Under IAS, the Group recognizes transactions in derivative instruments hedging non-trading po- sitions 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 report- ed at fair value with changes in fair value record- ed in income unless specified criteria are met to obtain hedge accounting treatment (accrual or deferral method). The Group does not comply with all of the criteria necessary to obtain hedge accounting treatment under U.S. GAAP. Accordingly, for purposes of the U.S. GAAP reconciliation, deriv- ative instruments held or issued for non-trading purposes that did not meet U.S. GAAP hedging criteria have been carried at fair value with changes in fair value recognized as adjustments to Net trading income. e. Financial investments Under IAS, financial investments are classified as either current investments or long-term invest- ments. The Group considers current financial in- vestments to be held for sale and carried at lower of cost or market value (“LOCOM”). The Group accounts for long-term financial investments at cost, less any permanent impairments. Under U.S. GAAP, investments are classified as either held to maturity (essentially debt securi- ties) which are carried at amortized cost or avail- able for sale (debt and marketable equity securities), which are carried at fair value with changes in fair value recorded as a separate com- ponent of Shareholders’ equity. Realized gains and losses are recognized in net profit in the peri- od sold. For purposes of the U.S. GAAP reconciliation, marketable equity securities are adjusted from LOCOM to fair value and classified as available for sale investments. Held to maturity invest- ments that do not meet U.S. GAAP criteria are also reclassified to the available for sale category. Unrealized gains or unrealized losses relating to these investments are recorded as a component of Shareholders’ equity. 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 liabili- ties. 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 lim- itations 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 state- ments. Generally, under U.S. GAAP, pension expense is based on the same method of valuation of lia- bilities and assets as under IAS. Differences in the levels of expense and liabilities (or prepaid assets) exist due to the different transition date rules and the stricter provisions for recognition of a pre- paid 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 de- fined benefit obligation by CHF 3,525 million. Under IAS this resulted in a one time charge to in- come which was offset by the recognition of as- sets (previously unrecognized due to certain lim- itations 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 in- clude 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 reconcilia- tion, the Group recorded a prepaid asset for the Union Bank of Switzerland plans as of 1 Janu- ary 1998. Swiss Bank Corporation recorded a purchase accounting adjustment to recognize its prepaid asset at 29 June 1998. The recognition of these assets impacts the pension expense 130 UBS Group Financial Statements Notes to the Financial Statements recorded under U.S. GAAP versus IAS. The as- sets recognized under IAS (which had been pre- viously unrecognized due to certain limitations under IAS) were already recognized under U.S. GAAP due to the absence of such limitations under U.S. GAAP. g. Other employee benefits Under IAS, the Group has recorded expenses and liabilities for post-retirement benefits determined under a methodology similar to that described above under retirement benefit plans. Under U.S. GAAP, expenses and liabilities for post-retirement benefits would be determined under a similar methodology as under IAS. Dif- ferences in the levels of expenses and liabilities have occurred due to different transition date rules and the treatment of the merger of Union Bank of Switzerland and Swiss Bank Corporation under the purchase method. h. Equity participation plans IAS does not specifically address the recogni- tion and measurement requirements for equity participation plans. U.S. GAAP permits the recognition of com- pensation cost on the grant date for the estimat- ed fair value of equity instruments issued (State- ment of Financial Accounting Standard “SFAS” No. 123) or based on the intrinsic value of equi- ty instruments issued (Accounting Principles Board “APB” No. 25), with the disclosure of the pro forma effects of equity participation plans on net profit and earnings per share, as if the fair value had been recorded on the grant date. The Group recognizes only intrinsic values at the grant date with subsequent changes in value not recognized. For purposes of the U.S. GAAP reconciliation, certain of the Group’s option awards have been determined to be variable pursuant to APB No. 25, primarily because they may be settled in cash or the Group has offered to hedge their value. Additional compensation expense from these op- tions awards for the years ended 31 December 2000, 1999 and 1998, is CHF 85 million, CHF 41 million and CHF 1 million, respectively. In ad- dition, certain of the Group’s equity participation plans provide for deferral and diversification of the awards, and the instruments are held in trusts for the participants. Certain of these trusts are recorded on the Group’s balance sheet for U.S. GAAP presentation. The net effect on income of recording these assets and liabilities is a debit to expense of CHF 82 million, CHF 8 million and nil for the years ended 31 December 2000, 1999 and 1998, respectively. i. Software capitalization Under IAS, effective 1 January 2000, certain costs associated with the acquisitions or development of internal use software are required to be capi- talized. Once the software is ready for its intend- ed 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 develop- ment of internal use software that met the U.S. GAAP software capitalization criteria in 1999 have been reversed from Operating expenses and amortized over a life of two years once it is ready for its intended use. From 1 January 2000, the only remaining reconciliation item is the amorti- zation of software capitalized in 1999 for U.S. GAAP purposes. j. Trading in own shares and derivatives on own shares As of 1 January 2000, upon adoption of the Standing Interpretations Committee’s (“SIC”) in- terpretation 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. Deriv- atives on own shares are classified as assets, lia- bilities or in shareholders’ equity depending upon the manner of settlement. As a result of this adop- tion, there is no difference between IAS and U.S. GAAP. For 1999 and 1998, figures have been retroactively restated (see Note 1, Summary of Significant Accounting Policies). 