-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DRZGeOwN2NKCGL/5IRheqwQvuvgV/+SokZqaIFWiTiVmGrrY5WXH7UUShYS8dhL3 +3KWj11yVPHlm/Hu8kSaHQ== 0001005477-00-002699.txt : 20000331 0001005477-00-002699.hdr.sgml : 20000331 ACCESSION NUMBER: 0001005477-00-002699 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKERS TRUST CORP CENTRAL INDEX KEY: 0000009749 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 136180473 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05920 FILM NUMBER: 588107 BUSINESS ADDRESS: STREET 1: 130 LIBERTY ST CITY: NEW YORK STATE: NY ZIP: 10006 BUSINESS PHONE: 2122502500 MAIL ADDRESS: STREET 1: 130 LIBERTY STREET CITY: NEW YORK STATE: NY ZIP: 10006 FORMER COMPANY: FORMER CONFORMED NAME: BANKERS TRUST NEW YORK CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BT NEW YORK CORP DATE OF NAME CHANGE: 19671107 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5920 Bankers Trust Corporation (Exact Name of Registrant as Specified in Its Charter) New York 13-6180473 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 130 Liberty Street New York, NY 10006 (Address of Principal (Zip Code) Executive Offices) (212) 250-2500 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Name Of Each Exchange On Title of Each Class Which Registered Adjustable Rate Cumulative Preferred Stock, Series Q New York Stock Exchange Depositary Shares representing a one-hundredth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series Q ($2,500 Liquidation Preference) New York Stock Exchange Adjustable Rate Cumulative Preferred Stock, Series R New York Stock Exchange Depositary Shares representing a one-hundredth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series R ($2,500 Liquidation Preference) New York Stock Exchange 7 3/4% Cumulative Preferred Stock, Series S ($2,500 Liquidation Preference) New York Stock Exchange Depositary Shares representing a one-hundredth interest in a share of 7 3/4% Cumulative Preferred Stock, Series S ($2,500 Liquidation Preference) New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Because the registrant is a wholly-owned subsidiary of Deutsche Bank AG, none of the registrant's outstanding voting stock is held by non-affiliates of the registrant. As of the date hereof, 1 share of the registrant's common stock, $1 par value, was issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE None - -------------------------------------------------------------------------------- Form 10-K Cross-Reference Index Part I Item No. Pages 1. Business Description of Business 67 Supplemental Financial Data International Operations 9, 47 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 62-64 Investment Portfolio 32-33 Loan Portfolio 19-23, 31, 33-34 Summary of Credit Loss Experience 16-18, 31, 35 Deposits 66 Return on Equity and Assets 2 Short-Term Borrowings 35 2. Properties 70 3. Legal Proceedings 70 4. Submission of Matters to a Vote of Security Holders * Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters 39-40, 61 6. Selected Financial Data 2 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 3 7a. Quantitative and Qualitative Disclosures About Market Risk 12-14 8. Financial Statements and Supplementary Data Bankers Trust Corporation and Subsidiaries (Consolidated) 24-28 Notes to Financial Statements 29-59 Independent Auditors' Report 60 Selected Quarterly Financial Data 61 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure * Part III 10. Directors and Executive Officers of the Registrant Directors 71 Executive Officers 72 Section 16(a) Beneficial Ownership Reporting Compliance * 11. Executive Compensation 75-77 12. Security Ownership of Certain Beneficial Owners and Management * 13. Certain Relationships and Related Transactions 73 Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial Statements-See Item 8. (2) Financial Statement Schedules All schedules normally required by Form 10-K are omitted since they are either not applicable or the required information is shown in the financial statements or the notes thereto. (3) Exhibits 3. Articles of Incorporation and By-laws, as amended ** 4. Instruments Defining the Rights of Security Holders, Including Indentures (i) Long-Term Debt Indentures *** 10. Material Contracts (i) Contracts not made in the ordinary course of business ** (ii) (C) Acquisition or Sale of any Property, Plant or Equipment ** (ii) (D) Leases for Principal Premises described on page 70 ** (iii) (A) Management Contracts and Compensation Plans ** 12. Statements Re Computation of Ratios ** 21. Subsidiaries of the Registrant ** 23. Consent of Experts ** 24. Power of Attorney ** 27. Financial Data Schedule 99. Additional Exhibits (1) Unaudited Pro Forma Condensed Financial Statements for ** the year ended December 31, 1999. (b) Reports on Form 8-K-The Corporation did not file any reports on Form 8-K during the quarter ended December 31, 1999. - -------------------------------------------------------------------------------- * Not applicable. ** A copy of any exhibit not contained herein may be obtained by writing to James T. Byrne, Jr., Office of the Secretary, Bankers Trust Corporation, 130 Liberty Street, Mail Stop 2310, New York, NY 10006. *** The Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instruments defining the rights of holders of long-term debt issued by Bankers Trust Corporation or its subsidiaries. This report on Form 10-K has not been approved or disapproved by the Securities and Exchange Commission nor has the Commission passed upon the accuracy or adequacy of this report. Bankers Trust Corporation and its Subsidiaries 1 Table 1 Five-Year Summary of Selected Financial Data*
- ---------------------------------------------------------------------------------------------------------------------------- ($ in millions, except per share data) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- For the Year Net interest revenue $ 807 $ 1,372 $ 1,359 $ 1,057 $ 884 Noninterest revenue 3,500 3,757 4,861 4,117 3,129 Net income (loss) $(1,603) $ (73) $ 866 $ 766 $ 311 ============================================================================================================================ Per Common Share Basic Earnings (Loss) Per Share N/A $ (1.05) $ 8.15 $ 7.12 $ 2.62 Diluted Earnings (Loss) Per Share N/A $ (1.05) $ 7.66 $ 6.76 $ 2.54 Cash dividends declared $1.00 $ 4.00 $ 4.00 $ 4.00 $ 4.00 --as a percentage of net income N/M N/M 52% 59% 157% Book value, end of year N/A 42.66 49.06 49.21 45.73 Market price High N/A 136 7/16 133 5/8 90 7/8 72 Low N/A 45 74 61 49 3/4 End of year N/A 85 7/16 112 7/16 86 1/4 66 1/2 Price/earnings ratio, end of year N/A N/M 13.8x 12.1x 25.4x Cash dividend yield, end of year N/A 4.7% 3.6% 4.6% 6.0% At Year End Total assets $68,157 $133,115 $140,102 $122,543 $106,199 Long-term debt not included in risk-based capital 12,582 14,890 11,275 8,732 7,127 Long-term debt included in risk-based capital 2,424 3,113 3,312 2,576 2,360 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 1,428 1,420 1,472 730 -- Preferred stock of subsidiary -- -- -- 250 250 Preferred stock (Corporation) 376 394 658 810 865 Common stockholders' equity 3,974 4,302 5,050 5,068 4,608 Total stockholders' equity 4,350 4,696 5,708 5,878 5,473 Profitability Ratios Return on average common stockholders' equity N/M N/M 15.6% 14.5% 5.7% Return on average total stockholders' equity N/M N/M 14.6% 13.3% 5.9% Return on average total assets N/M N/M .63% .63% .28% Capital Ratios Common stockholders' equity to total assets, end of year 5.8% 3.2% 3.6% 4.1% 4.3% Total stockholders' equity to total assets, end of year 6.4% 3.5% 4.1% 4.8% 5.2% Average total stockholders' equity to average total assets 4.6% 3.3% 4.4% 4.7% 4.7% Bankers Trust Corporation: Risk-Based Capital Ratios Tier 1 Capital 10.4% 7.5% 8.3% 9.3% 9.0% Total Capital 18.4% 13.6% 14.1% 13.8% 14.0% Leverage Ratio 7.3% 3.5% 4.4% 5.9% 5.4% Bankers Trust Company: Risk-Based Capital Ratios Tier 1 Capital 16.5% 10.5% 9.0% 9.3% 9.5% Total Capital 18.9% 13.4% 12.3% 12.9% 12.8% Leverage Ratio 12.3% 5.7% 5.4% 5.3% 5.1% Employees, at December 31 In domestic offices 6,342 11,005 10,585 11,055 10,137 In foreign offices 1,433 9,536 8,070 6,881 6,365 - ---------------------------------------------------------------------------------------------------------------------------- Total 7,775 20,541 18,655 17,936 16,502 ============================================================================================================================
* Certain 1999 amounts are not comparable to prior year periods due to significant business and net financial asset transfers to Deutsche Bank entities, charges reflecting changes in management intent and responsibility regarding certain assets and the sale of Bankers Trust Australia Limited in 1999. N/M Not Meaningful. N/A--Information is not applicable as Deutsche Bank AG acquired all outstanding shares of common stock of Bankers Trust Corporation from its shareholders at a price of $93.00 per share on June 4, 1999. 2 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Management's discussion and analysis of Bankers Trust Corporation's results of operations and financial condition appears on pages 3 through 23. The discussion and analysis should be read in conjunction with the financial statements and supplemental financial data, which begin on page 24. Acquisition by Deutsche Bank AG Change in Control On June 4, 1999, the change-in-control ("COC") date, pursuant to an agreement dated as of November 30, 1998, between Deutsche Bank AG ("Deutsche Bank") and Bankers Trust Corporation ("Bankers Trust"), Deutsche Bank, through its U.S. holding corporation, Taunus Corporation ("Taunus"), acquired all of the outstanding shares of common stock of Bankers Trust from its shareholders at a price of $93.00 per share (the "Acquisition"). Deutsche Bank accounted for the Acquisition as a purchase. No purchase accounting adjustments were pushed down to Bankers Trust. On June 4, 1999, all Bankers Trust employee deferred compensation amounts vested in full. Employer contributions to individual employee retirement accounts also vested. In addition, all bonus- eligible employees on the date of COC became entitled to a pro rata bonus which was paid in cash on July 2, 1999 for that portion of the 1999 performance year ending on the COC date. The pro rata bonus was based on the greater of an employee's total (cash and deferred stock) 1998 performance bonus or the employee's average total 1996, 1997 and 1998 performance bonus awards. In conjunction with the Acquisition, during the second quarter of 1999 Bankers Trust Corporation together with its subsidiaries (the "Corporation" or the "Firm") incurred pre-tax charges of approximately $1.1 billion in COC-related costs, principally due to the aforementioned vesting of all employee deferred compensation amounts and related pro-rata bonus awards as well as a pre-tax restructuring charge of $459 million. Also, in connection with the Acquisition, the Corporation incurred other charges reflecting a change in management's intention regarding certain assets as a result of integrating the Corporation into Deutsche Bank, a change in certain pricing methodologies in order to conform to those of Deutsche Bank, and the transfer of certain available for sale securities to Deutsche Bank related entities based on changes in management responsibility. These one-time charges are included in Deutsche Bank's consolidated financial statements as of June 30, 1999 as part of the goodwill associated with the Acquisition. The goodwill is being amortized over 15 years. Disposition of Assets On June 5, 1999, Bankers Trust transferred its wholly-owned subsidiary BT Alex. Brown Incorporated ("BTAB") and substantially all of its interest in Bankers Trust International PLC ("BTI") to Deutsche Bank Securities Inc. ("DBSI") and Deutsche Holdings (BTI) Ltd., respectively, which are wholly-owned subsidiaries of Deutsche Bank. The transfer of BTAB to DBSI took the form of an exchange of stock pursuant to which BTAB became a wholly-owned subsidiary of DBSI and Bankers Trust received shares of DB U.S. Financial Markets Holding Corporation ("DBUSH"), the parent of DBSI. In the third quarter of 1999, the Corporation sold its shares of DBUSH to Taunus for approximately $800 million. The transfer of substantially all of Bankers Trust's interest in BTI was for cash in the amount of approximately $1.7 billion. On August 31, 1999, the Corporation completed the sale of Bankers Trust Australia Limited ("BTAL"), a wholly-owned subsidiary, to the Principal Financial Group for a price of approximately $1.3 billion. Prior to the sale, BTAL remitted to the Corporation a dividend for accumulated retained earnings that included proceeds from BTAL's sale of its investment banking division to Macquarie Bank. The Corporation also received cash for the assumption of certain BTAL long-term debt. In addition, according to the sale agreement, the Corporation is entitled to receive an additional payment. The amount and timing of such payment is not known at this time. When such payment is received, it will be reflected in the Corporation's results of operations. The Corporation recognized a pre-tax gain of approximately $779 million in the third quarter of 1999 on the sale of BTAL. In connection with the Acquisition and in addition to the foregoing transactions, the Corporation has and will continue to transfer certain entities and financial assets and liabilities to Deutsche Bank related entities. The consideration received and to be received for such transactions was and will be fair market value of the financial assets and liabilities at and on the date of transfer. In addition, the Corporation's money market related funding activities, which are short-term in nature, are expected to be significantly reduced over time. Prior to the Acquisition, the Corporation was a global financial institution, providing products and services to its clients worldwide. Subsequent to the Acquisition and associated reorganization activities, the Corporation and its subsidiaries conduct their business primarily in the Americas, focusing their activities principally in the asset management, lending, institutional services, private equity, and private banking businesses. Capital Contribution In conjunction with the Acquisition and to strengthen the Corporation's capital base, Deutsche Bank made a capital contribution of $1.4 billion in the second quarter of 1999. Results of Operations Summary of 1999 Results For the year 1999, the Corporation reported a net loss of $1,603 million, compared to a net loss of $73 million in 1998. For the year, total net revenue (net interest revenue after provision for credit losses related to loans plus noninterest revenue) of $4.365 billion was down $724 million, from 1998 revenue of $5.089 billion. Total noninterest expenses for the year increased $614 million, or 12 percent, from 1998. As previously mentioned, in the second quarter of 1999 the Corporation incurred pre-tax charges of Bankers Trust Corporation and its Subsidiaries 3 - -------------------------------------------------------------------------------- approximately $1.1 billion in COC-related costs and a pre-tax restruc turing charge of $459 million. During the fourth quarter of 1999, the Corporation recorded additional charges related to restructuring and other related activities of $174 million in connection with its continuing efforts to streamline support functions and realign certain business activities. The results for 1999 also include the aforementioned gain on the sale of BTAL. At December 31, 1999, total cash basis loans amounted to $737 million, up from $392 million at December 31, 1998. Prior to the Acquisition in the second quarter of 1999, the Corporation completed the sale of its remaining stake in Consorcio, a Chilean insurance company. The impact of the sale was immaterial to the Corporation's results of operations. Because of the significant business and net financial asset transfers to Deutsche Bank entities, the aforementioned other charges reflecting changes in management intent and responsibility in the second quarter of 1999 and the sale of BTAL in the third quarter of 1999, the Corporation's historical financial statements are not fully comparable for all periods presented. Business Segments Business segments results, which are presented in accordance with U.S. generally accepted accounting principles, are derived from internal management reports. In conjunction with the Acquisition, the Corporation realigned its business activities to conform to Deutsche Bank's management structure. In this regard, Retail and Private Banking focuses on the Corporation's private banking activities. The Asset Management division combines the Corporation's institutional asset management and retail investment fund businesses. Global Corporates and Institutions includes the Corporation's commercial banking and investment banking activities as well as trading activities. This business segment also includes credit business, trade finance, structured finance and cash management in addition to the Corporation's private equity business. Global Technology and Services includes four product groups: payments, securities processing, custody services and electronic banking services. Refer to Note 22 of Notes to Financial Statements for further discussion of the business segments' activities. Corporate Items include revenue and expenses that have not been allocated to business segments. Prior period results have been restated for changes in management structure. The information presented below reflects the results by business segment (in millions): Total Non- Pretax Year Ended Total Net interest Income/ December 31, 1999 Revenue Expenses (Loss) - -------------------------------------------------------------------------------- Retail and Private Banking $ 169 $ 189 $ (20) Asset Management 241 221 20 Global Corporates and Institutions 1,378 2,653 (1,275) Global Technology and Services 922 970 (48) - -------------------------------------------------------------------------------- Total Business Segments 2,710 4,033 (1,323) - -------------------------------------------------------------------------------- Corporate Items 1,655 1,747 (92) - -------------------------------------------------------------------------------- Total $ 4,365 $ 5,780 $(1,415) ================================================================================ Total Non- Pretax Year Ended Total Net interest Income/ December 31, 1998 Revenue Expenses (Loss) - -------------------------------------------------------------------------------- Retail and Private Banking $ 187 $ 175 $ 12 Asset Management 253 155 98 Global Corporates and Institutions 2,567 3,058 (491) Global Technology and Services 946 900 46 - -------------------------------------------------------------------------------- Total Business Segments 3,953 4,288 (335) - -------------------------------------------------------------------------------- Corporate Items 1,136 878 258 - -------------------------------------------------------------------------------- Total $5,089 $5,166 $ (77) ================================================================================ Total Non- Pretax Year Ended Total Net interest Income/ December 31, 1997 Revenue Expenses (Loss) - -------------------------------------------------------------------------------- Retail and Private Banking $ 173 $ 176 $ (3) Asset Management 191 137 54 Global Corporates and Institutions 3,499 2,739 760 Global Technology and Services 915 832 83 - -------------------------------------------------------------------------------- Total Business Segments 4,778 3,884 894 - -------------------------------------------------------------------------------- Corporate Items 1,442 1,097 345 - -------------------------------------------------------------------------------- Total $ 6,220 $ 4,981 $ 1,239 ================================================================================ The Retail and Private Banking business recorded a pre-tax loss of $20 million in 1999, compared to pre-tax income of $12 million in 1998. The 1999 results contain COC-related costs of approximately $21 million and reflect lower revenue from commissions. In 1998, Retail and Private Banking reported pre-tax income of $12 million, up $15 million from 1997. The increase reflected higher revenue from fiduciary and funds management activities. 4 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Asset Management recorded pre-tax income of $20 million in 1999, compared to pre-tax income of $98 million in 1998. The 1999 results contain COC-related costs of approximately $18 million and higher personnel-related costs. Asset Management pre-tax income of $98 million in 1998 increased $44 million from 1997 primarily due to higher revenue from fiduciary and funds management activities. The Global Corporates and Institutions business recorded a pre-tax loss of $1,275 million in 1999, compared to a pre-tax loss of $491 million in 1998. The 1999 results contain COC-related costs of approximately $848 million. Trading losses also negatively impacted the 1999 results. Total net revenue for 1999 includes the impact of a change in management's intention regarding certain assets as a result of integrating the Corporation into Deutsche Bank, as well as the transfer of certain securities available for sale to Deutsche Bank related entities. Global Corporates and Institutions recorded a pre-tax loss of $491 million in 1998 compared to pre-tax income of $760 million in 1997. The 1998 results included losses related to widening credit spreads on high-yield debt securities, mark-to-market losses on investments in the unit's private equity portfolio and losses on securities available for sale resulting from the economic turmoil experienced in the third quarter of 1998. The Corporation's Global Technology and Services business recorded a pre-tax loss of $48 million for 1999 compared to pre-tax income of $46 million in 1998. The 1999 results contain COC-related costs of approximately $86 million. Global Technology and Services pre-tax income of $46 million in 1998 decreased $37 million from 1997. Corporate Items include revenue and expenses that have not been allocated to business segments, the operating income and expenses of BTAL and Consorcio, and the results of smaller businesses that are not included in the main business segments. Due to the sale of BTAL in the third quarter of 1999, its results are not included as a reportable segment. Corporate Items also includes charges of $633 million for restructuring and other related activities for the year ended December 31, 1999. Financial Reporting Matters On January 1, 1999, the Corporation adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance as to when it is or is not appropriate to capitalize the cost of software developed or obtained for internal use. The adoption as of January 1, 1999 of SOP 98-1 did not have a material impact on the Corporation's net income, stockholders' equity or total assets. As used throughout this Annual Report, the term "International" signifies information based on the domicile of the customer, whereas the term "Foreign Office" refers to the location in which the transaction is recorded. Statement of Income Analysis Net Interest Revenue Net interest revenue for 1999 was $807 million, down $565 million from 1998. Net interest revenue for 1998 was $1.372 billion, up $13 million from 1997. The significant transfers of entities and other financial assets and liabilities to Deutsche Bank in the second half of 1999 negatively impacted net interest revenue and levels of average interest-bearing assets and average interest-bearing liabilities for the year ended December 31, 1999 as compared to prior periods. The Firm's trading and risk management businesses include the use of interest rate instruments and related derivatives. These activities can periodically shift revenue between trading and net interest, depending on a variety of factors, including risk management strategies. Therefore, the Corporation views trading revenue and trading-related net interest revenue together, which is discussed in the trading revenue section below. The Firm's nontrading-related net interest revenue, generally a more stable component of overall net interest revenue than trading-related net interest revenue, was $630 million in 1999, compared to $787 million in 1998. This decrease was primarily due to the decrease in securities borrowed and securities purchased under resale agreements. Nontrading-related net interest revenue was $787 million in 1998 compared to $818 million in 1997. In 1999, the interest rate spread was 1.06 percent compared to 1.02 percent in 1998. Net interest margin increased to 1.18 percent from 1.16 percent in 1998. The yield on interest-earning assets declined by 51 basis points. The cost of interest-bearing liabilities declined by 55 basis points. Average interest-earning assets totaled $69.4 billion at December 31, 1999, down $51.2 billion from December 31, 1998. The decrease was primarily attributable to the decrease in trading account assets, securities borrowed and securities purchased under resale agreements. Average interest-bearing liabilities totaled $67.8 billion at December 31, 1999, down $49.8 billion from December 31, 1998. The decrease was primarily attributable to the decrease in securi ties sold under repurchase agreements and interest-bearing deposits. Bankers Trust Corporation and its Subsidiaries 5 - -------------------------------------------------------------------------------- In 1998, the interest rate spread was 1.02 percent compared to 1.09 percent in 1997. Net interest margin decreased to 1.16 percent from 1.33 percent. The yield on interest-earning assets declined by 11 basis points. The cost of interest-bearing liabilities declined by 4 basis points. Average interest-earning assets totaled $120.7 billion at December 31, 1998, up $16.3 billion from December 31, 1997. The increase was primarily attributable to increases in securities borrowed and securities available for sale. Average interest-bearing liabilities totaled $117.6 billion at December 31, 1998, up $17.5 billion from December 31, 1997. The increase was primarily attributable to a rise in securities sold under repurchase agreements, long-term debt and interest-bearing deposits in domestic offices. Table 2 Net Interest Revenue Analysis The table below presents the Corporation's trend of net interest revenue, average balances and rates. For further details on these statistics, see pages 62 through 64.
- ----------------------------------------------------------------------------------------------- ($ in millions) Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------- Net interest revenue Book basis $ 807 $ 1,372 $ 1,359 Tax equivalent adjustment* 15 31 26 - ----------------------------------------------------------------------------------------------- Fully taxable basis $ 822 $ 1,403 $ 1,385 =============================================================================================== Average balances Interest-earning assets $69,411 $120,650 $104,334 Interest-bearing liabilities 67,803 117,637 100,154 - ----------------------------------------------------------------------------------------------- Earning assets financed by noninterest-bearing funds $ 1,608 $ 3,013 $ 4,180 =============================================================================================== Average rates (fully taxable basis) Yield on interest-earning assets 6.39% 6.90% 7.01% Cost of interest-bearing liabilities 5.33 5.88 5.92 - ----------------------------------------------------------------------------------------------- Interest rate spread 1.06 1.02 1.09 Contribution of noninterest-bearing funds .12 .14 .24 - ----------------------------------------------------------------------------------------------- Net interest margin 1.18% 1.16% 1.33% ===============================================================================================
* The applicable combined federal, state and local incremental tax rate used to determine the amounts of the tax equivalent adjustments (which recognize the income tax savings on tax-exempt assets) was 41 percent for 1999, 41 percent for 1998 and 41 percent for 1997. Provision for Credit Losses -- Loans The Corporation recorded a negative provision for credit losses related to loans of $58 million for the year ended December 31, 1999. The provision for credit losses related to loans amounted to $40 million in 1998 as compared with no provision for 1997. A discussion of the Corporation's allowance for credit losses--loans appears on page 16. Trading Revenue The Corporation's trading activities in 1999 were significantly reduced, reflecting the effects of integrating the Corporation into Deutsche Bank as well as a continuation of risk reduction efforts begun in the third quarter of 1998. In conjunction with the Acquisition, the Corporation anticipates further curtailment of trading-related activities. Trading-related net interest revenue represents interest earned on cash instruments held in the trading accounts less the cost to fund both cash and derivatives positions. 6 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The table below presents the Firm's trading revenue and trading-related net interest revenue by major category of market risk. These categories are based on management's view of the predominant underlying risk exposure of each of the Firm's trading positions. Trading- Related Net Trading Interest (in millions) Revenue Revenue Total - -------------------------------------------------------------------------------- Year Ended December 31, 1999 Interest rate risk $ (165) $244 $ 79 Foreign exchange risk 139 -- 139 Equity and commodity risk 68 (67) 1 - -------------------------------------------------------------------------------- Total $ 42 $177 $ 219 ================================================================================ Year Ended December 31, 1998 Interest rate risk $ (427) $593 $ 166 Foreign exchange risk 426 -- 426 Equity and commodity risk (183) (8) (191) - -------------------------------------------------------------------------------- Total $ (184) $585 $ 401 ================================================================================ Year Ended December 31, 1997 Interest rate risk $ 433 $603 $1,036 Foreign exchange risk 277 -- 277 Equity and commodity risk 345 (62) 283 - -------------------------------------------------------------------------------- Total $1,055 $541 $1,596 ================================================================================ Interest Rate Risk As indicated above, a portion of the Firm's trading and risk man agement activities involve positions in interest rate instruments and related derivatives. The revenue from these activities can periodically shift between trading and trading-related net interest revenue, depending on a variety of factors, including risk management activities. In 1999, trading and trading-related net interest revenue was $79 million compared to $166 million in 1998. The decrease reflects the integration of the Corporation's trading assets into the Deutsche Bank entity and includes post merger risk reduction initiatives. In 1998 trading and trading-related net interest revenue was $166 million compared to $1.036 billion in 1997. The decrease was primarily attributable to losses on high-yield securities, adverse market conditions in Latin America and Asia, valuation adjustments to trading assets for widening counterparty credit spreads, and Russian-related trading losses. Foreign Exchange Risk In 1999, trading revenue related to foreign exchange risk was $139 million, compared to $426 million in 1998. The decrease in foreign exchange revenue is primarily related to reduced revenue in Australian markets in the first six months of 1999 coupled with the sale of BTAL in the third quarter of 1999. In 1998 trading revenue related to foreign exchange risk was $426 million, up $149 million, or 54 percent, compared to 1997. The increase was principally due to gains in the Asian and Australian foreign exchange markets. Equity and Commodity Risk Total trading and trading-related net interest revenue related to equity and commodity risk was $1 million in 1999, an increase of $192 million from 1998 which decreased $474 million from 1997. The third quarter of 1998 included losses in global proprietary equity portfolios caused by increased market volatility, valuation adjustments related to the Corporation's European Equity business as well as decreased activity in the equity derivative books. Noninterest Revenue (Excluding Trading) The following table presents noninterest revenue (in millions): Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Fiduciary and funds management $1,017 $1,108 $1,059 Corporate finance fees 542 1,255 1,113 Other fees and commissions 538 817 606 Net revenue from equity investments 356 302 224 Securities available for sale gains (losses) (89) (56) 158 Insurance premiums 86 256 287 Other 1,008 259 359 - -------------------------------------------------------------------------------- Total $3,458 $3,941 $3,806 ================================================================================ Fiduciary and funds management revenue was down $91 million, or 8 percent, from 1998, which was up $49 million from 1997. The decrease in 1999 is due primarily to the sale of BTAL in the third quarter of 1999. Higher global private banking commissions and improved funds management revenue contributed to the increase in 1998. Corporate finance fees were down $713 million, or 57 percent, from 1998, which were up $142 million from 1997. Lower underwriting fees, loan syndication fees and merger and acquisition activities, which is primarily attributable to the transfer of BTAB to DBSI in June 1999, contributed to the decline in 1999. Higher merger and acquisition fees in addition to higher financial advisory and commitment fees contributed to the increase in 1998. Other fees and commissions were down $279 million, or 34 percent, from 1998, which were up $211 million from 1997. The decline in 1999 was primarily due to lower fees for brokerage services resulting from the transfer of BTAB and BTI to Deutsche Bank related entities. The increase in 1998 was primarily due to higher fees for brokerage services principally resulting from the acquisition of NatWest Markets' European equities business. Net revenue from equity investments was up $54 million, or 18 percent, from 1998, which was up $78 million from 1997. Higher gains on sales of direct equity investments contributed to the increase in both 1999 and 1998. Bankers Trust Corporation and its Subsidiaries 7 - -------------------------------------------------------------------------------- Securities available for sale losses were $89 million compared to securities available for sale losses of $56 million in 1998. The 1999 results reflect third party sale activity and the transfer of certain Latin American debt securities to Deutsche Bank related entities based on changes in management responsibility related to such securities following the COC date. Securities available for sale losses in 1998 decreased $214 million from 1997. The 1998 results included losses on Russian, Asian and Latin American securities. Insurance premiums decreased $170 million, or 66 percent, from 1998. The Corporation exited the insurance business with the sale of its remaining stake in Consorcio, the Corporation's 50 percent owned Chilean insurance company, in the second quarter of 1999. Insurance premiums in 1998 decreased $31 million, or 11 percent, from 1997. This decrease was mainly due to decreasing annuity sales at Consorcio. Other noninterest revenue was $1.008 billion in 1999, an increase of $749 million from 1998 which decreased $100 million, or 28 percent, from 1997. The 1999 results included the pre-tax gain on the sale of BTAL. The current year increase was partially offset by the recognition of cumulative translation adjustments for certain legal entities transferred to affiliated Deutsche Bank entities during 1999. The 1997 results included a pre-tax gain of $76 million on the sale of a midtown Manhattan office building that was previously the headquarters of the Corporation, a pre-tax gain of $62 million on the sale of the Corporation's defined contribution recordkeeping and participant services business, as well as a gain on the sale of 50 percent of the Corporation's stake in Consorcio. The Corporation also recognized in 1997 a decline in value for certain Southeast Asian investments that partially offset these gains. Noninterest Expenses The following table presents noninterest expenses (in millions): Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Salaries and commissions $1,039 $1,421 $1,273 Incentive compensation and employee benefits 1,088 1,530 1,726 Change in control related incentive compensation and employee benefits 1,101 -- -- Agency and other professional service fees 430 501 391 Communication and data services 206 252 231 Occupancy, net 198 218 181 Furniture and equipment 221 252 224 Travel and entertainment 114 171 142 Provision for policyholder benefits 114 322 333 Other 636 499 423 Restructuring and other related activities 633 -- 57 - -------------------------------------------------------------------------------- Total $5,780 $5,166 $4,981 ================================================================================ Total noninterest expenses for 1999 increased $614 million, or 12 percent, from 1998. Salaries and commissions expense decreased by $382 million, or 27 percent, in 1999, primarily due to a decrease in the average number of employees resulting from the transfer of BTAB and BTI in the second quarter of 1999, the sale of BTAL in the third quarter of 1999 and staff reductions resulting from the Acquisition. Incentive compensation and employee benefits decreased by $442 million, or 29 percent, primarily due to the decrease in the average number of employees as previously mentioned. The number of full-time staff at December 31, 1999 was 7,775 compared to 20,541 at December 31, 1998. The 1999 results also included $1.1 billion of change-in-control related incentive compensation and employee benefits, primarily as a result of accelerated amortization of deferred compensation amounts as of the COC date. All other noninterest expenses totaled $2.552 billion compared with $2.215 billion in 1998. During 1999, the Corporation recorded pre-tax charges for restructuring and other related activities totaling $633 million. Of this amount, $459 million related to a restructur ing charge recorded in the second quarter in conjunction with the Acquisition. This charge reflected $394 million of severance and other termination-related costs as well as $65 million of other costs primarily related to lease terminations and write-offs of fixed assets and leasehold improvements. During the fourth quarter, the Corporation recorded additional charges related to restructuring and other related activities of $174 million in connection with its con tinuing efforts to streamline support functions and realign certain business activities. These charges reflected $116 million of severance and other termination-related costs, as well as $58 million of other costs primarily related to the intended liquidation of certain financial assets. The provision for policyholder benefits decreased $208 million from 1998. The Corporation exited the insurance business with the sale of its remaining stake in Consorcio in the second quarter of 1999. Total noninterest expenses for 1998 increased $185 million, or 4 percent, from 1997. Salaries and commissions expense increased by $148 million, or 12 percent, in 1998, primarily due to an increase in the average number of employees and higher annual salaries. Incentive compensation and employee benefits decreased by $196 million, or 11 percent, due to the decline in financial performance, partly offset by employee stock awards granted in 1997. The number of full-time staff at December 31, 1998 was 20,541 compared to 18,655 at December 31, 1997. All other noninterest expenses totaled $2.215 billion in 1998 compared with $1.982 billion in 1997. The 1998 results reflected a $60 million fine to federal authorities and a $3.5 million payment to the State of New York as part of an agreement to resolve an investigation concerning inappropriate transfers of unclaimed funds and related recordkeeping problems that occurred between 1994 and early 1996. Included in the 1998 amount were additional costs for agency and other professional service fees due to integration and continuing costs associated with the acquisition of NatWest Markets' European equities business. 8 Bankers Trust and its Subsidiaries - -------------------------------------------------------------------------------- Taxes Income tax expense for 1999 amounted to $188 million, compared to an income tax benefit of $4 million in 1998 and income tax expense of $373 million in 1997. The effective tax rate for 1999 was (13) percent, while the 1998 and 1997 effective tax rates were 5 percent and 30 percent, respectively. Year 2000 The Corporation's computer systems, applications and infrastructure operated successfully on the first business day of the new millennium. It did not become necessary for the Corporation to invoke any of its contingency plans, including those related to possible failures by third parties. The Corporation's Year 2000 expenditures during 1999 aggregated approximately $56 million and largely represented the redeployment of existing operations and information technology resources. The cost of any remaining efforts related to the Year 2000 is not expected to be material. International Operations The Corporation's assets and results of operations for 1999, 1998 and 1997 have been allocated between domestic and international operations in Note 23 of Notes to Financial Statements. This analysis, which is based on the domicile of the customer, incorporates numerous subjective assumptions and, as a result, is different from legal entity and segment results shown elsewhere in this report. Management views the operation of the Corporation on a segment basis, as disclosed on page 4. International net loss for 1999 and 1998 totaled $1,134 million and $211 million, respectively. Net income from domestic operations was a negative $469 million during 1999 and a positive $138 million for 1998, therefore, the ratio of international to total net income is not meaningful. This ratio for 1997 was 26 percent. International total assets were $18.6 billion at December 31, 1999 compared to $63.1 billion at December 31, 1998, which represented 27 percent and 47 percent of total consolidated assets, respectively. The transfer of most of the Corporation's international operations to Deutsche Bank is the primary reason for the decline in international total assets during 1999. Much of the net loss in 1999 is due to the allocation of a significant portion of the COC-related and restructuring charges to international operations. The overall losses during 1998 from international operations were primarily due to Asia and the Western Hemisphere. During 1998, the Asian region suffered a loss of $210 million as compared to a loss of $44 million during 1997. This loss was primarily due to trading losses. In 1998 the Western Hemisphere had a loss of $96 million versus net income of $81 million in 1997. This loss was attributable to losses on trading assets and losses on securities available for sale. Domestic income decreased from $638 million in 1997 to $138 million in 1998. This decrease was primarily due to trading losses and a decrease in net interest margins. International total assets were $63.1 billion at December 31, 1998 compared to $72.7 billion at December 31, 1997, which represented 47 percent and 52 percent of total consolidated assets, respectively. The $9.6 billion decrease was primarily due to a reduction in Asian trading assets, partially offset by an increase in European assets. Bankers Trust Corporation and its Subsidiaries 9 - -------------------------------------------------------------------------------- Changes in Financial Condition Balance Sheet Analysis Table 3 below highlights the trends in the balance sheet over the past two years. Because annual averages may tend to conceal trends and year-end balances can be distorted by one-day fluctuations, fourth quarter averages for each year are provided to give a better indication of trends in the balance sheet. Table 3 Condensed Balance Sheets -- Fourth Quarter Averages
- ---------------------------------------------------------------------------------------------------------------- (in millions) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Assets Interest-earning Interest-bearing deposits with banks $ 3,867 $ 2,370 $ 6,211 Federal funds sold 3,608 3,445 4,950 Securities purchased under resale agreements 5,478 19,316 23,074 Securities borrowed -- 17,903 16,588 Trading assets 6,221 25,206 30,447 Securities available for sale Taxable 3,412 10,038 6,876 Exempt from federal income taxes 16 1,692 1,237 - ---------------------------------------------------------------------------------------------------------------- Total securities available for sale 3,428 11,730 8,113 Loans Domestic offices 16,132 12,847 10,800 Foreign offices 4,613 10,417 9,580 - ---------------------------------------------------------------------------------------------------------------- Total loans 20,745 23,264 20,380 Customer receivables 569 1,622 1,612 - ---------------------------------------------------------------------------------------------------------------- Total interest-earning assets 43,916 104,856 111,375 Noninterest-earning Cash and due from banks 1,745 2,721 1,476 Noninterest-earning trading assets 8,541 29,650 25,157 All other assets 8,774 11,853 10,694 Allowance for credit losses--loans (508) (665) (780) - ---------------------------------------------------------------------------------------------------------------- Total $62,468 $148,415 $147,922 ================================================================================================================ Liabilities Interest-bearing Interest-bearing deposits Domestic offices $12,200 $ 18,891 $ 21,881 Foreign offices 7,659 16,650 20,966 - ---------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 19,859 35,541 42,847 Trading liabilities 39 5,918 5,587 Securities loaned and securities sold under repurchase agreements 210 20,650 24,200 Other short-term borrowings 7,691 19,247 20,078 Long-term debt 13,915 18,645 13,050 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures 1,427 1,419 1,472 - ---------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 43,141 101,420 107,234 Noninterest-bearing Noninterest-bearing deposits 4,724 4,362 3,366 Noninterest-bearing trading liabilities 4,516 26,454 20,803 All other liabilities 5,542 11,271 10,591 - ---------------------------------------------------------------------------------------------------------------- Total Liabilities 57,923 143,507 141,994 Preferred Stock of Subsidiary -- 144 -- - ---------------------------------------------------------------------------------------------------------------- Stockholders' Equity Preferred stock 392 394 688 Common stockholders' equity 4,153 4,370 5,240 - ---------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 4,545 4,764 5,928 - ---------------------------------------------------------------------------------------------------------------- Total $62,468 $148,415 $147,922 ================================================================================================================