131 k. Recently issued US accounting standards Accounting for derivative instruments and hedging activities In June 1998, the US Financial Accounting Stan- dards board (“FASB”) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which, as amended, is re- quired to be adopted for financial statements as of 1 January 2001. The standard establishes ac- counting and reporting standards for derivative instruments, including certain derivative instru- ment embedded in other contracts, and for hedg- ing activities. Under International Accounting Standards, the Group is not required to comply with all the criteria necessary to obtain hedge ac- counting under U.S. GAAP. Accordingly, for fu- ture U.S. GAAP reconciliation, derivative instru- ments held or issued for non-trading purposes that do not meet U.S. GAAP hedging criteria under SFAS No. 133 will be carried at fair value with changes in fair value recognized as adjust- ments to trading income. The specific impact on earnings and financial position as a result of SFAS No. 133 is not possible to quantify as the Group will be complying with hedge accounting criteria necessary to obtain hedge accounting for certain activity, but not all. Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities In 1996 the FASB issued SFAS No. 125, “Ac- counting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. That statement provided standards for distinguishing transfers of financial assets that are sales from those that are financing transactions. In Septem- ber 2000, the FASB issued SFAS No. 140, “Ac- counting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities – a replacement of SFAS No. 125”. SFAS No. 140 revises the standards for accounting for securiti- zations and other transfers of financial assets and collateral and requires certain new disclo- sures, but it carries over most of SFAS No. 125’s provisions without reconsideration. Generally, the new provisions of this standard are to be ap- plied prospectively and become effective 31 March 2001. However, certain recognition and classification requirements for collateral and dis- closures for collateral and securitization transac- tions have been adopted by the Group as of 31 December 2000. Adoption of the remaining pro- visions of this revised accounting standard is not expected to have a material impact on the Group. UBS Group Financial Statements Notes to the Financial Statements 132 UBS Group Financial Statements Notes to the Financial Statements Note 41.2 Reconciliation of IAS Shareholders’ equity and Net profit/loss to U.S. GAAP CHF million 31.12.00 31.12.99 31.12.98 31.12.00 31.12.99 31.12.98 Shareholders’ equity Net profit/(loss) Amounts determined in accordance with IAS Adjustments in respect of a. SBC purchase accounting: Goodwill Other purchase accounting adjustments b. Harmonization of accounting policies c. Restructuring provision d. Derivative instruments held or issued for non-trading purposes e. Financial investments f. Retirement benefit plans g. Other employee benefits h. Equity participation plans i. Software capitalization Tax adjustments Total adjustments Amounts determined in accordance with U.S. GAAP 44,833 30,608 28,794 7,792 6,153 2,972 17,835 (808) 0 112 19,765 (858 ) 0 350 21,612 (895 ) 20 1948 (857) 379 1,898 (16) (311) 229 (334) 507 52 1,839 (24 ) (113 ) 389 (682 ) 1,052 108 1,858 (26 ) (40 ) 0 330 (1,719) 50 0 (238) (1,353) 28 59 8 (167) (160) 137 (1,729 ) 37 (20 ) (1,598 ) (545 ) 36 (19 ) 2 (47 ) 389 178 (864) (2,415) (751) (3,982) (405) 23 88 (20) (1) 0 1,690 18,127 21,225 25,967 (3,355) (3,316) (6,637) 62,960 51,833 54,761 4,437 2,837 (3,665) 133 Note 41.3 Earnings per share Under IAS and U.S. GAAP, basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted average common shares outstanding. Diluted EPS includes the determinants of basic EPS and, in addition, gives effect to dilutive potential common shares that were outstanding during the period. The computations of basic and diluted EPS for the years ended 31 December 2000, 31 December 1999 and 31 December 1998 are presented in the following table. The adjustment in 1998 is due to the difference in weighted average shares calculated under purchase accounting for U.S. GAAP versus the pooling method under IAS for the Union Bank of Switzerland merger with Swiss Bank Corporation on 29 June 1998. There is otherwise no difference between IAS and U.S. GAAP for the calculation of weighted average shares for EPS. For the year ended 31.12.00 31.12.99 31.12.98 % change from 31.12.99 Net profit / (loss) available for Basic earnings per share (CHF million) IAS U.S. GAAP Basic weighted average shares outstanding IAS U.S. GAAP Basic earnings / (loss) per share (CHF) IAS U.S. GAAP Net profit / (loss) available for Diluted earnings per share (CHF million) IAS U.S. GAAP Diluted weighted average shares outstanding IAS U.S. GAAP Diluted earnings / (loss) per share (CHF) IAS U.S. GAAP 7,792 4,437 6,153 2,837 2,972 (3,665 ) 403,029,309 403,029,309 404,742,482 404,742,482 405,222,295 414,609,886 19.33 11.01 7,778 4,423 15.20 7.01 6,153 2,837 7.33 (8.84 ) 2,972 (3,665 ) 408,525,900 408,525,900 408,375,152 408,375,152 412,881,041 414,609,886 1 19.04 10.83 15.07 6.95 7.20 (8.84)1 27 56 0 0 27 57 26 56 0 0 26 56 The following are adjustments to the calculation of weighted average outstanding common shares which result from valuation and presentation differences between IAS and U.S. GAAP: Weighted average shares outstanding 31.12.00 31.12.99 31.12.98 403,029,309 Basic weighted-average ordinary shares (IAS) add: Treasury shares adjustments 0 Basic weighted-average ordinary shares (U.S. GAAP) 403,029,309 404,742,482 0 404,742,482 405,222,295 9,387,591 414,609,886 1 No potential ordinary shares may be included in the computation of any diluted per-share amount when a loss from continuing operations exists. UBS Group Financial Statements Notes to the Financial Statements 134 UBS Group Financial Statements Notes to the Financial Statements Note 41.4 Presentation differences between IAS and U.S. GAAP In addition to the differences in valuation and in- come 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 re- ported shareholders’ equity and net profit, it may be useful to understand them to interpret the fi- nancial statements presented in accordance with U.S. GAAP. The following is a summary of pres- entation differences that relate to the basic IAS fi- nancial statements. 1. Purchase accounting As described in Note 42.1, under U.S. GAAP the business combination creating UBS AG was ac- counted for under the purchase method with Union Bank of Switzerland being considered the acquirer. In the U.S. GAAP Condensed Consoli- dated 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 peri- od from 1 January to 29 June 1998 which, under U.S. GAAP, would be excluded from the U.S. GAAP condensed consolidated Income statement for the year ended 31 December 1998. 2. Settlement date vs. trade date accounting The Group’s transactions from securities activi- ties are recorded on the settlement date for bal- ance sheet and on the trade date for income state- ment purposes. This results in recording an off- balance sheet forward transaction during the pe- riod between the trade date and the settlement date. Forward positions relating to trading activ- ities are revalued to fair value and any unrealized profits and losses are recognized in Net profit. Under U.S. GAAP, trade date accounting is re- quired for purchases and sales of securities. For purposes of U.S. GAAP presentation, all pur- chases and sales of securities previously recorded on settlement date have been recorded as of trade date for balance sheet purposes. Trade date ac- SBC’s summarized Income statement for the period 1 January 1998 to 29 June 1998 CHF million Operating income Interest income Less: Interest expense Net interest income Less: Credit loss expense Total Net fee and commission income Net trading income Income from disposal of associates and subsidiaries Other income Total Operating expenses Personnel General and administrative Depreciation and amortization Total Operating profit before taxes and minority interests Tax expense Profit Less: Minority interests Net profit 8,205 6,630 1,575 164 1,411 3,701 2,135 1,035 364 8,646 3,128 1,842 511 5,481 3,165 552 2,613 (1) 2,614 135 UBS Group Financial Statements Notes to the Financial Statements 136 counting has resulted in receivables and payables to broker-dealers and clearing organizations recorded in Other assets and Other liabilities. 3. Securities lending, Securities borrowing, Repurchase, Reverse repurchase and Other collateralized transactions Under IAS, the Group’s repurchase agreements and securities lending are accounted for as collat- eralized borrowings. Reverse repurchase agree- ments and securities borrowing are accounted for as collateralized lending transactions. Cash col- lateral is reported on the balance sheet at amounts equal to the collateral advanced or re- ceived. Under U.S. GAAP, these transactions are also generally accounted for as collateralized bor- rowing and lending transactions. However, cer- tain such transactions may be deemed sale or purchase transactions under specific circum- stances. U.S. GAAP (SFAS No. 125) required recognition of securities collateral controlled, and an offsetting obligation to return such secu- rities collateral on certain financing transactions, when specific control conditions existed. Pur- suant to the guidance in SFAS No. 140, Ac- counting for Transfers of Servicing of Financial Assets and Extinguishment of Liabilities (a re- placement of SFAS No. 125) issued in 2000, the Group has restated its 1999 U.S. GAAP Balance sheet to derecognize securities collateral received that are no longer required to be recognized. Additionally, SFAS No. 140 requires segrega- tion of the balance, as of 31 December 2000, of the Group’s Trading portfolio assets which it has pledged under agreements permitting the trans- feree to repledge or resell such collateral. For presentation purposes, such reclassifications are reflected in the U.S. GAAP Balance Sheet in Trad- ing portfolio assets, pledged. 4. Financial investments Under IAS, the Group’s private equity invest- ments, real estate held for sale and non-mar- ketable equity financial investments have been in- cluded in Financial investments. Under U.S. GAAP, private equity investments, real estate held for sale and non-marketable fi- nancial investments generally are reported in Other assets or reported as a separate caption in the Balance sheet. For purposes of U.S. GAAP presentation, pri- vate equity investments are reported as a separate caption in the Balance sheet and real estate held for sale and non-marketable equity financial in- vestments are reported in Other assets. 5. Equity participation plans Certain of the Group’s equity participation plans provide for deferral and diversification of the awards. The shares and other diversified instru- ments are held in trusts for the participants. Certain of these trusts are recorded on the Group’s balance sheet for U.S. GAAP presenta- tion, the effect of which is to increase assets by CHF 1,298 million and CHF 655 million, lia- bilities by CHF 1,377 million and CHF 717 mil- lion, and decrease shareholders’ equity by CHF 69 million and CHF 62 million (for UBS AG shares held by the trusts which are treated as treasury shares) at 31 December 2000 and 31 De- cember 1999, respectively. 6. Net trading income The Group has implemented a change in ac- counting policy for interest and dividend income and expenses on trading related assets and liabil- ities (see Note 1, Summary of Significant Ac- counting Policies). For the years ended 31 De- cember 1999 and 31 December 1998, figures have been retroactively restated. As a result of this change, there is no longer a difference be- tween IAS and U.S. GAAP. UBS Group Financial Statements Notes to the Financial Statements Note 41.5 Consolidated Income Statement The following is a Consolidated Income Statement of the Group, for the years ended 31 December 2000, 31 December 1999 and 31 December 1998, restated to reflect the impact of valuation and in- come recognition differences and presentation differences between IAS and U.S. GAAP. For the year ended CHF million Operating income Interest income Less: Interest expense Net interest income Less: Credit loss expense Total Net fee and commission income Net trading income Net gains from disposal of associates and subsidiaries Other income 31.12.00 31.12.991 31.12.981 Reference U.S. GAAP IAS U.S. GAAP IAS U.S. GAAP IAS a, d, 1 