10 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Liquidity and Capital Resources Management believes that the Corporation has sufficient liquidity and capital resources to meet the needs of its business operations. Liquidity Liquidity is the ability to have funds available at all times to meet the commitments of the Corporation. As part of the Acquisition, the Corporation's liquidity process has become an integral part of Deutsche Bank's global liquidity process. Management's policy is designed to maintain Deutsche Bank's ability to fund assets and meet any contractual financial obligations on a timely basis at a fair market cost under any market conditions. While Deutsche Bank and the Corporation manage their liquidity positions on a day-to-day basis to meet ongoing funding needs, Deutsche Bank's planning and management process also encompasses contingency planning to address even the most severe liquidity events. Short-term unsecured financing for the Corporation is available under an uncommitted credit line with its parent, Deutsche Bank. At December 31, 1999, this credit line totaled over $5 billion. Of this amount, approximately $2 billion was drawn. The Corporation's consolidated long-term debt and mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital ("trust preferred capital securities"), at December 31, 1999 totaled $16.4 billion, most of which was unsecured, and consisted of $11.5 billion in senior borrowings, $3.5 billion of subordinated debt, and $1.4 billion of trust preferred capital securities. These liabilities mature between 2000 and 2037, as detailed in Notes 9 and 10 of Notes to Financial Statements. Capital Resources The Corporation pursues capital management with the objective of enhancing its ability to execute its global strategic business plans while retaining financial flexibility. Management believes that a strong capital base is critical to achieving these objectives. Consolidated total stockholder's equity totaled $4.350 billion on December 31, 1999, down $346 million, or 7 percent, from year end 1998, which was down $1.012 million, or 18 percent, from year end 1997. The current year's decrease was primarily due to the net operating loss of $1.6 billion offset in part by a capital contribution from Deutsche Bank of $1.4 billion. The decrease in 1998 was primarily due to dividends declared on common and preferred stock and the repurchase of common and preferred stock. The Corporation actively monitors compliance with bank regulatory capital requirements, focusing primarily on the risk-based capital guidelines. The Corporation manages its capital base and on- and off-balance sheet items to ensure that it remains strongly capitalized. The Federal Reserve Board's risk-based capital guidelines address the capital adequacy of bank holding companies and banks (collectively "banking organizations"). These guidelines include a definition of capital, a framework for calculating risk-weighted assets and minimum risk-based capital ratios to be maintained by banking organizations. A banking organization's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. The Federal Reserve Board also has a minimum Leverage ratio that is used as a supplement to the risk-based capital ratios in evaluating the capital adequacy of banks and bank holding companies. The Leverage ratio is calculated by dividing Tier 1 Capital by adjusted quarterly average assets. The Corporation had previously adopted the market risk amendment to the risk-based capital guidelines issued by the Federal Reserve, which requires the use of internal models to measure market risk in the calculation of the risk-weighted assets for trading accounts. This amendment is consistent with the amendment to the Basle Capital Accord adopted by the Basle Committee on Banking Supervision at the Bank for International Settlements ("the BIS"). The following discussion of the risk-based capital and leverage ratios should be read in conjunction with Note 15 of the Notes to Financial Statements, which defines the components of Tier 1, Tier 2 and Tier 3 Capital, as well as the regulatory guidelines for well- capitalized banks and bank holding companies. The Corporation's and BTCo's regulatory capital ratios are presented in Table 4. During 1999, the Corporation's Tier 1 Capital ratio increased 290 basis points as the slight decline in Tier 1 Capital of $607 million was offset by the significant decrease in risk-weighted assets of $25.1 billion. The Tier 1 Capital decrease was primarily caused by the 1999 net operating loss of $1.6 billion and the net decline in the other components of Tier 1 Capital of $.4 billion, partially offset by the capital contribution of $1.4 billion made by Deutsche Bank in the second quarter of 1999. Risk-weighted assets decreased principally because positions were liquidated or transferred to other Deutsche Bank affiliates. The Total Capital ratio increased 480 basis points as the decrease in risk-weighted assets more than offset the decline of $1.4 billion in Total Capital. The Leverage ratio increased 380 basis points with the decrease in Tier 1 Capital more than offsetting a decrease of $84.6 billion in adjusted quarterly average assets. The negative effect of the aforementioned operating losses and positive effect of the asset liquidations and transfers were also the main reasons for comparative variances in BTCo's ratios. During 1999, BTCo's Tier 1 Capital ratio increased 600 basis points as the decrease in Tier 1 Capital of $972 million was more than offset by a reduction of $29.1 billion in risk-weighted assets. Total Capital ratio increased 550 basis points as the reduction in risk-weighted assets was more than enough to offset the decline of $2 billion in Total Capital. The Leverage ratio increased 660 basis points as the decline in Tier 1 Capital was offset by the significant reduction of $69.7 billion in quarterly average assets. Table 4 presents the regulatory capital ratios of the Corporation and BTCo at December 31, 1999 and 1998 and the well-capitalized guidelines. Bankers Trust Corporation and its Subsidiaries 11 - -------------------------------------------------------------------------------- Table 4 Regulatory Capital Ratios Well December 31, December 31, Capitalized 1999 1998 Guidelines - -------------------------------------------------------------------------------- Corporation Risk-Based Ratios Tier 1 Capital 10.4% 7.5% 6.0% Total Capital 18.4% 13.6% 10.0% Leverage Ratio 7.3% 3.5% N/A BTCo Risk-Based Ratios Tier 1 Capital 16.5% 10.5% 6.0% Total Capital 18.9% 13.4% 10.0% Leverage Ratio 12.3% 5.7% 5.0% N/A Not Applicable. The following were the essential components (in millions) used in calculating the Corporation's and BTCo's risk-based capital ratios: December 31, 1999 1998 - -------------------------------------------------------------------------------- Corporation Tier 1 Capital $ 4,462 $ 5,069 Tier 2 Capital 3,399 3,812 Tier 3 Capital -- 400 - -------------------------------------------------------------------------------- Total Capital $ 7,861 $ 9,281 ================================================================================ Total risk-weighted assets $42,823 $67,980 ================================================================================ BTCo Tier 1 Capital $ 5,710 $ 6,682 Tier 2 Capital 851 1,858 - -------------------------------------------------------------------------------- Total Capital $ 6,561 $ 8,540 ================================================================================ Total risk-weighted assets $34,657 $63,748 ================================================================================ Risk Management Market Risk Market risk is the risk of losses in the value of the Corporation's portfolio due to movements in market prices and rates. Market risk arises from the Corporation's investment, trading, and client activities. One summary measure of market risk is Daily Price Volatility ("DPV"). The Daily Price Volatility of a portfolio is the potential loss in fair value that statistically would be exceeded only 1 percent of the time if that portfolio were held unchanged for one day. As such, Daily Price Volatility falls within a general class of risk measures that are referred to as Value at Risk ("VaR"). The Corporation's Daily Price Volatility is calculated using proprietary simulation and risk modeling techniques. Table 5 provides information on the Daily Price Volatility associated with the Corporation's market risk positions during 1999. The table shows this information for the set of financial assets and liabilities whose values are functions of market-traded variables irrespective of accounting classification. This set of figures is labeled Total Daily Price Volatility in the table. The table also reports information on the Daily Price Volatility from the subset of market risk positions that are reported as trading assets and liabilities. This set of figures is labeled Trading Daily Price Volatility. Finally, the table reports information on the Daily Price Volatility associated with the non-trading, market-sensitive positions. This set of positions is labeled Non-Trading Daily Price Volatility, and the information in this portion of the table reflects the incremental contribution these positions have on the Corporation's Total Daily Price Volatility. Effective October 1, 1999 the Corporation adopted the market risk VaR models and methodologies that are used throughout the Deutsche Bank Group for various purposes, including regulatory capital. Although the methodologies employed by the former and current models differ in some respects, both models meet the regulatory requirements and have been approved by the banking regulators in the United States for use in risk-based capital. Therefore, the 1999 Daily Price Volatility Statistics for the overall portfolio in Table 5 are generally comparable with the 1998 Daily Price Volatility Statistics for the overall portfolio in Table 6. The prior period amounts have not been restated due to the complexities of VaR models and of the correlation effects across risk classifications. In addition, the quantitative risk measures presented for 1999 are not comparable to those presented for 1998 due to the significant business and net financial asset transfers to Deutsche Bank entities, as well as continued risk reduction efforts begun in the third quarter of 1998. The Corporation's market risks at December 31, 1999 were primarily from its private equity investments and high-yield distressed debt positions, as well as positions arising from loan trading, loan syndication and loan securitization businesses. 12 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Table 5 BTC Daily Price Volatility Statistics for 1999 (in millions) Total Daily Price Volatility - -------------------------------------------------------------------------------- Average Minimum Maximum December 31, Risk Class 1999 1999 1999 1999 - -------------------------------------------------------------------------------- Interest Rate $ 18.0 $ 4.3 $30.7 $ 5.1 Currency 2.5 0.1 11.2 0.6 Equity 22.6 10.2 37.7 11.7 Commodity 0.6 -- 1.8 -- Diversification (12.4) -- -- (4.6) - -------------------------------------------------------------------------------- Overall Portfolio $ 31.3 * * $12.8 ================================================================================ Trading Daily Price Volatility - -------------------------------------------------------------------------------- Average Minimum Maximum December 31, Risk Class 1999 1999 1999 1999 - -------------------------------------------------------------------------------- Interest Rate $11.1 $ 4.2 $18.4 $ 5.0 Currency 2.3 0.1 7.8 0.6 Equity 8.7 3.4 18.8 5.8 Commodity 0.6 -- 1.8 -- Diversification (7.0) -- -- (3.7) - -------------------------------------------------------------------------------- Overall Portfolio $15.7 * * $ 7.7 ================================================================================ Non-Trading Daily Price Volatility: Incremental impact of non-trading positions on Total Daily Price Volatility - -------------------------------------------------------------------------------- Average Minimum Maximum December 31, Risk Class 1999 1999 1999 1999 - -------------------------------------------------------------------------------- Interest Rate $ 6.9 $ -- $16.3 $ 0.1 Currency 0.2 -- 9.1 -- Equity 13.9 5.0 20.2 5.9 Commodity -- -- 0.4 -- Diversification (5.4) -- -- (0.9) - -------------------------------------------------------------------------------- Overall Portfolio $15.6 * * $ 5.1 ================================================================================ * The minimum (maximum) for each risk category occurred on different days so it is not meaningful to sum the risk class amounts presented above. For example, during 1999 the minimum Trading Daily Price Volatility was $7.6 million and the maximum Trading Daily Price Volatility was $28.7 million. Table 6 BTC Daily Price Volatility Statistics for 1998 (in millions) Total Daily Price Volatility - ------------------------------------------------------------------------------- Average Minimum Maximum December 31, Risk Class 1998 1998 1998 1998 - ------------------------------------------------------------------------------- Interest Rate $ 31.9 $19.2 $45.8 $ 25.0 Currency 11.3 5.1 20.9 8.5 Equity 28.5 16.2 36.7 33.9 Commodity 1.3 0.6 3.4 1.2 Diversification (21.7) -- -- (21.3) - ------------------------------------------------------------------------------- Overall Portfolio $ 51.3 * * $ 47.3 =============================================================================== Bankers Trust Corporation and its Subsidiaries 13 - -------------------------------------------------------------------------------- Trading Daily Price Volatility - -------------------------------------------------------------------------------- Average Minimum Maximum December 31, Risk Class 1998 1998 1998 1998 - -------------------------------------------------------------------------------- Interest Rate $19.3 $11.3 $31.4 $16.8 Currency 11.1 5.0 20.7 7.2 Equity 18.4 8.4 28.1 16.5 Commodity 1.3 0.6 3.4 1.2 Diversification (17.2) -- -- (15.4) - -------------------------------------------------------------------------------- Overall Portfolio $32.9 * * $26.3 ================================================================================ Non-Trading Daily Price Volatility: Incremental impact of non-trading positions on Total Daily Price Volatility - -------------------------------------------------------------------------------- Average Minimum Maximum December 31, Risk Class 1998 1998 1998 1998 - -------------------------------------------------------------------------------- Interest Rate $12.6 $ 1.5 $22.8 $ 8.2 Currency 0.2 -- 1.5 1.3 Equity 10.1 5.1 17.5 17.4 Commodity -- -- -- -- Diversification (4.5) -- -- (5.9) - -------------------------------------------------------------------------------- Overall Portfolio $18.4 * * $21.0 ================================================================================ * The minimum (maximum) for each risk category occurred on different days so it is not meaningful to sum the risk class amounts presented above. For example, during 1998 the minimum Total Daily Price Volatility was $32.7 million and the maximum Total Daily Price Volatility was $71.4 million. Tables 5 and 6 show that the Corporation's overall market risk as measured by DPV declined in 1999 on an average and spot basis by 39 percent and 73 percent, respectively. The overall decline was driven by declines in all risk classes. These reductions reflect the continuing effects of integrating the Corporation into Deutsche Bank Group. The primary risks remaining at December 31, 1999 are interest rate risk and equity risk. The interest rate risk stems primarily from the loan trading, loan syndication and loan securitization businesses. The equity risk is primarily from private equity investments held by the Corporation and from high yield distressed debt positions. Distressed debt is classified as equity risk after implementation of Deutsche Bank models at the beginning of the fourth quarter. Tables 5 and 6 show that the Corporation's DPV from Trading Assets also declined sharply during this period, decreasing on an average and spot basis by 52 percent and 71 percent, respectively. The decline was evident across all risk classes. These reductions reflect the continuing effects of integrating the Corporation into Deutsche Bank Group. Credit Risk Management In conformity with Deutsche Bank policies, the Credit Risk Management Department, headed by the Chief Credit Officer, is responsible for developing credit policies, as well as for monitoring and managing overall credit risk. The department evaluates the creditworthiness of each borrower/issuer/counterparty and assigns a rating for each. Credit limits are established at the portfolio level by borrower/issuer/counterparty and by other categories. A credit officer is responsible for reviewing the entire credit risk portfolio of a borrower/issuer/counterparty regardless of the nature of the exposure (e.g., loans, securities, and derivatives). Credit officers also monitor the usage of credit risk by entity versus the limits at the product and business activity level. The Credit Risk Management Department monitors country exposures and industry, borrower/issuer/counterparty, product and regional risk concentrations in order to evaluate the degree of diversification in the portfolio. Derivatives Derivatives are swaps, futures, forwards, options and other similar types of contracts based on interest rates, foreign exchange rates and the prices of equities and commodities (or related indices). Derivatives are generally either privately-negotiated over-the-counter ("OTC") contracts or standard contracts transacted through regulated exchanges. OTC contracts generally consist of swaps, forwards and options. In the normal course of business, with the agreement of the original customer, OTC derivatives may be terminated or assigned to another customer. Exchange-traded derivatives include futures and options. These capital markets products are described further in Note 24 of Notes to Financial Statements. Derivatives may be used for either trading or end-user purposes. 14 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Trading Derivatives The Corporation holds derivatives in connection with its activities as a dealer acting as principal for particular transactions with clients, as a market maker quoting bid and offer prices to provide liquidity and regular availability of derivatives for clients and as a risk manager of its own trading positions resulting from these client-driven transactions. The risks of derivative positions are managed in accordance with Deutsche Bank's risk management policies. As a result of the Acquisition, the Corporation's former derivatives activities have been largely transferred to Deutsche Bank entities, and it is anticipated that the existing positions at December 31, 1999 will be reduced further over time. Substantially all of the Corporation's derivative positions at December 31, 1999 were trading-related, with gains and losses included in trading revenue as they occur. Contracts with positive fair values are recorded as assets and contracts with negative fair values are recorded as liabilities, after application of qualifying master netting agreements. These positions may vary in size from period to period, similar to the positions in cash instruments also carried in the Corporation's trading account. Average trading assets and trading liabilities related to derivatives during 1999 were $9.7 billion and $9.4 billion, respectively. The notional amounts, which are not recorded on the balance sheet, of trading derivatives totaled $282 billion at December 31, 1999 and indicate the volume of activity but do not represent the Corporation's exposure to market or credit risk. End-User Derivatives The Corporation utilizes end-user derivatives to manage exposures to interest rate, and foreign currency risks associated with certain liabilities such as interest-bearing deposits, short-term borrowings and long-term debt, as well as loans and other assets. For example, the majority of the Corporation's end-user derivatives involve certain instruments (principally interest rate and currency swaps) used to transform fixed-rate-paying liabilities into variable-rate-paying liabilities. See Note 24 and Note 26 of Notes to Financial Statements for additional end-user information and for the fair value of end-user derivatives and related financial instruments. The notional amounts, which are not recorded on the balance sheet, of end-user derivatives totaled $41 billion at December 31, 1999 and indicate the volume of activity but do not represent the Corporation's exposure to market or credit risk. End-user derivative contracts represent approximately 13 percent of the aggregate notional amounts of all derivatives outstanding at year end. Market Risk The market risk of derivatives arises principally from the potential for changes in interest rates, foreign exchange rates, and equity and commodity prices and is generally similar to the market risk of the cash instruments underlying the contracts. The market risk to the Corporation is not measured by the price sensitivity of the individual contracts, but by the net price sensitivity of the relevant portfolio, including cash instruments. Exposures are generally managed by taking risk-offsetting positions. Therefore, the Corporation believes it is not meaningful to view the market risk of derivatives in isolation. Market exposures arising from derivatives are monitored and are included in the Daily Price Volatility amounts discussed in the preceding Risk Management section. Liquidity Risk In times of stress, sharp price movements or volatility shocks may reduce liquidity in certain derivatives positions, as well as in cash instruments. The liquidity risk of derivatives is substantially based on the liquidity of the underlying cash instrument, which affects the ability of the Corporation to alter the risk profile of its posi tions rapidly and at a reasonable cost. The Corporation's mark-to-market practices for derivatives include adjustments in consideration of liquidity risks, when appropriate. These practices are consistent with those applied to the Corporation's trading positions in cash instruments. Derivatives-Related Credit Risk Derivative transactions create dynamic credit exposure which changes as markets move. The credit risk of derivatives arises from the potential for a customer to default on its contractual obligations. Accordingly, credit risk related to derivatives depends on the following: the current fair value of the contracts with the customer; the potential credit exposure over time; the extent to which legally enforceable netting arrangements allow the fair value of offsetting contracts with that customer to be netted against each other; the extent to which collateral held against the contracts reduces credit risk exposure; and the likelihood of default by the customer. The Corporation monitors and manages the credit risk associated with derivatives by applying a uniform credit process for all credit exposures. The credit risk of derivatives is included in Deutsche Bank's credit risk management systems. In order to reduce derivatives-related credit risk, the Corporation enters into master netting agreements that provide for offsetting of all contracts under each such agreement and obtains collateral where appropriate. Such master netting agreements contemplate payment netting as well as the net settlement of all covered contracts through a single payment in a single currency with the same counterparty in the event that a default (including insolvency) under the agreement occurs. Credit risk exposure is monitored on a gross and a net basis and on a collateralized and an uncollateralized basis, as appropriate. Current credit risk is calculated based on the current replacement cost of outstanding positions with customers in OTC derivative financial instruments. The gross replacement cost of a derivative portfolio with a customer is the positive mark-to-market value of all transactions with that customer without the effects of netting or collateral arrangements. The replacement costs, after netting, of $4.8 billion more accurately portray the credit risk associated with the Corporation's derivatives activities with external customers at December 31, 1999 than do the gross replacement costs. The Corporation applies netting based upon the criteria prescribed by Financial Accounting Standards Board ("FASB") Interpretation No. 39 ("FIN 39"), "Offsetting of Amounts Related to Certain Contracts," which provides that offsetting is appropriate where the available evidence indicates that there are reasonable assurances that the right of setoff contained in a master netting Bankers Trust Corporation and its Subsidiaries 15 - -------------------------------------------------------------------------------- agreement governing derivatives contracts would be upheld after default, including in the event of the customer's bankruptcy. Collateral also reduces credit risk. The Corporation generally accepts collateral in the form of cash, U.S. Treasuries, and other approved securities (generally, only liquid, marketable, publicly-traded securities are acceptable). The international bank regulatory standards for risk-based capital consider the credit risk arising from derivatives in the assessment of capital adequacy. These standards were issued under the Basle Capital Accord of July 1988 and adopted in 1989 by the U.S. bank regulators, including the Federal Reserve Board. These standards use a formula-based assessment of customer credit risk which, as amended at year-end 1995, reflect the credit-risk-reducing impact of legally enforceable master netting agreements. These standards include a calculation for estimating the potential future credit exposure caused by potential price volatility (the "add-on"). At December 31, 1999, the risk-weighted amounts (reflecting both current and potential future credit exposure) that were calculated based on these international standards for derivative financial instruments aggregated to $2.7 billion after application of risk weightings. Allowance for Credit Losses -- Loans Overview The Corporation's loan portfolio primarily consists of commercial lending transactions to a diverse customer and geographic base. As such, the Corporation's commercial loans tend to be individually large in size and are non-homogeneous. As part of the Corporation's overall management and control process, the Asset Quality Review Department is responsible for performing an ongoing independent examination of the loan portfolio. The review program is designed to identify at the earliest possible stage, counterparties who might be facing financial difficulties. All significant counterparty relationships are reviewed on a periodic basis, meaning that individual loans to a particular counterparty are grouped together in evaluating the credit risk to such counterparty. Loans under special supervision, such as cash basis and renegotiated loans, as well as loans criticized by the Asset Quality Review Department under regulatory guidelines (i.e., those loans classified as Special Mention, Substandard and Doubtful) are also reviewed on a periodic basis. In addition, all levels of management are required to bring to the attention of the Asset Quality Review Department any credit risk where an additional review of the counterparty's financial position is believed to be warranted. The Asset Quality Review Department reports at least quarterly on the portfolio to the Audit and Fiduciary Committee of the Board of Directors. In addition to the above procedures, Federal Reserve and State of New York bank examiners (the "Bank regulatory authorities") perform periodic examinations of the Corporation's credit risks, including the loan portfolio. The reports on these examinations are also reviewed by the Asset Quality Review Department with the Audit and Fiduciary Committee of the Board of Directors. Determination of the Allowance for Credit Losses -- Loans The allowance for credit losses--loans represents management's estimate of probable loan losses that have occurred as of the date of the financial statements. The Corporation undertook a comprehensive review in 1999 of its policies and procedures related to the determination of the allowance for credit losses to ensure that they are appropriate within the framework of generally accepted accounting principles. The Corporation's policies and procedures were revised and improved to ensure a systematic and adequately documented process for the estimation of credit losses and related charge-offs. As a result of the aforementioned comprehensive review, the Corporation recorded a $49 million reversal of the allowance for credit losses--loans in the third quarter of 1999. For the year ended December 31, 1999, the Corporation recorded a negative provision for credit losses--loans of $58 million. As noted above, all significant counterparty relationships and criticized loans are reviewed periodically to allow management to determine the level of the allowance for credit losses--loans. This process results in the following three components of the allowance for credit losses--loans: Specific Allowance--The specific allowance component is the amount required for impaired loans as calculated under SFAS 114, "Accounting by Creditors for Impairment of a Loan." The specific component of the overall allowance is determined through a loan-by-loan analysis of impaired loans that considers expected future cash flows, the value of collateral and other factors that may impact the borrowers' ability to pay. During 1999, the population of loans that were individually evaluated for impairment under the SFAS 114 methodology was significantly broadened to include all loans rated Substandard and Doubtful in the Corporation's internal class system. Country Risk--The country risk component is the amount provided for exposures in countries experiencing financial stress, excluding those exposures already identified and evaluated as impaired loans. The Deutsche Bank Group Board approves the countries that warrant risk provisioning together with the percentages to be applied to the exposures in these countries. The determination of countries to be included considers both historical loss experience and market data such as economic, political and other relevant factors affecting a country's financial condition. The list of countries and associated percentages are periodically reviewed and changed as necessary. Expected Loss--The expected loss component is an estimate of the remaining probable losses inherent in the loan portfolio. This component is determined by using a statistical model that utilizes a loan-type, risk-rated stratified approach. Loss factors are derived by analyzing historical charge-offs and recent economic events and applied to categories of loans by type and risk rating. In calculating the loss factors, the Corporation utilizes the historical loss experience of its portfolios and the actual amounts outstanding of the portfolios segregated by borrower/counterparty ratings and several broad classes of obligors. These ratings are internally determined mathematical expressions of credit quality for individual obligors. 16 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Amounts deemed uncollectible are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Actual losses may vary from current estimates and the amount of the actual credit loss provision may be either greater than or less than actual net charge-offs. The related provision for credit losses--loans, which is charged to income, is the amount necessary to adjust the allowance to the level determined through the process described above. The Bank regulatory authorities also assess and issue reports on the quality of the portfolio and on the adequacy of the allowance and related provision activity. Further, as part of their annual audit, the Corporation's independent auditors review the process surrounding the determination of the allowance for credit losses--loans and the level thereof. Their procedures include discussions with management, a review of selected credit files and an evaluation of the periodic reports issued by the Asset Quality Review Department and regulatory examiners. In the opinion of management, the allowance for credit losses--loans is fairly stated in accordance with generally accepted accounting principles. The tables below provide the components of the allowance for credit losses--loans by category. This breakdown of the allowance at each year end reflects management's best estimate of probable credit losses and may not necessarily be indicative of actual future charge-offs. (in millions) December 31, 1999* - -------------------------------------------------------------------------------- Domestic Specific Commercial and industrial $200 Real estate and real-estate related 12 - -------------------------------------------------------------------------------- Total specific 212 Expected loss 127 - -------------------------------------------------------------------------------- Total domestic 339 International Specific 56 Country risk 56 Expected loss 40 - -------------------------------------------------------------------------------- Total international 152 - -------------------------------------------------------------------------------- Total allowance for credit losses--loans $491 ================================================================================ * Not comparable to prior years due to revised policies and procedures for determining the allowance for credit losses implemented in 1999. (in millions) December 31, 1998 1997 1996 1995* - -------------------------------------------------------------------------------- Domestic Commercial and industrial $162 $117 $153 $222 Financial institutions 20 38 20 40 Real estate and real-estate related 84 89 107 100 - -------------------------------------------------------------------------------- Total domestic 266 244 280 362 International 380 391 212 377 - -------------------------------------------------------------------------------- Total allocated** 646 635 492 739 Unallocated portion 6 64 281 253 - -------------------------------------------------------------------------------- Total allowance for credit losses--loans $652 $699 $773 $992 ================================================================================ * Not comparable to other years presented in the table as 1995 includes allowance amounts related to derivatives and other credit-related commitments. ** The specific allowance component was $61 million, $13 million, and $57 million at December 31, 1998, 1997, and 1996, respectively. The general allowance component was $585 million, $622 million, and $435 million at December 31, 1998, 1997, and 1996, respectively. The allowance for credit losses--loans decreased to $491 million at December 31, 1999, from $652 million at year-end 1998 and $699 million at December 31, 1997. The decrease of $161 million in 1999 from 1998 was primarily due to a negative provision for credit losses--loans of $58 million, reductions in the allowance for credit losses--loans related to entities sold/transferred and net charge-offs of $64 million. Such decrease reflects the significant decline in the international component of the Corporation's loan portfolio during 1999. The decrease of $47 million in 1998 from 1997 was primarily due to $107 million of charge-offs, mainly related to Asian counterparties, partially offset by recoveries and a $40 million provision. The decline in the 1998 allowance level is primarily attributable to the overall reduction in the Corporation's risk profile in emerging market commercial and industrial loans. The following table presents an analysis of the changes in the international component of the allowance for credit losses--loans:
(in millions) Year Ended December 31, 1999 1998 1997 1996 1995(2) - ------------------------------------------------------------------------------------------------ Balance, beginning of year $ 380 $ 391 $ 212 $ 377 $ 416 - ------------------------------------------------------------------------------------------------ Net charge-offs Charge-offs 63 83 46 22 121 Recoveries 12 6 7 26 24 - ------------------------------------------------------------------------------------------------ Total net charge-offs (recoveries) to the allowance 51 77 39 (4) 97 Allowance related to acquisition -- -- 17 -- -- Provision and increases (decreases) in the international portion of allowance (138) 66 258 (10) 58 Allowance related to BTAL and transferred entities(1) (39) -- -- -- -- Reclassifications -- -- (57) (159) -- - ------------------------------------------------------------------------------------------------ Balance, end of year $ 152 $ 380 $ 391 $ 212 $ 377 ================================================================================================
(1) Reflects the allowance for credit losses--loans of certain legal entities transferred to Deutsche Bank on the date of transfer and the allowance for credit losses--loans of BTAL on the date of sale. (2) Not comparable to other years presented in the table as 1995 includes allowance amounts related to derivatives and other credit-related commitments. Bankers Trust Corporation and its Subsidiaries 17 - -------------------------------------------------------------------------------- Table 7 Analysis of the Allowances for Credit Losses
- -------------------------------------------------------------------------------------------------------------- ($ in millions) Year Ended December 31, 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Loans Allowance, beginning of year $ 652 $ 699 $ 773 $ 992 $1,252 - -------------------------------------------------------------------------------------------------------------- Charge-offs Domestic Commercial and industrial 28 24 19 46 177 Real estate Construction -- -- 11 3 10 Mortgage -- -- 2 18 22 International 63 83 46 22 121 - -------------------------------------------------------------------------------------------------------------- Total charge-offs 91 107 78 89 330 - -------------------------------------------------------------------------------------------------------------- Recoveries Domestic Commercial and industrial 13 5 23 32 11 Real estate Construction -- 1 1 -- -- Mortgage 2 8 13 7 4 International 12 6 7 26 24 - -------------------------------------------------------------------------------------------------------------- Total recoveries 27 20 44 65 39 - -------------------------------------------------------------------------------------------------------------- Total net charge-offs(1) 64 87 34 24 291 Allowance related to acquisition -- -- 17 -- -- Provision for credit losses (58) 40 -- 5 31 Allowance related to BTAL and transferred entities* (39) -- -- -- -- Reclassification -- -- (57) (200) -- - -------------------------------------------------------------------------------------------------------------- Allowance, end of year $ 491 $ 652 $ 699 $ 773 $ 992 ============================================================================================================= Percentage of total net charge-offs to average loans for the year 0.30% 0.39% 0.19% 0.18% 2.47% ============================================================================================================= (1) Components: Secured by real estate $ (8) $(13) $ 5 $ 14 $ 23 Real estate related (4) 8 (2) 3 2 Other 76 92 31 7 266 - -------------------------------------------------------------------------------------------------------------- Total $ 64 $ 87 $ 34 $ 24 $291 ============================================================================================================= Other Liabilities Allowance, beginning of year $ 18 $ 13 $ 10 $ -- $-- Provision for credit losses 6 5 -- -- -- Reclassification -- -- 3 10 -- - -------------------------------------------------------------------------------------------------------------- Allowance, end of year $ 24 $ 18 $ 13 $ 10 $-- =============================================================================================================
* Reflects the allowance for credit losses of certain legal entities transferred to Deutsche Bank on the date of transfer and the allowance for credit losses of BTAL on the date of sale. 18 Bankers Trust Corporation and its Subsidiaries Loans The following table summarizes the composition of the loan portfolio at the end of each of the last five years:
(in millions) December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Domestic Commercial and industrial $ 8,125 $ 6,448 $ 4,244 $ 3,422 $ 2,520 Financial institutions 2,788 2,441 2,148 1,631 1,778 Real estate 1,471 1,449 2,196 1,695 1,430 Other 4,028 3,558 1,427 1,436 1,490 - ------------------------------------------------------------------------------------------------ Total domestic 16,412 13,896 10,015 8,184 7,218 - ------------------------------------------------------------------------------------------------ International Governments and official institutions 120 190 252 237 227 Banks and other financial institutions 690 3,599 3,175 3,482 1,543 Commercial and industrial 1,765 3,931 4,931 2,759 1,934 Real estate 31 166 195 130 178 Other 1,167 1,813 1,402 1,290 1,701 - ------------------------------------------------------------------------------------------------ Total international 3,773 9,699 9,955 7,898 5,583 - ------------------------------------------------------------------------------------------------ Gross loans 20,185 23,595 19,970 16,082 12,801 Less: unearned income 223 310 165 202 120 - ------------------------------------------------------------------------------------------------ Total loans $19,962 $23,285 $19,805 $15,880 $12,681 ================================================================================================
Total loans decreased to $20.0 billion at December 31, 1999 down from $23.3 billion at year-end 1998 and up from $19.8 billion at December 31, 1997. The 1999 decrease of $3.3 billion primarily related to the international loan portfolio which decreased $5.9 billion, or 61 percent, to $3.8 billion at December 31, 1999, offset by an increase in the domestic component of the loan portfolio. Following the Acquisition, the Corporation has actively sought to increase its lending exposure in the domestic market. The domestic lending portfolio balance at December 31, 1999 was $16.4 billion, an 18% increase over 1998. This increase primarily relates to commercial and industrial loans and reflects the continuing high levels of merger and acquisition related activity in the domestic market. The significant decline in the international loan portfolio reflects the de-emphasizing of lending in certain emerging markets and the consolidation of business conducted by both Deutsche Bank and Bankers Trust into Deutsche Bank legal entities. Such decline also reflects the sale of BTAL as well as the transfer of BTI during 1999. During 1998, the loan portfolio increased $3.5 billion to $23.3 billion at December 31, 1998 from $19.8 billion at December 31, 1997. The 1998 increase related to the domestic loan portfolio which increased $3.9 billion, or 39 percent, to $13.9 billion at December 31, 1998, offset by a slight decline in the international component of the loan portfolio. Within the domestic loan portfolio, commercial and industrial loans increased $2.2 billion in 1998, reflecting increased business volumes as well as higher targeted hold amounts in relation to loan syndication activity. Domestic loans secured by real estate declined $0.7 billion, or 34 percent, in 1998 reflecting a decrease in the volume of direct real estate loans held. Other domestic loans increased to $3.6 billion at December 31, 1998 from $1.4 billion at December 31, 1997. The increase was primarily related to an increase in real estate related loans, including loans to real estate investment trusts ("REIT"), as well as to increases in Private Client loans and in overnight overdrafts arising as a matter of course from depository business. The international component of the loan portfolio totaled $9.7 billion at December 31, 1998 down slightly from $10.0 billion at December 31, 1997. Within the international portfolio, commercial and industrial loans decreased 20 percent in 1998 to $3.9 billion, reflecting the Corporation's efforts to reduce exposure in this segment of the portfolio, particularly in the emerging markets, following a significant increase in commercial and industrial lending beginning in 1995. This reduction in exposure was primarily effected through pay-downs of outstanding loans. The decline in commercial and industrial lending was offset by increases in loans to banks and other financial institutions and in other international loans which includes margin related lending. At year-end 1998, the Corporation's inter national loan portfolio was primarily concentrated in Australia/ New Zealand, Western Europe, Latin America, and non-Japan Asia. Bankers Trust Corporation and its Subsidiaries 19 Nonperforming Assets Table 8 Nonperforming Assets
- --------------------------------------------------------------------------------------------------------------------- ($ in millions) December 31, 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Cash basis loans Domestic Commercial and industrial $495 $ 91 $ 49 $117 $263 Secured by real estate 67 86 92 233 297 Financial institutions 11 15 -- -- 10 - --------------------------------------------------------------------------------------------------------------------- Total domestic 573 192 141 350 570 - --------------------------------------------------------------------------------------------------------------------- International Commercial and industrial 132 135 65 57 106 Secured by real estate 10 18 25 39 65 Financial institutions -- 2 -- 4 3 Foreign governments -- 23 -- -- -- Lease financings 1 7 2 2 -- Other 21 15 7 -- -- - --------------------------------------------------------------------------------------------------------------------- Total international 164 200 99 102 174 - --------------------------------------------------------------------------------------------------------------------- Total cash basis loans $737 $392 $240 $452 $744 ===================================================================================================================== Ratio of cash basis loans to total gross loans 3.7% 1.7% 1.2% 2.8% 5.9% ===================================================================================================================== Ratio of allowance for credit losses--loans to cash basis loans 67% 166% 291% 171% 133% ===================================================================================================================== Renegotiated loans Secured by real estate $ -- $ 25 $ 25 $ 37 $ 88 Other 11 1 -- -- 12 - --------------------------------------------------------------------------------------------------------------------- Total renegotiated loans $ 11 $ 26 $ 25 $ 37 $100 ===================================================================================================================== Other real estate $ 88 $ 87 $194 $213 $259 ===================================================================================================================== Other nonperforming assets $ 8 $ 8 $ 4 $ 10 $ 66 ===================================================================================================================== Loans 90 days or more past due and still accruing interest(1) $ -- $ -- $ -- $ -- $ 26 =====================================================================================================================
(1) Represents loans 90 days or more past due with respect to interest or principal. These loans were considered to be well secured and were in the process of collection. 20 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The Corporation's credit review procedures are designed to promote early identification of counterparty, country, and industry exposures that require a higher-than normal degree of scrutiny. Each quarter a review is performed by the Asset Quality Review Department and senior credit management of cash basis loans and criticized assets (i.e. those assets internally classified as Special Mention, Substandard and Doubtful). Individual borrower balances are evaluated and a charge-off of amounts deemed uncollectible is recommended. Factors considered in this evaluation include the credit quality of the counterparties, the amount and duration of the exposure, collateral values, the Corporation's ability to reduce exposure in situations of deteriorating creditworthiness and loss probabilities. Once a charge-off is taken, the remaining portion, if any, is immediately placed on a cash basis. If the collection or liquidation in full is questionable, the asset is classified as doubtful. In addition, it is generally the Corporation's policy that loans be immediately placed on a cash basis when they become 90 days past due with respect to interest or principal. The Corporation's total cash basis loans amounted to $737 million at December 31, 1999, an increase of $345 million, or 88 percent, from 1998, which had increased $152 million, or 63 percent, from 1997. The 1999 increase was significantly impacted by a rise in domestic commercial and industrial loans. Such increase related to certain borrowers in the manufacturing, health care and gaming sectors. Cash basis loans increased $345 million during 1999, primarily due to a rise in impaired loans from $418 million at December 31, 1998 to $889 million at December 31, 1999. The specific allowance related to impaired loans amounted to $268 million at December 31, 1999, an increase of $207 million from 1998 which had increased $48 million from 1997. An analysis of the changes in the Corporation's total cash basis loans follows:
(in millions) Year Ended December 31, 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------- Balance, beginning of year $ 392 $ 240 $ 452 $ 744 $ 996 Net transfers to cash basis loans 622 365 111 96 314 Net paydowns (91) (64) (146) (241) (221) Charge-offs (91) (107) (78) (87) (330) Net transfers from (to) other real estate (13) (2) (16) (14) 13 Loan sales (19) (24) (47) (38) (1) Transfers to Deutsche Bank* (15) -- -- -- -- Other (48) (16) (36) (8) (27) - -------------------------------------------------------------------------------------------- Balance, end of year $ 737 $ 392 $ 240 $ 452 $ 744 ============================================================================================
* Reflects the cash basis loans of certain legal entities transferred to Deutsche Bank on date of the transfer. Cross-Border Outstandings The Corporation's cross-border outstandings reflect certain additional economic and political risks beyond those associated with its domestic outstandings, such as risks arising from funds transfer restrictions and balance-of-payments issues, as well as risks arising from operating in different legal and regulatory jurisdictions. The following table presents the Corporation's cross-border outstandings at December 31, 1999, 1998 and 1997 for each foreign country where such outstandings exceeded .75 percent of the Corporation's total assets. The outstanding balances are presented in accordance with the reporting guidelines adopted by the Federal Financial Institutions Examination Council (FFIEC) as of March 1997. Bankers Trust Corporation and its Subsidiaries 21 - -------------------------------------------------------------------------------- Table 9 Cross-Border Outstandings
- -------------------------------------------------------------------------------------------------------------------------------- Governments Banks and % of and Other Commercial Total Total Official Financial and ($ in millions) Outstandings Assets Institutions Institutions Industrial Other - -------------------------------------------------------------------------------------------------------------------------------- At December 31, 1999 Germany $ 4,993 7.32% $ 1 $ 4,471 $ 521 $ -- International(1) 516 0.76 516 -- -- -- Cayman Islands 315 0.46 -- 271 44 -- All other cross-border outstandings 4,067 5.97 128 1,885 1,976 78 - -------------------------------------------------------------------------------------------------------------------------------- Total cross-border outstandings $ 9,891 14.51% $ 645 $ 6,627 $ 2,541 $ 78 ================================================================================================================================ At December 31, 1998 France $ 5,600 4.21% $ 373 $ 4,639 $ 588 $ -- Germany 3,651 2.74 162 3,226 263 -- United Kingdom 3,093 2.32 47 2,218 824 4 Japan(2) 2,705 2.03 1,122 1,184 399 -- Australia 2,097 1.58 408 1,199 490 -- Canada 1,898 1.43 649 915 331 3 Switzerland 1,839 1.38 -- 1,754 85 -- Netherlands 1,778 1.34 106 1,448 224 -- Italy 1,705 1.28 293 917 495 -- All other cross-border outstandings 12,364 9.29 1,738 6,212 4,412 2 - -------------------------------------------------------------------------------------------------------------------------------- Total cross-border outstandings $36,730 27.60% $ 4,898 $23,712 $ 8,111 $ 9 ================================================================================================================================ At December 31, 1997 Japan(2) $ 7,018 5.01% $ 935 $ 4,996 $ 1,087 $ -- France 3,898 2.78 2 3,558 338 -- Spain 3,520 2.51 302 2,940 278 -- Australia 3,003 2.14 507 2,072 424 -- Germany 2,771 1.98 281 2,295 195 -- United Kingdom 2,428 1.73 8 2,309 108 3 Canada 2,258 1.61 579 1,251 426 2 Switzerland 1,919 1.37 -- 1,123 796 -- Brazil(3) 1,917 1.37 809 588 520 -- Republic of Korea(4) 1,583 1.13 186 929 468 -- Netherlands 1,322 0.94 -- 879 443 -- Indonesia(3) 1,247 0.89 24 440 783 -- Italy 1,110 0.79 427 432 251 -- All other cross-border outstandings 12,572 8.97 3,208 6,408 2,905 51 - -------------------------------------------------------------------------------------------------------------------------------- Total cross-border outstandings $46,566 33.22% $ 7,268 $30,220 $ 9,022 $ 56 ================================================================================================================================
(1) The Corporation's cross-border outstandings with International primarily consisted of revaluation gains from the marking to market of interest rate and foreign exchange contracts held for trading purposes with multilateral development banks. (2) The Corporation's cross-border outstandings with Japan primarily consisted of trading account assets and securities available for sale which are carried at fair value. For 1997, the cross-border outstandings primarily consisted of interest-bearing deposits with banks and trading account assets carried at fair value. (3) The Corporation's cross-border outstandings with Brazil and Indonesia primarily consisted of trading account assets carried at fair value. (4) The Corporation's cross-border outstandings with the Republic of Korea primarily consisted of trading account assets carried at fair value and acceptances outstanding. 22 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The cross-border claims outstandings in Table 9 were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets (including net revaluation gains on foreign exchange and derivative products), securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable and acceptances outstanding. Governments and official institutions comprises foreign governments and their agencies; state, provincial and local governments and their agencies; and central banks. Banks and other financial institutions is comprised of commercial and savings banks and other similar institutions accepting short-term deposits, including government-owned banks which do not function as central banks, and nonbank credit and financial companies. The amounts outstanding for each country listed in Table 9 exclude local country claims. Local country claims, as defined by the FFIEC's March 1997 reporting guidelines, include claims on residents of the same country in which the booking office is domiciled. Such claims are generally funded with borrowings that represent liabilities of that office or are hedged with foreign exchange and derivative products. At December 31, 1999, total cross-border commitments to borrowers or counterparties domiciled in the countries presented in Table 9 were: Germany $107 million and Cayman Islands $28 million. The amendments to the FFIEC's cross-border reporting guidelines as adopted in March 1997 included the addition of net revaluation gains on foreign exchange and derivative products to the definition of claims outstanding, and the elimination of the currency denomination criteria when segregating local from cross-border country claims. There were no cash basis loans outstanding for the countries presented in Table 9 as of December 31, 1999. The following table details the cash basis loans of the outstandings at December 31, 1998 and 1997 for those countries presented in Table 9. Cash Basis (in millions) Loans - -------------------------------------------------------------------------------- At December 31, 1998 United Kingdom $36 Canada 16 Italy 3 - -------------------------------------------------------------------------------- Total $55 ================================================================================ At December 31, 1997 Indonesia $10 Spain 2 - -------------------------------------------------------------------------------- Total $12 ================================================================================ There were no cross-border renegotiated loans for the years ended December 31, 1999, 1998 and 1997. Accounting Developments In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives on the balance sheet as assets or liabilities measured at fair value. SFAS 137 deferred the effective date of SFAS 133 until January 1, 2001 for calendar year companies. Depending on the underlying risk management strategy, the accounting for these products under the new standard could affect reported earnings and balance sheet accounts. The Corporation continues to evaluate the potential impact of the new standard as plans for implementation proceed. Recent Developments On March 9, 2000, Deutsche Bank AG and Dresdner Bank AG announced their intention to merge. Dresdner Bank AG is one of the largest banks in Germany. The merger, which the parties expect to complete by January 2001, is subject to the approval of the shareholders of Deutsche Bank AG and Dresdner Bank AG and of various authorities worldwide. The impact on the Corporation's Consolidated Financial Statements is not known at this time. Bankers Trust Corporation and its Subsidiaries 23 Consolidated Statement of Income (in millions, except per share data) - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Net Interest Revenue Interest revenue $ 4,419 $ 8,291 $ 7,285 Interest expense 3,612 6,919 5,926 - --------------------------------------------------------------------------------------------------------------------- Net Interest Revenue 807 1,372 1,359 Provision for credit losses--loans (58) 40 -- - --------------------------------------------------------------------------------------------------------------------- Net Interest Revenue after Provision for Credit Losses -- Loans 865 1,332 1,359 - --------------------------------------------------------------------------------------------------------------------- Noninterest Revenue Trading 42 (184) 1,055 Fiduciary and funds management 1,017 1,108 1,059 Corporate finance fees 542 1,255 1,113 Other fees and commissions 538 817 606 Net revenue from equity investments 356 302 224 Securities available for sale gains (losses) (89) (56) 158 Insurance premiums 86 256 287 Other 1,008 259 359 - --------------------------------------------------------------------------------------------------------------------- Total noninterest revenue 3,500 3,757 4,861 - --------------------------------------------------------------------------------------------------------------------- Noninterest Expenses Salaries and commissions 1,039 1,421 1,273 Incentive compensation and employee benefits 1,088 1,530 1,726 Change in control related incentive compensation and employee benefits 1,101 -- -- Agency and other professional service fees 430 501 391 Communication and data services 206 252 231 Occupancy, net 198 218 181 Furniture and equipment 221 252 224 Travel and entertainment 114 171 142 Provision for policyholder benefits 114 322 333 Other 636 499 423 Restructuring and other related activities 633 -- 57 - --------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 5,780 5,166 4,981 - --------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (1,415) (77) 1,239 Income taxes (benefit) 188 (4) 373 - --------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $(1,603) $ (73) $ 866 ===================================================================================================================== Net Income (Loss) Applicable to Common Stock** * $ (105) $ 817 ===================================================================================================================== Earnings (Loss) per Common Share: Basic * $ (1.05) $ 8.15 ===================================================================================================================== Diluted * $ (1.05) $ 7.66 ===================================================================================================================== Cash dividends declared per common share $ 1.00* $ 4.00 $ 4.00 =====================================================================================================================
* Amounts for net income applicable to common stock and earnings (loss) per common share are not meaningful due to Deutsche Bank AG acquiring all of the outstanding shares of common stock of Bankers Trust Corporation on June 4, 1999. Cash dividends declared per common share of $1.00 represent dividends declared prior to June 4, 1999. ** Amounts shown are used to calculate basic earnings per common share for the year ended December 31, 1998 and 1997. The accompanying notes are an integral part of the financial statements. 24 Bankers Trust Corporation and its Subsidiaries Consolidated Statement of Comprehensive Income (in millions) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------- Net Income (Loss) $(1,603) $ (73) $ 866 - ----------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments: Unrealized foreign currency translation gains (losses) arising during the year, net of tax* (17) (36) 2 Reclassification adjustment for realized foreign currency translation (gains) losses, net of tax** 369 -- -- Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the year, net of tax*** (1) (90) 6 Reclassification adjustment for realized (gains) losses, net of tax**** 82 57 (95) - ----------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) 433 (69) (87) - ----------------------------------------------------------------------------------------------------- Comprehensive Income (Loss) $(1,170) $ (142) $ 779 =====================================================================================================
* Amounts are net of an income tax (benefit) expense of $(13) million, $(10) million and $76 million for the years ended December 31, 1999, 1998 and 1997, respectively. ** Realized foreign currency translation losses result from the transfer of certain foreign subsidiaries to Deutsche Bank and the sale of BTAL in 1999. Amount is net of an income tax benefit of $54 million for the year ended December 31, 1999. *** Amounts are net of an income tax (benefit) expense of $21 million, $(12) million and $6 million for the years ended December 31, 1999, 1998 and 1997, respectively. **** Amounts are net of an income tax (benefit) expense of $(7) million, $1 million and $63 million for the years ended December 31, 1999, 1998 and 1997 respectively. The accompanying notes are an integral part of the financial statements. Bankers Trust Corporation and its Subsidiaries 25 Consolidated Balance Sheet ($ in millions, except par value) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------- December 31, 1999 1998 - ----------------------------------------------------------------------------------------- Assets Cash and due from banks $ 3,212 $ 2,837 Interest-bearing deposits with banks 4,693 2,382 Federal funds sold 2,472 2,484 Securities purchased under resale agreements 6,764 17,053 Securities borrowed -- 14,709 Trading assets: Government securities 2,296 5,731 Corporate debt securities 1,367 5,519 Equity securities 7,144 5,810 Swaps, options and other derivatives 4,807 17,376 Other trading assets 3,403 11,734 - ----------------------------------------------------------------------------------------- Total trading assets 19,017 46,170 Securities available for sale 3,252 12,748 Loans, net 19,471 22,633 Customer receivables 306 1,524 Due from customers on acceptances 262 232 Accounts receivable and accrued interest 2,307 3,815 Other assets 6,401 6,528 - ----------------------------------------------------------------------------------------- Total $ 68,157 $ 133,115 ========================================================================================= Liabilities Noninterest-bearing deposits Domestic offices $ 2,690 $ 2,784 Foreign offices 2,299 1,689 Interest-bearing deposits Domestic offices 12,118 18,259 Foreign offices 6,362 14,602 - ----------------------------------------------------------------------------------------- Total deposits 23,469 37,334 Trading liabilities: Securities sold, not yet purchased Government securities 53 4,149 Equity securities 21 6,458 Other trading liabilities 9 789 Swaps, options and other derivatives 5,183 15,857 - ----------------------------------------------------------------------------------------- Total trading liabilities 5,266 27,253 Securities loaned and securities sold under repurchase agreements 56 17,420 Other short-term borrowings 11,540 16,313 Acceptances outstanding 266 232 Accounts payable and accrued expenses 3,314 5,210 Other liabilities 3,462 5,234 Long-term debt not included in risk-based capital 12,582 14,890 Long-term debt included in risk-based capital 2,424 3,113 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 1,428 1,420 - ----------------------------------------------------------------------------------------- Total liabilities 63,807 128,419 ========================================================================================= Commitments and contingent liabilities (Notes 7, 24 and 30) Stockholders' Equity Preferred stock 376 394 Common stock, $1 par value Authorized: 1999, 200 shares; 1998, 300,000,000 shares Issued: 1999, 1 share; 1998, 105,380,175 shares -- 105 Capital surplus 2,318 1,613 Retained earnings 1,686 3,504 Common stock in treasury, at cost: 1999, 0 shares; 1998, 9,666,055 shares -- (1,056) Other stockholders' equity -- 599 Accumulated other comprehensive income: Net unrealized gains (losses) on securities available for sale, net of taxes 16 (65) Foreign currency translation, net of taxes (46) (398) - ----------------------------------------------------------------------------------------- Total stockholders' equity 4,350 4,696 - ----------------------------------------------------------------------------------------- Total $ 68,157 $ 133,115 =========================================================================================
The accompanying notes are an integral part of the financial statements. 26 Bankers Trust Corporation and its Subsidiaries Consolidated Statement of Changes in Stockholders' Equity (in millions) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- Preferred Stock Balance, beginning of year $ 394 $ 658 $ 810 Preferred stock issued -- -- 1 Preferred stock repurchased (18) (16) (8) Preferred stock redeemed -- (248) (145) - ------------------------------------------------------------------------------------------------------- Balance, end of year 376 394 658 - ------------------------------------------------------------------------------------------------------- Common Stock Balance, beginning of year 105 105 104 Retirement of common stock (105) -- -- Issuance of common stock* -- -- 1 - ------------------------------------------------------------------------------------------------------- Balance, end of year -- 105 105 - ------------------------------------------------------------------------------------------------------- Capital Surplus Balance, beginning of year 1,613 1,563 1,437 Issuance of common stock -- -- 59 Repurchase and retirement of common stock -- -- (6) Common stock distributed under employee benefit plans 4 50 73 Capital transactions related to change in control (699) -- -- Capital contribution from parent 1,400 -- -- - ------------------------------------------------------------------------------------------------------- Balance, end of year 2,318 1,613 1,563 - ------------------------------------------------------------------------------------------------------- Retained Earnings Balance, beginning of year 3,504 4,202 3,988 Net income (loss) (1,603) (73) 866 Cash dividends declared Preferred stock (22) (35) (50) Common stock (98) (384) (366) Treasury stock distributed under employee benefit plans (95) (206) (236) - ------------------------------------------------------------------------------------------------------- Balance, end of year 1,686 3,504 4,202 - ------------------------------------------------------------------------------------------------------- Common Stock in Treasury, at cost Balance, beginning of year (1,056) (889) (372) Purchases of stock (71) (618) (1,038) Treasury stock distributed under employee benefit plans 322 451 521 Capital transactions related to change in control 805 -- -- - ------------------------------------------------------------------------------------------------------- Balance, end of year -- (1,056) (889) - ------------------------------------------------------------------------------------------------------- Common Stock Issuable -- Stock Awards Balance, beginning of year 817 901 526 Deferred stock awards granted, net 557 54 401 Deferred stock distributed (216) (138) (26) Capital transactions related to change in control (1,158) -- -- - ------------------------------------------------------------------------------------------------------- Balance, end of year -- 817 901 - ------------------------------------------------------------------------------------------------------- Deferred Compensation -- Stock Awards Balance, beginning of year (218) (438) (308) Deferred stock awards granted, net (556) (55) (404) Amortization of deferred compensation, net 749 275 274 Other 25 -- -- - ------------------------------------------------------------------------------------------------------- Balance, end of year -- (218) (438) - ------------------------------------------------------------------------------------------------------- Cumulative Translation Adjustments Balance, beginning of year (398) (362) (364) Translation adjustments/entity transfers and sales 393 (46) 78 Income taxes (41) 10 (76) - ------------------------------------------------------------------------------------------------------- Balance, end of year (46) (398) (362) - ------------------------------------------------------------------------------------------------------- Securities Valuation Allowance Balance, beginning of year (65) (32) 57 Change in unrealized net gains (losses), after applicable income taxes and minority interest 81 (33) (89) - ------------------------------------------------------------------------------------------------------- Balance, end of year 16 (65) (32) - ------------------------------------------------------------------------------------------------------- Total stockholders' equity, end of year $ 4,350 $ 4,696 $ 5,708 =======================================================================================================
*1999: 1 share, $1 par value. The accompanying notes are an integral part of the financial statements. Bankers Trust Corporation and its Subsidiaries 27 Consolidated Statement of Cash Flows (in millions)
- ------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net income (loss) $ (1,603) $ (73) $ 866 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for credit losses--loans (58) 40 -- Provision for credit losses--other 6 5 -- Provision for policyholder benefits 114 322 333 Restructuring and other related activities 633 -- 57 Deferred income taxes, net (395) (276) (272) Depreciation and other amortization and accretion 879 379 415 Other, net 153 13 (61) Gain on sale of Bankers Trust Australia Limited (779) -- -- - ------------------------------------------------------------------------------------------------------------------------------ Earnings adjusted for noncash charges, credits and other items (1,050) 410 1,338 Net change in: Trading assets (14,995) 8,554 (8,825) Trading liabilities 20,602 245 4,525 Receivables and payables from securities transactions 875 (528) 477 Customer receivables (1,110) 23 (18) Other operating assets and liabilities, net 42 (1,724) (79) Securities available for sale losses (gains) 89 56 (158) - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 4,453 7,036 (2,740) - ------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities Net change in: Interest-bearing deposits with banks (3,764) 1,886 (2,171) Federal funds sold (39) (1,102) 302 Securities purchased under resale agreements (4,268) 2,110 (1,197) Securities borrowed (8,716) 2,042 254 Loans 89 (1,906) (4,637) Securities available for sale: Purchases (6,190) (22,041) (6,430) Maturities and other redemptions 1,024 2,794 3,845 Sales and other transfers to affiliates 8,412 15,102 1,511 Acquisitions of premises and equipment (102) (447) (237) Other, net (501) 1,183 911 Proceeds from transfer of legal entities 3,062 -- -- Proceeds from sale of Bankers Trust Australia Limited 1,313 -- -- - ------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (9,680) (379) (7,849) - ------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities Net change in: Deposits (6,284) (5,474) 12,651 Securities loaned and securities sold under repurchase agreements 12,465 (277) (5,399) Other short-term borrowings (1,886) (2,879) 1,125 Issuances of long-term debt* 4,966 7,746 9,645 Repayments of long-term debt** (4,791) (3,973) (5,188) Issuances of common stock -- -- 48 Repurchase and retirement of common stock -- -- (6) Issuance of preferred stock of subsidiary -- 304 -- Redemptions of preferred stock of subsidiary -- (304) (250) Redemptions and repurchases of preferred stock (18) (264) (152) Purchases of treasury stock (71) (618) (1,038) Cash dividends paid (216) (421) (397) Capital contribution from parent 1,400 -- -- Other, net 18 128 248 - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 5,583 (6,032) 11,287 - ------------------------------------------------------------------------------------------------------------------------------ Net effect of exchange rate changes on cash 19 24 (78) - ------------------------------------------------------------------------------------------------------------------------------ Net Increase in Cash and Due from Banks 375 649 620 Cash and due from banks, beginning of year 2,837 2,188 1,568 - ------------------------------------------------------------------------------------------------------------------------------ Cash and due from banks, end of year $ 3,212 $ 2,837 $ 2,188 ============================================================================================================================== Interest paid $ 4,730 $ 6,868 $ 5,515 ============================================================================================================================== Income taxes paid, net $ 39 $ 76 $ 260 ============================================================================================================================== Noncash investing activities: Transfer of legal entity in exchange for shares in affiliate $ 852 $ -- $ -- Conversions of loans to other real estate and assets acquired in credit workouts 21 6 64 Exchanges of Chilean government bonds for annuity contracts 9 9 57 - ------------------------------------------------------------------------------------------------------------------------------ Total noncash investing activities $ 882 $ 15 $ 121 ============================================================================================================================== Noncash financing activity: conversion of debt to equity $ -- $ 15 $ 63 ==============================================================================================================================
* Includes $739 million for the year ended December 31, 1997 related to mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital. ** Includes $57 million for the year ended December 31, 1998, related to mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital. The accompanying notes are an integral part of the financial statements. 28 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 1 -- Acquisition by Deutsche Bank AG Change of Control On June 4, 1999, the change-of-control ("COC") date, pursuant to an agreement dated as of November 30, 1998, between Deutsche Bank AG ("Deutsche Bank") and Bankers Trust Corporation ("Bankers Trust"), Deutsche Bank, through its U.S. holding corporation, Taunus Corporation ("Taunus"), acquired all of the outstanding shares of common stock of Bankers Trust from its shareholders at a price of $93.00 per share (the "Acquisition"). Deutsche Bank accounted for the Acquisition as a purchase. No purchase accounting adjustments were pushed down to Bankers Trust. On June 4, 1999, all Bankers Trust employee deferred compensation amounts vested in full. Employer contributions to individual employee retirement accounts also vested. In addition, all bonus- eligible employees on the date of COC became entitled to a pro rata bonus which was paid in cash on July 2, 1999 for that portion of the 1999 performance year ending on the COC date. The pro rata bonus was based on the greater of an employee's total (cash and deferred stock) 1998 performance bonus or the employee's average total 1996, 1997 and 1998 performance bonus awards. In conjunction with the Acquisition, during the second quarter of 1999 Bankers Trust Corporation together with its subsidiaries (the "Corporation" or the "Firm") incurred pre-tax charges of approximately $1.1 billion in COC-related costs, principally due to the aforementioned vesting of all employee deferred compensation amounts and related pro-rata bonus awards as well as a pre-tax restructuring charge of $459 million. Also, in connection with the Acquisition, the Corporation incurred other charges reflecting a change in management's intention regarding certain assets as a result of integrating the Corporation into Deutsche Bank, a change in certain pricing methodologies in order to conform to those of Deutsche Bank, and the transfer of certain available for sale securities to Deutsche Bank related entities based on changes in management responsibility. These one-time charges are included in Deutsche Bank's consolidated financial statements as of June 30, 1999 as part of the goodwill associated with the Acquisition. The goodwill is being amortized over 15 years. Disposition of Assets On June 5, 1999, Bankers Trust transferred its wholly-owned subsidiary BT Alex. Brown Incorporated ("BTAB") and substantially all of its interest in Bankers Trust International PLC ("BTI") to Deutsche Bank Securities Inc. ("DBSI") and Deutsche Holdings (BTI) Ltd., respectively, which are wholly-owned subsidiaries of Deutsche Bank. The transfer of BTAB to DBSI took the form of an exchange of stock pursuant to which BTAB became a wholly-owned subsidiary of DBSI and Bankers Trust received shares of DB U.S. Financial Markets Holding Corporation ("DBUSH"), the parent of DBSI. In the third quarter of 1999, the Corporation sold its shares of DBUSH to Taunus for approximately $800 million. The transfer of substantially all of Bankers Trust's interest in BTI was for cash in the amount of approximately $1.7 billion. On August 31, 1999, the Corporation completed the sale of Bankers Trust Australia Limited ("BTAL"), a wholly-owned subsidiary, to the Principal Financial Group for a price of approximately $1.3 billion. Prior to the sale, BTAL remitted to the Corporation a dividend for accumulated retained earnings that included proceeds from BTAL's sale of its investment banking division to Macquarie Bank. The Corporation also received cash for the assumption of certain BTAL long-term debt. In addition, according to the sale agreement, the Corporation is entitled to receive an additional payment. The amount and timing of such payment is not known at this time. When such payment is received, it will be reflected in the Corporation's results of operations. The Corporation recognized a pre-tax gain of approximately $779 million in the third quarter of 1999 on the sale of BTAL. In connection with the Acquisition and in addition to the foregoing transactions, the Corporation has and will continue to transfer certain entities and financial assets and liabilities to Deutsche Bank related entities. The consideration received and to be received for such transactions was and will be fair market value of the financial assets and liabilities at and on the date of transfer. In addition, the Corporation's money market related funding activities, which are short-term in nature, are expected to be significantly reduced over time. Because of the significant business and net financial asset transfers to Deutsche Bank entities, the aforementioned other charges reflecting changes in management intent and responsibility and the sale of BTAL, the Corporation's historical financial statements are not fully comparable for all periods presented. Prior to the Acquisition, the Corporation was a global financial institution, providing products and services to its clients worldwide. Subsequent to the Acquisition and associated reorganization activities, the Corporation and its subsidiaries conduct their business primarily in the Americas, focusing their activities principally in the asset management, lending, institutional services, private equity, and private banking businesses. Capital Contribution In conjunction with the Acquisition and to strengthen the Corporation's capital base, Deutsche Bank made a capital contri bution of $1.4 billion in the second quarter of 1999. Note 2 -- Significant Accounting Policies On September 1, 1997, Alex. Brown Incorporated ("Alex. Brown") was merged into a wholly-owned subsidiary of Bankers Trust Corporation. The merger was accounted for as a pooling-of-interests, and accordingly, the information included in the financial statements presents the combined results of Alex. Brown and the Corporation prior to the transfer of BTAB to DBSI on June 5, 1999. The accounting policies of the Corporation conform with generally accepted accounting principles and prevailing industry practices. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenue Bankers Trust Corporation and its Subsidiaries 29 - -------------------------------------------------------------------------------- and expenses during the reporting period. Actual results could differ from management's estimates. The following is a description of the significant accounting policies of the Corporation. Principles of Consolidation The consolidated financial statements of the Corporation include Bankers Trust, Bankers Trust Company and its subsidiaries ("BTCo") and all other significant, majority-owned subsidiaries, after elimination of material intercompany transactions and accounts. Investments in other companies over which the Corpo ration has significant influence are accounted for using the equity method of accounting. These investments are reported in other assets and the related equity income or loss, as well as disposition gains and losses, is included in noninterest revenue. Investments within designated Small Business Investment Company subsidiaries are carried at fair value. Changes in fair value are included in noninterest revenue. Foreign Currency Translation Assets and liabilities denominated in currencies other than an entity's functional currency are translated into its functional currency using the current exchange rates and the resulting translation gains and losses are reported in noninterest revenue. Assets and liabilities of entities whose functional currency is not the U.S. dollar are translated into U.S. dollars using the current exchange rates and the translation gains and losses, net of tax effects, are reported in other comprehensive income. Resale and Repurchase Agreements Resale and repurchase agreements are generally treated as collateralized financings and are carried at the amount of cash disbursed or received. The Corporation offsets resale and repurchase agreements which meet the applicable netting criteria. Generally, the party disbursing the cash takes possession of the securities serving as collateral for the financing. Securities purchased under resale agreements consist primarily of U.S. government and federal agency securities and OECD country sovereign bonds. The Corporation monitors the fair value of the securities received or sent. For securities purchased under resale agreements, the Corporation requests additional securities or the return of a portion of the cash disbursed when appropriate in response to a decline in the market value of the securities received. Similarly, the return of excess securities or additional cash is requested when appropriate in response to an increase in the market value of securities sold under repurchase agreements. Trading Securities; Securities Available for Sale The Corporation designates debt and marketable equity securities as either held for trading purposes or available for sale at the date of acquisition. Debt and marketable equity securities, loans and money market instruments that are classified as trading assets, as well as short trading positions which are classified as trading liabilities, are carried at their fair values and related gains and losses are included in trading revenue. Securities available for sale are carried at fair value with the changes in fair value, net of applicable deferred income taxes, reported in other comprehensive income. Realized gains and losses, as well as the amortization of premiums and accretion of discounts, are recorded in earnings. The specific identification method is used to determine the cost of securities sold. Fair value is generally based on quoted market prices, price quotes from brokers or dealers or discounted expected cash flows. Derivatives The Corporation enters into swaps, futures contracts, forward commitments, options and other similar types of contracts and commitments based on interest and foreign exchange rates, and equity and commodity prices, for trading purposes. Such positions are carried at their fair values as either trading assets or trading liabilities. Fair values for derivatives are based on quoted market prices or pricing models which take into account current market and contractual prices of the underlying instruments as well as time value and yield curve or volatility factors underlying the positions. Fair values also take into account expected market risks, administrative costs and credit considerations. Unrealized gains and losses are reported as assets and liabilities, respectively, and those arising from contracts covered by qualifying master netting agreements are reported on a net basis. Gains and losses resulting from trading positions are included in trading revenue. In addition to its trading activities, the Corporation, as an end user, enters into various types of derivative transactions (principally interest rate and currency swaps) to manage the interest rate, currency and other market risks arising from a number of categories of its assets and liabilities. Hedge accounting, as described below, is applied to derivatives used to manage such risks. To qualify for hedge accounting, the derivative contract must be designated as a hedge at its inception and must remain effective as a hedge throughout its term. A derivative is considered to be an effective hedge when its terms correlate highly with the hedged item. The accounting for end-user derivatives follows that of the underlying item being hedged. Thus, net interest revenue is accrued or amortized for interest rate contracts, and in addition, hedges of securities available for sale are carried at fair value with changes in fair value due to market price changes reported in other comprehensive income. Foreign exchange rate contracts used to hedge foreign-currency-denominated assets and liabilities are translated at spot rates with the resulting gains and losses reported in noninterest revenue or other comprehensive income, and the discounts or premiums on these contracts are accrued to net interest revenue. Translation gains and losses, as well as the accretion of discount and amortization of premium on foreign exchange rate contracts used to hedge net investments in foreign entities are reported in other comprehensive income. The book values of end-user derivatives are reported in other assets or other liabilities. Realized gains and losses on terminated hedges where the underlying hedged items are still outstanding are deferred and amortized to net interest revenue over the remaining term of the hedge or hedged item, whichever is shorter. Any time the underlying item is also terminated, the remaining deferred amounts related to the 30 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- terminated hedge are recognized and reported consistently with the realized gain or loss on the underlying item. Derivatives that do not qualify for hedge accounting are considered to be trading positions and are accounted for as such. Loans, Other Real Estate and Other Nonperforming Assets Loans generally are stated at their outstanding unpaid principal balances net of any deferred fees on originated loans, and net of any unamortized premiums or discounts on purchased loans. Interest revenue is accrued on the unpaid principal balance. Net deferred fees and premiums or discounts are recognized as an adjustment of the yield (interest revenue) over the lives of the related loans. Loans are accounted for on a cash basis once principal or interest payments are past due 90 days or earlier if considered appropriate by management. In addition, all loans classified as doubtful and all partially charged-off loans are accounted for on a cash basis even if the borrower is still making required payments. Any accrued but unpaid interest previously recorded on cash basis loans is reversed against current period interest revenue. Cash receipts of interest on cash basis loans are recorded as either revenue or a reduction of principal according to management's judgment as to the collectibility of principal. Renegotiated loans are those which have been renegotiated to an effective interest rate lower than the then-current market rate because of a deterioration in the financial position of the borrower. Interest on such loans is accrued at the renegotiated rate. Assets acquired in credit work-outs, including real estate, are recorded at the lower of fair value less costs to sell or the recorded investment in the related loan and are classified as other assets. Any excess of the recorded investment in the loan over the fair value of the asset acquired is charged against the allowance for credit losses-loans. Allowance For Credit Losses The allowance for credit losses represents management's estimate of probable losses that have occurred as of the date of the financial statements. The allowance for credit losses-loans is reported as a reduction of loans and the allowance for credit losses for other credit-related items is reported in other liabilities. The Corporation recently undertook a comprehensive review of its policies and procedures related to the determination of the allowance for credit losses to ensure that they are appropriate within the framework of generally accepted accounting principles. Policies and procedures were revised and improved to ensure a systematic and adequately documented process for the estimation of credit losses and related charge-offs. To allow management to determine the appropriate level of the allowance for credit losses-loans, all significant counterparty relationships are reviewed periodically, as are loans under special supervision, such as criticized, cash basis and renegotiated loans. This management process results in three components of the overall allowance for credit losses-loans: a specific allowance component, a country risk component and an expected loss component. The specific allowance component is the amount required for impaired loans as calculated under SFAS 114, "Accounting by Creditors for Impairment of a Loan." The country risk component is the amount provided for exposures in countries experiencing financial stress, excluding those exposures already identified and evaluated as impaired loans. The expected loss component is an estimate of the remaining probable losses inherent in the loan portfolio. This component is determined by using a statistical model that utilizes a loan-type, risk-rated stratified approach. Loss factors are derived by analyzing historical charge-offs and recent economic events and applied to categories of loans by type and risk rating. Amounts deemed uncollectible are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Actual losses may vary from current estimates and the amount of the actual credit loss provision may be either greater than or less than actual net charge-offs. The related provision for credit losses--loans, which is charged to income, is the amount necessary to adjust the allowance to the level determined through the process described above. Customer Receivables Customer receivables include amounts due on uncompleted transactions and margin balances. Securities owned by customers and held as collateral for these receivables are not reflected in the financial statements. Premises and Equipment Premises and equipment owned are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the terms of the leases or the estimated useful lives of the improvements, whichever are shorter. Maintenance and repairs are charged to expense and improvements are capitalized. Gains and losses on dispositions are reflected in earnings. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the terms of the leases. Income Taxes The Corporation recognizes the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of enacted tax laws. Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. Stock-Based Compensation Prior to the Acquisition, the Corporation accounted for its stock option awards under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Corporation Bankers Trust Corporation and its Subsidiaries 31 - -------------------------------------------------------------------------------- made pro forma disclosures of net income and earnings per share as if the fair value-based method of accounting had been applied under SFAS 123, "Accounting for Stock-Based Compensation." On the COC date, all outstanding stock options were settled in cash equaling a price of $93.00 per option less the exercise price. Prior to the Acquisition, the Corporation also recorded its obli gations under outstanding deferred stock awards in stockholders' equity as common stock issuable-stock awards. The related deferred compensation was also included in stockholders' equity. These classifications were based upon the Corporation's intent to settle these awards with its common stock. On the COC date, all outstanding awards were settled in cash. Statement of Cash Flows For purposes of the consolidated statement of cash flows, the Corporation's cash and cash equivalents are cash and due from banks. Net cash flows from instruments such as futures, forwards, options and swaps used to hedge assets or liabilities are classified as cash flows from operating activities. Reclassifications Certain prior period amounts have been reclassified to conform to the current presentation. Note 3 -- Trading Assets and Trading Liabilities The components of these accounts, which are carried at fair value, were as follows: (in millions) December 31, 1999 1998 - -------------------------------------------------------------------------------- Trading assets U.S. government and agency securities $ 2,101 $ 686 Obligations of U.S. states and political subdivisions 81 246 Foreign government securities 114 4,799 Corporate debt securities 1,367 5,519 Equity securities 7,144 5,810 Swaps, options and other derivative contracts(1) 4,807 17,376 Bankers acceptances and certificates of deposit 53 2,844 Other 3,350 8,890 - -------------------------------------------------------------------------------- Total trading assets $19,017 $46,170 ================================================================================ Trading liabilities Securities sold, not yet purchased U.S. government and agency securities $ 53 $ 1,504 Foreign government securities -- 2,616 Equity securities 21 6,458 Other 9 818 Swaps, options and other derivative contracts(1) 5,183 15,857 - -------------------------------------------------------------------------------- Total trading liabilities $ 5,266 $27,253 ================================================================================ (1) Comprised of fair values of interest rate instruments, foreign exchange rate instruments, and equity and commodity instruments, reduced by the effects of master netting agreements, in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 39 ("FIN 39"), "Offsetting of Amounts Related to Certain Contracts." Note 4 -- Securities Available for Sale The fair value, amortized cost, and gross unrealized holding gains and losses for the Corporation's securities available for sale follow:
(in millions) December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Gross Gross Unrealized Holding Unrealized Holding Fair ------------------ Amortized Fair ------------------ Amortized Value Gains (Losses) Cost Value Gains (Losses) Cost - ------------------------------------------------------------------------------------------------------------------------------ Debt securities U.S. government and agencies $ 348 $ -- $ (9) $ 357 $ 1,431 $ 14 $ (11) $ 1,428 States of the U.S. and political subdivisions 16 -- -- 16 1,770 91 (72) 1,751 Asset-backed 5 -- -- 5 107 8 (1) 100 Certificates of deposit -- -- -- -- 108 1 -- 107 Foreign governments 480 -- -- 480 3,182 23 (114) 3,273 Corporate debt 2,226 -- (1) 2,227 2,431 6 (81) 2,506 Mortgage-backed 94 -- (2) 96 3,125 52 (69) 3,142 Equity securities 83 45 (8) 46 594 69 (71) 596 - ------------------------------------------------------------------------------------------------------------------------------ Total securities available for sale $ 3,252 $ 45 $ (20) $ 3,227 $12,748 $ 264 $ (419) $12,903 ============================================================================================================================== (in millions) December 31, 1997 - -------------------------------------------------------------------------------------- Gross Unrealized Holding Fair ------------------ Amortized Value Gains (Losses) Cost - -------------------------------------------------------------------------------------- Debt securities U.S. government and agencies $ 525 $ 3 $ -- $ 522 States of the U.S. and political subdivisions 1,392 78 (50) 1,364 Asset-backed 156 -- -- 156 Certificates of deposit 135 -- -- 135 Foreign governments 2,122 5 (46) 2,163 Corporate debt 3,135 1 (61) 3,195 Mortgage-backed 113 -- -- 113 Equity securities 503 41 (18) 480 - -------------------------------------------------------------------------------------- Total securities available for sale $ 8,081 $ 128 $ (175) $ 8,128 ======================================================================================
There were no securities of any individual issuer included in securities available for sale that exceeded 10 percent of the Corporation's total stockholders' equity at December 31, 1999. The components of securities available for sale gains (losses) as reported in the consolidated statement of income follow: (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Debt securities--gross realized gains $ 81 $ 163 $ 53 Debt securities--gross realized losses (234) (248) (18) Equity securities--net realized gains 64 29 123 - -------------------------------------------------------------------------------- Total securities available for sale gains (losses) $ (89) $ (56) $ 158 ================================================================================ 32 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The following table shows the fair value, remaining maturities, approximate weighted-average yields (based on amortized cost) and total amortized cost by maturity distribution of the debt components of the Corporation's securities available for sale at December 31, 1999. Maturity Distribution
- ---------------------------------------------------------------------------------------------------------------------- After One After Five Within But Within But Within After One Year Five Years Ten Years Ten Years - ---------------------------------------------------------------------------------------------------------------------- ($ in millions) Amount Yield Amount Yield Amount Yield Amount Yield - ---------------------------------------------------------------------------------------------------------------------- U.S. government and agencies $ 42 8.49% $126 5.09% $ 180 3.64% $ -- --% States of the U.S. and political subdivisions 8 6.28 -- -- 6 5.5 2 37.6 Asset-backed securities -- -- 5 2.45 -- -- -- -- Certificates of deposit -- -- -- -- -- -- -- -- Foreign government securities 182 14.88 298 3.24 -- -- -- -- Corporate debt securities 181 3.65 901 7.31 1,120 5.16 24 14.88 Mortgage-backed securities -- -- -- -- 72 5.86 12 12.76 - ---------------------------------------------------------------------------------------------------------------------- Total fair value $413 $1,330 $1,378 $ 38 ======================================== ====== ====== ====== Total amortized cost $416 $1,336 $1,380 $ 39 ======================================== ====== ====== ====== - -------------------------------------------------------------------------- Mortgage- Backed Total - -------------------------------------------------------------------------- ($ in millions) Amount Yield Amount Yield - -------------------------------------------------------------------------- U.S. government and agencies $ -- --% $ 348 4.70% States of the U.S. and political subdivisions -- -- 16 10.18 Asset-backed securities -- -- 5 2.45 Certificates of deposit -- -- -- -- Foreign government securities -- -- 480 7.64 Corporate debt securities -- -- 2,226 6.02 Mortgage-backed securities 10 16.90 94 7.94 - -------------------------------------------------------------------------- Total fair value $ 10 $3,169 ================================ ====== ====== Total amortized cost $ 10 $3,181 ================================ ====== ======
Note 5 -- Loans The following table summarizes the composition of loans at the end of each of the last five years:
- --------------------------------------------------------------------------------------------------------------------------------- ($ in millions) December 31, 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Domestic Commercial and industrial $ 8,125 40% $ 6,448 27% $ 4,244 21% $ 3,422 21% $ 2,520 20% Financial institutions 2,788 14 2,441 10 2,148 11 1,631 10 1,778 14 Real estate Construction 128 1 134 1 108 1 133 1 154 1 Mortgage 1,343 6 1,315 6 2,088 10 1,562 10 1,276 10 Other 4,028 20 3,558 15 1,427 7 1,436 9 1,490 11 - --------------------------------------------------------------------------------------------------------------------------------- Total domestic 16,412 81 13,896 59 10,015 50 8,184 51 7,218 56 - --------------------------------------------------------------------------------------------------------------------------------- International Governments and official institutions 120 1 190 1 252 1 237 1 227 2 Banks and other financial institutions 690 3 3,599 15 3,175 16 3,482 22 1,543 13 Commercial and industrial 1,765 9 3,931 17 4,931 25 2,759 17 1,934 15 Real estate Construction -- -- 71 -- -- -- -- -- 2 -- Mortgage 31 -- 95 -- 195 1 130 1 176 1 Other 1,167 6 1,813 8 1,402 7 1,290 8 1,701 13 - --------------------------------------------------------------------------------------------------------------------------------- Total international 3,773 19 9,699 41 9,955 50 7,898 49 5,583 44 - --------------------------------------------------------------------------------------------------------------------------------- Gross loans 20,185 100% 23,595 100% 19,970 100% 16,082 100% 12,801 100% === === === === === Less: unearned income 223 310 165 202 120 - --------------------------------------- ------- ------- ------- ------- Total loans $19,962 $23,285 $19,805 $15,880 $12,681 ======================================= ======= ======= ======= =======
On a global basis, the commercial and industrial category and the "other" category included no single industry group with aggregate borrowings from the Corporation in excess of 10 percent of the total loan portfolio at December 31, 1999. Bankers Trust Corporation and its Subsidiaries 33 - -------------------------------------------------------------------------------- Certain contractual maturity information for the Corporation's loans at December 31, 1999, excluding 1-4 family mortgages, installment loans and lease financing is summarized below. Actual maturities may differ from contractual maturities since borrowers may have the right to prepay obligations with or without prepayment penalties. Remaining Maturity - -------------------------------------------------------------------------------- Within After One After One But Within Five (in millions) Year Five Years Years Total - -------------------------------------------------------------------------------- Domestic Commercial and industrial $ 955 $4,707 $2,463 $ 8,125 Financial institutions 2,411 347 30 2,788 Real estate Construction 58 70 -- 128 Mortgage 238 836 63 1,137 Other 1,961 883 87 2,931 - -------------------------------------------------------------------------------- Total domestic 5,623 6,843 2,643 15,109 International 2,231 699 68 2,998 - -------------------------------------------------------------------------------- Total $7,854 $7,542 $2,711 $18,107 ================================================================================ Loans due after one year With predetermined interest rates $ 249 $ 351 ==================================================================== With floating or adjustable interest rates $7,293 $2,360 ==================================================================== Cash Basis Loans and Renegotiated Loans The Corporation's cash basis loans and renegotiated loans are summarized as follows: (in millions) December 31, 1999 1998 - -------------------------------------------------------------------------------- Cash basis loans Domestic $573 $192 International 164 200 - -------------------------------------------------------------------------------- Total cash basis loans $737 $392 ================================================================================ Renegotiated loans Domestic $ 11 $ 25 International -- 1 - -------------------------------------------------------------------------------- Total renegotiated loans $ 11 $ 26 ================================================================================ At December 31, 1999 and 1998, borrowers on a cash basis or renegotiated status had undrawn commitments with the Corporation of $38 million and $39 million, respectively. Such 1999 amounts, if drawn, will be classified as cash basis or renegotiated. The following table sets forth the approximate effect on interest revenue of cash basis loans and renegotiated loans. This disclosure reflects the interest on loans that were carried on the balance sheet and classified as either cash basis or renegotiated at December 31 of each year. The rates used in determining the gross amount of interest that would have been recorded at the original rate were not necessarily representative of current market rates. (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Domestic loans Gross amount of interest that would have been recorded at original rate $27 $16 $16 Less, interest, net of reversals, recognized in interest revenue 18 8 3 - -------------------------------------------------------------------------------- Reduction of interest revenue 9 8 13 - -------------------------------------------------------------------------------- International loans Gross amount of interest that would have been recorded at original rate 3 16 5 Less, interest, net of reversals, recognized in interest revenue 1 11 -- - -------------------------------------------------------------------------------- Reduction of interest revenue 2 5 5 - -------------------------------------------------------------------------------- Total reduction of interest revenue $11 $13 $18 ================================================================================ At December 31, 1999 and 1998, the recorded investment in loans that was considered to be impaired under SFAS 114 was $889 million and $418 million, respectively. Included in these amounts were $718 million and $295 million of loans that required a valuation allowance of $268 million and $61 million at those same dates, respectively. The average recorded investment in impaired loans during the years ended December 31, 1999 and December 31, 1998 was approximately $502 million and $295 million, respectively. For the years ended December 31, 1999, 1998 and 1997, the Corporation recognized interest income on impaired loans of $12 million, $19 million and $3 million, respectively. 34 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Note 6 -- Allowances for Credit Losses An analysis of the changes in the Corporation's allowances for credit losses follows:
(in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Loans Balance, beginning of year $ 652 $ 699 $ 773 Provision for credit losses (58) 40 -- Allowance related to BTAL and transferred entities* (39) -- -- Reclassification -- -- (57) Allowance related to acquisition -- -- 17 Net charge-offs Charge-offs 91 107 78 Recoveries 27 20 44 - -------------------------------------------------------------------------------- Total net charge-offs 64 87 34 - -------------------------------------------------------------------------------- Balance, end of year $ 491 $ 652 $ 699 ================================================================================ Other liabilities Balance, beginning of year $ 18 $ 13 $ 10 Provision for credit losses 6 5 -- Reclassification -- -- 3 - -------------------------------------------------------------------------------- Balance, end of year $ 24 $ 18 $ 13 ================================================================================