a, 1 51,565 (43,584) 51,745 (43,615) 35,404 (29,660 ) 35,604 (29,695 ) 29,136 (25,773 ) 37,442 (32,424) 1 1 b, d, 1 1 b, e, 1 7,981 130 8,111 16,703 8,597 83 1,431 8,130 130 8,260 16,703 9,953 83 1,403 5,744 (956 ) 4,788 5,909 (956 ) 4,953 12,607 7,174 12,607 7,719 3,363 (787 ) 2,576 8,925 455 5,018 (951) 4,067 12,626 3,313 1,821 1,361 1,821 1,325 84 641 1,119 1,122 Total 34,925 36,402 27,751 28,425 12,681 22,247 Operating expenses Personnel General and administrative Depreciation and amortization Restructuring costs b, c, f, g, h, 1 a, c, i, 1 a, b, i, 1 c 17,262 6,813 3,952 191 17,163 6,765 2,275 0 12,483 6,664 3,454 750 12,577 6,098 1,857 0 7,938 6,259 2,403 1,089 9,816 6,735 1,825 0 Total 28,218 26,203 23,351 20,532 17,689 18,376 Operating profit/(loss) before tax and minority interests Tax expense / (benefit) 1 Net profit/(loss) before minority interests 6,707 2,183 4,524 10,199 2,320 7,879 4,400 1,509 2,891 7,893 1,686 6,207 (5,008) 3,871 (1,339 ) 904 (3,669) 2,967 Minority interests Net profit/(loss) 1 (87) (87) (54 ) (54 ) 4 5 4,437 7,792 2,837 6,153 (3,665) 2,972 1 Certain IAS and U.S. GAAP 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1, Summary of Significant Accounting Policies). Note: References above coincide with the discussions in Note 41.1 and Note 41.4. These references indicate which IAS to U.S. GAAP adjustments affect an individual financial statement caption. 137 UBS Group Financial Statements Notes to the Financial Statements Note 41.6 Consolidated Balance Sheet The following is a Consolidated Balance Sheet of the Group, as of 31 December 2000 and 31 De- cember 1999 restated to reflect the impact of valuation and income recognition principles and pres- entation differences between IAS and U.S. GAAP. CHF million Reference U.S. GAAP IAS U.S. GAAP IAS 31.12.00 31.12.99 1 Assets Cash and balances with central banks Money market paper Due from banks Cash collateral on securities borrowed Reverse repurchase agreements Trading portfolio assets Trading portfolio assets, pledged Positive replacement values Loans, net of allowance for credit losses Financial investments Accrued income and prepaid expenses Investments in associates Property and equipment Intangible assets and goodwill Private equity investments Other assets a, 3 b, 2,3 3 2 a, 3 b, e, 4 a, b, i a 4 b, d, f, g, h, 2, 4, 5 2,979 66,454 29,182 177,857 193,801 197,048 59,448 57,775 245,214 7,807 7,062 880 9,692 35,726 6,658 26,971 2,979 66,454 29,147 177,857 193,801 253,296 57,875 244,842 16,405 7,062 880 8,910 19,537 0 8,507 5,073 69,717 29,954 113,162 132,391 184,085 62,294 235,401 2,378 5,167 1,102 9,655 21,428 3,001 18,717 5,073 69,717 29,907 113,162 132,391 211,932 62,957 234,858 7,039 5,167 1,102 8,701 3,543 0 11,007 Total assets 1,124,554 1,087,552 893,525 896,556 Liabilities Money market paper issued Due to banks Cash collateral on securities lent Repurchase agreements Trading portfolio liabilities Negative replacement values Due to customers Accrued expenses and deferred income Long-term debt Other liabilities Total liabilities Minority interests Total shareholders’ equity a 3 3 3 2, 3 2 a, 3 a a, b, c, d, e, h, 2, 3 74,780 82,240 23,418 295,513 87,832 75,423 310,686 21,038 54,970 32,809 74,780 82,240 23,418 295,513 82,632 75,923 310,679 21,038 54,855 18,756 64,655 76,363 12,832 173,840 52,658 95,004 279,971 12,040 56,049 17,846 64,655 76,365 12,832 196,914 54,638 95,786 279,960 12,040 56,332 15,992 1,058,709 1,039,834 841,258 865,514 2,885 2,885 434 434 62,960 44,833 51,833 30,608 Total liabilities, minority interests and shareholders’ equity 1,124,554 1,087,552 893,525 896,556 1 Certain IAS and U.S. GAAP 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly ap- plicable International Accounting Standards and changes in presentation (see Note 1, Summary of Significant Accounting Policies). Note: References above coincide with the discussions in Note 41.1 and Note 41.4. These references indicate which IAS and U.S. GAAP adjustments affect an individual financial statement caption. 138 UBS Group Financial Statements Notes to the Financial Statements Note 41.7 Comprehensive income Comprehensive income is defined as the change in Shareholders’ equity excluding transactions with shareholders. Comprehensive income has two major components: Net profit, as reported in the in- come statement, and Other comprehensive income. Other comprehensive income includes such items as foreign currency translation and unrealized gains in available-for-sale securities. The components and accumulated other comprehensive income amounts for the years ended 31 December 2000, 31 December 1999 and 31 December 1998 are as follows: CHF million Balance, 1 January 1998 Net loss Other comprehensive income: Foreign currency translation Unrealized gains, arising during the year, net of CHF 89 million tax Reclassification adjustment for gains realized in net profit, net of CHF 76 million tax Comprehensive loss Foreign currency translation Unrealized gains in available-for- sale securities Accumulated other comprehensive Comprehensive income income (111) 47 ( 64) (345 ) (345 ) 267 (229 ) 267 (229 ) Balance, 31 December 1998 (456) 85 (371) Net profit Other comprehensive income: Foreign currency translation Unrealized gains, arising during the year, net of CHF 18 million tax Reclassification adjustment for gains realized in net profit, net of CHF 40 million tax Comprehensive income Balance, 31 December 1999 Net profit Other comprehensive income: Foreign currency translation Unrealized gains, arising during the year, net of CHF 152 million tax Reclassification adjustment for gains realized in net profit, net of CHF 40 million tax Comprehensive income Balance, 31 December 2000 14 14 74 (143 ) 74 (143 ) (442) 16 (426) (245 ) (245 ) 456 (121 ) 456 (121 ) (687) 351 (336) (3,665) (307) (3,972) 2 837 (55) 2,782 4,437 90 4,527 139 UBS Group Financial Statements Notes to the Financial Statements 140 Note 42 Additional Disclosures Required under U.S. GAAP In addition to the differences in valuation and income recognition and presentation, disclosure differences exist between IAS and U.S. GAAP. The following are additional U.S. GAAP disclosures that relate to the basic financial statements. Note 42.1 Business combinations On 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation consummated a merger of the banks, resulting in the formation of UBS AG. New shares totaling 428,746,982 were issued ex- clusively for the exchange of the existing shares of Union Bank of Switzerland and Swiss Bank Cor- poration. 