* Reflects the allowance for credit losses of certain legal entities transferred to Deutsche Bank on the date of transfer and the allowance for credit losses--loans of BTAL on the date of sale. Note 7 -- Premises and Equipment; Leases An analysis of premises and equipment follows: (in millions) December 31, 1999 1998 - -------------------------------------------------------------------------------- Land $ 71 $ 85 Buildings 265 338 Leasehold improvements 330 416 Furniture and equipment 816 1,389 Construction-in-progress 21 36 - -------------------------------------------------------------------------------- Total 1,503 2,264 Less accumulated depreciation and amortization 842 1,131 - -------------------------------------------------------------------------------- Net book value $ 661 $1,133 ================================================================================ The Corporation is a lessee under lease agreements covering real property and equipment. The future minimum lease payments required under the Corporation's noncancelable operating leases at the end of 1999 were as follows: (in millions) Year Ended December 31, - -------------------------------------------------------------------------------- 2000 $ 47 2001 46 2002 40 2003 37 2004 36 2005 and later 222 - -------------------------------------------------------------------------------- Total minimum lease payments 428 Less minimum noncancelable sublease rentals 4 - -------------------------------------------------------------------------------- Net minimum lease payments $424 ================================================================================ The following shows the net rental expense for all operating leases: (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Gross rental expense $124 $131 $107 Less sublease rental income 6 4 3 - -------------------------------------------------------------------------------- Net rental expense $118 $127 $104 ================================================================================ Note 8 -- Securities Loaned and Securities Sold Under Repurchase Agreements and Other Short-term Borrowings Short-term borrowings are borrowed funds generally with an original maturity of one year or less. Debt instruments which contain a provision for early redemption, exercisable at the option of the security holder, are classified on the basis of the earliest possible redemption date. Securities loaned and securities sold under repurchase agreements and federal funds purchased generally mature in one day; commercial paper generally matures within 90 days. The details of these borrowings for the years 1999, 1998 and 1997 are presented below: ($ in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Securities loaned and securities sold under repurchase agreements Balance at year end $ 56 $17,420 $17,896 Average amount outstanding 8,261 28,732 23,897 Maximum amount outstanding at any month end 23,383 37,140 27,878 Average interest rate for the year 6.52% 6.60% 5.91% Average interest rate on year-end balance 6.89% 5.06% 5.30% Federal funds purchased Balance at year end $ 5,270 $ 3,686 $ 3,260 Average amount outstanding 3,226 3,840 4,097 Maximum amount outstanding at any month end 5,968 10,036 8,444 Average interest rate for the year 4.48% 4.83% 5.03% Average interest rate on year-end balance 3.45% 3.90% 5.42% Commercial paper Balance at year end $-- $ 5,110 $ 8,733 Average amount outstanding 3,615 9,708 8,881 Maximum amount outstanding at any month end 9,458 15,293 9,584 Average interest rate for the year 6.98% 5.98% 5.79% Average interest rate on year-end balance --% 5.41% 5.94% Other Balance at year end $ 6,270 $ 7,517 $ 7,584 Average amount outstanding 6,044 8,049 7,190 Maximum amount outstanding at any month end 8,854 8,885 8,249 Average interest rate for the year 6.61% 6.97% 6.58% Average interest rate on year-end balance 9.74% 5.54% 5.93% ================================================================================ Bankers Trust Corporation and its Subsidiaries 35 - -------------------------------------------------------------------------------- Note 9 -- Long-Term Debt In accordance with the Federal Reserve Board's Capital Adequacy Guidelines, long-term debt included in risk-based capital must meet specific criteria. Generally, qualifying debt must be unsecured, subordinated and have an original weighted-average maturity of at least five years. Additionally, the outstanding amount of long-term debt included in risk-based capital is reduced as these issues approach maturity. That is, one-fifth of the original issue is amortized each year during the last five years before maturity. Long-term debt included in risk-based capital and other long-term debt are summarized as follows, based on the contractual terms of each issue: Long-term debt included in risk-based capital Dec. 31, Dec. 31, Subordinated Subordinated 1999 1998 (in millions) Fixed Rate Floating Rate Total Total - -------------------------------------------------------------------------------- Bankers Trust Due in 1999 $ -- $ -- $ -- $ 147 Due in 2000 197 -- 197 196 Due in 2001 214 -- 214 212 Due in 2002 617 80 697 693 Due in 2003 102 194 296 296 Due in 2004 16 25 41 42 Due in 2005-2009 760 71 831 830 Thereafter 886 -- 886 886 - -------------------------------------------------------------------------------- Total $ 2,792 $ 370 $ 3,162 $ 3,302 - -------------------------------------------------------------------------------- BTCo Due in 1999 $ -- $ -- $ -- $ 9 Due in 2000 9 -- 9 8 Due in 2001 9 -- 9 8 Due in 2002 8 -- 8 7 Due in 2003 7 -- 7 7 Due in 2004 7 -- 7 6 Due in 2005-2009 11 247 258 359 Thereafter -- -- -- -- - -------------------------------------------------------------------------------- Total $ 51 $ 247 $ 298 $ 404 - -------------------------------------------------------------------------------- Other Due in 1999 $ -- $ -- $ -- $ 200 Due in 2000 -- -- -- 200 - -------------------------------------------------------------------------------- Total $ -- $ -- $ -- $ 400 - -------------------------------------------------------------------------------- Total long-term debt $ 3,460 $ 4,106 - -------------------------------------------------------------------------------- Less: Amortization for risk-based capital purposes (1,036) (882) - -------------------------------------------------------------------------------- Less: Subordinated debt in excess of risk-based capital limitations -- (111) - -------------------------------------------------------------------------------- Total long-term debt included in risk-based capital $ 2,424 $ 3,113 ================================================================================ Long-term debt not included in risk-based capital Senior Senior Dec. 31, Dec. 31, Fixed Floating 1999 1998 (in millions) Rate Rate Total Total - -------------------------------------------------------------------------------- Bankers Trust Due in 1999 $ -- $ -- $ -- $ 836 Due in 2000 194 542 736 737 Due in 2001 250 868 1,118 1,128 Due in 2002 -- 555 555 564 Due in 2003 -- 499 499 663 Due in 2004 -- 7 7 7 Due in 2005-2009 113 443 556 691 Thereafter -- -- -- -- - -------------------------------------------------------------------------------- Total $ 557 $ 2,914 $ 3,471 $ 4,626 - -------------------------------------------------------------------------------- BTCo Due in 1999 $ -- $ -- $ -- $ 1,805 Due in 2000 466 647 1,113 1,113 Due in 2001 6 533 539 659 Due in 2002 729 528 1,257 722 Due in 2003 36 -- 36 103 Due in 2004 2 8 10 380 Due in 2005-2009 50 -- 50 1,636 Thereafter 3 8 11 8 - -------------------------------------------------------------------------------- Total $ 1,292 $ 1,724 $ 3,016 $ 6,426 - -------------------------------------------------------------------------------- Other Other (fixed rate) $ 828 $ 21 Other (floating rate) 4,231 2,824 - -------------------------------------------------------------------------------- Total long-term debt $11,546 $13,897 Add: Amortization for risk-based capital purposes 1,036 882 Add: Subordinated debt in excess of risk-based capital limitations -- 111 - -------------------------------------------------------------------------------- Total long-term debt not included in risk-based capital $12,582 $14,890 ================================================================================ Based solely on the contractual terms of the debt issues, at December 31, 1999 and 1998 the Corporation's total fixed rate long-term debt had a weighted-average interest rate of 6.41 percent and 6.98 percent, respectively. The Corporation has entered into interest rate and currency swap agreements for many of its long-term debt issues, in order to manage its interest rate and currency risks. The interest rates for the floating rate debt issues and the fixed rate debt issues effectively converted to floating are generally based on LIBOR, although in certain instances they are subject to minimum interest rates as specified in the agreements governing the respective issues. The weighted-average effective interest rates for total long-term debt, including the effects of the related swap agreements, were 5.38 percent and 5.06 percent at December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, certain subsidiaries of Bankers Trust Company had outstanding $1.2 billion and $3.54 billion, respectively of mandatory redeemable preference securities included in the table above which are not included in risk-based capital. Maturities at December 31, 1999 range from April 2000 to May 2002 and maturities at December 31, 1998 ranged from February 1999 to December 2005. Additionally, a subsidiary of the Corporation, had outstanding $1.83 billion of mandatory redeemable 36 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- preference securities included in the table above which are not included in risk-based capital. These securities mature in December 2003. Note 10-- Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Junior Subordinated Deferrable Interest Debentures Included in Risk-Based Capital ("Trust Preferred Capital Securities") The trust preferred capital securities are issued by trusts all of whose outstanding common securities are owned by either Bankers Trust or BTCo. The trust preferred capital securities represent preferred undivided beneficial interests in the assets of the trusts. The trusts exist for the sole purpose of issuing the trust preferred capital securities and investing the proceeds thereof in junior subordinated deferrable interest debentures issued by Bankers Trust or BTCo, as applicable (the "debentures"). The debentures are unsecured and subordinated to all senior indebtedness of Bankers Trust or BTCo, as applicable, and are the sole assets of the trusts. Payments under the debentures by either Bankers Trust or BTCo are the same as those for the trust preferred capital securities. The debentures are redeemable prior to stated maturity at the option of Bankers Trust or BTCo during the redemption periods described below. The trust preferred capital securities are subject to mandatory redemption upon repayment of the related debentures at their stated maturity dates or their earlier redemption at a redemption price equal to their liquidation amount plus accrued distributions to the date fixed for redemption and the premium, if any, paid by Bankers Trust or BTCo upon concurrent repayment of the related debentures. Bankers Trust and BTCo, as applicable, have issued guarantees for the payment of distributions and payments on liquidation or redemption of the trust preferred capital securities, but only to the extent of funds held by the relevant trust. The appropriate obligations of Bankers Trust or BTCo under each series of debentures, the relevant indenture and trust agreement, the relevant guarantee and certain other related agreements, in the aggregate, constitute a full and unconditional guarantee by Bankers Trust or BTCo, as applicable, of each trust's obligations under the relevant trust preferred capital securities. The Corporation is required by the Federal Reserve to maintain certain levels of capital. The Federal Reserve has announced that certain cumulative preferred securities having the characteristics of trust preferred capital securities qualify as minority interest, which is included in Tier 1 Capital for bank holding companies. Such Tier 1 Capital treatment, together with Bankers Trust's ability to deduct, for federal income tax purposes, interest expense on the corresponding debentures, provides Bankers Trust with a cost-effective means of obtaining capital for regulatory purposes. The following is a summary of the outstanding trust preferred capital securities and debentures:
Aggregate Aggregate Liquidation Liquidation Per Annum Amount of Amount of Interest Trust Trust Rate of Preferred Preferred Debentures Capital Capital and Trust Securities at Securities at Preferred Interest December 31, December 31, Capital Payment ($ in millions) 1999 1998 Securities Dates - -------------------------------------------------------------------------------------------------- Bankers Trust--Obligated BT Institutional Capital Trust A(3) $290 $290 8.09% 6/1, 12/1 BT Institutional Capital Trust B 200 200 7.75 6/1, 12/1 BT Capital Trust B 250 250 7.90 1/15, 7/15 BT Preferred Capital Trust I 250 250 8 1/8 3/31, 6/30 9/30, 12/31 BT Preferred Capital Trust II(3) 203 203 7.875 2/25, 8/25 BTCo--Obligated BTC Capital Trust I 250 250 3-Month 3/30, 6/30 LIBOR 9/30, 12/30 plus 0.75% - -------------------------------------------------------------------------------------------------- Total $1,443(1) $1,443(1) ================================================================================================== Stated Maturity of Debentures and Trust Preferred Earlier Redemption Capital Maturity Period of ($ in millions) Securities Date(2) Debentures - ---------------------------------------------------------------------------------- Bankers Trust--Obligated BT Institutional Capital Trust A(3) 12/1/26 -- On or after 12/1/06 BT Institutional Capital Trust B 12/1/26 -- On or after 12/1/06 BT Capital Trust B 1/15/27 1/15/17 On or after 1/15/07 BT Preferred Capital Trust I 2/1/37 2/1/02 On or after 2/1/02 BT Preferred Capital Trust II(3) 2/25/27 2/25/12 On or after 2/25/07 BTCo--Obligated BTC Capital Trust I 12/30/26 -- On or after 12/30/06 - ---------------------------------------------------------------------------------- Total ==================================================================================
(1) Excludes $15 million and $23 million of deferred issuance costs and unamortized discount at December 31, 1999 and December 31, 1998, respectively. (2) The maturity dates may be shortened under certain circumstances. (3) During 1998, the Corporation repurchased $10 million and $47 million of BT Institutional Capital Trust A and BT Preferred Capital Trust II securities, respectively. Bankers Trust Corporation and its Subsidiaries 37 Note 11 -- Preferred Stock Series Preferred Stock Bankers Trust is authorized to issue 190,100 shares of Series Preferred Stock, without par value. All shares of Series Preferred Stock constitute one and the same class and have equal rank and priority over common stockholders as to dividends and in the event of liquidation. Each series of Series Preferred Stock has a liquidation preference per share (as indicated below), plus accrued and unpaid dividends, as well as contingent voting rights. Dividends on shares of each outstanding series of preferred stock are payable quarterly and are cumulative. The Series Preferred Stock outstandings were as follows: Outstanding At December 31, -------------- 1999 1998 Liquidation Earliest -------------- Preference Redemption (in millions) Per Share Date(1) - -------------------------------------------------------------------------------- Adjustable Rate Cumulative, Series Q(2) $151 $160 $2,500 03/01/99 Adjustable Rate Cumulative, Series R(2) 100 109 2,500 09/01/99 7.75% Cumulative, Series S 125 125 2,500 06/01/00 - -------------------------------------------------------------------------------- Total preferred stock $376 $394 ================================================================================ (1) At the option of Bankers Trust, series may be redeemed, in whole or in part, on or after the above mentioned redemption date at $2,500 per share (or $25 per depositary share), plus accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. (2) The dividend rate is determined by a formula that considers the interest rates of selected short- and long-term U.S. Treasury securities at the time the rate is set. In no event will the dividend rate be less than 41/2 percent or more than 101/2 percent per annum. The rates in effect for Series Q were 5.17 percent and 4.50 percent at December 31, 1999 and 1998, respectively. The rates in effect for Series R were 5.14 percent and 4.50 percent at December 31, 1999 and 1998, respectively. The number of shares of Series Preferred Stock issued, repurchased and redeemed during 1997, 1998 and 1999 was as follows (number of shares in thousands):
Fixed/ Adjustable Adjustable Adjustable 8.55% Rate 7 5/8% 7.50% Rate Rate 7.75% Cumulative Cumulative Cumulative Cumulative Cumulative Cumulative Cumulative Preferred Preferred Preferred Preferred Preferred Preferred Preferred Shares of Series Stock, Stock, Stock, Stock, Stock, Stock, Stock, Preferred Stock Series I Series J Series O(1) Series P(2) Series Q(3) Series R(3) Series S(3) - ---------------------------------------------------------------------------------------------------------------------------- December 31, 1996 1,000 447 592 99 65 52 50 - ---------------------------------------------------------------------------------------------------------------------------- Issued -- -- 3 -- -- -- -- Repurchased -- -- -- -- (1) (2) -- Redeemed(4) (1,000) (447) -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- December 31, 1997 -- -- 595 99 64 50 50 - ---------------------------------------------------------------------------------------------------------------------------- Issued -- -- -- -- -- -- -- Repurchased -- -- -- -- -- (6) -- Redeemed(5) -- -- (595) (99) -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- December 31, 1998 -- -- -- -- 64 44 50 - ---------------------------------------------------------------------------------------------------------------------------- Issued -- -- -- -- -- -- -- Repurchased -- -- -- -- (4) (4) -- Redeemed -- -- -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- December 31, 1999 -- -- -- -- 60 40 50 ============================================================================================================================
(1) On March 1, 1995, Bankers Trust reset the interest rate on $150 million of 75/8% Convertible Capital Securities to a rate of 61/8% per annum giving holders of this issue the right to convert the debt securities into depositary shares, at $25 per depositary share, each representing a one-tenth interest in a share of Series O. Approximately $147 million of the debt securities were converted in 1995. (2) On May 15, 1995, Bankers Trust reset the interest rate on $100 million of 7.50% Convertible Capital Securities to a rate of 6.00% per annum giving holders of this issue the right to convert the debt securities into depositary shares, at $25 per depositary share, each representing a one-fortieth interest in a share of Series P. Approximately $98 million of the debt securities were converted in 1995. (3) Series Q, Series R and Series S are represented by depositary shares at $25 per depositary share, each representing a one-hundredth interest of a share. (4) Series I and Series J were redeemed at $100 per share plus an amount equal to accrued and unpaid dividends to the redemption date. (5) Series O and Series P were redeemed at $250 per share (or $25 per depositary share) and $1000 per share (or $25 per depositary share), respectively, plus an amount equal to accrued and unpaid dividends to the redemption date. 38 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Note 12 -- Preferred Share Purchase Rights On February 16, 1988, the Board of Directors of Bankers Trust Corporation declared a dividend distribution of one Preferred Share Purchase Right ("Right") for each share of common stock held, payable February 26, 1988 to stockholders of record on that date. Rights also automatically attached to each share of common stock issued after February 26, 1988. Each Right entitled the registered holder to purchase from Bankers Trust a one-hundredth interest in a share of Bankers Trust's Series C ("Series C") Junior Participating Preferred Stock at an exercise price of $480, as amended, subject to certain adjustments. No Series C shares were ever issued. The Rights terminated on the COC date. Note 13 -- Common Stock and Stock-Based Compensation Plans Common stock activity during 1999, 1998 and 1997 was as follows:
Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------ Common shares outstanding, beginning of year 95,714,120 96,956,340 99,189,329 - ------------------------------------------------------------------------------------------ Shares issued or distributed under employee benefit plans 2,974,125 4,192,633 7,167,221 Conversion of 5 3/4% Convertible Subordinated Debentures -- 1,434 399,450 Shares issued for acquisitions -- -- 14,678(1) Shares purchased for treasury (837,410) (5,436,287) (9,735,358) Shares purchased and retired (97,850,834)(2) -- (78,980) - ------------------------------------------------------------------------------------------ Common shares outstanding, end of year 1 95,714,120 96,956,340 ================================================================================
(1) The information presented reflects the additional shares issued in conjunction with the Alex. Brown merger. (2) Amount represents shares purchased and retired in connection with Acquisition. Prior to the Acquisition, stock options were granted to purchase stock at a price not less than the fair market value of the stock on the date of grant. As of the Acquisition date, all unvested options vested and became immediately exercisable. The Corporation paid $93.00 less the exercise price for each option outstanding on the Acquisition date. No stock options were granted in 1999. There were no stock options outstanding at December 31, 1999. The following is a summary of stock option transactions that occurred during 1997, 1998 and 1999 (number of shares in thousands): Weighted-Average Exercise Price Exercise Price Options Per Option Per Option - -------------------------------------------------------------------------------- December 31, 1996 9,859 $14.01-83.3125 $ 60.77 ========================================= Granted 7,417 68.44-111.75 93.56 Exercised (4,590) 14.01-79.125 59.37 Cancelled (208) 60.18 - ----------------------------------------- December 31, 1997 12,478 16.81-111.75 80.76 ========================================= Granted 959 56.25-134.50 112.88 Exercised (1,970) 16.81-102.6625 65.37 Cancelled (671) 98.87 - ----------------------------------------- December 31, 1998 10,796 21.59-134.50 85.29 ========================================= Exercised (442) 21.59-90.75 57.74 Cancelled (297) 92.61 Settled due to COC (10,057) - ----------------------------------------- December 31, 1999 -- -- -- ========================================= ======= Exercisable at: December 31, 1998 7,581 $ 76.72 ========================================= ======= Deferred stock awards, which entitled certain employees to receive common stock of the Corporation at a specified future date, were also granted prior to the Acquisition. On the COC date, all deferred compensation amounts vested in full. There were no deferred stock awards outstanding at December 31, 1999. At December 31, 1998, there were deferred stock awards outstanding of 8,698,216 shares. In January 1999, 6,548,524 deferred stock awards were granted related to the 1998 performance year. Compensation expense recognized for deferred stock awards was $749 million, $275 million and $274 million in 1999, 1998 and 1997, respectively. The increase in 1999 is due to the vesting of all deferred stock awards on the COC date. All deferred stock awards granted during 1999 were paid out at $93.00 per share on the COC date. SFAS 123 Pro Forma Information In conjunction with the Acquisition, compensation expense related to all options outstanding as of the Acquisition date was recognized reflecting the buyout of such options. For each option outstanding, this expense was equal to $93.00 less the exercise price resulting in total expense of $118 million. Prior to the Acquisition, the Corporation applied Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Corporation's employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized for the years ended December 31, 1998 and 1997. Pro forma information regarding net income and earnings per share is required by SFAS 123, and was determined for the years ended December 31, 1998 and 1997 as if the Corporation had accounted for its employee stock options under the fair value method of SFAS 123. For purposes of pro forma disclosure, the Bankers Trust Corporation and its Subsidiaries 39 - -------------------------------------------------------------------------------- estimated fair value of the options was amortized to expense over the options' vesting period. (in millions except earnings per share) 1998 1997 - -------------------------------------------------------------------------------- Net income (loss): As reported $ (73) $ 866 Pro forma $ (129) $ 807 Basic earnings (loss) per share: As reported $(1.05) $8.15 Pro forma $(1.61) $7.56 Diluted earnings (loss) per share: As reported $(1.05) $7.66 Pro forma $(1.61) $7.11 ================================================================================ Note 14 -- Asset and Dividend Restrictions The Federal Reserve Act, as amended by the Monetary Control Act of 1980, requires that reserve balances on certain deposits of depository institutions be maintained at the Federal Reserve Bank. The required reserve balances of the Corporation's subsidiary banks were $189 million and $200 million at December 31, 1999 and 1998, respectively. For the years 1999 and 1998, the average reserve balances of these banks amounted to $132 million and $148 million, respectively. Assets, principally trading assets and securities available for sale, of approximately $9.569 billion at December 31, 1999 were pledged as collateral to secure public and trust deposits, for borrowings, and for other purposes. Federal law also requires that "covered transactions," as defined, engaged in by insured banks and their subsidiaries with certain affiliates, including Bankers Trust, be at arm's length and limited to 20 percent of capital surplus. The Federal Reserve Board defines capital surplus as Tier 1 Capital and Tier 2 Capital plus the balance of the institution's allowance for loan and lease losses not included in Tier 2 Capital. Additionally, "covered transactions" with any one such affiliate is limited to 10 percent of capital and surplus. Covered transactions are defined to include, among other things, loans and other extensions of credit to such an affiliate and guarantees, acceptances and letters of credit issued on behalf of such an affiliate. Such loans, other extensions of credit, guarantees, acceptances and letters of credit must be secured. Other restrictions also apply to inter-affiliate transactions. Limitations exist on the availability of BTCo's undistributed earnings for the payment of dividends to Bankers Trust without prior approval of the bank regulatory authorities. In this regard, BTCo cannot declare dividends in 2000 without approval of the regulatory authorities. The Federal Reserve Board may prohibit the payment of dividends if it determines that circumstances relating to the financial condition of a bank are such that the payment of dividends would be an unsafe and unsound practice. Certain other subsidiaries are subject to various regulatory and other restrictions that may limit cash dividends and advances to Bankers Trust. Note 15 -- Regulatory Capital The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. The Federal Reserve Board's risk-based capital guidelines address the capital adequacy of bank holding companies and banks (collectively, "banking organizations"). These guidelines include a definition of capital, a framework for calculating risk-weighted assets, and minimum risk-based capital ratios to be maintained by banking organizations. A banking organization's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. The Federal Reserve Board also has a minimum Leverage ratio that is used as a supplement to the risk-based capital ratios in evaluating the capital adequacy of banks and bank holding companies. The Leverage ratio is calculated by dividing Tier 1 Capital by adjusted quarterly average assets. Failure to meet minimum capital requirements can initiate certain mandates, and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the consolidated financial statements of the Corporation and BTCo. Under the risk-based capital guidelines, there are two categories of capital: core capital ("Tier 1 Capital") and supplemental capital ("Tier 2 Capital"), collectively referred to as Total Capital. Tier 1 Capital includes common stockholders' equity, qualifying perpetual preferred stock, qualifying trust preferred capital securities and minority interest in equity accounts of consolidated subsidiaries. Tier 2 Capital includes perpetual preferred stock and trust preferred capital securities (to the extent ineligible for Tier 1 Capital), hybrid capital instruments (i.e., perpetual debt and mandatory convertible securities), limited amounts of subordinated debt, intermediate-term preferred stock, and a portion of the allowance for credit losses. Risk-weighted assets are calculated by assigning nontrading account assets and off-balance sheet items to broad risk categories. The Corporation had previously adopted the market risk amendment to the risk-based capital guidelines issued by the Federal Reserve Board and the Bank for International Settlements (BIS). The amendment changed the calculation of the risk-weighted assets for trading accounts from assigning trading assets to broad risk categories to the use of internal models to measure market risk. The market risk amendment also provides for the inclusion of Tier 3 Capital, which is defined to be subordinated debt that is unsecured; has an original maturity of a minimum of two years; is not redeemable before maturity without prior approval from the Federal Reserve; and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing organization's risk-based capital ratio to fall below the minimum required level. In addition, under the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), five capital categories were established for banks. Pursuant to that statute, the federal bank regulatory agencies have specifically defined these categories by determining that a bank is well capitalized if it maintains a Tier 1 Capital ratio of at least 6.0 percent, a Total Capital ratio of at least 10 percent and a Leverage ratio of at least 5.0 percent. The Federal Reserve Board has also adopted these same thresholds for the Tier 1 Capital ratio and Total Capital ratio in defining a well-capitalized bank holding company. The well-capitalized 40 Bankers Trust Corporation and its Subsidiaries 41 threshold for the Leverage ratio is not applicable at the bank holding company level. Based on their respective regulatory capital ratios at December 31, 1999 and December 31, 1998, both the Corporation and BTCo are well capitalized. There are no conditions or events that management believes have changed the Corporation's and BTCo's well-capitalized status. The Corporation's and BTCo's actual capital amounts and ratios are presented in the table below.
FRB Minimum To Be Well For Capitalized Capital Under Actual as of Actual as of Adequacy Regulatory 12/31/99 12/31/98 Purposes: Guidelines: - --------------------------------------------------------------------------------------------------------- ($ in millions) Amount Ratio Amount Ratio Ratio Ratio - --------------------------------------------------------------------------------------------------------- Corporation Risk-Based Capital Ratios Tier 1 Capital(1) $4,462 10.4% $5,069 7.5% 4.0% 6.0% Total Capital(1) 7,861 18.4% 9,281 13.6% 8.0% 10.0% Leverage Ratio(2) $4,462 7.3% $5,069 3.5% 3.0% N/A BTCo Risk-Based Capital Ratios Tier 1 Capital(1) $5,710 16.5% $6,682 10.5% 4.0% 6.0% Total Capital(1) 6,561 18.9% 8,540 13.4% 8.0% 10.0% Leverage Ratio(2) $5,710 12.3% $6,682 5.7% 3.0% 5.0%
(1) Ratios are calculated on Tier 1 Capital and Total Capital as a percentage of risk-weighted assets. (2) Ratio is calculated on Tier 1 Capital as a percentage of adjusted quarterly average assets. N/A Not Applicable. Note 16 -- Interest Revenue and Interest Expense The following are the components of interest revenue and interest expense: (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Interest Revenue Interest-bearing deposits with banks $ 309 $ 310 $ 395 Federal funds sold 160 211 266 Securities purchased under resale agreements 675 1,635 1,352 Securities borrowed 383 1,222 746 Trading assets 916 2,388 2,488 Securities available for sale Taxable 362 633 436 Exempt from federal income taxes 22 43 32 Loans 1,522 1,711 1,437 Customer receivables 70 138 133 - -------------------------------------------------------------------------------- Total interest revenue 4,419 8,291 7,285 - -------------------------------------------------------------------------------- Interest Expense Interest-bearing deposits Domestic offices 694 1,183 895 Foreign offices 730 1,012 1,181 Trading liabilities 131 462 476 Securities loaned and securities sold under repurchase agreements 539 1,897 1,413 Other short-term borrowings 796 1,327 1,193 Long-term debt 608 921 655 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 114 117 113 - -------------------------------------------------------------------------------- Total interest expense 3,612 6,919 5,926 - -------------------------------------------------------------------------------- Net interest revenue $ 807 $1,372 $1,359 ================================================================================ Note 17 -- Trading Revenue The following are the components of trading revenue: (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Interest rate risk $ (165) $ (427) $ 433 Foreign exchange risk 139 426 277 Equity and commodity risk 68 (183) 345 - -------------------------------------------------------------------------------- Total trading revenue $ 42 $ (184) $1,055 ================================================================================ Note 18 -- Pension and Other Employee Benefit Plans The Corporation has a trusteed, noncontributory, defined benefit pension plan covering substantially all domestic employees. Effective January 1, 1999, the value of a participant's accrued benefit is expressed using a cash balance account approach (a type of defined benefit plan). Previously, the pension plan benefit formula was based upon years of service and average compensation over the final years of service. The Corporation also has both defined benefit and defined contribution retirement and similar plans covering the majority of its foreign employees. Contributions to defined contribution plans are based upon a percentage of salary. During 1998 and 1997, the Corporation maintained a noncontributory profit sharing plan, called PartnerShare, covering certain domestic employees. The Corporation's contribution consisted of a fixed contribution equal to six percent of eligible domestic employees' annual salary as well as an additional contribution of from zero to nine percent of eligible employees' annual salary, which percentage was calculated using a formula based on the Corporation's consolidated income before income taxes. Expense recognized for Bankers Trust Corporation and its Subsidiaries 41 this plan amounted to $27 million and $53 million for the years ended December 31, 1998 and 1997, respectively. Effective January 1, 1999, the Corporation implemented a 401 (k) Savings Plan covering substantially all domestic employees, which replaced the Partnershare Plan and the Corporation's prior 401(k) plan. Employees are permitted within limitations imposed by tax laws to make pretax contributions to the 401(k) Savings Plan. The Corporation makes fixed contributions equaling three percent of eligible domestic employees' annual salary and will also match employees' contributions up to three percent of eligible salary. The Corporation may, solely at its discretion, match an additional zero percent to 200 percent of the employees' contribution up to 3 percent of eligible salary. Expense recognized for this plan amounted to $27 million for the year ended December 31, 1999. The Corporation also provides health care benefits to employ ees (retirees) who met specific age and/or service requirements on January 1, 1990 provided that they retire (retired) under the principal domestic pension plan with at least ten years of service. This plan is contributory for participating retirees and also requires them to absorb deductibles and coinsurance. The Corporation also provides noncontributory life insurance benefits for substantially all domestic retirees who retired before January 1, 1999 with at least ten years of service. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ended December 31, 1999 and a statement of the funded status as of December 31 of both years:
Pension Benefits Postretirement Benefits - --------------------------------------------------------------------------------------------------- (in millions) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year $ 803 $ 685 $ 101 $ 126 Service cost 33 23 1 1 Interest cost 52 48 6 7 Plan amendments -- 25 -- -- Acquisitions -- 13 -- -- Actuarial (gain) loss (111) 28 (10) (19) Benefits paid (50) (21) (4) (7) Curtailment/settlement (12) -- -- (7) Foreign currency exchange rate changes (5) 2 -- -- - --------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 710 $ 803 $ 94 $ 101 =================================================================================================== Change in plan assets Fair value of plan assets at beginning of year $ 1,107 $ 973 $ 4 $ 4 Actual return on plan assets 172 144 -- -- Employer contributions 6 2 4 7 Acquisitions -- 13 -- -- Benefits paid (50) (21) (4) (7) Curtailment/settlement (7) (5) -- -- Foreign currency exchange rate changes (4) 1 -- -- - --------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 1,224 $ 1,107 $ 4 $ 4 =================================================================================================== Funded Status $ 514 $ 304 $ (90) $ (97) Unrecognized net (gain) loss (315) (143) (34) (28) Unrecognized prior service cost 18 35 5 2 Unrecognized net (assets) obligations (7) (11) -- -- - --------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost at end of year* $ 210 $ 185 $ (119) $ (123) ===================================================================================================
* Prepaid pension costs totaled $229 million and $210 million at December 31, 1999 and 1998, respectively. No prepaid postretirement costs were recognized at these dates. The aggregate projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for those pension plans with accumulated benefit obligations in excess of plan assets were $16 million, $16 million and $1 million, respectively, as of December 31, 1999 and $24 million, $23 million and $3 million, respectively, as of December 31, 1998. Benefits expense for 1999, 1998 and 1997 included the following components:
Pension Benefits Postretirement Benefits - ---------------------------------------------------------------------------------------------------- (in millions) Year Ended December 31, 1999 1998 1997 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- Service cost $ 33 $ 23 $ 21 $ 1 $ 1 $ 1 Interest cost 52 48 45 6 7 8 Expected return on plan assets (94) (84) (81) -- -- -- Net amortization and deferral (5) (6) (1) (3) (3) -- - ---------------------------------------------------------------------------------------------------- Total defined benefit plans (14) (19) (16) 4 5 9 ==================================================================================================== Defined contribution plans 43 79 88 -- -- -- Other plans 5 4 6 -- -- -- - ---------------------------------------------------------------------------------------------------- Net periodic benefit expense $ 34 $ 64 $ 78 $ 4 $ 5 $ 9 ====================================================================================================
42 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The actuarial assumptions used for the principal domestic defined benefit plan and postretirement benefit plan were as follows:
Pension Benefits Postretirement Benefits - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Discount rate in determining expense 6.75% 7.00% 7.50% 6.75% 7.00% 7.50% Discount rate in determining benefit obligations at year end 7.75% 6.75% 7.00% 7.75% 6.75% 7.00% Rate of increase in future compensation levels for determining expense 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Rate of increase in future compensation levels for determining benefit obligations at year end 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Expected long-term rate of return on assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
The assumptions used for the other domestic and the principal foreign defined benefit pension plans were substantially similar to those used for the principal domestic pension plan, given local economic conditions in the cases of the principal foreign pension plans. In determining postretirement benefits expense, a 7.00 per cent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 5.50 percent over 2 years and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the retiree health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects on the Corporation's retiree health care plan: One-Percentage One-Percentage Point Increase Point Decrease - -------------------------------------------------------------------------------- (in millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Effect on total of service and interest cost components $ -- $ 1 $ (--) $ (1) Effect on accumulated postretirement benefit obligation $ 5 $ 6 $ (5) $ (6) Benefit Plan Changes Effective January 1, 2000, the Corporation's trusteed, noncontributory, domestic defined benefit pension plan merged with Deutsche Bank Americas Holding Corp.'s pension plan. There has been no change in the value of a participant's accrued benefit as a result of this transaction. Note 19 -- Restructuring and Other Related Activities During 1999, the Corporation recorded pre-tax charges for restructuring and other related activities totaling $633 million. Of this amount, $459 million related to a restructuring charge recorded in the second quarter in conjunction with the Acquisition ("Plan 1"). This charge reflected $394 million of severance and other termination-related costs as well as $65 million of other costs primarily related to lease terminations and write-offs of fixed assets and leasehold improvements. During the fourth quarter, the Corporation recorded additional charges related to restructuring and other related activities of $174 million in connection with its continuing efforts to streamline support functions and realign certain business activities ("Plan 2"). These charges reflected $116 million of severance and other termination-related costs, as well as $58 million of other costs primarily related to the intended liquidation of certain financial assets. Plan 1 Plan 2 --------------------------------------------------- (in millions) Severance Other Severance Other Total - -------------------------------------------------------------------------------- Beginning Reserve Balance $394 $ 65 $116 $ 58 $633 Charges Against Reserve 282 54 59 -- 395 - -------------------------------------------------------------------------------- Ending Reserve Balance at December 31, 1999 $112 $ 11 $ 57 $ 58 $238 ================================================================================ At December 31, 1999, $169 million of the remaining reserve balance related to severance and other termination-related costs for further staff reductions of approximately 850 positions. These severance actions, as well as the actions related to other exit activities, are expected to be substantially completed during 2000. Note 20 -- Income Taxes The Corporation's 1999 results of operations are included in the consolidated tax returns of Taunus. The domestic and foreign components of consolidated income (loss) before income taxes (benefit) follow: (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Domestic $(1,104) $ (83) $ 640 Foreign (311) 6 599 - -------------------------------------------------------------------------------- Total $(1,415) $ (77) $ 1,239 ================================================================================ Bankers Trust Corporation and its Subsidiaries 43 - -------------------------------------------------------------------------------- For purposes of determining the above amounts, foreign income is defined as income recorded by operations located outside of the U.S. Deferred income taxes result from differences in the timing of revenue and expense recognition for income tax and financial reporting purposes. An analysis of consolidated income taxes (benefit) follows: (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Income taxes (benefit) applicable to: Income (loss) before income taxes (benefit)* $ 188 $ (4) $ 373 Capital surplus (5) (50) (73) Cumulative translation adjustments 41 (10) 76 Securities valuation allowance 28 (13) (57) - -------------------------------------------------------------------------------- Total $ 252 $ (77) $ 319 ================================================================================ * Includes income tax expense (benefit) related to securities available for sale transactions of $4 million, $(7) million and $68 million in 1999, 1998 and 1997, respectively. The components of consolidated income taxes (benefit) follow: (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Current Federal $ 290 $ (9) $ 198 Foreign 237 175 232 State and local 120 33 161 - -------------------------------------------------------------------------------- Total current 647 199 591 - -------------------------------------------------------------------------------- Deferred Federal (122) (229) (203) Foreign (171) 10 (31) State and local (102) (57) (38) - -------------------------------------------------------------------------------- Total deferred $(395) (276) (272) - -------------------------------------------------------------------------------- Total $ 252 $ (77) $ 319 ================================================================================ The following is an analysis of the difference between the U.S. federal statutory income tax (benefit) and the effective tax (benefit) on consolidated income (loss) before income taxes: (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Computed expected tax expense (benefit) $(495) $ (27) $ 434 State and local income taxes (benefit) 7 (15) 55 Tax-exempt income (11) (17) (58) Foreign subsidiary earnings 428 54 (47) Valuation allowance 211 -- (20) Nondeductible penalty -- 22 -- Other 48 (21) 9 - -------------------------------------------------------------------------------- Effective income tax (benefit) $ 188 $ (4) $ 373 ================================================================================ The following is an analysis of the Corporation's net deferred tax assets: (in millions) December 31, 1999 1998 - -------------------------------------------------------------------------------- Deferred tax assets $1,943 $1,486 Valuation allowance 418 207 - -------------------------------------------------------------------------------- Deferred tax assets net of valuation allowance 1,525 1,279 Deferred tax liabilities 158 307 - -------------------------------------------------------------------------------- Net deferred tax assets $1,367 $ 972 ================================================================================ At December 31, 1999, the Corporation's deferred tax assets were primarily related to foreign tax credit carryovers that will expire in 2003 and 2004 ($545 million), credit losses ($299 million), net operating loss carryovers that primarily will start to expire in 2018 ($133 million), and international operations ($81 million). Deferred tax liabilities were primarily related to certain trading activities ($49 million) and lease financing activities ($46 million). At December 31, 1998, the Corporation's deferred tax assets were primarily related to credit losses ($332 million), employee benefits ($317 million) and international operations ($292 million). Deferred tax liabilities were primarily related to certain trading activities ($201 million) and lease financing activities ($83 million). Note 21 -- Earnings (Loss) per Common Share At December 31, 1997, the Corporation adopted SFAS 128, "Earnings Per Share," which established standards for computing and presenting earnings per share. Due to the Acquisition, earnings per common share are not meaningful for 1999. The following table sets forth the computation of basic and diluted earnings (loss) per share for the years ended December 31, 1998 and 1997 (in millions, except per share amounts): Year Ended December 31, 1998 1997 - -------------------------------------------------------------------------------- Numerator Net income (loss) $ (73) $ 866 Preferred stock dividends (32) (49) - -------------------------------------------------------------------------------- Numerator for basic earnings (loss) per share--net income (loss) applicable to common stockholders (105) 817 Effect of dilutive securities Convertible subordinated debentures -- 3 - -------------------------------------------------------------------------------- Numerator for diluted earnings (loss) per share--net income (loss) applicable to common stockholders after assumed conversions $ (105) $ 820 ================================================================================ Denominator Denominator for basic earnings (loss) per share--weighted-average shares outstanding 100.152 100.286 Effect of dilutive securities* Options -- 1.839 Convertible subordinated debentures -- 2.457 Deferred stock -- 2.408 - -------------------------------------------------------------------------------- Dilutive potential common shares -- 6.704 Denominator for diluted earnings (loss) per share--adjusted weighted- average shares after assumed conversions 100.152 106.990 ================================================================================ Basic earnings (loss) per share $ (1.05) $ 8.15 ================================================================================ Diluted earnings (loss) per share $ (1.05) $ 7.66 ================================================================================ * Due to a loss for the year ended December 31, 1998, no incremental shares are included in the loss per share calculation because the effect would be antidilutive. 44 Bankers Trust Corporation and its Subsidiaries Note 22 -- Business Segments and Related Information SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," redefines operating segments and establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas, and major customers. In order to conform to Deutsche Bank's management structure, the Corporation has realigned its business activities into the following business segments: Retail and Private Banking, Asset Management, Global Corporates and Institutions, and Global Technology and Services. All prior periods have been restated to conform with the Deutsche Bank reporting format. Business segments results are determined based on the Corporation's internal management accounting process, which allocates revenue and expenses among the business segments. Because the Corporation's business is diverse in nature and its operations are integrated, certain estimates and judgments have been made to apportion revenue and expense items. The internal management accounting process, unlike financial accounting in accordance with generally accepted accounting principles, is based on the way management views its business and is not necessarily comparable with similar information disclosed by other financial institutions. The accounting policies of the business segments are generally the same as those described in Note 2. Segments that hold net asset positions are allocated interest expense to reflect their net use of funds and segments that have net liability positions are allocated interest income to reflect their net contribution of funds. The Retail and Private Banking division provides banking services to private clients, self-employed individuals as well as to smaller business clients, and offers a wide variety of banking products to these clients including financial planning services and market research and investment strategies for high net worth individuals. The Asset Management division combines the institutional asset management and retail investment fund businesses. The Global Corporates and Institutions division integrates long-standing relationship and credit-oriented commercial banking with the product and transactional orientation of investment banking for corporate clients and financial institutions. This business segment also includes credit business, trade finance, structured finance and cash management in addition to the Corporation's private equity business and trading activities. Global Technology and Services comprises custody services, payment settlement, securities settlement, and electronic banking services.
Year Ended Global Global Total December 31, 1999 Retail and Asset Corporates and Technology and Business (in millions) Private Banking Management Institutions Services Segments - ------------------------------------------------------------------------------------------------------------------------- Net revenues from external customers* $ 169 $ 241 $ 1,378 $ 922 $ 2,710 Net interest revenue 38 (3) 378 181 594 Credit quality expense--loans -- -- 64 2 66 Pre-tax income (loss) (20) 20 (1,275) (48) (1,323) Total assets* 2,589 222 55,774 7,453 66,038
* There were no material intersegment revenues or intersegment assets among the business segments.
Year Ended Global Global Total December 31, 1998 Retail and Asset Corporates and Technology and Business (in millions) Private Banking Management Institutions Services Segments - ------------------------------------------------------------------------------------------------------------------------- Net revenues from external customers* $ 187 $ 253 $ 2,567 $ 946 $ 3,953 Net interest revenue 40 (3) 658 190 885 Credit quality expense--loans 2 -- 85 1 88 Pre-tax income (loss) 12 98 (491) 46 (335) Total assets* 3,063 185 106,433 8,907 118,588
* There were no material intersegment revenues or intersegment assets among the business segments.
Year Ended Global Global Total December 31, 1997 Retail and Asset Corporates and Technology and Business (in millions) Private Banking Management Institutions Services Segments - ------------------------------------------------------------------------------------------------------------------------- Net revenues from external customers* $ 173 $ 191 $ 3,499 $ 915 $ 4,778 Net interest revenue 32 -- 618 167 817 Credit quality expense--loans -- -- 46 5 51 Pre-tax income (loss) (3) 54 760 83 894
* There were no material intersegment revenues among the business segments. Bankers Trust Corporation and its Subsidiaries 45 The following table reconciles total net revenue for business segments to consolidated net revenue (in millions):
Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------- Total net revenue reported for business segments $ 2,710 $ 3,953 $ 4,778 Earnings associated with unassigned capital 195 317 342 Net revenue of entities sold 370 855 932 Gain on sale of BTAL* 779 -- -- Gain on sale of office building -- -- 76 Credit quality adjustment 124 48 51 Other 187 (84) 41 - ------------------------------------------------------------------------------------------- Consolidated net revenue(1) $ 4,365 $ 5,089 $ 6,220 ===========================================================================================
(1) Consolidated net revenue includes net interest revenue after provision for credit losses--loans and noninterest revenue. * Gain is net of foreign currency translation losses realized on the sale. The following table reconciles total pre-tax income (loss) for business segments to consolidated pre-tax income (loss) (in millions):
Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------- Total pre-tax income (loss) reported for business segments $(1,323) $ (335) $ 894 Pre-tax income (loss) of entities sold (76) 188 213 Gain on sale of BTAL* 779 -- -- Restructuring and other related activities (633) -- (63) Realized foreign currency translation losses** (257) -- -- Earnings associated with unassigned capital 195 317 342 Gain on sale of office building -- -- 76 Credit quality adjustment 124 48 51 Legal settlement -- (69) -- Legal fees -- -- (32) Other unallocated amounts (224) (226) (242) - ------------------------------------------------------------------------------------------- Consolidated pre-tax income (loss) $(1,415) $ (77) $ 1,239 ===========================================================================================
* Gain is net of foreign currency translation losses realized on the sale. ** Excluding realized foreign currency translation losses related to BTAL. The following table reconciles total assets for business segments to consolidated assets (in millions): December 31, 1999 1998 - -------------------------------------------------------------------------------- Total assets reported for business segments $ 66,038 $118,588 Premises and equipment 211 58 Securities available for sale 46 359 Goodwill not allocated to business segments 22 403 Investments in unconsolidated companies accounted for at equity 3 3 Assets of entities sold -- 10,886 Other unallocated amounts 1,837 2,818 - -------------------------------------------------------------------------------- Consolidated assets $ 68,157 $133,115 ================================================================================ The following table reconciles the other significant items reported for the business segments to the consolidated financial statements:
(in millions) Year Ended December 31, 1999 - ------------------------------------------------------------------------------------- Total Business Total Segments Adjustments Consolidated - ------------------------------------------------------------------------------------- Net interest revenue(1) $ 594 $ 213 $ 807 Credit quality expense--loans 66 (124) (58) ===================================================================================== (in millions) Year Ended December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Total Total Business Total Business Total Segments Adjustments Consolidated Segments Adjustments Consolidated - ------------------------------------------------------------------------------------------------------------------------------ Net interest revenue(1) $ 885 $ 487 $1,372 $ 817 $ 542 $1,359 Credit quality expense--loans 88 (48) 40 51 (51) -- ==============================================================================================================================
(1) Adjustments primarily represent earnings associated with unassigned capital partially offset by unallocated funding costs. 46 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The following table presents net revenue by geographical location (in millions): Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- United States $3,254 $2,823 $3,692 United Kingdom 521 993 1,159 Australia 284 603 576 Chile 153 375 441 Other foreign countries 153 295 352 - -------------------------------------------------------------------------------- Consolidated net revenue(1) $4,365 $5,089 $6,220 ================================================================================ (1) Consolidated net revenue includes net interest revenue after provision for credit losses--loans and noninterest revenue. Revenue is attributed to countries based on the location in which entities are incorporated. The following table presents net revenue of the Corporation organized around specific products and services (in millions): Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Corporate Finance $1,163 $ 1,460 $ 1,325 Debt Investments 35 44 71 Private Equity 521 452 428 Trading and Risk Management (127) 471 1,619 Processing Services 1,030 1,176 949 Investment Management 427 496 479 Private Banking 381 596 568 Insurance 128 331 394 Other 807* 63 387 - -------------------------------------------------------------------------------- Consolidated net revenue $ 4,365 $ 5,089 $ 6,220 ================================================================================ * Amount includes the gain on the sale of BTAL. Note 23 -- International Operations Management views the operations of the Corporation on a business segment basis, as disclosed in Note 22. However, in order to comply with the financial reporting regulations of the Securities and Exchange Commission, the Corporation is required to report international operations on the basis of the domicile of the customer. Pursuant to these regulations, any business transacted with a customer who is domiciled outside the U.S. is reported as international operations. Due to the complex nature of the Corporation's businesses and because its revenue from customers domiciled outside the U.S. is recorded in both domestic and foreign offices, it is impossible to segregate with precision the respective contributions to income from the domestic and international operations. As these operations are highly integrated, estimates and subjective assumptions have been made to apportion revenue and expenses between domestic and international operations. These estimates and assumptions include the following: interest revenue and interest expense are apportioned to geographic areas based on the geographic distribution of average interest earning assets. The geographic location of the assets is determined by the domicile of the customer, or for interest earning securities, by the domicile of the issuer. Trading gains and losses are primarily allocated based on the geographic distribution of average trading assets as determined by the domicile of the issuer. All other noninterest revenue is allocated based on the geographic location of the office recording the income. Noninterest expense is basically apportioned geographically based on the geographical distribution of operating income (net interest revenue plus noninterest revenue). Corporate overhead expenses are allocated based upon average assets by geographic region. International offices are assessed a cost of funds charge based on a short-term funding rate. Allocation of the provisions for credit losses is based on the geographical distribution of net charges to the allowances for credit losses and management's assessment of the risks associated with the domestic and international portfolios. International taxes are calculated based on the foreign tax rate for each foreign office. Earning assets are allocated by the domicile of the customer. All other assets are allocated based on the location of the office recording the assets. Subject to the above limitations, estimates and assumptions, the following tables present information attributable to international operations ($ in millions):
Income (loss) Net Total Total Total before income assets revenue (1) expenses (1) taxes (loss) - ------------------------------------------------------------------------------------------------------- 1999 - ------------------------------------------------------------------------------------------------------- International operations Asia $ 1,131 $ 222 $ 402 $ (180) $ (145) Australia/New Zealand 60 474 624 (150) (120) Western Hemisphere 8,712 802 1,057 (255) (206) Europe 18,159 684 933 (249) (201) United Kingdom 10,885 704 1,269 (565) (453) Middle East/Africa 801 58 69 (11) (9) Eliminations (21,135) (278) (278) -- -- - ------------------------------------------------------------------------------------------------------- Total international 18,613 2,666 4,076 (1,410) (1,134) Domestic operations 49,544 5,253 5,258 (5) (469) - ------------------------------------------------------------------------------------------------------- Total $ 68,157 $ 7,919 $ 9,334 $ (1,415) $ (1,603) ======================================================================================================= International as a percentage of total 27% 34% 44% N/M N/M =======================================================================================================
(1) Total revenue includes interest revenue and noninterest revenue. Total expenses includes interest expense, noninterest expenses and provision for credit losses--loans. N/M Not meaningful.
Income (loss) Net Total Total Total before income assets revenue (1) expenses (1) taxes (loss) - ---------------------------------------------------------------------------------------------------- 1998 - ---------------------------------------------------------------------------------------------------- International operations Asia $ 11,362 $ 493 $ 811 $(318) $(210) Australia/New Zealand 12,095 1,062 899 163 107 Western Hemisphere 16,568 1,625 1,771 (146) (96) Europe 19,363 963 1,010 (47) (30) United Kingdom 29,097 1,377 1,349 28 18 Middle East/Africa 414 30 30 -- -- Eliminations (25,839) (1,228) (1,228) -- -- - ---------------------------------------------------------------------------------------------------- Total international 63,060 4,322 4,642 (320) (211) Domestic operations 70,055 7,726 7,483 243 138 - ---------------------------------------------------------------------------------------------------- Total $133,115 $12,048 $12,125 $ (77) $ (73) International as a percentage of total 47% 36% 38% N/M N/M ====================================================================================================
(1) Total revenue includes interest revenue and noninterest revenue. Total expenses includes interest expense, noninterest expenses and provision for credit losses--loans. N/M Not Meaningful. Bankers Trust Corporation and its Subsidiaries 47
Income Net Total Total Total before income assets revenue (1) expenses (1) taxes (loss) - ------------------------------------------------------------------------------------------------ 1997 - ------------------------------------------------------------------------------------------------ International operations Asia $ 18,203 $ 916 $ 975 $ (59) $(44) Australia/New Zealand 10,598 939 827 112 83 Western Hemisphere 16,420 1,618 1,509 109 81 Europe 15,787 1,050 1,014 36 26 United Kingdom 29,396 1,374 1,268 106 79 Middle East/Africa 471 66 62 4 3 Eliminations (18,210) (851) (851) -- -- - ------------------------------------------------------------------------------------------------ Total international 72,665 5,112 4,804 308 228 Domestic operations 67,437 7,034 6,103 931 638 - ------------------------------------------------------------------------------------------------ Total $140,102 $12,146 $10,907 $1,239 $866 =============================================================================================== International as a percentage of total 52% 42% 44% 25% 26% ===============================================================================================
(1) Total revenue includes interest revenue and noninterest revenue. Total expenses includes interest expense, noninterest expenses and provision for credit losses--loans. Note 24-- Derivative Financial Instruments and Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Corporation is a party to a variety of derivative and off-balance sheet financial instruments to meet the needs of its customers and to manage its exposure to interest rate and other risks. These financial instruments consist of derivatives (such as swaps, forwards and options), securities lending indemnifications, and credit-related arrangements and involve varying degrees of credit risk and market risk. Credit risk, as defined by SFAS 105, represents the maximum potential accounting loss due to possible non-performance by obligors and counterparties under the terms of their contracts. Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates or foreign exchange rates, or the prices of equities or commodities (or related indices). The Corporation manages the credit risk of its derivative and off-balance sheet portfolios by limiting the total amount of arrangements outstanding with individual customers; by monitoring the size and maturity structure of the portfolios; by obtaining collateral based on management's credit assessment of the customer; and by applying a uniform credit process for all credit exposures. Collateral held generally includes cash and U.S. government and federal agency securities. In order to reduce derivatives-related credit risk, the Corporation enters into master netting agreements which incorporate the right of setoff to provide for the net settlement of covered contracts with the same customer in the event of default or other cancellation of the agreement. Trading Derivative Financial Instruments The Corporation manages trading positions in a variety of derivative contracts. All positions are reported at fair value and changes in fair values are reflected in trading revenue as they occur. As a result of the Acquisition, the Corporation's former derivatives activities have been largely transferred to Deutsche Bank entities, and it is anticipated that the existing positions at December 31, 1999 will be reduced further over time. As required by SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," the amounts disclosed below represent the end-of-period fair values of trading derivatives and their average aggregate fair values during the year. These amounts are presented gross before the impact of master netting agreements. The gross fair values of trading derivatives do not represent the amount of market or credit risk of derivatives in the trading portfolio. Rather, they indicate the extent of involvement in the over-the-counter (OTC) markets for interest rate, foreign exchange rate, equity and commodity price derivatives, and exchange traded options during the year. Any measurement of risk is meaningful only when all related factors are identified, such as risk-offsetting transactions, master netting agreements, and the value of any related collateral. These factors are considered in internal risk analyses. The accounting impact of netting agreements, which is applied on a cross-product basis in accordance with the terms of each master agreement and which is calculated based on the criteria prescribed by FIN 39, is provided below in order to display how these amounts are reflected in trading assets and trading liabilities in the consolidated balance sheet. 48 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Contracts with positive fair values are recorded as assets and contracts with negative fair values are recorded as liabilities after application of master netting agreements. The following table reflects the gross fair values and balance sheet amounts of trading derivative financial instruments:
At December 31, 1999 Average during 1999 ----------------------------- -------------------------- (in millions) Assets (Liabilities) Assets (Liabilities) - -------------------------------------------------------------------------------------------------- OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 6,400 $ (6,570) $ 12,295 $(11,966) Interest Rate Contracts Forwards -- -- 205 (249) Options purchased 519 771 Options written (614) (834) Foreign Exchange Rate Contracts Spot and Forwards 11 (3) 7,228 (7,081) Options purchased 351 1,043 Options written (350) (946) Equity-related contracts 1,760 (1,865) 4,323 (4,685) Commodity-related and other contracts 853 (852) 693 (682) Exchange-Traded Options Interest Rate -- -- 3 (1) Foreign Exchange -- -- 2 (1) Commodity -- -- 2 (3) Equity -- (16) 136 -- - -------------------------------------------------------------------------------------------------- Total Gross Fair Values 9,894 (10,270) 26,701 (26,448) - -------------------------------------------------------------------------------------------------- Impact of Netting Agreements (5,087) 5,087 (17,024) 17,024 - -------------------------------------------------------------------------------------------------- $ 4,807(1) $ (5,183)(1) $ 9,677 $ (9,424) ======= ======== ======== ========
At December 31, 1998 Average during 1998 ----------------------------- -------------------------- (in millions) Assets (Liabilities) Assets (Liabilities) - -------------------------------------------------------------------------------------------------- OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 26,923 $(26,401) $ 24,062 $(22,222) Interest Rate Contracts Forwards 188 (193) 252 (242) Options purchased 2,236 1,509 Options written (2,111) (1,615) Foreign Exchange Rate Contracts Spot and Forwards 17,851 (17,169) 14,780 (14,875) Options purchased 1,254 1,436 Options written (1,048) (1,260) Equity-related contracts 5,508 (5,672) 4,808 (5,551) Commodity-related and other contracts 966 (970) 775 (780) Exchange-Traded Options Interest Rate 12 (4) 8 (8) Foreign Exchange 30 (39) 24 (20) Commodity 8 (9) 578 (394) Equity 531 (372) 2 (4) - -------------------------------------------------------------------------------------------------- Total Gross Fair Values 55,507 (53,988) 48,234 (46,971) - -------------------------------------------------------------------------------------------------- Impact of Netting Agreements (38,131) 38,131 (30,481) 30,481 - -------------------------------------------------------------------------------------------------- $17,376 (1) $(15,857)(1) $ 17,753 $(16,490) ======= ======== ======== ========
(1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities." Derivative contracts are generally either privately-negotiated OTC contracts or standard contracts transacted through regulated exchanges. Fair values of futures contracts are not included above due to cash margining requirements of regulated exchanges. Monthly averages are used in the table above. End-User Derivative Financial Instruments The Corporation, as an end user, utilizes various types of derivative products (principally interest rate and currency swaps) to manage the interest rate, currency and other market risks associated with certain liabilities such as interest-bearing deposits, short-term borrowings and long-term debt, as well as loans and other assets. Revenue or expense pertaining to management of interest rate exposure is predominantly recognized over the life of the contract as an adjustment to interest revenue or expense. When the Corporation issues liabilities at fixed interest rates it subjects itself to risk as market interest rates change. This risk is managed by entering into interest rate contracts which change the fixed rate cash flows into variable rate cash flows. When the Corporation purchases foreign currency denominated assets or issues foreign currency denominated debt, it subjects itself to risk as exchange rates move. This risk is managed by entering into currency swaps and forwards. The fair values and other information related to end-user derivatives are disclosed in Note 26. Notional Amounts of Trading and End-User Derivative Financial Instruments Notional amounts indicate the extent of the Corporation's involvement in the various types and uses of derivative financial instruments and do not measure the Corporation's exposure to credit or market risks and do not necessarily represent the amounts exchanged by the parties to the instruments. The amounts exchanged are based on the contractual notional amounts and the other terms of the instruments. Notional amounts are not included in the consolidated balance sheet and generally exceed the future cash requirements relating to the instruments. The leveraging Bankers Trust Corporation and its Subsidiaries 49 - -------------------------------------------------------------------------------- effects of leveraged derivative transactions are reflected in the table below.
Notional Amounts (in millions) December 31, 1999 December 31, 1998 - ----------------------------------------------------------------------------------------- End End Trading User(1) Trading User(1) - ----------------------------------------------------------------------------------------- Interest rate contracts Swaps $172,778 $38,404 $1,079,450 $94,041 Futures -- -- 110,995 -- Forwards 4,151 -- 84,741 600 Options purchased Exchange traded -- -- 22,362 -- OTC 29,068 13 135,671 146 Options written Exchange traded -- -- 15,873 -- OTC 18,378 -- 122,497 -- - ----------------------------------------------------------------------------------------- Total $224,375 $38,417 $1,571,589 $94,787 ========================================================================================= Foreign exchange rate contracts Spot, forwards, futures $ 2,309 $ 4 $ 647,221 $ 5,063 Swaps 15,351 2,736 67,059 4,425 OTC options purchased 8,990 -- 38,179 -- OTC options written 8,792 -- 37,932 -- - ----------------------------------------------------------------------------------------- Total $ 35,442 $ 2,740 $ 790,391 $ 9,488 ========================================================================================= Equity derivative contracts Swaps $ 3,134 -- $ 5,851 -- Futures and forwards 470 -- 5,026 -- Options purchased Exchange traded -- -- 10,124 -- OTC 3,899 -- 31,035 -- Options written Exchange traded -- -- 8,164 -- OTC 1,493 -- 14,354 -- - ----------------------------------------------------------------------------------------- Total $ 8,996 $ -- $ 74,554 -- ========================================================================================= Commodity and other contracts (2) Swaps $ 9,693 $ -- $ 4,974 -- Futures -- -- 534 -- Forwards -- -- 843 -- Options purchased Exchange traded -- -- 81 -- OTC 1,815 -- 2,666 -- Options written Exchange traded -- -- 264 -- OTC 1,749 -- 2,596 -- - ----------------------------------------------------------------------------------------- Total $ 13,257 $ -- $ 11,958 -- =========================================================================================
(1) These are hedges of loans, other assets, interest-bearing deposits, other short-term borrowings and long-term debt. (2) Excluded from the notional amounts above were benefit-responsive contracts reflecting actuarial-related risk, minimal market risk and no credit risk, for which the notional values totaled $7.6 billion and $11.0 billion at December 31, 1999 and 1998, respectively. Swaps Interest rate swap contracts generally represent the contractual exchange of fixed and floating rate payments of a single currency, based on a notional amount and an interest reference rate. Cross-currency interest rate swap contracts generally involve the exchange of payments which are based on the interest reference rates availa ble 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. Equity swap contracts typically involve the payment of an amount equal to the total return of a U.S. or international equity index, basket of equities, or an individual equity over a fixed time period in exchange for receiving a floating interest rate, both based upon the same notional amount. Futures and Forwards Futures and forward contracts represent commitments to purchase or sell securities, money market instruments, foreign currencies or commodities at a future date and at a specified price. Futures contracts are traded on regulated U.S. and international exchanges. The Corporation intends to close out most open positions in futures contracts prior to maturity; therefore future cash receipts or payments are generally limited to the change in fair value of the underlying instruments. Since futures contracts generally entail daily net cash margining with regulated exchanges, the credit risk is generally minimized to a one-day receivable. Included in this category of contracts are spot foreign currency contracts, cash-settled index contracts, and forward rate agreements (agreements to exchange amounts at a specified future date for interest rate differentials between an agreed interest rate and a reference rate, computed on a notional amount). Options Option contracts are either deliverable or cash-settled. Deliverable contracts convey to the purchaser (holder) the right to buy (call) or sell (put) securities, money market instruments, foreign currencies or commodities at or before a specified date for a contracted price from the seller (writer) of the contract. Cash-settled contracts convey to the purchaser the right to the monetary equivalent of the increase (call) or decrease (put), or a percentage thereof, in a specified reference rate or index, computed on a notional amount, from the writer. The initial price of an option contract is equal to the premium paid by the purchaser and is significantly less than the contract or notional amount. Included in these contracts are: (i) interest rate caps, floors and collars, which are agreements to make periodic payments for interest rate differentials between an agreed upon interest rate and a reference rate and (ii) purchased options to enter into future (or cancel existing) interest rate swap contracts ("swap options"). The Corporation is subject to credit risk as a purchaser of an option contract, and is subject to market risk to the extent of the purchase price of the option. The Corporation is subject to market risk on its written option contracts, but not to credit risk since the customer has already performed according to the terms of the contract by paying a cash premium up front. Financial Instruments with Off-Balance Sheet Credit Risk As required by SFAS 105, off-balance sheet credit risk amounts are determined without consideration of the value of any related collateral and reflect the total potential loss on commitments to purchase securities for all obligors (including governments); securities lending indemnifications; and undrawn commitments, standby letters of credit and similar arrangements. 50 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Securities and Money Market Activities (in millions) December 31, 1999 December 31, 1998 - -------------------------------------------------------------------------------- Contract Credit Risk Contract Credit Risk Amount Amount Amount Amount - -------------------------------------------------------------------------------- Commitments to purchase(1) $ 57 $ 57 $ 80 $ 80 Securities lending indemnifications 37,553 37,553 41,695 41,695 - -------------------------------------------------------------------------------- (1) Includes $57 million and $65 million of forward-dated money market assets at December 31, 1999 and 1998, respectively. Securities lending indemnifications represent the market value of customers' securities lent to third parties. The Corporation indemnifies customers to the extent of the replacement cost and/or the market value of the securities in the event of a failure by a third party to return the securities lent. The market value of collateral, primarily cash, received for customers' securities lent was in excess of the contract amounts and was approximately $39 billion at December 31, 1999 and $43 billion at December 31, 1998. Credit-Related Arrangements (in millions) December 31, 1999 December 31, 1998 - ------------------------------------------------------------------------------- Credit Credit Contract Risk Contract Risk Amount Amount Amount Amount - ------------------------------------------------------------------------------- Commitments to extend credit(1) $19,073 $19,073 $19,707 $19,707 Standby letters of credit and similar arrangements(2) 4,700 4,700 3,422 3,422 - ------------------------------------------------------------------------------- (1) Includes participations to other entities of approximately $1 billion and $2 billion at December 31, 1999 and 1998, respectively. Of the non-participated amount, approximately $7 billion and $5 billion expire in one year or less at December 31, 1999 and 1998, respectively. (2) Includes participations to other entities of approximately $1 billion at December 31, 1999 and 1998. Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates or other termination clauses and require the payment of a fee. Because commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. Included in the amounts above are unused commitments to extend credit that are related to loans held for trading purposes. Standby letters of credit and similar arrangements ("standbys"), issued primarily to support corporate obligations, commit the Corporation to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract. Standbys at December 31, 1999 related to customer obligations such as commercial paper, medium- and long-term notes and debentures (including industrial revenue obligations), as well as other financial and performance-related obligations. At December 31, 1999, $3.380 billion will expire within one year, $1.027 billion from one to four years and $293 million after four years. For standbys, commitments to extend credit and securities lending indemnifications, the credit risk amount represents the contractual amount. Standbys and commitments to extend credit would have market risk if issued or extended at a fixed rate of interest. However, these contracts are primarily made at a floating rate. Fees received are generally recognized as revenue over the life of the commitment. Note 25 -- Concentrations of Credit Risk The Corporation, as required by SFAS 105, has identified two significant concentrations of credit risk: OECD country banks and OECD country central governments, their agencies and central banks. Together they represented 27 percent and 37 percent of total credit risk (after exclusion of securities lending indemnifications for customers) at December 31, 1999 and 1998, respectively. The Organization for Economic Cooperation and Development (OECD) is an international organization of countries which are committed to market-oriented economic policies, including the promotion of private enterprise and free market prices, liberal trade policies, and the absence of exchange controls. The OECD consists of 29 industrialized countries that are located primarily in Western Europe and North America, as well as Australia, Japan, New Zealand and South Korea. For regulatory capital purposes, domestic and foreign bank regulators generally assign OECD country central governments, their agencies and their central banks a credit risk weighting of zero percent, which means that no credit risk capital is required to support their financial instruments. OECD country banks are assigned the next lowest credit risk weighting (20 percent) by these regulators. The largest counterparty concentration was the U.S. government and its related entities, which comprised approximately 89 percent of the OECD country governments category. Within all other counterparties, approximately 43 percent was collateralized by cash and U.S. government securities. The following table reflects the aggregate credit risk by groups of counterparties, as defined by SFAS 105, relating to on- and off-balance sheet financial instruments, including derivatives, at December 31, 1999 and 1998. Bankers Trust Corporation and its Subsidiaries 51 - -------------------------------------------------------------------------------- Credit Risk On-Balance Off-Balance (in millions) Sheet Sheet Total - -------------------------------------------------------------------------------- 1999 - -------------------------------------------------------------------------------- Significant concentrations(1) OECD country banks $ 12,767 $ 3,541 $ 16,308 OECD country governments 4,975 -- 4,975 - -------------------------------------------------------------------------------- Total significant concentrations 17,742 3,541 21,283 All other(3) 36,345 57,842 94,187 - -------------------------------------------------------------------------------- Total $ 54,087 $61,383 $115,470 ================================================================================ 1998 - -------------------------------------------------------------------------------- Significant concentrations(1) OECD country banks(2) $ 36,584 $ 3,019 $ 39,603 OECD country governments 12,277 416 12,693 - -------------------------------------------------------------------------------- Total significant concentrations 48,861 3,435 52,296 All other(3) 70,096 61,960 132,056 - -------------------------------------------------------------------------------- Total $118,957 $65,395 $184,352 ================================================================================ (1) For these purposes, Poland has been excluded from the OECD categories. (2) Included in the on-balance sheet component of this category was approximately $2 billion at December 31, 1998 that was collateralized by U.S. government securities. (3) The "all other" category of credit risk is diversified with respect to type of obligor and counterparty. Included in the on-balance sheet component of this category was approximately $5 billion and $13 billion at December 31, 1999 and 1998, respectively, that was collateralized by cash and U.S. government securities. Included in the off-balance sheet component of this category at December 31, 1999 was approximately $36 billion that was collateralized by cash and U.S. government securities and approximately $18 billion of unused commitments to extend credit, approximately $7 billion of which expire in one year or less. The corresponding amounts for December 31, 1998 were $42 billion, $19 billion and $7 billion, respectively. Note 26 -- Fair Value of Financial Instruments SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires the disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Quoted market prices, when available, are used as the measure of fair value. In cases where quoted market prices are not available, fair values are based on present value estimates or other valuation techniques. These derived fair values are significantly affected by assumptions used, principally the timing of future cash flows and the discount rate. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values would not necessarily be realized in an immediate sale or settlement of the instrument. The disclosure requirements of SFAS 107 exclude certain financial instruments and all nonfinancial instruments (e.g., franchise value of businesses). Accordingly, the aggregate fair value amounts presented do not represent management's estimation of the underlying value of the Corporation. The disclosures distinguish between financial instruments held for trading purposes, measured at fair value with gains and losses recognized in earnings, and financial instruments held or issued for purposes other than trading. The fair value of derivative financial instruments must be disclosed separately from nonderivative financial instruments. Additionally, the fair value of derivative financial instruments may not be netted with the fair value of other derivative financial instruments, except as allowed by FIN 39. 52 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The following are the estimated fair values of the Corporation's financial instruments followed by a general description of the methods and assumptions used to estimate such fair values.
Fair Value of Financial Instruments - ------------------------------------------------------------------------------------------------------------------------------------ Underlying Effect of Fair Value Over Book Fair End-User Total (Under) (in millions) December 31, 1999 Value Value Derivative Fair Value Book Value - ------------------------------------------------------------------------------------------------------------------------------------ Financial Assets, Including Hedges Cash and due from banks $ 3,212 $ 3,212 $ -- $ 3,212 $ -- Interest-bearing deposits with banks 4,693 4,693 -- 4,693 -- Federal funds sold 2,472 2,472 -- 2,472 -- Securities purchased under resale agreements 6,764 6,766 -- 6,766 2 Securities borrowed -- -- -- -- -- Trading assets (see Notes 3 and 24) 19,017 19,017 -- 19,017 -- Securities available for sale (see Note 4) 3,252 3,114 138 3,252 -- Loans (excluding leases), commitments to extend credit and standby letters of credit, net 18,602 18,813 (3) 18,810 208 Customer receivables 306 306 -- 306 -- Due from customers on acceptances 262 262 -- 262 -- Accounts receivable and accrued interest 2,307 2,307 -- 2,307 -- Other financial assets 3,030 3,175 -- 3,175 145 Financial Liabilities, Including Hedges Noninterest-bearing deposits 4,989 4,989 -- 4,989 -- Interest-bearing deposits 18,480 18,217 171 18,388 (92) Trading liabilities (see Notes 3 and 24) 5,266 5,266 -- 5,266 -- Securities loaned and securities sold under repurchase agreements 56 56 -- 56 -- Other short-term borrowings 11,540 11,542 -- 11,542 2 Acceptances outstanding 266 266 -- 266 -- Other financial liabilities 5,208 5,208 -- 5,208 -- Long-term debt* 16,434 16,329 109 16,438 4 Net investments in foreign subsidiaries -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ (in millions) December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Financial Assets, Including Hedges Cash and due from banks $ 2,837 $ 2,837 $ -- $ 2,837 $ -- Interest-bearing deposits with banks 2,382 2,376 -- 2,376 (6) Federal funds sold 2,484 2,484 -- 2,484 -- Securities purchased under resale agreements 17,053 17,074 -- 17,074 21 Securities borrowed 14,709 14,709 -- 14,709 -- Trading assets (see Notes 3 and 24) 46,170 46,170 -- 46,170 -- Securities available for sale (see Note 4) 12,748 12,814 (66) 12,748 -- Loans (excluding leases), commitments to extend credit and standby letters of credit, net 22,142 22,602 (78) 22,524 382 Customer receivables 1,524 1,524 -- 1,524 -- Due from customers on acceptances 232 232 -- 232 -- Accounts receivable and accrued interest 3,815 3,815 -- 3,815 -- Other financial assets 2,532 2,693 (14) 2,679 147 Financial Liabilities, Including Hedges Noninterest-bearing deposits 4,473 4,473 -- 4,473 -- Interest-bearing deposits 32,861 32,977 (70) 32,907 46 Trading liabilities (see Notes 3 and 24) 27,253 27,253 -- 27,253 -- Securities loaned and securities sold under repurchase agreements 17,420 17,428 -- 17,428 8 Other short-term borrowings 16,313 16,350 13 16,363 50 Acceptances outstanding 232 232 -- 232 -- Other financial liabilities 6,697 6,679 -- 6,679 (18) Long-term debt* 19,423 19,756 (380) 19,376 (47) Net investments in foreign subsidiaries -- -- (15) (15) (15) ====================================================================================================================================
* Includes trust preferred capital securities. A discussion of the nature, objectives and strategies for using end-user derivatives can be found in Note 24. Bankers Trust Corporation and its Subsidiaries 53 - -------------------------------------------------------------------------------- The following table provides the gross unrealized gains and losses for end-user derivatives. Gross unrealized gains and losses for hedges of securities available for sale are recognized in the financial statements with the offset as an adjustment to securities valuation allowance in stockholders' equity. Gross unrealized gains and losses for hedges of loans, other assets, interest-bearing deposits, other short-term borrowings, long-term debt and net investments in foreign subsidiaries are not yet recognized in the financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------ Net Securities Interest- Other investments available Other bearing short-term Long- in foreign (in millions) December 31, 1999 for sale Loans assets deposits borrowings term debt(1) subsidiaries Total - ------------------------------------------------------------------------------------------------------------------------------------ Interest Rate Swaps(2) Pay Variable Unrealized Gain $ -- $ -- $ -- $ 44 $ 3 $ 25 $ -- $ 72 Unrealized (Loss) -- (2) -- (256) (3) (171) -- (432) - ------------------------------------------------------------------------------------------------------------------------------------ Pay Variable Net -- (2) -- (212) -- (146) -- (360) - ------------------------------------------------------------------------------------------------------------------------------------ Pay Fixed Unrealized Gain 1 -- -- 58 -- 7 -- 66 Unrealized (Loss) -- -- -- (17) -- -- -- (17) - ------------------------------------------------------------------------------------------------------------------------------------ Pay Fixed Net 1 -- -- 41 -- 7 -- 49 - ------------------------------------------------------------------------------------------------------------------------------------ Total Unrealized Gain 1 -- -- 102 3 32 -- 138 - ------------------------------------------------------------------------------------------------------------------------------------ Total Unrealized (Loss) -- (2) -- (273) (3) (171) -- (449) - ------------------------------------------------------------------------------------------------------------------------------------ Total Net $ 1 $ (2) $ -- $(171) $ -- $(139) $ -- $(311) ==================================================================================================================================== Forward Rate Agreements Unrealized Gain $ 1 $ -- $ -- $ -- $ -- $ -- $ -- $ 1 Unrealized (Loss) -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net $ 1 $ -- $ -- $ -- $ -- $ -- $ -- $ 1 ==================================================================================================================================== Currency Swaps and Forwards Unrealized Gain $ 136 $ -- $ -- $ -- $ -- $ 54 $ -- $ 190 Unrealized (Loss) -- (1) -- -- -- (24) -- (25) - ------------------------------------------------------------------------------------------------------------------------------------ Net $ 136 $ (1) $ -- $ -- $ -- $ 30 $ -- $ 165 ==================================================================================================================================== Other Contracts Unrealized Gain $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Unrealized (Loss) -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- ==================================================================================================================================== Total Unrealized Gain $ 138 $ -- $ -- $ 102 $ 3 $ 86 $ -- $ 329 Total Unrealized (Loss) -- (3) -- (273) (3) (195) -- (474) - ------------------------------------------------------------------------------------------------------------------------------------ Total Net $ 138 $ (3) $ -- $(171) $ -- $(109) $ -- $(145) ==================================================================================================================================== (in millions) December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Rate Swaps(2) Pay Variable Unrealized Gain $ 64 $ 8 $ -- $ 149 $ 17 $ 471 $ -- $ 709 Unrealized (Loss) (3) (7) -- (13) (14) (55) -- (92) - ------------------------------------------------------------------------------------------------------------------------------------ Pay Variable Net 61 1 -- 136 3 416 -- 617 - ------------------------------------------------------------------------------------------------------------------------------------ Pay Fixed Unrealized Gain 6 -- -- 3 -- 7 -- 16 Unrealized (Loss) (129) (76) (13) (70) (16) (30) -- (334) - ------------------------------------------------------------------------------------------------------------------------------------ Pay Fixed Net (123) (76) (13) (67) (16) (23) -- (318) - ------------------------------------------------------------------------------------------------------------------------------------ Total Unrealized Gain 70 8 -- 152 17 478 -- 725 - ------------------------------------------------------------------------------------------------------------------------------------ Total Unrealized (Loss) (132) (83) (13) (83) (30) (85) -- (426) - ------------------------------------------------------------------------------------------------------------------------------------ Total Net $ (62) $(75) $ (13) $ 69 $ (13) $ 393 $ -- $ 299 ==================================================================================================================================== Forward Rate Agreements Unrealized Gain $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Unrealized (Loss) -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- ==================================================================================================================================== Currency Swaps and Forwards Unrealized Gain $ 6 $ -- $ -- $ 5 $ 1 $ 76 $ 19 $ 107 Unrealized (Loss) (7) (3) (1) (4) (1) (89) (34) (139) - ------------------------------------------------------------------------------------------------------------------------------------ Net $ (1) $ (3) $ (1) $ 1 $ -- $ (13) $ (15) $ (32) ==================================================================================================================================== Other Contracts Unrealized Gain $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Unrealized (Loss) (3) -- -- -- -- -- -- (3) - ------------------------------------------------------------------------------------------------------------------------------------ Net $ (3) $ -- $ -- $ -- $ -- $ -- $ -- $ (3) ==================================================================================================================================== Total Unrealized Gain $ 76 $ 8 $ -- $ 157 $ 18 $ 554 $ 19 $ 832 Total Unrealized (Loss) (142) (86) (14) (87) (31) (174) (34) (568) - ------------------------------------------------------------------------------------------------------------------------------------ Total Net $ (66) $(78) $ (14) $ 70 $ (13) $ 380 $ (15) $ 264 ====================================================================================================================================
(1) Includes trust preferred capital securities (2) Includes swaps with embedded options to cancel. 54 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The unrealized gains and losses on these hedges were determined on the basis of valuation pricing models which take into account current market and contractual prices of the underlying instruments, as well as time value and yield curve or volatility factors underlying the positions. The remaining maturities of the notional amounts of end-user derivatives at December 31, 1999 and December 31, 1998 were as follows: December 31, 1999 Interest Foreign Total (in millions) Rate Currency Equity Notional Notional Amount Maturing In: Risk Risk* Risk Amount - -------------------------------------------------------------------------------- 2000 $26,641 $1,956 $ -- $28,597 2001-2002 3,518 628 -- 4,146 2003-2004 1,470 57 -- 1,527 2005 and thereafter 6,788 99 -- 6,887 - -------------------------------------------------------------------------------- Total $38,417 $2,740 $ -- $41,157 ================================================================================ December 31, 1998 Interest Foreign Total (in millions) Rate Currency Equity Notional Notional Amount Maturing In: Risk Risk* Risk Amount - -------------------------------------------------------------------------------- 1999 $64,930 $4,579 $ -- $ 69,509 2000-2001 13,078 4,213 -- 17,291 2002-2003 6,588 384 -- 6,972 2004 and thereafter 10,191 312 -- 10,503 - -------------------------------------------------------------------------------- Total $94,787 $9,488 $ -- $104,275 ================================================================================ * Currency swaps and currency forwards are primarily based upon EURO/U.S. dollar contracts. For pay variable and pay fixed interest rate swaps entered into as an end user, the weighted average receive rate and pay rate (interest rates were based on the weighted averages of both U.S. and non-U.S. currencies) by maturity and corresponding notional amounts at December 31, 1999 and December 31, 1998 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ Paying Variable Paying Fixed December 31, 1999 --------------- ------------ (in millions) Notional Receive Pay Notional Receive Pay Total Notional Amount Maturing In: Amount Rate Rate Amount Rate Rate Notional - ------------------------------------------------------------------------------------------------------------------------------------ 2000 $23,569 5.79% 5.78% $3,066 6.09% 5.82% $26,635 2001-2002 3,194 6.45 5.96 316 6.46 6.16 3,510 2003-2004 1,301 6.26 5.98 168 6.33 6.23 1,469 2005 and thereafter 6,240 6.36 6.26 550 6.24 6.24 6,790 - ------------------------------------------------------------------------------------------------------------------------------------ Total $34,304 $4,100 $38,404 ====================================================================================================================================
All rates were those in effect at December 31, 1999. Variable rates are primarily based on LIBOR or Federal funds rate and may change significantly, affecting future cash flows.