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, to- taling 257,500,000 shares of UBS AG. Swiss Bank Corporation shareholders received 11/13 registered shares of the Group for each Swiss Bank Corporation registered share held, totaling 171,246,982 shares. The combined share capital amounted to CHF 5,754 million. As a result of the exchange of shares, CHF 1,467 million were transferred from share capital to the share premium account. The merger was accounted for under the pooling of interests method and, accordingly, the information in- cluded 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: CHF million Total operating income Net profit Union Bank of Switzerland Swiss Bank Corporation 5,702 739 8,646 2,614 As a result of the merger, the Group harmonized its accounting policies that have been retrospective- ly applied for the restatement of comparative information and opening retained earnings at 1 Janu- ary 1997. As a result, adjustments were required for the accounting for treasury shares, netting of bal- ance 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: CHF million Union Bank of Switzerland Swiss Bank Corporation Total as previously reported Impact of accounting policy harmonization Consolidated Total operating income 13,114 13,026 26,140 (1,260 ) 24,880 Net loss (129) (248) (377) (290) (667) Prior to 29 June 1998, Union Bank of Switzerland and Swiss Bank Corporation entered into certain transactions with each other in the normal course of business. These intercompany transactions have been eliminated in the accompanying financial statements. UBS Group Financial Statements Notes to the Financial Statements Note 42.2 Financial investments See Note 15 for information on financial investments. The following table summarizes the Group’s financial investments as of 31 December 2000 and 31 December 1999: Amortized cost Gross unrealized gains Gross unrealized losses CHF million 31 December 2000 Equity securities 1 Debt securities issued by the Swiss national government and agencies Debt securities issued by Swiss local governments Debt securities issued by the U.S.Treasury and agencies Debt securities issued by foreign governments and official institutions Corporate debt securities Mortgage-backed securities Other debt securities Total 31 December 1999 Equity securities 1 Debt securities issued by the Swiss national government and agencies Debt securities issued by Swiss local governments Debt securities issued by the U.S. Treasury and agencies Debt securities issued by foreign governments and official institutions Corporate debt securities Mortgage-backed securities Other debt securities Total 1,147 447 34 46 0 4,852 1,139 47 88 7,353 388 78 81 410 321 851 109 120 2,358 2 1 0 7 5 0 4 466 3 3 3 0 6 24 1 3 43 Fair value 1,588 36 46 0 4,856 1,143 47 92 7,808 377 81 83 410 326 869 109 123 6 0 1 0 3 1 0 0 11 14 0 1 0 1 6 1 0 23 2,378 1 The LOCOM value of the equity securities as reported in Note 15 is adjusted to cost basis for the purpose of fair value calculation. The following table presents an analysis of the contractual maturities of the investments in debt securities as of 31 December 2000: CHF million, except percentages Amount Yield (%) Amount Yield (%) Amount Yield (%) Amount Yield (%) Within 1 year 1–5 years 5–10 years Over 10 years 2 Swiss national government and agencies 1 Swiss local governments U.S. Treasury and agencies 0 Foreign governments and official institutions 2,451 16 Corporate debt securities 20 Mortgage-backed securities 21 Other debt securities Total amortized cost Total market value 2,511 2,514 6.90 6.11 1.62 5.20 6.02 6.57 16 27 0 1,236 917 5 56 2,257 2,272 5.13 5.19 1.80 6.02 6.54 4.33 16 18 0 1,165 206 22 11 1,438 1,434 6.45 4.43 0.85 2.21 14.46 3.68 0 0 0 0 0 0 0 0 0 Proceeds from sales and maturities of investment securities available for sale during the year ended 31 December 2000 and the year ended 31 December 1999 were CHF 325 million and CHF 1,482 million, respectively. Gross gains of CHF 162 million and gross losses of CHF 1 million were realized in 2000 on those sales, and gross gains of CHF 180 million and gross losses of CHF 3 million were realized in 1999. 141 UBS Group Financial Statements Notes to the Financial Statements Selected Financial Data CHF million, except where indicated For the year ended Income statement key figures Interest income Interest expense Net interest income Credit loss recovery / (expense) Net interest income after credit loss expense Net fee and commission income Net trading income Other income Operating income Operating expenses Operating profit before tax Restructuring costs Tax expense (benefit) Minority interests Net profit Cost / income ratio (%) 2 Cost / income ratio before goodwill amortization (%) 2, 3 Per share data (CHF) Basic earnings per share 4, 7 Basic earnings per share before goodwill 3, 4, 7 Diluted earnings per share 4, 7 Diluted earnings per share before goodwill 3, 4, 7 Dividend payout ratio (%) 31.12.00 31.12.99 1 31.12.98 1 31.12.97 51,745 43,615 8,130 130 8,260 16,703 9,953 1,486 36,402 26,203 10,199 0 2,320 (87) 7,792 72.2 70.4 19.33 20.99 19.04 20.67 31.56 35,604 29,695 5,909 (956 ) 4,953 12,607 7,719 3,146 28,425 20,532 7,893 0 1,686 (54 ) 6,153 69.9 68.7 15.20 16.04 15.07 15.90 36.18 37,442 32,424 5,018 (951 ) 4,067 12,626 3,313 2,241 22,247 18,376 3,871 0 904 5 2,972 79.2 77.7 7.33 8.18 7.20 8.03 68.21 23,669 16,733 6,936 (1,278) 5,658 12,234 5,491 1,497 24,880 18,636 6,244 7,000 (105) (16) (667) 71.2 70.7 (1.59) (1.59) As of Balance sheet key figures Total assets Shareholders’ equity Market capitalization 31.12.00 31.12.99 1 31.12.98 1 31.12.97 1,087,552 44,833 112,666 896,556 30,608 92,642 861,282 28,794 90,720 1,086,414 30,927 Outstanding shares (weighted average) 7 Registered ordinary shares Own shares to be delivered Treasury shares Shares for basic earnings per share 433,486,003 2,058,212 (32,514,906) 403,029,309 430,497,026 429,710,128 426,994,240 (25,754,544 ) 404,742,482 (24,487,833 ) 405,222,295 (7,724,236) 419,270,004 BIS capital ratios Tier 1 (%) Total BIS (%) Risk-weighted assets Total assets under management (CHF billion) Headcount (full time equivalents) 6 Long-term ratings Fitch, London Moody’s, New York Standard & Poor’s, New York 11.7 15.7 273,290 2,469 71,076 AAA Aa1 AA+ 10.6 14.5 273,107 1,744 49,058 AAA Aa1 AA+ 9.3 13.2 303,719 1,573 48,011 AAA Aa1 AA+ 8.3 12.6 345,904 1 The 1999 and 1998 figures have been restated to reflect retroactive changes in accounting policy arising from newly applicable International Accounting Standards and changes in presentation (see Note 1: Summary of Significant Accounting Policies). 2 Operating expenses / operating income before credit loss expense. 3 The amortization of goodwill and other purchased intangible assets are excluded from the calculation. 4 For EPS calculation, see Note 10 to the Financial Statements. 5 Net profit / average shareholders’ equity excluding dividends. 6 The Group headcount does not include the Klinik Hirslanden AG headcount of 1,839 and 1,853 for 31 December 2000 and 31 December 1999, respec- tively. 7 1999, 1998 and 1997 share figures are restated for the two-for-one share split, effective 8 May 2000. 142 UBS Group Financial Statements Report of the Group Auditors 143 UBS AG (Parent Bank) UBS AG (Parent Bank) Table of Contens UBS AG (Parent Bank) Table of Contents Parent Bank Review Financial Statements Income Statement Balance Sheet Statement of Appropriation of Retained Earnings Notes to the Financial Statements Additional Income Statement Information Net Trading Income Extraordinary Income and Expenses Additional Balance Sheet Information Value Adjustments and Provisions Statement of Shareholders’ Equity Share Capital 147 148 148 149 150 151 152 152 152 153 153 153 153 Off-Balance Sheet and other Information Assets Pledged or Assigned as Security for own Obligations, Assets Subject to Reservation of Title 154 154 Fiduciary Transactions Due to UBS Pension Plans, Loans to Corporate Bodies / Related Parties 154 154 Report of the Statutory Auditors 155 146 Parent Bank Review UBS AG (Parent Bank) Parent Bank Review Income statement UBS AG net profit increased CHF 1,118 million from CHF 6,788 million in 1999 to CHF 7,906 million in 2000. Income from investments in associates de- creased to CHF 896 million in 2000, from CHF 1,669 million in 1999, mainly due to lower divi- dends received. Sundry operating expenses were CHF 614 mil- lion, up from CHF 21 million in 1999. This was mainly due to a net write-down of financial in- vestments. Allowances, provisions and losses were CHF 345 million in 2000, down from CHF 1,815 mil- lion in 1999, mainly due to the release of previ- ously established provisions as credit quality im- proved as a result of the strong performance of the Swiss economy in 2000. Extraordinary income contains CHF 496 mil- lion from the sale of former subsidiaries, down from CHF 2,100 million in 1999, and CHF 15 mil- lion from the sale of tangible fixed assets, down from CHF 417 million in 1999. It also contains CHF 139 million from the release of provisions. Extraordinary expenses consist mainly of losses of CHF 20 million from the sale of tangible fixed assets, compared to losses of CHF 254 mil- lion in 1999. There were no losses from the disposal of investments in associated companies in 2000, compared to losses of CHF 157 million in 1999. Balance sheet Total assets declined by CHF 164 billion to CHF 935 billion at 31 December 2000. This decline is principally due to changes in the accounting treatment of the securities lending and borrowing business, bringing it closer into line with the treatment in UBS Group’s Financial Statements. 147 UBS AG (Parent Bank) Financial Statements Financial Statements Income Statement CHF million For the year ended Interest and discount income 1 Interest and dividend income from financial assets Interest expense 1 Net interest income Credit-related fees and commissions Fee and commission income from securities and investment business Other fee and commission income Fee and commission expense Net fee and commission income Net trading income 1 Net income from disposal of financial assets Income from investments in associated companies Income from real estate holdings Sundry income from ordinary activities Sundry ordinary expenses Other income from ordinary activities Operating income Personnel expenses General and administrative expenses Operating expenses Operating profit Depreciation and write-offs on fixed assets Allowances, provisions and losses Profit before extraordinary items and taxes Extraordinary income Extraordinary expenses Tax expense / (benefit) Profit for the period 31.12.00 40,375 93 (32,161) 31.12.99 24,172 41 (18,148 ) 8,307 292 9,574 492 (1,229) 9,129 7,378 785 896 41 380 (614) 1,488 26,302 10,292 5,405 15,697 10,605 1,623 345 8,637 650 20 1,361 7,906 6,065 361 7,758 534 (763 ) 7,890 5,593 440 1,669 30 894 (21 ) 3,012 22,560 9,178 5,154 14,332 8,228 423 1,815 5,990 2,518 411 1,309 6,788 % change from 31.12.99 67 127 77 37 (19) 23 (8) 61 16 32 78 (46) 37 (57) (51) 17 12 5 10 29 284 (81) 44 (74) (95) 4 16 1 The figures for 2000 are not comparable to 1999. See Notes to the Financial Statements for further details. 148 Balance Sheet CHF million Assets Liquid assets Money market paper Due from banks Due from customers Mortgage loans Trading balances in securities and precious metals Financial assets Investments in associated companies Tangible fixed assets Accrued income and prepaid expenses Positive replacement values Other assets Total assets Total subordinated assets Total amounts receivable from Group companies Liabilities Money market paper issued Due to banks Due to customers on savings and deposit accounts Other amounts due to customers Medium-term note issues Bond issues and loans from central mortgage institutions Accruals and deferred income Negative replacement values Other liabilities Value adjustments and provisions Share capital General statutory reserve Reserve for own shares Other reserves Profit brought forward Profit for the period Total liabilities Total subordinated liabilities Total liabilities to Group companies UBS AG (Parent Bank) Financial Statements 31.12.00 31.12.99 % change from 31.12.99 2,242 61,152 243,911 175,255 117,830 155,342 12,133 10,587 5,949 3,239 141,516 6,242 935,398 805 187,724 36,340 228,928 68,069 263,459 5,408 42,731 11,230 155,059 73,585 7,817 4,444 18,047 4,007 8,361 7 7,906 935,398 15,302 142,263 3,975 62,154 356,858 195,464 123,151 196,782 5,067 6,727 5,709 3,555 131,730 7,923 1,099,095 939 197,211 47,931 352,775 76,414 341,509 5,918 44,254 8,746 159,713 7,835 18,554 4,309 14,528 3,462 6,356 3 6,788 1,099,095 13,362 160,055 (44) (2) (32) (10) (4) (21) 139 57 4 (9) 7 (21) (15) (14) (5) (24) (35) (11) (23) (9) (3) 