- ------------------------------------------------------------------------------------------------------------------------------------ Paying Variable Paying Fixed December 31, 1998 --------------- ------------ (in millions) Notional Recieve Pay Notional Receive Pay Total Notional Amount Maturing In: Amount Rate Rate Amount Rate Rate Notional - ------------------------------------------------------------------------------------------------------------------------------------ 1999 $55,494 5.37% 5.18% $ 8,704 5.34% 5.54% $64,198 2000-2001 9,802 5.63 5.32 3,266 4.94 6.49 13,068 2002-2003 5,601 5.48 4.51 983 4.15 5.04 6,584 2004 and thereafter 8,071 6.49 4.90 2,120 5.28 6.34 10,191 - ------------------------------------------------------------------------------------------------------------------------------------ Total $78,968 $15,073 $94,041 ====================================================================================================================================
All rates were those in effect at December 31, 1998. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows. The effect of these end-user derivatives was a net increase in revenue of $206 million for the year ended December 31, 1999 and a net increase in revenue of $175 million for the year ended December 31, 1998. The Corporation has reviewed its other categories of off-balance sheet instruments (forward-dated assets and liabilities, securities lending indemnifications and securities borrowed) accounted for at cost and has determined that, in the case of each such category, the unrealized gain or loss on such instruments at both December 31, 1999 and 1998 was not material. Methods and Assumptions For short-term financial instruments, defined as those with remaining maturities of 90 days or less, the carrying amount was considered to be a reasonable estimate of fair value. The following instruments were predominantly short-term: Assets Liabilities - -------------------------------------------------------------------------------- Cash and due from banks Interest-bearing deposits Interest-bearing deposits Securities loaned and securities with banks sold under repurchase agreements Federal funds sold Other short-term borrowings Securities purchased under Acceptances outstanding resale agreements Other financial liabilities Securities borrowed Customer receivables Due from customers on acceptances Accounts receivable and accrued interest For those components of the above-listed financial instruments with remaining maturities greater than 90 days, fair value was determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date. Bankers Trust Corporation and its Subsidiaries 54 - -------------------------------------------------------------------------------- As indicated in Note 2, trading assets (including derivatives), trading liabilities and securities available for sale are carried at their fair values. For short-term loans and variable rate loans which reprice within 90 days, the carrying value was considered to be a reasonable estimate of fair value. For those loans for which quoted market prices were available, fair value was based on such prices. For other types of loans, fair value was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In addition, for loans secured by real estate, appraisal values for the collateral were considered in the fair value determination. The fair value estimate of commitments to extend credit and standby letters of credit represented the unrealized gains and losses on those off-balance sheet positions and was generally determined in the same manner as loans. Other financial assets consisted primarily of investments in equity instruments (excluding, in accordance with SFAS 107, investments accounted for under the equity method) and cash and cash margins with brokers. The fair value of non-marketable equity instruments was determined by matrix pricing utilizing market prices for comparable publicly traded instruments, adjusted for liquidity and contractual arrangements. Noninterest-bearing deposits do not have defined maturities. In accordance with SFAS 107, fair value represented the amount payable on demand as of the balance sheet date. Other financial liabilities consisted primarily of accounts payable and accrued expenses at both December 31, 1999 and 1998. The fair value of long-term debt was estimated by using market quotes as well as discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with a similar remaining maturity as of the balance sheet date. Note 27 -- Condensed Bankers Trust Financial Statements
Condensed Statement of Income (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------- Revenue Dividends Banks $ -- $ 502 $ 93 Nonbanks 118 537 404 Interest from subsidiaries 498 816 615 Other interest 118 314 275 Trading (205) (535) (103) Securities available for sale gains (losses) -- 39 45 Other (154) 40 80 - -------------------------------------------------------------------------------------- Total revenue 375 1,713 1,409 - -------------------------------------------------------------------------------------- Expenses Interest to subsidiaries 253 362 217 Other interest 696 1,017 834 Other 271 175 216 - -------------------------------------------------------------------------------------- Total expenses 1,220 1,554 1,267 - -------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed income of subsidiaries and affiliates (845) 159 142 Income taxes (benefit) (409) (465) (222) Income before equity in undistributed income of subsidiaries and affiliates (436) 624 364 Equity in undistributed (loss) income of subsidiaries and affiliates (1,167) (697) 502 - -------------------------------------------------------------------------------------- Net Income (Loss) $(1,603) $ (73) $ 866 ======================================================================================
Condensed Balance Sheet (in millions) December 31, 1999 1998 - -------------------------------------------------------------------------------- Assets Cash and due from banks $ 3 $ 29 Interest-bearing deposits with bank subsidiaries 3,219 3,237 Securities purchased under resale agreements with nonbank subsidiary -- 2 Trading assets 187 957 Securities available for sale 4 2,180 Loans 153 76 Investments in subsidiaries and affiliates Banks 5,840 6,501 Nonbanks 1,387 1,848 Receivables from subsidiaries and affiliates Banks 468 1,520 Nonbanks 9,320 10,191 Accounts receivable and accrued interest 215 308 Other assets 1,336 594 - -------------------------------------------------------------------------------- Total assets $22,132 $27,443 ================================================================================ Liabilities and Stockholders' Equity Trading liabilities $ 29 $ 72 Commercial paper -- 3,411 Other short-term borrowings 4,806 5,057 Payables to subsidiaries and affiliates Banks 51 326 Nonbanks 5,977 5,505 Other liabilities 296 461 Long-term debt 6,623 7,915 - -------------------------------------------------------------------------------- Total liabilities 17,782 22,747 - -------------------------------------------------------------------------------- Total stockholders' equity 4,350 4,696 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $22,132 $27,443 ================================================================================ 56 Bankers Trust Corporation and its Subsidiaries - --------------------------------------------------------------------------------
Condensed Statement of Cash Flows (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income (loss) $(1,603) $ (73) $ 866 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed loss (income) of subsidiaries and affiliates 1,167 697 (502) Deferred income taxes (235) (165) (82) Net change in trading assets 770 4,816 (2,964) Net change in trading liabilities (43) (240) (166) Securities available for sale (gains) losses -- (39) (45) Other, net (375) (29) (632) - -------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (319) 4,967 (3,525) - -------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Net change in: Interest-bearing deposits with bank subsidiaries 17 (1,033) 1,093 Securities purchased under resale agreements with nonbank subsidiary (17) (475) (209) Short-term notes receivable from subsidiaries and affiliates 737 2,304 (1,255) Securities available for sale: Purchases (434) (5,627) (650) Maturities and other redemptions 161 268 345 Sales 2,431 4,924 158 Increases in long-term notes receivable from subsidiaries (1,440) (9,843) (2,301) Decreases in long-term notes receivable from subsidiaries 2,196 7,607 1,037 Capital contributed to subsidiaries and affiliates (501) (1,158) (688) Return of capital from subsidiaries and affiliates 884 25 300 Other, net (78) 90 75 - -------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 3,956 (2,918) (2,095) - -------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Net change in: Commercial paper and other short-term borrowings (3,663) (1,609) 2,449 Short-term notes payable to subsidiaries 216 (618) 2,326 Issuance of long-term notes payable to subsidiaries (10) (1) 770 Issuance of long-term debt -- 2,078 2,387 Repayments of long-term debt (1,326) (792) (913) Redemption/repurchase of preferred stock (18) (264) (152) Purchases of treasury stock (71) (618) (1,038) Cash dividends paid (216) (421) (384) Capital contribution from Taunus 1,400 -- -- Other, net 25 128 248 - -------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (3,663) (2,117) 5,693 - -------------------------------------------------------------------------------------------- Net Increase (Decrease) In Cash and Due From Bank s (26) (68) 73 Cash and due from banks, beginning of year 29 97 24 - -------------------------------------------------------------------------------------------- Cash and due from banks, end of year $ 3 $ 29 $ 97 ============================================================================================ Interest paid $ 975 $ 1,388 $ 1,007 ============================================================================================ Income taxes paid $ 15 $ 81 $ 131 ============================================================================================ Noncash financing activity: Conversion of debt to equity $ -- $ 15 $ 63 ============================================================================================
Note 28 -- Bankers Trust Company Consolidated Summarized Financial Information
Consolidated Statement of Income (in millions) Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------ Net Interest Revenue Interest revenue $ 3,399 $ 5,727 $5,287 Interest expense 2,429 4,371 4,070 - ------------------------------------------------------------------------------------ Net Interest Revenue 970 1,356 1,217 Provision for credit losses--loans (41) 40 -- - ------------------------------------------------------------------------------------ Net Interest Revenue After Provision For Credit Losses-- Loans 1,011 1,316 1,217 - ------------------------------------------------------------------------------------ Noninterest Revenue Trading (50) -- 584 Fiduciary and funds management 882 919 886 Corporate finance fees 292 473 354 Other fees and commissions 383 480 299 Securities available for sale gains (losses) (153) (141) 28 Other 1,294 427 415 - ------------------------------------------------------------------------------------ Total noninterest revenue 2,648 2,158 2,566 - ------------------------------------------------------------------------------------ Noninterest Expenses Salaries and commissions 788 947 812 Incentive compensation and employee benefits* 1,451 950 1,004 Agency and other professional service fees 363 549 357 Communication and data services 155 164 153 Occupancy, net 178 183 149 Furniture and equipment 197 213 185 Travel and entertainment 76 112 94 Other 347 393 396 Restructuring and other related activities 606 -- 4 - ------------------------------------------------------------------------------------ Total noninterest expenses 4,161 3,511 3,154 - ------------------------------------------------------------------------------------ Income (loss) before income taxes (502) (37) 629 Income taxes 579 41 182 - ------------------------------------------------------------------------------------ Net Income (Loss) $(1,081) $ (78) $ 447 ====================================================================================
*Includes change-of-control related costs. In the normal course of business, BTCo enters into various transactions with Bankers Trust and Bankers Trust's other subsidiaries. Included in the above financial statements were the following transactions and balances with such affiliates. (in millions) Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Interest revenue $ 246 $ 824 $349 Interest expense 213 346 239 Noninterest revenue 500 343 326 Noninterest expenses 151 321 285 (in millions) December 31, 1999 1998 - -------------------------------------------------------------------------------- Interest-earning assets $ 93 $11,370 Noninterest-earning assets 313 706 Interest-bearing liabilities 3,785 7,286 Noninterest-bearing liabilities 616 1,602 Bankers Trust Corporation and its Subsidiaries 57 - --------------------------------------------------------------------------------
Consolidated Balance Sheet ($ in millions, except par values) December 31, 1999 1998 - --------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 3,205 $ 2,772 Interest-bearing deposits with banks 1,850 2,423 Federal funds sold 2,545 2,484 Securities purchased under resale agreements 6,694 11,374 Securities borrowed -- 8,994 Trading assets 12,551 39,982 Securities available for sale 3,017 8,564 Loans, net of allowance for credit losses of $477 at December 31, 1999 and $620 at December 31, 1998 17,014 21,262 Due from customers on acceptances 262 232 Accounts receivable and accrued interest 1,233 2,648 Other assets 2,785 3,823 - --------------------------------------------------------------------------------------------- Total assets $ 51,156 $ 104,558 ============================================================================================= Liabilities Noninterest-bearing deposits Domestic offices $ 2,815 $ 3,124 Foreign offices 2,404 1,781 Interest-bearing deposits Domestic offices 10,719 17,285 Foreign offices 10,351 18,386 - --------------------------------------------------------------------------------------------- Total deposits 26,289 40,576 Trading liabilities 2,950 26,175 Securities loaned and securities sold under repurchase agreements 50 9,667 Other short-term borrowings 7,162 7,867 Acceptances outstanding 266 232 Accounts payable and accrued expenses 2,396 2,862 Other liabilities, including allowance for credit losses of $24 at December 31, 1999 and $18 at December 31, 1998 2,243 2,616 Long-term debt not included in risk-based capital 3,192 6,594 Long-term debt included in risk-based capital 174 846 Mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated deferrable interest debentures included in risk-based capital 245 244 - --------------------------------------------------------------------------------------------- Total liabilities 44,967 97,679 - --------------------------------------------------------------------------------------------- Stockholders' Equity Floating rate non-cumulative preferred stock-- Series A, $1 million par value Authorized, issued and outstanding: 1999, 1,500 shares; 1998, 1,500 shares 1,500 1,500 Common stock, $10 par value Authorized, issued and outstanding: 1999, 212,730,867 shares; 1998, 212,730,867 shares 2,127 2,127 Capital surplus 542 541 Retained earnings 2,055 3,136 Accumulated other comprehensive income: Net unrealized gains (losses) on securities available for sale, net of taxes (2) (36) Foreign currency translation, net of taxes (33) (389) - --------------------------------------------------------------------------------------------- Total stockholders' equity 6,189 6,879 - --------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 51,156 $ 104,558 =============================================================================================
See Note 9 for details of BTCo's long-term debt issued to nonaffiliates. Note 29 -- Related Party Transactions In conjunction with the Acquisition and subsequent integration of the Corporation into Deutsche Bank's management structure, the Corporation has entered into various related party transactions with Deutsche Bank and its affiliated entities. As previously mentioned, the Corporation transferred BTAB and substantially all of its interest in BTI to Deutsche Bank entities. This resulted in approximately $2.5 billion of net assets transferred on June 5, 1999. In addition, the Corporation has transferred at fair market value certain other entities and financial assets and liabilities to Deutsche Bank entities. In order to realign the Corporation's businesses with the Deutsche Bank management structure, the Corporation will continue to transfer other financial assets and liabilities and entities as necessary. In connection with the sale of BTAL to the Principal Financial Group ("Principal"), Deutsche Bank provided various representations and warranties to Principal. Historical BTAB employees (retirees), who were transferred to DBSI, continue to be covered by the Corporation's trusteed, noncontributory, defined benefit plan. In addition, the Corporation also provides health care benefits to these employees (retirees) who met specific age/or service requirements on January 1, 1990 provided that they retire (retired) under the principal domestic pension plan with at least ten years of service. The Corporation also has related party balances with Deutsche Bank or affiliated companies. These balances generally include interest-bearing deposits with banks, securities purchased under resale agreements, securities borrowed, securities loaned and securities sold under repurchase agreements, other short-term borrowings, and derivative contracts. These transactions are entered into in the ordinary course of business. Included in the Corporation's financial statements were the following balances with such affiliates. (in millions) December 31, 1999 - -------------------------------------------------------------------------------- Interest-earning assets $10,843 Noninterest-earning assets 1,147 Interest-bearing liabilities 6,568 Noninterest-bearing liabilities 139 58 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Note 30 -- Litigation Pursuant to an agreement (the "Agreement") with the United States Attorney's Office in the Southern District of New York entered into in 1999, BTCo pleaded guilty to misstating entries in the bank's books and records, constituting a criminal violation of Title 18, United States Code, Section 1005 and paid a fine to federal and state authorities. Although the Agreement concludes the United States Attorney's Office's investigation of BTCo, BTCo continues to cooperate with and provide information to the United States Attorney's Office and other regulatory agencies and authorities, including the Securities and Exchange Commission ("Commission"), regarding this matter. As a consequence of its guilty plea, BTCo and/or certain affiliates have received certain exemptions and continue to seek other exemptions from regulatory agencies and authorities, including the Commission, to continue to provide certain services to its clients. Although no assurance can be given that such exemptions will be granted, the Corporation does not expect further consequences of the Agreement to be materially adverse to the consolidated financial statements of the Corporation. Additional information with respect to the foregoing is set forth in the Corporation's Current Report on Form 8-K filed on March 12, 1999 with the Commission. In addition to the matter described above, various legal actions and proceedings involving Bankers Trust and various of its subsidiaries are currently pending. Management, after discussions with counsel, does not anticipate that losses, if any, resulting from such actions and proceedings would be material. Bankers Trust Corporation and its Subsidiaries 59 - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Stockholder of Bankers Trust Corporation: We have audited the accompanying consolidated balance sheet of Bankers Trust Corporation (formerly Bankers Trust New York Corporation) and Subsidiaries (the "Corporation", a wholly owned indirect subsidiary of Deutsche Bank AG) as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bankers Trust Corporation and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /S/ KPMG LLP KPMG LLP New York, New York February 25, 2000 60 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- SUPPLEMENTAL FINANCIAL DATA - -------------------------------------------------------------------------------- The statistical data on pages 61 through 66 should be read in conjunction with the Financial Review and the financial statements included elsewhere in this Annual Report. In the opinion of management, all material adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. Condensed Quarterly Consolidated Statement of Income
(in millions, except per share data) - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 -------------------------------------------- ------------------------------------------ Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------------------- Interest revenue $ 797 $ 818 $ 1,293 $1,511 $1,716 $ 2,281 $2,305 $1,989 Interest expense 641 664 1,057 1,250 1,448 1,945 1,939 1,587 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest revenue 156 154 236 261 268 336 366 402 Provision for credit losses--loans 16 (49) (25) -- 20 20 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net interest revenue after provision for credit losses--loans 140 203 261 261 248 316 366 402 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest revenue 815 1,428 8 1,249 1,189 155 1,182 1,231 Total noninterest expenses 867 810 2,802 1,301 1,343 1,178 1,320 1,325 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 88 821 (2,533) 209 94 (707) 228 308 Income taxes (benefit) 145 559 (585) 69 65 (219) 64 86 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ (57) $ 262 $(1,948) $ 140 $ 29 $ (488) $ 164 $ 222 =================================================================================================================================== Net income (loss) applicable to common stock N/A N/A N/A $ 134 $ 23 $ (494) $ 155 $ 211 =================================================================================================================================== Earnings (Loss) Per Common Share:(1) Basic N/A N/A N/A $ 1.33 $ 0.24 $ (4.98) $ 1.54 $ 2.08 Diluted N/A N/A N/A $ 1.30 $ 0.23 $ (4.98) $ 1.46 $ 2.01 =================================================================================================================================== Cash dividends declared per common share N/A N/A N/A $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ===================================================================================================================================
N/A-- Information is not applicable as Deutsche Bank AG acquired all outstanding shares of common stock of Bankers Trust Corporation from it shareholders at a price of $93.00 per share on June 4, 1999. (1) Due to changes in the number of average shares outstanding, quarterly earnings per share do not necessarily add to the total for the year ended December 31, 1998. Stockholder Data
- ----------------------------------------------------------------------------------------------------------------------------------- Market price High N/A N/A N/A $88 7/8 $87 7/8 $ 123 1/2 $136 7/16 $124 1/4 Low N/A N/A N/A 83 5/8 45 53 109 3/8 99 1/4 End of quarter N/A N/A N/A 88 1/4 85 7/16 59 116 1/16 120 5/16 - -----------------------------------------------------------------------------------------------------------------------------------
N/A-- Information is not applicable as Deutsche Bank AG acquired all outstanding shares of common stock of Bankers Trust Corporation from it shareholders at a price of $93.00 per share on June 4, 1999. The Corporation is a wholly-owned subsidiary of Deutsche Bank AG, as of the date hereof, 1 share of the Corporation's common stock par value $1 per share, was issued and outstanding. Dividends Cash dividends on common stock were paid in 1999 on the 25th of January and April. Bankers Trust Corporation and its Subsidiaries 61 - -------------------------------------------------------------------------------- Average Balances, Interest and Average Rates The following table shows the major consolidated assets and liabilities, together with their respective interest amounts and rates earned or paid by the Corporation. Cash basis and renegotiated loans are included in the averages to determine an effective yield on all loans. The average balances are principally daily averages.
- ------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 -------------------------- ------------------------ -------------------------- Average Average Average Average Average Average ($ in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------ Assets Interest-bearing deposits with banks (primarily in foreign offices) $ 4,465 $ 309 6.92% $ 3,316 $ 310 9.35% $ 4,662 $ 395 8.47% Federal funds sold (in domestic offices) 3,146 160 5.09% 3,865 211 5.46% 4,758 266 5.59% Securities purchased under resale agreements In domestic offices 8,386 545 6.50% 15,254 1,200 7.87% 14,076 847 6.02% In foreign offices 3,270 130 3.98% 8,175 435 5.32% 9,158 505 5.51% - ------------------------------------------------------------ ---------------- ----------------- Total securities purchased under resale agreements 11,656 675 5.79% 23,429 1,635 6.98% 23,234 1,352 5.82% Securities borrowed In domestic offices 7,254 312 4.30% 21,080 1,096 5.20% 13,128 653 4.97% In foreign offices 691 71 10.27% 2,640 126 4.77% 1,763 93 5.28% - ------------------------------------------------------------ ---------------- ----------------- Total securities borrowed 7,945 383 4.82% 23,720 1,222 5.15% 14,891 746 5.01% Trading assets In domestic offices (1) 6,118 489 7.99% 10,334 973 9.42% 9,578 850 8.87% In foreign offices 7,006 431 6.15% 19,685 1,423 7.23% 19,449 1,646 8.46% - ------------------------------------------------------------ ---------------- ----------------- Total trading assets (1) 13,124 920 7.01% 30,019 2,396 7.98% 29,027 2,496 8.60% Securities available for sale In domestic offices Taxable 2,398 171 7.13% 6,090 403 6.62% 2,635 206 7.82% Exempt from federal income taxes (1) 676 25 3.70% 1,602 56 3.50% 1,076 40 3.72% In foreign offices Taxable 3,460 191 5.52% 4,319 230 5.33% 4,011 230 5.73% Exempt from federal income taxes (1) 35 8 22.86% 84 10 11.90% 92 10 10.87% - ------------------------------------------------------------ ---------------- ----------------- Total securities available for sale (1) 6,569 395 6.01% 12,095 699 5.78% 7,814 486 6.22% Loans In domestic offices Commercial and industrial 6,674 492 7.37% 5,182 386 7.45% 4,029 312 7.74% Financial institutions 1,467 106 7.23% 1,306 89 6.81% 1,269 92 7.25% Secured by real estate 1,344 113 8.41% 1,650 132 8.00% 1,561 131 8.39% Other (1) 4,720 298 6.31% 3,651 230 6.30% 2,577 175 6.79% - ------------------------------------------------------------ ---------------- ----------------- Total in domestic offices (1) 14,205 1,009 7.10% 11,789 837 7.10% 9,436 710 7.52% In foreign offices 7,346 482 6.56% 10,789 844 7.82% 8,923 695 7.79% - ------------------------------------------------------------ ---------------- ----------------- Total loans, excluding fees (1) 21,551 1,491 6.92% 22,578 1,681 7.45% 18,359 1,405 7.65% Loan fees -- 31 -- 30 -- 32 - ------------------------------------------------------------ ---------------- ----------------- Total loans, including fees (1) 21,551 1,522 7.06% 22,578 1,711 7.58% 18,359 1,437 7.83% - ------------------------------------------------------------ ---------------- ----------------- Customer receivables In domestic offices 955 70 7.33% 1,628 138 8.48% 1,589 133 8.37% In foreign offices -- -- -- -- -- -- - ------------------------------------------------------------ ---------------- ----------------- Total customer receivables 955 70 7.33% 1,628 138 8.48% 1,589 133 8.37% - ------------------------------------------------------------ ---------------- ----------------- Total Interest-Earning Assets(1) 69,411 $4,434 6.39% 120,650 $8,322 6.90% 104,334 $7,311 7.01% ====== ====== ====== Cash and due from banks 2,264 2,448 1,496 Noninterest-earning trading assets 15,008 28,233 21,712 Due from customers on acceptances 253 485 682 All other assets 10,266 10,741 9,058 Allowance for credit losses--loans (564) (686) (776) - -------------------------------------------------- -------- -------- Total Assets $96,638 $161,871 $136,506 ================================================== ======== ======== % of assets attributable to foreign offices 41% 46% 50%
(1) Interest and average rates are presented on a fully taxable basis. The applicable combined federal, state and local incremental tax rate used to determine the amounts of the tax equivalent adjustments to interest revenue (which recognize the income tax savings on tax-exempt assets) was 41 percent for 1999, 41 percent for 1998 and 41 percent for 1997. 62 Bankers Trust Corporation and its Subsidiaries - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 --------------------------- ---------------------------- --------------------------- Average Average Average Average Average Average ($ in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Interest-bearing deposits In domestic offices Time deposits $ 8,006 $ 431 5.38% $ 15,203 $ 879 5.78% $ 12,133 $ 679 5.60% Other 6,658 263 3.95% 6,993 304 4.35% 4,707 216 4.59% - ------------------------------------------------------------- ------------------ ------------------- Total in domestic offices 14,664 694 4.73% 22,196 1,183 5.33% 16,840 895 5.31% In foreign offices Deposits from banks in foreign countries 3,283 256 7.80% 6,430 471 7.33% 7,628 480 6.29% Other time and savings deposits 9,021 428 4.74% 10,474 458 4.37% 11,022 611 5.54% Other 388 46 11.86% 1,694 83 4.90% 1,952 90 4.61% - ------------------------------------------------------------- ------------------ ------------------- Total in foreign offices 12,692 730 5.75% 18,598 1,012 5.44% 20,602 1,181 5.73% - ------------------------------------------------------------- ------------------ ------------------- Total interest-bearing deposits 27,356 1,424 5.21% 40,794 2,195 5.38% 37,442 2,076 5.54% Trading liabilities In domestic offices 286 33 11.54% 1,957 147 7.51% 1,699 181 10.65% In foreign offices 2,294 98 4.27% 5,762 315 5.47% 3,966 295 7.44% - ------------------------------------------------------------- ------------------ ------------------- Total trading liabilities 2,580 131 5.08% 7,719 462 5.99% 5,665 476 8.40% Securities loaned and securities sold under repurchase agreements In domestic offices 5,944 415 6.98% 19,881 1,458 7.33% 13,679 837 6.12% In foreign offices 2,317 124 5.35% 8,851 439 4.96% 10,218 576 5.64% - ------------------------------------------------------------- ------------------ ------------------- Total securities loaned and securities sold under repurchase agreements 8,261 539 6.52% 28,732 1,897 6.60% 23,897 1,413 5.91% Other short-term borrowings In domestic offices 9,889 556 5.62% 16,488 961 5.83% 14,429 881 6.11% In foreign offices 2,996 240 8.01% 5,109 366 7.16% 5,739 312 5.44% - ------------------------------------------------------------- ------------------ ------------------- Total other short-term borrowings 12,885 796 6.18% 21,597 1,327 6.14% 20,168 1,193 5.92% Long-term debt In domestic offices 9,375 545 5.81% 10,056 581 5.78% 7,725 455 5.89% In foreign offices 5,922 63 1.06% 7,284 340 4.67% 3,856 200 5.19% - ------------------------------------------------------------- ------------------ ------------------- Total long-term debt 15,297 608 3.97% 17,340 921 5.31% 11,581 655 5.66% - ------------------------------------------------------------- ------------------ ------------------- Trust preferred capital securities 1,424 114 8.01% 1,455 117 8.04% 1,401 113 8.07% - ------------------------------------------------------------- ------------------ ------------------- Total Interest-Bearing Liabilities 67,803 $3,612 5.33% 117,637 $6,919 5.88% 100,154 $5,926 5.92% ====== ====== ====== Noninterest-bearing deposits In domestic offices 2,578 2,766 2,331 In foreign offices 1,597 1,497 842 - -------------------------------------------------- -------- ------- Total noninterest-bearing deposits 4,175 4,263 3,173 Noninterest-bearing trading liabilities 12,097 23,706 18,199 Acceptances outstanding 218 471 682 All other liabilities 7,856 10,183 8,311 Preferred stock of subsidiary -- 253 45 Stockholders' equity Preferred stock 393 522 717 Common stockholders' equity 4,096 4,836 5,225 - -------------------------------------------------- -------- ------- Total Liabilities and Stockholders' Equity $96,638 $161,871 $136,506 ================================================== ======== ======= % of liabilities attributable to foreign offices 43% 46% 49% Rate spread 1.06% 1.02% 1.09% Net interest margin (net interest revenue to total interest- earning assets) In domestic offices $44,350 $ 509 1.15% $ 71,763 $ 545 0.76% $ 56,367 $ 427 0.76% In foreign offices 25,061 313 1.25% 48,887 858 1.76% 47,967 958 2.00% - ------------------------------------------------------------- ------------------ ------------------- Total $69,411 $ 822 1.18% $120,650 $1,403 1.16% $104,334 $1,385 1.33% ============================================================= ================== ===================
Bankers Trust Corporation and its Subsidiaries 63 - -------------------------------------------------------------------------------- Volume/Rate Analysis of Changes in Net Interest Revenue The following table attributes changes in fully taxable net interest revenue to changes in either average daily balances or average rates for both interest-earning assets and interest-bearing sources of funds. Because of the numerous simultaneous balance and rate changes during any period, it is not possible to precisely allocate such changes between balances and rates. For purposes of this table, changes that are not due solely to balance or rate changes are allocated to such categories based on the respective percentage changes in average daily balances and average rates.
- ----------------------------------------------------------------------------------------------------------------------------------- 1999/98 1998/97 -------------------------- --------------------------- Increase (decrease) Increase (decrease) due to change in: due to change in: -------------------------- --------------------------- Average Average Average Average (in millions) Balance Rate Total Balance Rate Total - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Interest Revenue Interest-bearing deposits with banks $ 91 $ (92) $ (1) $ (123) $ 38 $ (85) Federal funds sold (37) (14) (51) (49) (6) (55) Securities purchased under resale agreements (717) (243) (960) 11 272 283 Securities borrowed (765) (74) (839) 454 22 476 Trading assets (1,214) (262) (1,476) 83 (183) (100) Securities available for sale (331) 27 (304) 250 (37) 213 Loans (76) (113) (189) 321 (47) 274 Customer receivables (51) (17) (68) 3 2 5 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest revenue (3,100) (788) (3,888) 950 61 1,011 - ----------------------------------------------------------------------------------------------------------------------------------- Interest Expense Interest-bearing deposits (702) (69) (771) 182 (63) 119 Trading liabilities (270) (61) (331) 145 (159) (14) Securities loaned and securities sold under repurchase agreements (1,336) (22) (1,358) 307 177 484 Other short-term borrowings (538) 7 (531) 87 47 134 Long-term debt (100) (213) (313) 308 (42) 266 Trust preferred capital securities (2) (1) (3) 4 -- 4 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense (2,948) (359) (3,307) 1,033 (40) 993 - ----------------------------------------------------------------------------------------------------------------------------------- Net change in net interest revenue $ (152) $(429) $ (581) $ (83) $ 101 $ 18 =================================================================================================================================== Domestic Offices Interest Revenue Interest-bearing deposits with banks $ 83 $ (73) $ 10 $ 15 $ (21) $ (6) Federal funds sold (37) (14) (51) (49) (6) (55) Securities purchased under resale agreements (472) (184) (656) 76 277 353 Securities borrowed (621) (163) (784) 412 31 443 Trading assets (353) (131) (484) 69 54 123 Securities available for sale (293) 30 (263) 240 (27) 213 Loans 173 (23) 150 174 (47) 127 Customer receivables (51) (17) (68) 3 2 5 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest revenue (1,571) (575) (2,146) 940 263 1,203 - ----------------------------------------------------------------------------------------------------------------------------------- Interest Expense Interest-bearing deposits (368) (121) (489) 285 3 288 Trading liabilities (167) 53 (114) 25 (59) (34) Securities loaned and securities sold under repurchase agreements (976) (67) (1,043) 432 189 621 Other short-term borrowings (372) (33) (405) 121 (41) 80 Long-term debt (40) 4 (36) 135 (9) 126 Trust preferred capital securities (2) (1) (3) 4 -- 4 Funds provided to foreign offices (137) 418 281 (297) (47) (344) Funds provided by foreign offices (62) (389) (451) 475 150 625 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense (2,124) (136) (2,260) 1,180 186 1,366 - ----------------------------------------------------------------------------------------------------------------------------------- Net change in net interest revenue $ 553 $(439) $ 114 $ (240) $ 77 $ (163) =================================================================================================================================== Foreign Offices Interest Revenue Interest-bearing deposits with banks $ 5 $ (16) $ (11) $ (111) $ 32 $ (79) Securities purchased under resale agreements (215) (89) (304) (53) (17) (70) Securities borrowed (135) 80 (55) 43 (10) 33 Trading assets (806) (186) (992) 20 (243) (223) Securities available for sale (51) 10 (41) 17 (17) -- Loans (248) (91) (339) 147 -- 147 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest revenue (1,450) (292) (1,742) 63 (255) (192) - ----------------------------------------------------------------------------------------------------------------------------------- Interest Expense Interest-bearing deposits (337) 55 (282) (111) (58) (169) Trading liabilities (159) (58) (217) 111 (91) 20 Securities loaned and securities sold under repurchase agreements (347) 32 (315) (72) (65) (137) Other short-term borrowings (165) 39 (126) (37) 91 54 Long-term debt (54) (223) (277) 162 (22) 140 Funds provided by domestic offices 137 (418) (281) 297 47 344 Funds provided to domestic offices 62 389 451 (475) (150) (625) - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense (863) (184) (1,047) (125) (248) (373) - ----------------------------------------------------------------------------------------------------------------------------------- Net change in net interest revenue $ (587) $(108) $ (695) $ 188 $ (7) $ 181 ===================================================================================================================================
64 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Interest Rate Sensitivity Interest rate sensitivity data for the Corporation at December 31, 1999 is presented in the table below. For purposes of this presentation, the interest-earning/bearing components of trading assets and trading liabilities are assumed to reprice within three months. The interest rate gaps reported in the table arise when assets are funded with liabilities having different repricing intervals, after considering the effect of off-balance sheet hedging instruments. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not be reflective of the Corporation's interest rate view in subsequent periods. Active management dictates that longer-term economic views are balanced against prospects of short-term interest rate changes in all repricing intervals.