28 (3) 839 (58) 3 24 16 32 133 16 (15) 15 (11) 149 Statement of Appropriation of Retained Earnings CHF million The Board of Directors proposes to the Annual General Meeting the following appropriation: Profit for the financial year 2000 as per the Parent Bank’s Income Statement Retained earnings from prior years Release of other reserves Available for appropriation Appropriation to General statutory reserve Distributed partial dividend (1.1.00–30.9.00) Appropriation to other reserve Total appropriation 7,906 7 1,764 9,677 165 1,764 7,748 9,677 The Extraordinary General Meeting on 7 September 2000 accepted a proposal to pay a partial divi- dend of CHF 4.50 gross per CHF 10.00 share in respect of the first three quarters of the reporting year. This payment, after deduction of 35% Swiss withholding tax, was made on 5 October 2000, to all UBS shareholders on record on 2 October 2000. The Board of Directors proposes to repay CHF 1.60 of the par value of each CHF 10.00 share, instead of distributing a final dividend for the remaining months of the reporting year: October, November and December. This repayment would reduce the share capital by CHF 682 million and reduce the par amount per share to CHF 8.40. This proposal would be approved on the explicit condition that the revised article 622 paragraph 4 of the Swiss Code of Obligations comes into force. If the propos- al is approved and the condition met, the repayment of CHF 1.60 of the par value would be made on 18 July 2001 to those shareholders who hold UBS shares on 13 July 2001, through their depository banks. UBS AG (Parent Bank) Financial Statements 150 UBS AG (Parent Bank) Notes to the Financial Statements Notes to the Financial Statements Accounting and Valuation Principles The Parent Bank’s accounting and valuation poli- cies are in compliance with Swiss federal banking law. The accounting and valuation policies are principally the same as outlined for the Group in Note 1 to the Group Financial Statements. Major differences between the Swiss federal banking law requirements and International Accounting Standards are described in Note 40 to the Group Financial Statements. In addition, the following principles are ap- plied for the Parent Bank: Treasury shares Treasury shares is the term used to describe a company’s holdings in its own equity instru- ments. In accordance with IAS, treasury shares are presented in the balance sheet as a deduction from equity. No gain or loss is recognised in the income statement on the sale, issuance, or can- cellation of those shares. Consideration received is presented in the financial statement as a change in equity. Under Swiss federal banking requirements, treasury shares are carried in the balance sheet as trading balances, financial assets or other liabili- ties with gains and losses on the sale, issuance or cancellation, unrealised losses on treasury shares, and unrealised gains on treasury shares included in trading balances and other liabilities reflected in the income statement. Securities borrowing and lending At 31 December 1999, securities received or de- livered were recognised in the balance sheet to- gether with any collateral in respect of those se- curities for which control was transferred. At 31 December 2000, securities borrowed and lent that are collateralized by cash are included in the balance sheet at amounts equal to the collateral advanced or received. Non-cash collateral is not reflected in the balance sheet. Investments in associated companies Investments in associated companies are equity interests which are held on a long-term basis for the purpose of the Parent Bank’s business activi- ties. They are carried at a value no higher than their cost price. Property and equipment Bank buildings and other real estate are carried at cost less depreciation at a rate which takes account of the economic and business situation and which is permissible for tax purposes. Depreciation of computer and telecommunication equipment, as well as other equipment, fixtures and fittings is recognised on a straight-line basis over the esti- mated useful lives of the related assets. The useful lives of Property and Equipment are summarised in Note 1 to the Group Financial Statements. Interest and dividend income on trading assets In 1999, interest and dividend income and ex- pense on trading assets and liabilities were in- cluded in Net trading income. In order to im- prove comparability with the main competitors, interest and dividend income and expense on trading assets and liabilities are now included in Interest income and interest expense respectively. Extraordinary Income and Expenses Certain items of income and expense appear as extraordinary within the Parent Bank Financial Statements, whereas in the Group Financial Statements they are considered to be operating income or expenses and appear within the ap- propriate income or expense category. These are separately identified below. Taxation Deferred Tax Assets, except those relating to Re- structuring Provisions, and Deferred Tax Liabili- ties, except for a few immaterial exceptions, are not recognised in the Parent Bank Financial State- ments as it is not required by Swiss federal bank- ing law to do so. 151 UBS AG (Parent Bank) Notes to the Financial Statements Additional Income Statement Information Net Trading Income CHF million For the year ended Foreign exchange and bank notes Bonds and other interest rate instruments Equities Precious metals and commodities Total 31.12.00 31.12.99 1,151 88 6,117 22 7,378 717 1,816 3,089 (29) 5,593 Extraordinary Income and Expenses Extraordinary income contains CHF 496 million (1999: CHF 2,100 million) from the sale of sub- sidiaries, CHF 15 million (1999: CHF 417 mil- lion) from the sale of tangible fixed assets and CHF 139 million from the release of provisions no longer operationally necessary. Extraordinary expenses consist mainly of loss- es of CHF 20 million (1999: CHF 254 million) from the sale of tangible fixed assets. There were no losses from the disposal of investments in associated companies in 2000 (1999: CHF 157 million). 152 UBS AG (Parent Bank) Notes to the Financial Statements Additional Balance Sheet Information Value Adjustments and Provisions Provisions Recoveries, doubtful applied in interest, accordance currency with their specified translation purpose differences New Provisions provisions released and charged to income credited Balance at 31.12.00 to income (2,890 ) (1,211 ) (421 ) (659 ) 489 404 (8 ) (344 ) 0 473 1,330 196 (139 ) 0 0 0 10,389 2,933 2,054 1,573 Balance at 31.12.99 12,929 3,267 1,153 2,380 19,729 (5,181) 541 1,999 (139) 16,949 CHF million Default risks (credit and country risk) Other business risks 1 Capital and income taxes Other provisions Total allowance for general credit losses and other provisions Allowances deducted from assets 1,175 Total provisions as per balance sheet 18,554 1 Provisions for litigation, settlement and other business risks. Statement of Shareholders’ Equity 9,132 7,817 CHF million 31.12.00 31.12.99 Change % Shareholders’ equity Share capital at the beginning of the year General statutory reserve Reserves for own shares Other reserves Retained earnings 4,309 14,528 3,462 6,356 6,791 4,300 14,295 490 10,806 653 Total shareholders’ equity at the beginning of the period (before distribution of profit) 35,446 30,544 Capital increase Increase in General statutory reserve Premium Other allocations 1 Prior-year dividend Profit for the period Total shareholders’ equity at the end of the year (before distribution of profit) of which: Share capital General statutory reserve Reserves for own shares Other reserves Retained earnings 1 Includes distributed partial dividend (1.1.–30.9.2000). Share Capital 135 215 3,304 (1,979) (2,255) 7,906 9 190 45 (38 ) (2,092 ) 6,788 42,772 35,446 4,444 18,047 4,007 8,361 7,913 4,309 14,528 3,462 6,356 6,791 9 233 2,972 (4,450 ) 6,138 4,902 126 25 3,259 (1,941 ) (163 ) 1,118 7,326 135 3,519 545 2,005 1,122 0 2 607 (41) 940 16 13 8 16 21 3 24 16 32 17 Par value Ranking for dividends No. of shares Capital in CHF No. of shares Capital in CHF Issued and paid up 444,379,729 4,443,797,290 444,379,729 4,443,797,290 Conditional share capital 16,571,341 165,713,410 153 Off-Balance Sheet and other Information Assets Pledged or Assigned as Security for own Obligations, Assets Subject to Reservation of Title CHF million Money market paper Mortgage loans Securities Total 31.12.00 31.12.99 Change in % Book value 28,355 1,565 40,649 70,569 Effective liability 0 1,066 24,721 25,787 Book value 35,475 1,869 3,722 41,066 Effective liability Book value Effective liability 702 1,325 188 2,215 (20 ) (16 ) 992 72 (20) Assets are pledged as collateral for securities borrowing and repo transactions, for collateralized credit lines with central banks, loans from mortgage institutions and security deposits relating to stock exchange membership. Fiduciary Transactions CHF million Deposits with other banks with Group banks Loans and other financial transactions Total 31.12.00 31.12.99 Change 50,274 682 403 51,359 47,802 759 415 48,976 2,472 (77 ) (12 ) 2,383 % 5 (10) (3) 5 Due to UBS Pension Plans, Loans to Corporate Bodies / Related Parties CHF million 31.12.00 31.12.99 Change Due to UBS pension plans (including securities borrowed) and UBS securities held by pension plans Loans to directors, senior executives and auditing bodies 1 4,644 6,785 61 (2,141 ) (61 ) % (32) (100) 1 Loans to directors, senior executives and auditing bodies are loans to members of the Board of Directors, the Group Executive Board, the Group Managing Board and the Group’s official auditors under Swiss company law. This also includes loans to companies which are controlled by these natural or legal persons. UBS AG (Parent Bank) Notes to the Financial Statements 154 UBS AG (Parent Bank) Report of the Statutory Auditors 155 Information for Shareholders Information for Shareholders UBS Registered Shares (Par Value CHF 10), ISIN Number CH0010740741, CUSIP Number H8920G155 Ticker symbols Stock exchange listings SWX (Swiss exchange) NYSE (New York Stock Exchange) Tokyo Financial calendar Annual General Meeting Bloomberg UBSN SW UBS US 8657 JP Reuters UBSZn.S UBS.N UBS.T Telekurs UBSN, 004 UBS, 65 N16631, 106 Thursday, 26 April 2001 Publication of first quarter 2001 results Tuesday, 15 May 2001 Publication of second quarter 2001 results Tuesday, 14 August 2001 Publication of third quarter 2001 results Tuesday, 13 November 2001 For information contact Change of address UBS AG Investor Relations G41B P.O. Box CH-8098 Zurich Phone +41-1-234 41 00 Fax +41-1-234 34 15 E-Mail SH-investorrelations@ubs.com www.ubs.com/investor-relations UBS AG Shareholder Services GUMV P.O. Box CH-8098 Zurich Phone +41-1-235 62 02 Fax +41-1-235 31 54 E-Mail SH-shareholder-services@ubs.com 156 Cautionary statement regarding forward-looking statements This communication contains statements that constitute “forward-looking statements”, including, without limitation, statements relating to the implementation of strategic ini- tiatives, including the implementation of the new European wealth management strategy and the implementation of a new business model for UBS Capital, and other statements relating to our future business development and economic performance. While these forward-looking statements represent our judgments and future expecta- tions concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, (1) general market, macro-economic, governmental and regulatory trends, (2) movements in local and international securities markets, currency exchange rates and interest rates, (3) competitive pressures, (4) tech- nological developments, (5) changes in the financial position or credit-worthiness of our customers, obligors and counterparties, (6) legislative developments and (7) other key factors that we have indicated could adversely affect our business and financial perfor- mance which are contained in our past and future filings and reports, including those with the SEC. More detailed information about those factors is set forth in documents furnished by UBS and filings made by UBS with the SEC. UBS is not under any obligation to (and express- ly disclaims any such obligations to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise. For information contact: UBS AG, Investor Relations G41B, P.O. Box, CH-8098 Zurich Phone: +41-1-234 41 00, Fax: +41-1-234 34 15 E-mail: SH-investorrelations@ubs.com, Internet: www.ubs.com/investor-relations Change of address UBS AG, Shareholder Services GUMV, P.O. Box, CH-8098 Zurich Phone: +41-1-235 62 02, Fax: +41-1-235 31 54 E-mail: SH-shareholder-services@ubs.com Published by UBS AG Content: UBS AG, Investor Relations and Corporate Control and Accounting. Languages: English, German. Copyright: UBS AG. ab UBS AG P.O. Box, CH-8098 Zurich P.O. Box, CH-4002 Basel www.ubs.com