- ------------------------------------------------------------------------------------------------------------------------------------ By Repricing Interval ----------------------------------------------------- After three After six After Non- Within months months one year After interest- three but within but within but within five bearing (in millions) December 31, 1999 months six months one year five years years funds Total - ------------------------------------------------------------------------------------------------------------------------------------ Assets Interest-bearing deposits with banks $ 2,209 $ 9 $ 18 $ 2,457 $ -- $ -- $ 4,693 Federal funds sold 2,472 -- -- -- -- -- 2,472 Securities purchased under resale agreements 6,525 -- 239 -- -- -- 6,764 Trading assets 5,621 -- -- -- -- 13,396 19,017 Securities available for sale 2,197 237 194 326 298 -- 3,252 Customer receivables 306 -- -- -- -- -- 306 Gross loans 16,905 1,288 219 909 641 -- 19,962 Noninterest-earning assets and allowance for credit losses -- -- -- -- -- 11,691 11,691 - ------------------------------------------------------------------------------------------------------------------------------------ Total 36,235 1,534 670 3,692 939 25,087 68,157 - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Interest-bearing deposits 14,094 1,112 189 657 2,428 -- 18,480 Trading liabilities 53 -- -- -- -- 5,213 5,266 Securities loaned and securities sold under repurchase agreements 56 -- -- -- -- -- 56 Other short-term borrowings 10,993 264 283 -- -- -- 11,540 Long-term debt 5,882 753 105 6,734 1,532 -- 15,006 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures -- -- -- -- 1,428 -- 1,428 Preferred stock 251 125 -- -- -- -- 376 Noninterest-bearing liabilities, including allowance for credit losses, and common stockholders' equity -- -- -- -- -- 16,005 16,005 - ------------------------------------------------------------------------------------------------------------------------------------ Total 31,329 2,254 577 7,391 5,388 21,218 68,157 - ------------------------------------------------------------------------------------------------------------------------------------ Effect of off-balance sheet hedging instruments (5,465) 3,961 80 970 454 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Interest Rate Sensitivity Gap $ (559) $3,241 $ 173 $(2,729) $(3,995) $ 3,869 $ -- ==================================================================================================================================== Cumulative Interest Rate Sensitivity Gap $ (559) $2,682 $2,855 $ 126 $(3,869) $ -- $ -- ====================================================================================================================================
Bankers Trust Corporation and its Subsidiaries 65 - -------------------------------------------------------------------------------- Deposits The Corporation's certificates of deposit and other time deposits issued by domestic and foreign offices in amounts of $100,000 or more, together with their remaining maturities, and other interest-bearing deposits at December 31, 1999 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (in millions) Domestic Foreign Total - ------------------------------------------------------------------------------------------------------------------------------------ Certificates of deposit of $100,000 or more 3 months or less $ 637 $ 32 $ 669 Over 3 through 6 months 1,241 122 1,363 Over 6 through 12 months 38 8 46 Over 12 months 511 3 514 - ------------------------------------------------------------------------------------------------------------------------------------ Total 2,427 165 2,592 - ------------------------------------------------------------------------------------------------------------------------------------ Other time deposits of $100,000 or more 3 months or less 181 4,188 4,369 Over 3 through 6 months 8 209 217 Over 6 through 12 months 1 119 120 Over 12 months 153 111 264 - ------------------------------------------------------------------------------------------------------------------------------------ Total 343 4,627 4,970 - ------------------------------------------------------------------------------------------------------------------------------------ Other 9,348 1,570 10,918 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits $12,118 $6,362 $18,480 ====================================================================================================================================
Deposits by foreign depositors in domestic offices amounted to $1.5 billion, $1.4 billion and $1.0 billion at December 31, 1999, 1998 and 1997, respectively. 66 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- DESCRIPTION OF BUSINESS - -------------------------------------------------------------------------------- Acquisition by Deutsche Bank AG On June 4, 1999, the change-in-control ("COC") date, pursuant to an agreement dated as of November 30, 1998, between Deutsche Bank AG ("Deutsche Bank") and Bankers Trust Corporation ("Bankers Trust"), Deutsche Bank, through its U.S. holding corporation, Taunus Corporation ("Taunus"), acquired all of the outstanding shares of common stock of Bankers Trust from its shareholders at a price of $93.00 per share (the "Acquisition"). On June 5, 1999, Bankers Trust transferred its wholly-owned subsidiary BT Alex. Brown Incorporated ("BTAB") and substantially all of its interest in Bankers Trust International PLC ("BTI") to Deutsche Bank Securities Inc. ("DBSI") and Deutsche Holdings (BTI) Ltd., respectively, which are wholly-owned subsidiaries of Deutsche Bank. The transfer of BTAB to DBSI took the form of an exchange of stock pursuant to which BTAB became a wholly-owned subsidiary of DBSI and Bankers Trust received shares of DB U.S. Financial Markets Holding Corporation ("DBUSH"), the parent of DBSI. In the third quarter of 1999, Bankers Trust sold its shares of DBUSH to Taunus for approximately $800 million. The transfer of substantially all of Bankers Trust's interest in BTI was for cash in the amount of approximately $1.7 billion. On August 31, 1999, Bankers Trust Corporation completed the sale of Bankers Trust Australia Limited ("BTAL"), a wholly-owned subsidiary, to the Principal Financial Group for a price of approximately $1.3 billion. Prior to the sale, BTAL remitted to Bankers Trust Corporation a dividend for accumulated retained earnings that included proceeds from BTAL's sale of its investment banking division to Macquarie Bank. Bankers Trust Corporation also received cash for the assumption of certain BTAL long-term debt. In addition, according to the sale agreement Bankers Trust Corporation is entitled to receive an additional payment. The amount and timing of such payment is not known at this time. When such payment is received, it will be reflected in Bankers Trust's results of operations. Bankers Trust Corporation recognized a pre-tax gain of approximately $779 million in the third quarter of 1999 on the sale of BTAL. In connection with the Acquisition and in addition to the foregoing transactions, Bankers Trust Corporation together with its subsidiaries (the "Corporation" or the "Firm") has and will continue to transfer certain entities and financial assets and liabilities to Deutsche Bank related entities. The consideration received and to be received for such transactions was and will be fair market value of the financial assets and liabilities at and on the date of transfer. In addition, the Corporation's money market related funding activities, which are short-term in nature, are expected to be significantly reduced over time. In conjunction with the Acquisition and to strengthen the Corporation's capital base, Deutsche Bank made a capital contribution of $1.4 billion in the second quarter of 1999. See Note 1 of Notes to Financial Statements for more information on the Acquisition by Deutsche Bank. Prior to the Acquisition, the Corporation was a global financial institution, providing products and services to its clients worldwide. Subsequent to the Acquisition and associated reorganization activities, the Corporation and its subsidiaries conduct their business primarily in the Americas, focusing their activities principally in the asset management, lending, institutional services, private equity and private banking businesses. Bankers Trust Corporation Bankers Trust Corporation is a registered bank holding company that was incorporated in 1965. Bankers Trust, which accounted for 3 percent of consolidated assets at December 31, 1999, is the parent of Bankers Trust Company ("BTCo" or the "Bank") and its other subsidiaries. Bankers Trust is a legal entity separate and distinct from its subsidiaries, including BTCo. There are various legal limitations governing the extent to which certain of Bankers Trust's subsidiaries may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, Bankers Trust or certain of its other subsidiaries. The rights of Bankers Trust to participate in any distribution of assets of any subsidiary upon its dissolution, winding-up, liquidation or reorganization or otherwise are subject to the prior claims of creditors of that subsidiary, except to the extent that Bankers Trust may itself be a creditor of that subsidiary and its claims are recognized. Claims on Bankers Trust's subsidiaries by creditors other than Bankers Trust include long-term debt and substantial obligations with respect to deposit liabilities, trading liabilities, federal funds purchased, securities sold under repurchase agreements and commercial paper, as well as short-term borrowings and accounts payable. Business Segments In conjunction with the Acquisition, the Corporation realigned its business activities to conform to Deutsche Bank's management structure. In this regard, the Retail and Private Banking division provides banking services to private clients, self-employed individuals as well as to smaller business clients, and offers a wide variety of banking products to these clients including financial planning services and market research and investment strategies for high net worth individuals. The Asset Management division combines the institutional asset management and retail investment fund businesses. The Global Corporates and Institutions division integrates long-standing relationship and credit-oriented commercial banking with the product and transactional orientation of investment banking for corporate clients and financial institutions. This business segment also includes credit business, trade finance, structured finance and cash management in addition to the Corporation's private equity business and trading activities. Global Technology and Services comprises custody services, payment settlement, securities settlement, and electronic banking services. Corporate Items include revenue and expenses that have not been allocated to business segments, the operating income and expenses of BTAL and Consorcio, and the results of smaller businesses that are not included in the main business segments. See Note 22 of Notes to Financial Statements for a description of these Business Segments. Bankers Trust Corporation and its Subsidiaries 67 - -------------------------------------------------------------------------------- Bankers Trust Company Bankers Trust's principal banking subsidiary is Bankers Trust Company, which, along with its subsidiaries accounted for 75 percent of the Corporation's consolidated assets at December 31, 1999. BTCo, founded in 1903, originates loans and other forms of credit, accepts deposits, arranges financings and provides numerous other commercial banking and financial services. Bankers Trust (Delaware) Bankers Trust (Delaware) is a state bank chartered under the laws of Delaware, which, along with its subsidiaries, accounted for 2 percent of the Corporation's consolidated assets at December 31, 1999. Bankers Trust (Delaware) engages in commercial banking activities, with an emphasis on lending, funding and corporate finance. Supervision and Regulation Bankers Trust is a bank holding company within the meaning of the Bank Holding Company Act of 1956, and as such is required to register with the Federal Reserve Board. As a registered bank holding company, Bankers Trust is required to file with the Federal Reserve Board certain reports and information and is restricted in certain of its acquisitions, some of which are subject to approval by the Federal Reserve Board. In addition, Bankers Trust may be required to obtain the approval of the New York State Banking Department in order for it to acquire certain bank and non-bank subsidiaries. Bankers Trust and its nonbank subsidiaries are affiliates of BTCo and Bankers Trust (Delaware) within the meaning of applicable federal statutes, and such banks are therefore subject to restrictions on loans and other extensions of credit to Bankers Trust and certain other affiliates and on certain other types of transactions with them or involving their securities. BTCo is subject to the supervision of, and to examination by, the New York State Banking Department, the Federal Reserve Board and the Federal Deposit Insurance Corporation. Bankers Trust (Delaware) is subject to regulation by the Office of the State Bank Commissioner of the State of Delaware and by the Federal Deposit Insurance Corporation. See Note 14 of Notes to Financial Statements for the required reserve balances maintained by the Corporation's subsidiary banks at a Federal Reserve Bank and limitations on the availability of BTCo's undistributed earnings for the payment of dividends. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides for cross-guarantees of the liabilities of insured depository institutions pursuant to which any bank or savings association subsidiary of a holding company may be required to reimburse the FDIC for any loss or anticipated loss to the FDIC that arises from a default of any other subsidiary bank or savings association of the parent holding company or assistance provided to such an institution in danger of default. In December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. FDICIA substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and revised several other federal banking statutes. FDICIA establishes five capital categories, ranging from "well capitalized," to "critically undercapitalized." A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market; in addition, "pass through" insurance coverage may not be available for certain employee benefit accounts. FDICIA also requires an undercapitalized depository institution to submit an acceptable capital restoration plan to the appropriate federal bank regulatory agency. One requisite element of such a plan is that the institution's parent holding company must guarantee compliance by the institution with the plan, subject to certain limitations. In the event of the parent holding company's bankruptcy, the guarantee, and any other commitments that the parent holding company has made to federal bank regulators to maintain the capital of its depository institution subsidiaries, would be assumed by the bankruptcy trustee and entitled to priority in payment. Based on their respective regulatory capital ratios at December 31, 1999, both BTCo and Bankers Trust (Delaware) are well capitalized, based on the definitions in the regulations issued by the Federal Reserve Board and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA. See Note 15 of Notes to Financial Statements for information regarding the Corporation's and BTCo's regulatory capital ratios. FDICIA contains numerous other provisions, including reporting requirements, termination of the "too big to fail" doctrine except for special cases, limitations on the FDIC's payment of deposits at foreign branches and revised regulatory standards for, among other things, real estate lending and capital adequacy. A federal depositor preference statute was enacted in 1993 providing that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver. In November 1999 federal financial modernization legislation was enacted which allows qualifying banks and bank holding companies to elect to be treated as financial holding companies ("FHCs"). FHCs may engage in a broader range of activity than non-FHCs, which will be limited to the activities traditionally permissible for bank holding companies. Although bank regulatory authorities have issued interim and proposed regulations, the full scope of the new powers available to FHCs will only become clear after the bank regulatory authorities adopt final implementing regulations. The expanded activities will include insurance underwriting and agency activities, and expanded securities, mutual fund and merchant banking activities. The ability to engage in information technology and data processing related businesses will also be expanded. The expanded scope of activities permits the affiliation of firms, such as banks and insurance companies, not permissible under prior law. In order to qualify to make the FHC election, the electing foreign bank or the bank subsidiaries of the electing bank 68 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- holding company, as the case may be, must be "well capitalized", "well managed", and, if subject to the CRA, have at least a "satisfactory" CRA rating. In the case of Bankers Trust, Deutsche Bank, BTCo and Bankers Trust (Delaware) would all be required to meet the standards (or their equivalent) for it to elect FHC status. The modernization legislation also modifies current law related to financial privacy and community reinvestment. The new financial privacy provisions will generally prohibit financial institutions, including the Corporation, from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to "opt out" of the disclosure. Although Deutsche Bank has received FHC status, the Corporation at this time is unable to predict the impact the modernization legislation may have on it and its affiliates. In addition to banking and securities laws, regulations and regulatory agencies governing the Corporation worldwide, the Corporation also is subject to various other laws, regulations and regulatory agencies throughout the United States and in other countries, including Germany. Furthermore, various proposals, bills and regulations have been, and may in the future be, considered in the United States Congress, the New York State Legislature and various other governmental regulatory and legislative bodies, which could result in changes in the profitability and governance of the Corporation. References under the caption "Supervision and Regulation" to applicable statutes, regulations and orders are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference thereto. Important Factors Relating to Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain statements made in this report and those that may be made in the future by or on behalf of the Corporation which are identified as forward-looking statements, the Corporation notes that the following important factors, among others, could cause actual results to differ materially from those set forth in any such forward-looking statements. Further, such forward-looking statements speak only as of the date on which such statement or statements are made, and the Corporation undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The business and profitability of a large financial services organization such as the Corporation is influenced by prevailing economic conditions and governmental policies, both foreign and domestic. The actions and policy directives of the Federal Reserve Board determine to a significant degree the cost and the availability of funds obtained from money market sources for lending and investing. Federal Reserve Board policies and regulations also influence, directly and indirectly, the rates of interest paid by commercial banks on their interest-bearing deposits and may also impact the value of financial instruments held by the Corporation. The nature and impact on the Corporation of future changes in economic and market conditions and monetary and fiscal policies, both foreign and domestic, are not predictable and are beyond the Corporation's control. In addition, these conditions and policies can impact the Corporation's customers and counterparties which may increase the risk of default on their obligations to the Corporation and its affiliates. They can also affect the competitive conditions in the markets and products within which the Corporation operates, which can have an adverse impact on the Corporation's ability to maintain its revenue streams. As part of its ongoing business, the Corporation assumes financial exposures to interest rates, currencies, equities and other financial products. In doing so, the Corporation is subject to unforeseen events which may not have been anticipated or which may have effects which exceed those assumed within its risk management processes. This risk can be accentuated by volatility and reduction in liquidity in those markets which in turn can impact the Corporation's ability to hedge and trade the positions concerned. In addition, the Corporation is dependent on the ability of Deutsche Bank to access the financial markets for its funding needs. The operations of the Corporation and its affiliates, which are widely diversified geographically and vary from country to country, involve certain economic, political and legal risks which differ from those associated with their U.S. operations. These risks include, among others, the possibility of expropriation of assets, exchange rate fluctuations, severe reductions in business levels, restrictions on the withdrawal of funds, balance-of-payments problems and changes in laws and regulations. In addition, in certain jurisdictions the operations of the Corporation and its affiliates may involve legal uncertainties. See "Cross-Border Outstandings" on page 21. Further, certain financial institutions with which the Corporation competes may not be subject to the same regulatory restrictions as the Corporation and its affiliates which may make it more difficult for the Corporation to compete with those institutions for business. Bankers Trust Corporation and its Subsidiaries 69 - -------------------------------------------------------------------------------- As noted in "Supervision and Regulation" on page 68, the Corporation is regulated by and subject to various domestic and international regulators. The actions of these regulators can have an impact on the profitability and governance of the Corporation. Increases by regulatory authorities of minimum capital, reserve, deposit insurance and other financial viability requirements can also affect the Corporation's profitability. The Corporation is subject to operational and control risk which is the potential for loss caused by a breakdown in communication, information, processing and settlement systems or processes or a lack of compliance with the procedures on which they rely either within the Corporation and its affiliates or within the broader financial systems infrastructure. As with any large financial institution, the Corporation is also subject to the risk of litigation and to an unexpected or adverse outcome in such litigation. Competitive pressures in the marketplace and unfavorable or adverse publicity and news coverage can have the effect of lessening customer demand for the Corporation's services. Ultimately, the Corporation's businesses and their success are dependent on the Corporation's ability to attract and retain high quality employees. Properties BTCo owns a 39-story building at 130 Liberty Street, a 10-story office building at 4 Albany Street, both in Manhattan, and a 998-year leasehold interest in an eight-story office building in the Broadgate complex in London, England. The other principal office premises leased are a portion of a 42-story office building located at 280 Park Avenue, (formerly an owned property), seven stories of a 37-story building at 14-16 Wall Street, four stories of the office complex at the World Trade Center, all in Manhattan, an eight-story building in Jersey City, New Jersey, and a three-story building in Nashville, Tennessee. Portions of certain of these properties are leased to tenants or subtenants. In addition to the offices referred to above, branch offices and locations for other activities are occupied in cities throughout the world under various types of ownership and leaseholds. See Note 7 of Notes to Financial Statements for additional information concerning lease commitments. Litigation and Related Matters Pursuant to an agreement (the "Agreement") with the United States Attorney's Office in the Southern District of New York entered into in 1999, BTCo pleaded guilty to misstating entries in the bank's books and records, constituting a criminal violation of Title 18, United States Code, Section 1005 and paid a fine to federal and state authorities. Although the Agreement concludes the United States Attorney's Office's investigation of BTCo, BTCo continues to cooperate with and provide information to the United States Attorney's Office and other regulatory agencies and authorities, including the Securities and Exchange Commission ("Commission"), regarding this matter. As a consequence of its guilty plea, BTCo and/or certain affiliates have received certain exemptions and continue to seek other exemptions from regulatory agencies and authorities, including the Commission, to continue to provide certain services to its clients. Although no assurance can be given that such exemptions will be granted, the Corporation does not expect further consequences of the Agreement to be materially adverse to the consolidated financial statements of the Corporation. Additional information with respect to the foregoing is set forth in the Corporation's Current Report on Form 8-K filed on March 12, 1999 with the Commission. In addition to the matter described above, various legal actions and proceedings involving Bankers Trust and various of its subsidiaries are currently pending. Management, after discussions with counsel, does not anticipate that losses, if any, resulting from such actions and proceedings would be material. Proposed Merger of Deutsche Bank AG and Dresdner Bank AG On March 9, 2000, Deutsche Bank AGand Dresdner Bank AG announced their intention to merge. Dresdner Bank AG is one of the largest banks in Germany. The merger, which the parties expect to complete by January 2001, is subject to the approval of the shareholders of Deutsche Bank AG and Dresdner Bank AG and of various authorities worldwide. 70 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Directors of the Registrant Dr. Josef Ackermann Director since 1999 Member of the Group Board of Deutsche Bank AG Chairman of the Board, Chief Executive Officer and President of the Corporation and Bankers Trust Company Chairman of the Supervisory Board of Deutsche Bank Luxembourg S.A, and member of the Supervisory Boards of Eurex Frankfurt AG, Eurex Zurich AG, Linde AG, Stora Enso Oyj and Mannesmann AG. Dr. Ackermann relinquished his title as President of the Corporation and Bankers Trust Company effective January 1, 2000. Age 52. Hans H. Angermueller Director since 1999 Director of Bankers Trust Company. Counsel, Shearman & Sterling. Age 75. George B. Beitzel Director since 1977 Director of Various Corporations Director of Bankers Trust Company. Retired Senior Vice President and Director, International Business Machines Corporation. Also a director of Computer Task Group, Inc. and Staff Leasing, Inc. Age 71. William R. Howell Director since 1986 Retired Chief Executive Officer and Chairman of the Board of J.C. Penney Company, Inc. Director of Bankers Trust Company. Also a director of Exxon Mobil Corporation, Halliburton Company, Warner-Lambert Corporation, Williams, Inc., and Central & South West Corp.; and chairman, Southern Methodist University Board of Trustees. Age 64. Hermann-Josef Lamberti Director since 1999 Member of the Group Board of Deutsche Bank AG Executive Vice President of Deutsche Bank AG Director of Bankers Trust Company. Vice Chairman of Bankers Trust Corporation and Bankers Trust Company since August 19, 1999. Board member of Euroclear plc (London), Euroclear sc. (Brussels) and The Clearing House Interbank Payments Co. L.L.C. (New York); and supervisory board member of GZS (Frankfurt) and European Transaction Bank (e.t.b.); and Advisory Council Member of Carl Zeiss Stiftung, Oberkochen. Mr. Lamberti relinquished his title as Vice Chairman of Bankers Trust Company effective January 1, 2000. Age 44. John A. Ross Director since 1999 Chief Executive Officer of Deutsche Bank Americas Holding Corp. Director of Bankers Trust Company. President of the Corporation and Bankers Trust Company as of January 1, 2000. Member of the Group Management Committee of Deutsche Bank AG. Also a director and chief executive officer of Taunus Corporation and director of Deutsche Bank Securities Inc. and DB Alex. Brown LLC. Age 55. Dr. Ronaldo H. Schmitz Director since 1999 Member of the Group Board of Deutsche Bank AG Director of Bankers Trust Company. Chairman of Deutsche Bank Americas Holding Corp. Also a director of Deutsche Bank S.A.E.--Spain, Rohm and Haas and INSEAD--Paris, France; member of the advisory board, Morgan Grenfell Private Equity Fund; member of the Supervisory Board of Bertelsmann AG; non-executive board member, Glaxo Wellcom plc; member of the board of trustees, American Institute for Advanced Studies and American Institute for Contemporary German Studies; member of the board, Harvard Business School; and member, Central Capital Committee of Bundesverband Deutscher Banken (Federation of German Banks). Age 61. Bankers Trust Corporation and its Subsidiaries 71 - -------------------------------------------------------------------------------- EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------------------------------------- Set forth below are the names and ages of the executive officers of Bankers Trust, positions held and the year from which held. These officers are elected annually by the Board of Directors. There are no family relationships among such persons.* Dr. Josef Ackermann, 52 Chairman of the Board and Chief Executive Officer Chairman of the Board, Chief Executive Officer and President of Bankers Trust and BTCo since July 1, 1999. Member of the Group Board of Deutsche Bank AG. Also, Chairman of the Supervisory Board of Deutsche Bank Luxembourg S.A. Dr. Ackermann formerly held the position of President of the Executive Board of Credit Suisse from 1993 to 1996, of which he was a member since 1990. Dr. Ackermann relinquished his title as President of Bankers Trust and BTCo. effective January 1, 2000. Mary Cirillo, 52 Executive Vice President Executive Vice President of Bankers Trust and Managing Director of BTCo since June 1997. Executive Vice President of BTCo, effective January 1, 2000. Chief Executive Officer of BTCo's Global Institutional Services business and Divisional Board Member of BTCo's Global Technology & Services business. Ms. Cirillo formerly held many positions in her 20-year career at Citicorp, including division executive from 1989 to 1992; senior corporate officer for the business evaluation and corporate re-engineering unit from 1993 to 1994; and Senior Vice President of Global Finance Operations and Technology from 1994 to 1997. Ms. Cirillo resigned as an officer of Bankers Trust and BTCo effective March 1, 2000. Yves C. de Balmann, 53 Vice Chairman Vice Chairman of Bankers Trust since April 1997. Senior Vice President of Bankers Trust 1995-1997. Managing Director of BTCo from 1988 to September 1997. He is Co-Chairman and Co-Chief Executive Officer of DB Alex.Brown LLC and Deutsche Bank Securities Inc., and Co-Head of Global Investment Banking for Deutsche Bank. Michael Fazio, 38 Executive Vice President and Chief Administrative Officer Executive Vice President and Chief Operating Officer of Bankers Trust and Managing Director and Chief Operating Officer of BTCo since August 1, 1999. Effective January 1, 2000, Executive Vice President and Chief Administrative Officer of both Bankers Trust and BTCo. Mr. Fazio was formerly a Partner at Arthur Andersen LLP, where he was in charge of the New York Banking, Brokerage and Investment Banking Industry Program, the Business Process Risk Consulting Services for financial market clients, as well as a member of the firm's Global Financial Markets Advisory Committee. Mr. Fazio resigned as an officer of Bankers Trust and BTCo effective March 1, 2000. Hermann-Josef Lamberti, 44 Vice Chairman Vice Chairman of Bankers Trust and BTCo. since August 19, 1999. Executive Vice President of Deutsche Bank AG since December 1998. Member of the Group Board of Deutsche Bank AG. Mr. Lamberti formerly held the position of General Manager of IBM, Germany from 1997 to 1998 and Vice President Marketing and Brand Management from 1995 to 1996. Mr. Lamberti relinquished his title as Vice Chairman of BTCo effective January 1, 2000. Troland S. Link, 63 General Counsel General Counsel of Bankers Trust and Managing Director and General Counsel of BTCo since July 21, 1999. Also, General Counsel of Deutsche Bank Americas since 1997. Mr. Link was formerly a Partner at Davis Polk & Wardwell. Eugene A. Ludwig, 53 Vice Chairman Vice Chairman of Bankers Trust and BTCo since May 1998. Mr. Ludwig formerly held the positions of Comptroller of the Currency of the United States from 1993 to April 1998, chairman of the Federal Financial Institutions Examination Council, chairman of Neighborhood Housing Services, and director of the Federal Deposit Insurance Corporation. Mr. Ludwig was head of the Control Committee and Capital Commitment Committee and was responsible for risk and control, legal, regulatory and other governmental issues central to implementing global strategies in securities underwriting, lending and related businesses. In addition, Mr. Ludwig was responsible for the Firm's corporate responsibility area. Mr. Ludwig resigned as an officer of Bankers Trust and BTCo effective December 31, 1999. Rodney A. McLauchlan, 46 Executive Vice President Executive Vice President of Bankers Trust since April 1997. Senior Vice President of Bankers Trust from 1992 to April 1997. Managing Director of BTCo 1987-1995 and since 1998. He has held the position of Managing Director of DB Alex. Brown LLC (and its predecessors BT Securities Corporation and BT Alex. Brown Incorporated) since 1995. Mr. McLauchlan is Chief Executive Officer of Latin America for the Deutsche Bank Group. John A. Ross, 55 President President of Bankers Trust and BTCo since January 1, 2000. Chief Executive Officer of Deutsche Bank Americas Holding Corp. since October 25, 1999. Mr. Ross formerly held senior management positions in his 21-year career at The Bank of New York, including Executive Vice President, Head of Global Asset and Liability Management. Mayo A. Shattuck III, 45 Vice Chairman Vice Chairman of Bankers Trust since September 1997. He formerly held the positions of President and Chief Operating Officer of Alex. Brown Incorporated from 1991 to September 1997. He is Co-Chairman and Co-Chief Executive Officer of DB Alex. Brown LLC and Deutsche Bank Securities Inc., and Co-Head of Global Investment Banking for Deutsche Bank. * Certain of the executive officers held the Senior Managing Director title for a portion of 1996 and 1997. BTCo eliminated the title effective January 1, 1998 and reverted to the use of the Managing Director title as the most senior title below that of Vice Chairman. 72 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Interest of Directors and Executive Officers and Their Associates in Transactions with the Corporation Some of the Corporation's directors and executive officers and their associates, including affiliates and related interests, are customers of the Corporation and/or subsidiaries of the Corporation, and some of the Corporation's directors and executive officers and their associates, including affiliates and related interests, from time to time are directors or officers of, or investors in, corporations or members of partnerships or have an interest in other entities which are customers of the Corporation and/or such subsidiaries. As such customers, they have had transactions in the ordinary course of business with the Corporation and/or such subsidiaries, including borrowings, all of which were on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present other unfavorable features. Extension of Directors and Officers Liability Insurance Program Deutsche Bank maintains Directors & Officers Liability Insurance, under which Bankers Trust Corporation is co-insured. This program will reimburse Bankers Trust and/or any of its subsidiaries for certain payments they may be required to make in indemnifying their directors and officers, and covers directors and officers against certain liabilities and expenses for which they may not or cannot be indemnified by Bankers Trust and/or any of its subsidiaries. The program also includes coverage for a director or an officer who serves as a director of a non-subsidiary corporation at the request of the Corporation. This program is written by Zurich Insurance and other major insurance companies. Committees of the Board of Directors Following is a description of each of the Board Committees maintained by the Corporation and the Bank. Included with the description is the number of times each Committee met since that date and a list of the current members of each such Committee: Executive Committee (also functions as the Dividend and Price Committees)-- 2 Meetings The Executive Committee acts for the Board of Directors when the Board is not in session, subject to certain statutory limitations on its authority. The Committee also considers and acts on matters which do not require full Board consideration and approval and, upon the request of Management, it considers some matters on a preliminary basis before their submission for full Board consideration and approval. This Committee also serves as the Dividend Committee to declare and set aside contractually required dividends (such as those dividends declared from time to time on preferred stock issues) which may become due during the periods between scheduled Board meetings. Current Members: Josef Ackermann, Chair; Hans H. Angermueller; George B. Beitzel; John A. Ross; and Ronaldo H. Schmitz. Audit and Fiduciary Committee -- 7 Meetings The Audit and Fiduciary Committee is comprised entirely of independent outside directors and is appointed annually by the Board of Directors to oversee the accounting, reporting and audit practices established by Management. The function of the Committee, which meets at least quarterly, is twofold. It monitors the effectiveness and quality of the system of internal accounting policies, standards and controls designed to insure the accurate and efficient reporting of financial activities, safeguarding of assets, proper exercise of fiduciary powers and compliance with laws and regulations. The Committee meets regularly with Management, the internal auditors, the internal credit auditors and the independent external auditors (the "Auditors"). The Auditors have free access to the Committee without the presence of Management. The Committee also reviews the quality and effectiveness of the organizational structure of the trust and fiduciary business units of the Corporation and the Bank and its subsidiaries to ensure the proper exercise of fiduciary policies. In addition, the Committee monitors the activities of management fiduciary committees appointed from time to time by the Board of Directors, reviews the effective implementation of policies, practices and procedures to prevent conflicts of interest or improper interrelation between the administration of the fiduciary and banking functions of the Bank. The Committee reports regularly to the Board of Directors on its activities and such other matters as it deems necessary. Current Members: Hans H. Angermueller, Chair; George B. Beitzel; and William R. Howell. Bankers Trust Corporation and its Subsidiaries 73 - -------------------------------------------------------------------------------- Committee on Public Responsibility and Concern -- 2 Meetings The Committee on Public Responsibility and Concern, which is appointed annually by the Board of Directors, reviews policy and audits the performance of the Corporation in the discharge of its social responsibilities, which include, but are not limited to, the Corporation's Equal Opportunity and Vendor Outreach programs, community reinvestment activities, contributions program and compliance with labor and employment laws and regulations. Current Members: John A. Ross, Chair; George B. Beitzel; William R. Howell; Hermann-Josef Lamberti; and Ronaldo H. Schmitz. Transaction Authorization Committee -- 2 Meetings The Transaction Authorization Committee, which is comprised of at least two directors appointed annually by the Board of Directors, acts for the Board to approve certain transactions, including rated securitization transactions. Current Members: John A. Ross, Chair; and Josef Ackermann. In addition to the Committee meetings shown above, there were six regularly scheduled meetings of the Board of Directors following the Deutsche Bank acquisition of the Corporation. Director attendance at Board meetings during the period June 22-December 13, 1999 averaged 88%; aggregate attendance at Committee meetings during the same period averaged 87%. Meeting attendance was below 75% for Mr. Howell and Dr. Schmitz, due to previously scheduled commitments. Compensation of Non-Officer Directors Each director who is not also an employee of the Corporation, the Bank or Deutsche Bank AG (each, a "non-officer director") receives an annual cash retainer of $32,000. For each Board, Executive Committee and Committee on Public Responsibility and Concern meeting he attends, a non-officer director receives a fee of $1,000. The Chairman of the Committee on Public Responsibility and Concern receives an additional annual fee of $3,000. Members of the Audit and Fiduciary Committee receive a fee of $5,000 for each meeting he attends and the Chairman of the Committee receives an additional annual fee of $5,000. No fees are paid to members of the Transaction Authorization Committee. Travel and out-of-pocket expenses of the directors in connection with their attendance at Board or Committee meetings are either paid for or reimbursed by the Committee. 74 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- I. Summary Compensation Table ($000 omitted)
Long Term Compensation --------------------------------- Annual Compensation Awards Payouts ---------------------------------------------------------- ---------------------- --------- Bonus --------------------------------- Shares Total Other Annual Restricted Underlying LTIP Named Executive Officer Year Salary Cash(c) + Stock(d) = Bonus Compensation(e) Stock Awards Options Payouts(f) - ------------------------------------------------------------------------------------------------------------------------------------ Frank N. Newman(a) 1999 $ 900.0 $ 1,799.2 $ -- $ 1,799.2 $ 6.6 -- -- $19,509.3 Chairman, Chief Executive 1998 900.0 -- -- -- 148.4 -- -- 2,989.6 Officer & President 1997 900.0 5,760.7 4,204.6 9,965.3 72.1 -- 80,000 1,031.3 Dr. Josef Ackermann(b) 1999 -- -- -- -- -- -- -- -- Yves C. de Balmann 1999 350.0 5,005.0 2,145.0 7,150.0 2,827.2 -- -- 22,542.7 Vice Chairman 1998 350.0 1,012.0 4,048.0 5,060.0 923.2 -- -- 2,391.7 1997 350.0 4,030.7 3,821.0 7,851.7 -- -- 60,000 825.0 Mayo A. Shattuck III 1999 350.0 5,005.0 2,145.0 7,150.0 2,825.7 -- -- 6,965.9 Vice Chairman 1998 350.0 1,012.0 4,048.0 5,060.0 -- -- 60,000 -- 1997 66.7 5,510.7 1,000.0 6,510.7 -- -- 80,000 6,572.7 Mary Cirillo 1999 350.0 3,650.0 -- 3,650.0 -- -- -- 5,941.9 Executive Vice President 1998 350.0 580.0 2,320.0 2,900.0 44.6 -- -- -- 1997 175.0 1,350.0 1,577.3 2,927.3 -- 901.3 50,000 -- Rodney A. McLauchlan 1999 350.0 2,650.0 -- 2,650.0 7,500.0 -- -- 15,059.1 Executive Vice President All Other Named Executive Officer Compensation(g) - --------------------------------------------- Frank N. Newman(a) $ 9.6 Chairman, Chief Executive 691.6 Officer & President 617.6 Dr. Josef Ackermann(b) -- Yves C. de Balmann 9.6 Vice Chairman 1,077.5 907.8 Mayo A. Shattuck III 9.6 Vice Chairman 79.7 9.0 Mary Cirillo 9.6 Executive Vice President 102.1 719.1 Rodney A. McLauchlan 9.6 Executive Vice President
(a) Mr. Newman resigned as Chairman, Chief Executive Officer and President effective June 30, 1999. (b) Dr. Ackermann received no compensation for acting as President and Chief Executive Officer of the Corporation subsequent to the Acquisition. Compensation is paid to Dr. Ackermann by Deutsche Bank for services performed by Dr. Ackermann for Deutsche Bank and its affiliates other than the Corporation and its subsidiaries. (c) Includes annual bonus part of which was paid in July 1999. Mr. Newman received a pro rata bonus in July 1999. (d) Includes the value of shares under Deutsche Bank's Share Scheme Plan. Under this Plan, shares are deferred and vest in equal installments for three years. For 1999, Messrs. de Balmann and Shattuck were each awarded shares under the Share Scheme Plan valued at $2,145,000. (e) Other Annual Compensation reflects amounts as follows: Newman -- $6,598 for ground transportation; de Balmann -- $27,207 for ground transportation; and Shattuck -- $25,697 for ground transportation. Other Annual Compensation also reflects the value of Deutsche Bank stock appreciation rights. For 1999, Messrs. de Balmann and Shattuck were each awarded stock appreciation rights valued at $2,799,976. Other Annual Compensation for Mr. McLauchlan represents a retention payment from the Corporation. (f) Includes LTIP payouts for all deferred compensation amounts, awarded in prior years, which vested in full on June 4, 1999, the change-of-control ("COC") date. Also, includes payment for unexercised options outstanding on the COC date at $93.00 per option less the exercise price. Total COC payouts (excluding pro rata bonus included in bonus column) were as follows: Newman -- $19,509,264; de Balmann -- $22,542,695; Shattuck -- $6,965,877; McLauchlan -- $15,059,068; and Cirillo -- $5,941,861. Messrs. de Balmann, Shattuck, and Ms. Cirillo received one-third of the payout in July 1999. The remaining two-thirds was deferred over the next two years pursuant to the Employment Agreements described below. (g) Includes company contributions to defined contribution plans. Bankers Trust Corporation and its Subsidiaries 75 - -------------------------------------------------------------------------------- Employment Agreements In connection with the Acquisition of the Corporation by Deutsche Bank, the Corporation entered into agreements with Yves C. de Balmann, Mayo A. Shattuck III, Mary Cirillo and Rodney A. McLauchlan (the "Employment Agreements"). Each Employment Agreement is generally for a three-year term expiring on the third anniversary of the date of the Acquisition. Each Employment Agreement provides for an annual base salary (the "Base Salary") of at least $350,000 and an annual bonus (the "Annual Bonus") of at least $7.15 million (in the case of Messrs. de Balmann and Shattuck), $3.65 million (in the case of Ms. Cirillo) and $2.65 million (in the case of Mr. McLauchlan). A portion of each exec utive's Annual Bonus will be payable in cash, with the balance payable in, or based on the value of, Deutsche Bank common stock (the "Equity Bonus Portion"). The Equity Bonus Portion of the Annual Bonus for the executives will vest in three equal installments on the first, second and third anniversaries of the date of the Acquisition (in the case of awards made in respect of 1999), in two equal installments on each of the second and third anniversaries of the date of the Acquisition (in the case of awards made in respect of 2000) and in full on the third anniversary of the date of the Acquisition (in the case of awards made in respect of 2001). Certain of the Employment Agreements provide for the deferral of certain amounts otherwise due to the executives under incentive compensation plans of the Corporation. Each Employment Agreement also provides for a retention bonus (the "Retention Bonus"), 50% of the value of which is payable in cash and 50% of the value of which may be paid in, or based on the value of, Deutsche Bank common stock. The Retention Bonus is payable in two equal installments on each of the second and third anniversaries of the Acquisition date. The initial values of the Retention Bonuses were $8 million in the case of Ms. Cirillo, $15 million in the case of each of Messrs. de Balmann and Shattuck and $7.5 million, in the case of Mr. McLauchlan. Mr. McLauchlan subsequently entered into an agreement pursuant to which his Retention Bonus was paid to him in cash in 1999. During the employment period, each executive will be eligible to participate in the employee benefit plans of the Corporation and its affiliates and will generally receive service credit for all prior service with the Corporation and its affiliates. If, during the employment period, the employment of an executive is terminated by the Corporation without Cause (as such term is defined in the Employment Agreements) or such executive terminates his or her employment for Good Reason (as such term is defined in the Employment Agreements), such executive will be entitled to receive (i) any unpaid Base Salary and Annual Bonus for the remainder of the employment period, (ii) any unvested Equity Bonus Portion of the Annual Bonus will become vested and payable based on the prevailing value of Deutsche Bank common stock, and (iii) any unpaid Retention Bonus will become vested and payable. The termination benefits payable under the Employment Agreements generally supercede and replace any benefits due the executive under the Bankers Trust Change of Control Severance Plan I described below. If an amount payable to an executive under the Employment Agreement or otherwise would subject such executive to the excise tax under Section 4999 of the Code, the Corporation will make an additional payment to such executive such that after the payment of all income and excise taxes, the executive will be in the same after-tax position as if no excise tax under Section 4999 of the Code had been imposed. In connection with the Acquisition, the Corporation entered into a similar Employment Agreement with Frank N. Newman which would have expired in December 2003, and provided for an annual Base Salary of at least $900,000 and an Annual Bonus of at least $10.1 million, a portion of which would have been payable in, or based upon the value of Deutsche Bank common stock. Mr. Newman was also entitled to rights similar to those described above. Subsequent to the Acquisition, Mr. Newman resigned from his positions at the Corporation, and his rights under the Employment Agreement were terminated pursuant to a Separation Agreement described below. In June 1999, Frank N. Newman, former Chairman of the Board and Chief Executive Officer of the Corporation, terminated his Employment Agreement with the Corporation. In connection therewith, Mr. Newman and the Corporation entered into a Separation Agreement (the "Separation Agreement"), the princi-pal terms of which provided for, in addition to long-term incentive plan payouts described under "Summary Compensation Table" to Mr. Newman, cash payments and other benefits having a value of approximately $57 million. The Corporation also agreed to honor its obligations with respect to excise taxes on the payments under the Employment Agreement described above, and to continue certain health and similar benefits for a period of time. In February 2000, Mary Cirillo resigned, effective March 1, 2000. In connection with such resignation, Ms. Cirillo entered into a Solicitation and Consulting Agreement with Deutsche Bank, the principal terms of which provided for a payment of $17 million (the total of the annual payments remaining due under the Employment Agreement) and the continued deferral of certain other amounts payable pursuant to her Employment Agreement described above. Deutsche Bank also agreed to continue certain health and welfare benefits for a period of time. Ms. Cirillo agreed to act as a consultant for a twelve-month period following the termination date. Change of Control Agreements Pursuant to the Corporation's Change of Control Severance Plan I, upon termination of employment by the Corporation without "Cause" or by the executive officer for "Good Reason" (as such terms are defined in the Change of Control Severance Plan) during the two-year period immediately following a "Change of Control" of the Corporation (as defined below), each of the named executive officers would be entitled to receive a severance benefit equal to three times the sum of his base salary and the greater of average 76 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- annual bonus paid during the three-year period immediately preceding the Change of Control or annual bonus paid in the year immediately preceding the Change of Control. Such severance benefits may not exceed $7.5 million per employee. Under the Corporation's stock option and stock award plans, upon a Change of Control, all Stock Options become exercisable and all deferred stock, restricted stock and other stock-based awards become vested and immediately payable. Similarly, upon a Change of Control, the POPI and POP II units become vested and immediately payable. A Change of Control is defined generally as (i) the acquisition of 20% or more of the outstanding voting securities of the Corporation by an individual, entity, or group, other than from the Corporation; (ii) a change in the majority of the board of directors of the Corporation that is not approved by at least a majority of the current directors and those directors similarly approved ("incumbent directors"); (iii) the consummation of a merger, consolidation, or similar transaction involving the Corporation, unless immediately following such transaction:(A) more than 60% of the voting power of the resulting corporation's voting securities are represented by the Corporation's voting securities that were outstanding immediately prior to the transaction, (B) no person becomes the beneficial owner of 20% or more of the outstanding voting securities of the resulting corporation and (C) at least a majority of the board of directors of the resulting corporation were incumbent directors of the Corporation at the time of the approval of the transaction by the Corporation's board of directors; or (iv) the sale or disposition of all or substantially all of the assets of the Corporation or a liquidation of the Corporation. In the event any of the named executive officers is subject to the 20% excise tax under Section 4999 of the Code, such individual would be reimbursed in an amount sufficient to offset such excise tax unless such reimbursement could be avoided by reducing the severance payments received by the named executive officer by an amount that is less than 10% of his severance payments. The Change of Control Severance Policy also provides that, contingent on a Change of Control, the named executive officers would be entitled to certain welfare benefits for up to three years following termination. The foregoing benefits were generally replaced by, and certain amounts payable thereunder were deferred pursuant to, the Employment Agreements referred to above. Pension Plan Effective January 1, 1999, the Corporation's tax-qualified defined benefit pension plan was amended to: (i) convert to a cash balance plan (a type of defined benefit plan) for employees active on December 31, 1998. Opening balances were established based upon participants' December 31, 1998 accrued pension benefit plus, in certain cases based on age and length of service, 5 percent, GAM83 unisex mortality tables and the thirty (30) year Treasury bond rate for November, 1998. Special transition rules were used for participants eligible to retire under the prior plan and for participants age 50 or greater or whose age and service equaled 60 or greater. Participant cash balance accounts increase through annual Pay Credits (a percentage of base pay, up to the IRS limit, based on age) and monthly Interest Credits (based on the one (1) year Treasury bill rate for the November of the prior year plus 1 percent); (ii) change the vesting schedule to 25 percent vested after three (3) years, 50 percent after four (4) years and 100 percent after five (5) years of service; and (iii) include former Alex. Brown employees as participants in the Plan effective January 1, 1999 with eligibility (vesting) service from their original date of hire. At December 31, 1999, cash balances for Messrs. de Balmann, Shattuck, McLauchlan and Ms. Cirillo were $245,874, $11,200, $322,112 and $24,488, respectively. Bankers Trust Corporation and its Subsidiaries 77 - -------------------------------------------------------------------------------- Form 10-K Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 2000. Bankers Trust Corporation By /S/ JAMES T. BYRNE, JR. ---------------------------------------------------------- (James T. Byrne, Jr., Senior Vice President and Secretary) - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30, 2000. DR. JOSEF ACKERMANN* Chairman of the Board, - --------------------------- Chief Executive Officer (Dr. Josef Ackermann) and Director (Principal Executive Officer) DOUGLAS R. BARNARD* Chief Financial Officer - --------------------------- (Principal Financial Officer) (Douglas R. Barnard) RONALD HASSEN* Senior Vice President and - --------------------------- Controller (Principal (Ronald Hassen) Accounting Officer) HANS H. ANGERMUELLER* Director - --------------------------- (Hans H. Angermueller) GEORGE B. BEITZEL* Director - --------------------------- (George B. Beitzel) MICHAEL DOBSON* Director - --------------------------- (elected a Director effective 2/24/2000) (Michael Dobson) WILLIAM R. HOWELL* Director - --------------------------- (William R. Howell) HERMANN-JOSEF LAMBERTI* Director - --------------------------- (Hermann-Josef Lamberti) JOHN A. ROSS* President and Director - --------------------------- (John A. Ross) DR. RONALDO H. SCHMITZ* Director - --------------------------- (Dr. Ronaldo H. Schmitz) *By /S/ JAMES T. BYRNE, JR. - --------------------------- (James T. Byrne, Jr., Attorney-in-Fact) 78 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS TO FORM 10-K Filed Under THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 BANKERS TRUST CORPORATION 79 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- BANKERS TRUST CORPORATION EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 3. Articles of Incorporation and By-laws, as amended (i) Restated Certificate of Incorporation of the Registrant filed with the State of New York on June 4, 1999 * (ii) By-laws as in effect June 22, 1999 * 4. Instruments Defining the Rights of Security Holders, Including Indentures (ii) Long-Term Debt Indentures 1 10. Material Contracts (ii) (D) Leases for Principal Premises Described on Page 70 Lease Agreement relating to the seven stories of a 37-story building located at 14-16 Wall Street (2) Lease Agreement relating to the eight-story building located in Jersey City, New Jersey (3) Lease Agreement relating to the eight-story building located in London, England (4) Lease Agreement relating to the three-story building in Nashville, Tennessee (5) Lease abstract relating to Four World Trade Center, New York (16) Bankers Trust Corporation and its Subsidiaries 80 - -------------------------------------------------------------------------------- (iii) (A) Management Contracts and Compensation Plans (1) Employment Contract for Frank N. Newman (11) (2) Severance agreement with B.J. Kingdon (12) (3) Employment agreements in connection with the Agreement and Plan of Merger between Bankers Trust and Deutsche Bank (a) Frank N. Newman (16) (b) Mary Cirillo (16) (c) Mayo A. Shattuck III (16) (d) Yves C. de Balmann (16) (4) 1994 Stock Option and Stock Award Plan (7) (5) 1991 Stock Option and Stock Award Plan (8) (6) 1985 Stock Option and Stock Award Plan (9) January, 1989 amendments thereto (6) (7) Additional Capital Accumulation Plan (10) (8) The Supplemental Executive Retirement Plan (4) (9) Deferred Compensation Plan for Directors (1) (10) January, 1989 amendments to the Deferred Compensation Plan for Directors and The Supplemental Executive Retirement Plan (7) (11) Partnership for One-Hundred Plan II (13) (12) Bankers Trust New York Corporation (16) Change in Control Severance Plan I (13) Split Dollar Insurance Agreement (14) (14) Alex. Brown Incorporated 1996 Equity Incentive Plan (14) (15) Stock Option Agreement, dated as of November 30, 1998 between Bankers Trust Corporation and Deutsche Bank A.G. (15) 12. Statements Re Computation of Ratios Computation of Consolidated Ratios of Earnings to Fixed Charges 83 Computation of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements 84 21. Subsidiaries of the Registrant 85 23. Consents of Experts 86 24. Power of Attorney 87 27. Financial Data Schedule * 99. Additional Exhibits Unaudited Pro Forma Condensed Financial Statements for the year ended December 31, 1999 89 * Filed herewith. (NOTE: FOOTNOTE REFERENCES FOR THIS INDEX APPEAR ON THE NEXT PAGE.) 81 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- BANKERS TRUST CORPORATION EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 FOOTNOTE REFERENCES (1) This document is incorporated by reference from Bankers Trust Corporation's Form 8-K dated November 10, 1995, file number 1-5920. (2) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1986, file number 1-5920. (3) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1983, file number 1-5920. (4) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1987, file number 1-5920. (5) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1992, file number 1-5920. (6) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1993, file number 1-5920. (7) This document is incorporated by reference from Bankers Trust Corporation's Registration Statement on Form S-8 (No. 33-54971) as filed on August 9, 1994. (8) This document is incorporated by reference from Bankers Trust Corporation's Registration Statement on Form S-8 (No. 33-41014) as filed on June 10, 1991. (9) This document is incorporated by reference from Bankers Trust Corporation's Proxy Statement dated as of March 21, 1988, file number 1-5920. (10) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1989, file number 1-5920. (11) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1995, file number 1-5920. (12) This document is incorporated by reference from Bankers Trust Corporation's Form 10-Q dated May 15, 1997, file number 1-5920. (13) This document is incorporated by reference from Bankers Trust Corporation's Form 10-Q dated August 14, 1997, file number 1-5920. (14) This document is incorporated by reference from Bankers Trust Corporation's Form 10-Q dated November 14, 1997, file number 1-5920. (15) This document is incorporated by reference from Bankers Trust Corporation's Form 8-K dated November 30, 1998, file number 1-5920. (16) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1998. Bankers Trust Corporation and its Subsidiaries 82 - -------------------------------------------------------------------------------- EXHIBIT 12(a) BANKERS TRUST CORPORATION AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES (dollars in millions)
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 - ----------------------------------------------------------------------------------------------------------------- Earnings: 1. Income (loss) before income taxes $ 469 $1,131 $ 1,239 $ (77) $(1,415) 2. Add: Fixed charges excluding capitalized interest (Line 10) 5,138 5,483 5,959 6,954 3,654 3. Less: Equity in undistributed income of unconsolidated subsidiaries and affiliates 28 30 (117) 15 75 - ----------------------------------------------------------------------------------------------------------------- 4. Earnings including interest on deposits 5,579 6,584 7,315 6,862 2,164 5. Less: Interest on deposits 1,360 1,355 2,076 2,195 1,424 - ----------------------------------------------------------------------------------------------------------------- 6. Earnings excluding interest on deposits $4,219 $5,229 $ 5,239 $ 4,667 740 ================================================================================================================= Fixed Charges: 7. Interest expense $5,105 $5,451 $ 5,926 $ 6,919 $ 3,612 8. Estimated interest component of net rental expense 33 32 33 35 42 9. Amortization of debt issuance expense -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- 10. Total fixed charges including interest on deposits and excluding capitalized interest 5,138 5,483 5,959 6,954 3,654 11. Add: Capitalized interest -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- 12. Total fixed charges 5,138 5,483 5,959 6,954 3,654 13. Less: Interest on deposits (Line 5) 1,360 1,355 2,076 2,195 1,424 - ----------------------------------------------------------------------------------------------------------------- 14. Fixed charges excluding interest on deposits $3,778 $4,128 $ 3,883 $ 4,759 2,230 ================================================================================================================= Consolidated Ratios of Earnings to Fixed Charges: Including interest on deposits (Line 4/Line 12) 1.09 1.20 1.23 .99 N/A ================================================================================================================= Excluding interest on deposits (Line 6/Line 14) 1.12 1.27 1.35 .98 N/A =================================================================================================================
For the years ended December 31, 1999 and 1998, earnings, as defined, did not cover fixed charges, including and excluding interest on deposits by $1,490 million and $92 million, respectively, as a result of a net loss recorded during the period. N/A--Not Applicable. 83 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- EXHIBIT 12(b) BANKERS TRUST CORPORATION AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (dollars in millions)
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 - ------------------------------------------------------------------------------------------------------------------------------- Earnings: 1. Income (loss) before income taxes $ 469 $1,131 $ 1,239 $ (77) $(1,415) 2. Add: Fixed charges excluding capitalized interest (Line 13) 5,138 5,483 5,959 6,954 3,654 3. Less: Equity in undistributed income of unconsolidated subsidiaries and affiliates 28 30 (117) 15 75 - ------------------------------------------------------------------------------------------------------------------------------- 4. Earnings including interest on deposits 5,579 6,584 7,315 6,862 2,164 5. Less: Interest on deposits 1,360 1,355 2,076 2,195 1,424 - ------------------------------------------------------------------------------------------------------------------------------- 6. Earnings excluding interest on deposits $4,219 $5,229 $ 5,239 $ 4,667 740 =============================================================================================================================== Preferred Stock Dividend Requirements: 7. Preferred stock dividend requirements $ 51 $ 51 $ 49 $ 32 23 8. Ratio of income (loss) from continuing operations before income taxes to income (loss) from continuing operations after income taxes 151% 148% 143% 105% 88% - ------------------------------------------------------------------------------------------------------------------------------- 9. Preferred stock dividend requirements on a pretax basis $ 77 $ 75 $ 70 $ 34 20 =============================================================================================================================== Fixed Charges: 10. Interest Expense $5,105 $5,451 $ 5,926 $ 6,919 $ 3,612 11. Estimated interest component of net rental expense 33 32 33 35 42 12. Amortization of debt issuance expense -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- 13. Total fixed charges including interest on deposits and excluding capitalized interest 5,138 5,483 5,959 6,954 3,654 14. Add: Capitalized interest -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- 15. Total fixed charges 5,138 5,483 5,959 6,954 3,654 16. Add: Preferred stock dividend requirements--pretax (Line 9) 77 75 70 34 20 - ------------------------------------------------------------------------------------------------------------------------------- 17. Total combined fixed charges and preferred stock dividend requirements on a pretax basis 5,215 5,558 6,029 6,988 3,674 18. Less: Interest on deposits (Line 5) 1,360 1,355 2,076 2,195 1,424 - ------------------------------------------------------------------------------------------------------------------------------- 19. Combined fixed charges and preferred stock dividend requirements on a pretax basis excluding interest on deposits $3,855 $4,203 $ 3,953 $ 4,793 2,250 =============================================================================================================================== Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements: Including interest on deposits (Line 4/Line 17) 1.07 1.18 1.21 .98 N/A =============================================================================================================================== Excluding interest on deposits (Line 6/Line 19) 1.09 1.24 1.32 .97 N/A ===============================================================================================================================
For the years ended December 31, 1999 and 1998, earnings, as defined, did not cover fixed charges and preferred stock dividend requirements, including and excluding interest on deposits, by $1,510 million and $126 million, respectively, as a result of a net loss recorded during the period. N/A--Not Applicable. Bankers Trust Corporation and its Subsidiaries 84 - -------------------------------------------------------------------------------- EXHIBIT 21 BANKERS TRUST CORPORATION SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 1999 Subsidiary(1) State of Incorporation ------------- ---------------------- Bankers Trust Company New York BT Holdings (NY) Inc. New York All other subsidiaries of the Corporation, in the aggregate, would not constitute a significant subsidiary, as defined. (1) Subsidiaries' names listed hereon are names under which such subsidiaries do business. 85 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-13278, 33-58340, 33-50395, 33-51615, 33-65301, 333-15089, 333-15089-01 through -04, 333-32909, Form S-4 Nos. 333-22733, 333-22733-01 and Form S-8 Nos. 333-12181, 333-19963, 333-57427 and 333-74999) of our report dated February 25, 2000, with respect to the consolidated balance sheet of Bankers Trust Corporation and Subsidiaries (a wholly owned indirect subsidiary of Deutsche Bank AG) as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 Annual Report on Form 10-K of Bankers Trust Corporation. /S/ KPMG LLP ------------------------------------ KPMG LLP New York, New York March 28, 2000 Bankers Trust Corporation and its Subsidiaries 86 - -------------------------------------------------------------------------------- Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and officers of Bankers Trust Corporation hereby constitute and appoint Dr. Josef Ackermann, John A. Ross, James T. Byrne, Jr., Douglas R. Barnard and Troland S. Link, or any one of them, their true and lawful attorney or attorneys and agent or agents, with the power and authority to sign the names of the undersigned to the Annual Report on Form 10-K for the year 1999 of Bankers Trust Corporation pursuant to Section 13 of the Securities and Exchange Act of 1934 and any amendments thereto and each of the undersigned does hereby ratify and confirm all that said attorney or attorneys and agent or agents or any one of them shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents. March 23, 2000 Bankers Trust Corporation By /S/ DR. JOSEF ACKERMANN --------------------------------- Dr. Josef Ackermann Chairman of the Board /S/ DR. JOSEF ACKERMANN ------------------------------------ Dr. Josef Ackermann Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) /S/ DOUGLAS R. BARNARD ------------------------------------ Douglas R. Barnard Chief Financial Officer (Principal Financial Officer) /S/ RONALD HASSEN ------------------------------------ Ronald Hassen Senior Vice President and Controller (Principal Accounting Officer) 87 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- March 23, 2000 /S/ HANS H. ANGERMUELLER --------------------------------------------------- Hans H. Angermueller Director /S/ GEORGE B. BEITZEL --------------------------------------------------- George B. Beitzel Director /S/ MICHAEL DOBSON --------------------------------------------------- Michael Dobson Director (elected a Director effective 2/24/2000) /S/ WILLIAM R. HOWELL --------------------------------------------------- William R. Howell Director /S/ HERMANN-JOSEF LAMBERTI --------------------------------------------------- Hermann-Josef Lamberti Director /S/ JOHN A. ROSS --------------------------------------------------- John A. Ross President and Director /S/ DR. RONALDO H. SCHMITZ --------------------------------------------------- Dr. Ronaldo H. Schmitz Director Bankers Trust Corporation and its Subsidiaries 88 EX-27 2 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION AT DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,212 4,693 9,236 19,017 3,252 0 0 19,962 491 68,157 23,469 11,596 7,042 16,434 0 376 0 3,974 68,157 1,522 384 1,597 4,419 1,424 3,612 807 (58) (89) 5,780 (1,415) (1,415) 0 0 (1,603) 0 0 1.18 737 0 11 0 652 91 27 491 339 152 0 Short-term borrowings include the following: Securities loaned and securities sold under repurchase agreements 56 Other short-term borrowings 11,540 Total 11,596 Other liabilities include the following: Accounts payable and accrued expenses 3,314 Other liabilities 3,462 Acceptances outstanding 266 Total 7,042 Other interest income includes the following: Interest-bearing deposits with banks 309 Federal funds sold 160 Securities purchased under resale agreements 675 Securities borrowed 383 Customer receivables 70 Total 1,597 Amount pertains to the allowance related to loans.
EX-99.1 3 UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- EXHIBIT 99.1 BANKERS TRUST CORPORATION UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (in millions) The following Unaudited Pro Forma Condensed Statement of Income for the year ended December 31, 1999 give effect to Bankers Trust Corporation's ("BT" or the "Corporation") sale of its wholly-owned subsidiary Bankers Trust Australia Limited ("BTAL") to the Principal Financial Group for a price of approximately $1.4 billion. In addition, the following Unaudited Pro Forma Condensed Statement of Income for the year ended December 31, 1999 give effect to the Corporation's transfer on June 5, 1999 of its wholly-owned subsidiary BT Alex. Brown Incorporated ("BTAB") and substantially all of its interest in Bankers Trust International PLC ("BTI") to Deutsche Bank Securities Inc. and Deutsche Holdings (BTI) Ltd., respectively, which are wholly-owned subsidiaries of Deutsche Bank AG. The pro forma information is based on the historical consolidated financial statements of BT after giving effect to the pro forma adjustments described in the Notes to the Unaudited Pro Forma Condensed Financial Statements. The pro forma financial data are not necessarily indicative of the results that actually would have occurred had the sale of BTAL and transfer of BTAB and BTI been consummated on the dates indicated or that may be obtained in the future. 89 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- BANKERS TRUST CORPORATION UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME (in millions)
For the Year Ended December 31, 1999 ----------------------------------------------------- BT BTAB, BTI Pro Forma Consolidated and BTAL** Adjustments Pro Forma - ------------------------------------------------------------------------------------------------------- Not Interest Revenue (a) (b) (c) Interest revenue $ 4,419 $(1,316) $ 576 $ 3,679 Interest expense 3,612 (774) 253 3,091 - ------------------------------------------------------------------------------------------------------- Net Interest Revenue 807 (542) 323 588 Provision for credit losses--loans (58) 26 -- (32) - ------------------------------------------------------------------------------------------------------- Net Interest Revenue After Provision for Credit Losses--Loans 865 (568) 323 620 - ------------------------------------------------------------------------------------------------------- Noninterest Revenue Trading 42 260 (2) 300 Fiduciary and funds management 1,017 (178) -- 839 Corporate finance fees 542 (304) -- 238 Other fees and commissions 538 (186) -- 352 Net revenue from equity investments 356 -- -- 356 Securities available for sale gains (losses) (89) 108 -- 19 Insurance premiums 86 -- -- 86 Other 1,008 107 212 1,327 - ------------------------------------------------------------------------------------------------------- Total noninterest revenue 3,500 (193) 210 3,517 - ------------------------------------------------------------------------------------------------------- Noninterest Expenses Salaries and commissions 1,039 (310) -- 729 Incentive compensation and employee benefits* 2,189 (919) -- 1,270 Agency and other professional service fees 430 (54) 54 430 Communication and data services 206 (53) -- 153 Occupancy, net 198 (35) -- 163 Furniture and equipment 221 (33) -- 188 Travel and entertainment 114 (48) -- 66 Provision for policyholder benefits 114 -- -- 114 Other 636 (153) 412 895 Restructuring and other related activities 633 -- -- 633 - ------------------------------------------------------------------------------------------------------- Total noninterest expenses 5,780 (1,605) 466 4,641 - ------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (1,415) 844 67 (504) Income taxes 188 456 - ------------------------------------------------------------ -------- Net Loss $(1,603) $ (960) ============================================================ ========
* Includes charges of approximately $1.1 billion in change-in-control related costs. **Includes results of operations of BTAB and BTI through the transfer date, June 5, 1999 and includes results of operations of BTAL through the sale date, August 31, 1999. See Notes to Unaudited Pro Forma Condensed Financial Statements. Bankers Trust Corporation and its Subsidiaries 90 - -------------------------------------------------------------------------------- BANKERS TRUST CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (a) Amounts represent the elimination of BTAB's, BTI's and BTAL's third-party amounts from BT's historical consolidated financial statements. (b) Adjustments to record BTAB, BTI and BTAL intercompany amounts as third-party revenue or expense, as applicable. Intercompany amounts were eliminated in BT's historical consolidated financial statements. (c) Pro forma amounts reflect the gain on the sale of BTAL. 91 Bankers Trust Corporation and its Subsidiaries EX-3.I 4 ARTICLES OF INCORPORATION Exhibit 3(i) RESTATED CERTIFICATE OF INCORPORATION OF BANKERS TRUST CORPORATION Under Section 807 of the Business Corporation Law The undersigned, being respectively the president and the secretary of Bankers Trust Corporation, a New York corporation, hereby certify that: 1. The name of the corporation is Bankers Trust Corporation, and the name under which it was formed was BT New York Corporation. 2. The certificate of incorporation was filed by the Department of State on the 12th of May, 1965. 3. The text of the certificate of incorporation is hereby amended to (i) change the purposes of the corporation, (ii) change the authorized stock of the corporation by (A) deleting 299,999,800 of the shares of common stock, par value $1.00 per share, (B) deleting 9,809,900 of the shares, without par value, designated as Series Preferred Stock, (C) deleting paragraph (b) of Article FOURTH, which sets forth certain rights, preferences and limitations of the common stock, (D) deleting paragraph (c) of Article FOURTH, which contains certain general provisions, and (E) deleting paragraph (d) of Article FOURTH, which contains all matters set forth in the certificate of incorporation with respect to Series C Junior Participating Preferred Stock, none of the authorized shares of which are presently outstanding, (iii) change the process address, and (iv) designate a registered agent. The text of the certificate of incorporation is hereby amended to read as herein set forth in full: 1 FIRST: The name of the corporation is BANKERS TRUST CORPORATION. SECOND: The purposes for which it is formed are as follows: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law, provided, however, that the corporation is not formed to engage in any act or activity requiring the consent or approval of any state official, department, board, agency or other body without first obtaining the consent of such body. THIRD: The office of the corporation in the State of New York is to be located in the City of New York, County of New York. FOURTH: The aggregate number of shares which the corporation shall have authority to issue is 190,300 divided into 190,100 shares without par value designated as Series Preferred Stock and 200 shares of common stock, par value $ 1.00 per share. (A) Series Preferred Stock 1. Board Authority: The Series Preferred Stock may be issued from time to time by the Board of Directors as herein provided in one or more series. The designations, relative rights, preferences and limitations of the Series Preferred Stock, and particularity of the shares of each series thereof, may, to the extent permitted by law, be similar to or may differ from those of any other series. The Board of Directors of the corporation is hereby expressly granted authority, subject to the provisions of this Article FOURTH to issue from time to time Series Preferred Stock in one or more series and to fix from time to time before issuance thereof, by filing a certificate pursuant to the Business Corporation Law, the number of shares in each such series of such class and all designations, relative rights (including the right, to the extent permitted by law, to convert into shares of any class or into shares of any series of any class), preferences and limitations of the shares in each such series, including but without limiting the generality of the foregoing, the following: (i) The number of shares to constitute such series (which number may at any time, or from time to time, be increased or decreased by the Board of Directors, notwithstanding that shares of the series may be outstanding at the time of such increase or decrease, unless the Board of Directors shall have otherwise provided in creating such series) and the distinctive designation thereof; 2 (ii) The dividend rate on the shares of such series, whether or not dividends on the shares of such series shall be cumulative, and the date or dates, if any, from which dividends thereon shall be cumulative; (iii) Whether or not the shares of such series shall be redeemable, at the option of the corporation, the holder or another person or upon the happening of a specified event and, if redeemable, the date or dates upon which of after which they shall be redeemable, the cash, property, indebtedness or securities for which each share shall be redeemable and the redemption prices or rates and adjustment thereto; (iv) The right, if any, of holders of shares of such series to convert the same into, or exchange the same for, Common Stock or other stock as permitted by law, and the terms and conditions of such conversion or exchange, as well as provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine; (v) The amount per share payable on the shares of such series upon the voluntary and involuntary Liquidation, dissolution or winding up of the corporation; (vi) Whether the holders of shares of such series shall have voting power, full or limited, in addition to the voting powers provided by law, and in case additional voting powers are accorded to fix the extent thereof; and (vii) Generally to fix the other rights and privileges and any qualifications, limitations or restrictions of such rights and privileges of such series, provided, however, that no such rights, privileges, qualifications, limitations or restrictions shall be in conflict with the Certificate of Incorporation of the corporation or with the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of which there are shares outstanding. With respect to all shares of Series Preferred Stock issued prior to April 23, 1998, all Series Preferred Stock of the same series shall be identical in all respects, except that shares of any one series issued at different times may differ as to dates, if any, from which dividends thereon may accumulate. With respect to all shares of Series Preferred Stock issued prior to April 23, 1998, all shares of Series Preferred Stock of all series shall be of equal rank and shall be identical in all respects except that to the extent not otherwise limited in this Article FOURTH any series may differ from any other series with respect to any one or more of the designations, relative rights, preferences and limitations described or referred to in subparagraphs (i) to (vii) inclusive above. With respect to any series of Series Preferred Stock authorized or issued on or after April 23, 1998, except to the extent otherwise required by law, shares of any 3 series of Series Preferred Stock may have the same or different relative rights, preferences and limitations and each series of Series Preferred Stock may have the same or different relative rights, preferences and limitations, in each case, as determined by the Board of Directors. 2. Dividends: Dividends on the outstanding Series Preferred Stock of each series shall be declared and paid or set apart for payment before any dividends shall be declared and paid or set apart for payment on the Common Stock with respect to the same quarterly dividend period. Dividends on any shares of Series Preferred Stock shall be cumulative only if and to the extent set forth in a certificate filed pursuant to law. After dividends on all shares of Series Preferred Stock (including cumulative dividends if and to the extent any such shares shall be entitled thereto) shall have been declared and paid or set apart for payment with respect to any quarterly dividend period, then and not otherwise so long as any shares of Series Preferred Stock remain outstanding, dividends may be declared and paid or set apart for payment with respect to the same quarterly dividend period on the Common Stock out of the assets or funds of the corporation legally available therefor. With respect to all shares of Series Preferred Stock issued prior to April 23, 1998, all shares of Series Preferred Stock of all series shall be of equal rank, preference and priority as to dividends irrespective of whether or not the rates of dividends to which the same shall be entitled shall be the same and when the stated dividends are not paid in full, the shares of all series of the Series Preferred Stock shall share ratably in the payment thereof in accordance with the sums which would be payable on such shares if all dividends were paid in full, provided, however, that any two or more series of the Series Preferred Stock may differ from each other as to the existence and extent of the right to cumulative dividends, as aforesaid. With respect to all shares of Series Preferred Stock authorized or issued on or after April 23, 1998, the Board of Directors may authorize and issue series of Series Preferred Stock that do not share ratably in the payment of dividends and may fix the relative rights of each series of Series Preferred Stock to receive dividends. 3. Voting Rights: Except as otherwise specifically provided in the certificate filed pursuant to law with respect to any series of the Series Preferred Stock, or as otherwise provided by law, the Series Preferred Stock shall not have any right to vote for the election of directors or for any other purpose and the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes. 4. Liquidation: In the event of any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, each series of Series Preferred Stock shall have preference and priority over the Common Stock for payment of the amount to which each outstanding series of Series Preferred Stock shall be entitled in accordance with 4 the provisions thereof and each holder of Series Preferred Stock shall be entitled to be paid in full such amount, or have a sum sufficient for the payment in full set aside, before any payments shall be made to the holders of the Common Stock. With respect to all shares of Series Preferred Stock issued prior to April 23, 1998, if, upon liquidation, dissolution or winding up of the corporation, the assets of the corporation or proceeds thereof, distributable among the holders of the shares of all series of the Series Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributed among such holders ratably in accordance with the respective amounts which would be payable if all amounts payable thereon were paid in full. After the payment to the holders of Series Preferred Stock of all such amounts to which they are entitled, as above provided, the remaining assets and funds of the corporation shall be divided and paid to the holders of Common Stock. With respect to all shares of Series Preferred Stock authorized or issued on or after April 23, 1998, the Board of Directors may authorize and issue series of Series Preferred Stock that do not share ratably in the payment of amounts upon the voluntary or involuntary liquidation, dissolution or winding up of the corporation. 5. Redemption: In the event that the Series Preferred Stock of any series shall be made redeemable as provided in clause (iii) of paragraph 1 of section (A) of this Article FOURTH, the corporation, at the option of the Board of Directors, may redeem at any time or times, and from time to time, all or any part of any one or more series of Series Preferred Stock outstanding by paying for each share the then applicable redemption price fixed by the Board of Directors as provided herein, plus an amount equal to accrued and unpaid dividends to the date fixed for redemption, upon such notice and terms as may be specifically provided in the certificate filed pursuant to law with respect to the series. 6. Preemptive Rights: No holder of Series Preferred Stock of the corporation shall be entitled, as such, as a matter of right, to subscribe for or purchase any part of any new or additional issue of stock of any class or series whatsoever, any rights or options to purchase stock of any class or series whatsoever, or any securities convertible into, exchangeable for or carrying rights or options to purchase stock of any class or series whatsoever, whether now or hereafter authorized, and whether issued for cash or other consideration or by way of dividend. (B) Provisions relating to the Series Q Preferred Stock. 1. Designation. The distinctive serial designation of the series established hereby shall be "Adjustable Rate Cumulative Preferred Stock, Series Q" (hereinafter called the "Series Q Preferred Stock"). 2. Number. The number of shares of Series Q Preferred Stock shall initially be 80,000, which number may not be increased, but may from time to time be 5 decreased (but not below the number of shares of Series Q Preferred Stock then outstanding) by a resolution duly adopted by the Board of Directors of the corporation. Shares of Series Q Preferred Stock redeemed, purchased or otherwise acquired by the corporation shall be canceled and shall revert to authorized but unissued Series Preferred Stock undesignated as to series. 3. Dividends. (a) Holders of shares of Series Q Preferred Stock shall be entitled to receive cumulative cash dividends when, as and if declared by the Board of Directors of the corporation, out of funds legally available therefor, from the date of original issuance of such shares to and including May 31, 1994 (the "Initial Dividend Period"), and for each dividends period commencing on each March 1, June 1, September 1 and December 1 thereafter, and ending on and including the day next preceding the first day of the next dividend period (such Initial Dividend Period and each of such other periods being hereinafter referred to as a "Dividend Period") at a rate per annum for each Dividend Period equal to the Applicable Rate (as defined in paragraph 4 below) in respect of such Dividend Period. The amount of dividends per share payable for the Initial Dividend Period and for any portion of any other Dividend Period less than a full Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months and the actual number of days elapsed in the Dividend Period for which the dividends are payable, and by multiplying the Applicable Rate with respect to each Dividend Period, by $2,500. Dividends as provided for in this paragraph 3 will accrue from the date of original issuance and will be payable when, as and if declared by the Board of Directors of the corporation, out of funds legally available therefor, quarterly on March 1, June 1, September 1 and December 1 in each year, commencing June 1, 1994 (each, a "Dividend Payment Date"), to the holders of record on such respective dates, not exceeding 30 days preceding the related Dividend Payment Date, as may be determined by the Board of Directors of the corporation, or a duly authorized committee of the Board of Directors, in advance of such Dividend Payment Date. Dividends as provided for in this paragraph 3, to the extent not declared and paid for any past Dividend Periods, may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not exceeding 30 days preceding the payment date therefor, as may be fixed by the Board of Directors of the corporation, or a duly authorized committee of the Board of Directors. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend that is not paid when it accrues. (b) No dividend shall be declared and paid or set apart for payment on any share of Series Q Preferred Stock or any share of any other series of Series Preferred Stock or any share of any class of stock, or series thereof, ranking on a parity with the Series Q Preferred Stock as to dividends, for any Dividend Period unless at the same time a like proportionate dividend for the same Dividend Period, ratably in proportion to the respective dividends applicable thereto (adjusted in the case of the Initial Dividend Period to reflect the 6 length of such period), shall be declared and paid or set apart for payment on all shares of Series Q Preferred Stock and all shares of all other series of Series Preferred Stock and all shares of any class, or series thereof, ranking on a parity with the Series Q Preferred Stock as to dividends, then issued and outstanding and entitled to receive dividends. Holders of shares of Series Q Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided, on the Series Q Preferred Stock. (c) So long as any shares of Series Q Preferred Stock shall be outstanding, unless the full cumulative dividends on all outstanding shares of Series Q Preferred Stock shall have been declared and paid or set apart for payment for all past Dividend Periods and except as provided in paragraph 3(b), (i) no dividend (other than a dividend in Common Stock or in any other stock of the corporation ranking junior to the Series Q Preferred Stock as to dividends and distribution of assets upon liquidation, dissolution or winding up) shall be declared and paid or set apart for payment, or other distribution declared or made, on the Common Stock or on any other stock ranking junior to or on a parity with Series Q Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, and (ii) no shares of Common Stock or shares of any other stock of the corporation ranking junior to or on a parity with Series Q Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up shall be redeemed, purchased or otherwise acquired for any consideration by the corporation or any subsidiary of the corporation (nor shall any moneys be paid to or made available for a sinking or other fund for the redemption, purchase or other acquisition of any shares of any such stock), other than by conversion into or exchange for Common Stock or any other stock of the corporation ranking junior to Series Q Preferred Stock as to dividends and distribution of assets upon liquidation, dissolution or winding up. 4. Applicable Rate. (a) The dividend rate per annum referred to in paragraph 3(a) for any Dividend Period (the "Applicable Rate") shall be equal to (i) in the case of the Initial Dividend Period, 5.90% per annum and (ii) in the case of any Dividend Period subsequent to the Initial Dividend Period, 10-1/2% per annum; provided, however, that if a lower dividend rate for any such Dividend Period would result, then the Applicable Rate for such Dividend Period shall be equal to 85% of the Effective Rate (as defined below), but in no event less than 4-1/2% per annum. The "Effective Rate" for any Dividend Period shall be equal to 25 basis points over the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate (each as hereinafter defined) for such Dividend Period. If the corporation determines in good faith that for any reason: (i) any one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate cannot be determined for any Dividend Period, then the Effective Rate for such Dividend Period will be equal to 25 basis points above the higher of whichever two such Rates can be so determined; 7 (ii) only one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate can be determined for any Dividend Period, then the Effective Rate for such Dividend Period will be equal to 25 basis points above whichever such Rate can be so determined; or (iii) none of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate can be determined for any Dividend Period, then the Effective Rate for the preceding Dividend Period will be continued for such Dividend Period. Except as provided below in this paragraph, the "Treasury Bill Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period, as defined below) for three-month U.S. Treasury bills, as published weekly by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") during the Calendar Period immediately preceding the last ten calendar days preceding the Dividend Period for which the dividend rate on the Series Q Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum market discount rate during any such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three-month U.S. Treasury bills, as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a weekly per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for all of the U.S. Treasury bills then having remaining maturities of not less than 80 nor more than 100 days, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such rates, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason no such U.S. Treasury bill rates are published as provided above during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable noninterest-bearing U.S. Treasury securities with a remaining maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in The City of New York (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by 8 the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Treasury Bill Rate for any Dividend Period as provided above in this paragraph, the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable interest-bearing U.S. Treasury securities with a remaining maturity of not less than 80 not more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in The City of New York (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. Except as provided below in this paragraph, the, "Ten Year Constant Maturity Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields, as defined below (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly by the Federal Reserve Board during the Calendar Period immediately preceding the last ten calendar days preceding the Dividend Period for which the dividend rate on the Series Q Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum Ten Year Average Yield during any such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a weekly per annum Ten Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities, as defined below) then having remaining maturities of not less than eight nor more than twelve years, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Ten Year Constant Maturity Rate for any Dividend Period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight nor more than twelve years from the date of each such quotation, as chosen and quoted daily for each business day in The City of New York (or less frequently if daily quotations shall not be 9 generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. Except as provided below in this paragraph, the "Thirty Year Constant Maturity Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum Thirty Year Average Yields, as defined below (or the one weekly per annum Thirty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly by the Federal Reserve Board during the Calendar Period immediately preceding the last ten calendar days preceding the Dividend Period for which the dividend rate on the Series Q Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum Thirty Year Average Yield during any such Calendar Period, then the Thirty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum Thirty Year Average Yields (or the one weekly per annum Thirty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a per annum Thirty Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Thirty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having remaining maturities of not less than twenty-eight nor more than thirty years, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Thirty Year Constant Maturity Rate for any Dividend Period as provided above in this paragraph, then the Thirty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than twenty-eight nor more than thirty years from the date of each such quotation, as chosen and quoted daily for each business day in The City of New York (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. government securities selected by the corporation. The Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate shall each be rounded to the nearest five hundredths of a percentage point. 10 (b) The Applicable Rate with respect to each Dividend Period commencing after the Initial Dividend Period will be calculated as promptly as practicable by the corporation according to the appropriate method described herein. The corporation will cause each such Applicable Rate (separately identifying the Effective Rate) to be published in a daily newspaper of general circulation in The City of New York prior to the commencement of the first Dividend Period to which it applies and will cause notice of such Applicable Rate (separately identifying The Effective Rate) to be included with the dividend payment checks next mailed to the holders of the Series Q Preferred Stock. (c) For purposes of this paragraph 4, the per annum market discount rates for three-month U.S. Treasury bills shall be secondary market rates (quoted on a bank-discount basis), and the term: (i) "Calendar Period" shall mean 14 calendar days; (ii) "Special Securities" shall mean securities which can, at the option of the holder, be surrendered at face value in payment of any federal estate tax or which provide tax benefits to the holder and are priced to reflect such tax benefits or which were originally issued at a deep or substantial discount; (iii) "Ten Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years); and (iv) "Thirty Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of thirty years). 5. Liquidation. (a) Upon any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, the holders of the shares of Series Q Preferred Stock shall be entitled to receive in full out of the net assets of the corporation or the proceeds thereof, whether from capital or surplus, before any payment or distribution shall be made or set aside for payment on the Common Stock or on any other class or series of stock ranking junior to Series Q Preferred Stock as to distribution of assets upon such liquidation, dissolution or winding up, liquidating distributions in the amount of $2,500.00 per share, plus in each case an amount equal to accrued and unpaid dividends (whether or not declared) to the date of final distribution (the "Liquidation Preference"). (b) In the event the assets of the corporation, or the proceeds thereof, available for distribution to the holders of shares of Series Q Preferred Stock upon any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, shall be insufficient to pay the full Liquidation Preference to which such holders are entitled pursuant to paragraph 5(a), no such distribution shall be made on account of any shares of any 11 other series of Series Preferred Stock or any other class of stock, or series thereof ranking on a parity with the shares of Series Q Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up, unless proportionate distributive amounts shall be paid on account of the shares of Series Q Preferred Stock, ratably in proportion to the preferential sums which would be payable in such distribution if all sums payable in respect of the shares of all series of Series Preferred Stock and any such other class or series as aforesaid were paid in full. (c) After the payment to the holders of the shares of Series Q Preferred Stock of the full Liquidation Preference, the holders of shares of Series Q Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the corporation, or the proceeds thereof. (d) A consolidation or merger of the corporation with or into another corporation or corporations, or a sale, lease or conveyance, whether for cash, shares of stock, securities or properties, of all or substantially all or any part of the assets of the corporation, shall not be deemed or construed to be a liquidation, dissolution or winding up of the corporation within the meaning of this paragraph 5. 6. Redemption. (a) Issued and outstanding shares of Series Q Preferred Stock shall be redeemable, at the option of the corporation, as a whole or from time to time in part, at any time on or after March 1, 1999 at a redemption price of $2,500.00 per share, plus, in each case, an amount equal to accrued and unpaid dividends (whether or not declared) to the date fixed for redemption. (b)(i) In the event the corporation shall redeem shares of Series Q Preferred Stock, notice of such redemption shall be given by first-class mail, postage prepaid, mailed not more than 60 nor less than 30 days prior to the date fixed for redemption, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the books of the corporation. Each such notice shall state: (A) the date fixed for redemption; (B) the number of shares of Series Q Preferred Stock to be redeemed and, if less than all of the shares of Series Q Preferred Stock held by such holder are to be redeemed, the number of such shares (and the certificate numbers of such shares) to be redeemed from such holder; (C) the redemption price (specifying the amount of accrued and unpaid dividends to be included therein) and the manner in which such redemption price is to be paid and delivered; (D) the place or places (which shall include a place in the Borough of Manhattan, The City of New York) where certificates for such shares are to be surrendered for payment of the redemption price; and (E) that dividends on the shares to be redeemed will cease to accrue on such date fixed for redemption. No defect in the notice of redemption or in the mailing thereof shall affect the validity of the redemption proceedings, and the failure to give notice to any holder of shares of Series Q Preferred Stock to be so redeemed shall not affect the validity 12 of the notice given to the other holders of shares of Series Q Preferred Stock to be so redeemed. (ii) Notice having been mailed as aforesaid, from and after the date fixed for redemption (unless default shall be made by the corporation in providing funds for the payment of the redemption price), dividends on the shares of Series Q Preferred Stock so called for redemption shall cease to accrue, and such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as holders of Series Q Preferred Stock (except the right to receive from the corporation the redemption price, but without interest) shall cease. The corporation's obligation to provide funds in accordance with the preceding sentence shall be deemed fulfilled if, on or before 12:00 noon, New York City time on the date fixed for redemption, the corporation shall deposit with a paying agent (which may be an affiliate of the corporation) (a "Paying Agent"), which shall be a bank or trust company organized and in good standing under the laws of the United States or the State of New York having an office or agency in the Borough of Manhattan, The City of New York, and having, together with its corporate parent, capital, surplus and undivided profits aggregating at least $50,000,000, funds necessary for such redemption, in trust, with irrevocable instructions and authorization that such funds be applied to the redemption of the shares of Series Q Preferred Stock so called for redemption upon surrender of certificates for such shares (properly endorsed or assigned for transfer). (iii) If such notice of redemption shall have been duly mailed or if the corporation shall have given to a Paying Agent irrevocable authorization promptly to mail such notice, and if, on or before 12:00 noon, New York City time on the redemption date specified therein, the funds necessary for such redemption shall have been deposited by the corporation with such Paying Agent in trust for the pro rata benefit of the holders of the shares of Series Q Preferred Stock called for redemption, together with irrevocable instructions that such funds be applied to such redemption, then, notwithstanding that any certificate for shares of Series Q Preferred Stock so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit, all shares of Series Q Preferred Stock so called for redemption shall no longer be deemed to be outstanding and all rights with respect to such shares of Series Q Preferred Stock shall forthwith cease and terminate, except only the right of the holders thereof to receive from such Paying Agent at any time after the time of such deposit the funds so deposited, without any interest thereon. (iv) Any interest accrued on funds deposited with a Paying Agent in connection with any redemption of shares of Series Q Preferred Stock shall be paid to the corporation from time to time and the holders of any such shares to be redeemed with such money shall have no claim to any such interest. Any funds deposited and unclaimed at the end of two years from any redemption date shall be repaid or released to the corporation, after which the holder or holders of shares of Series Q Preferred Stock so called for redemption 13 shall look only to the corporation for payment of the redemption price, without any interest thereon. (c) Upon surrender in accordance with such notice of the certificates for any shares to be redeemed (properly endorsed or assigned for transfer), such shares shall be redeemed by the corporation at the applicable redemption price. If fewer than all the outstanding shares of Series Q Preferred Stock are to be redeemed, the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors of the corporation. (d) In no event shall the corporation redeem, purchase or otherwise acquire fewer than all the outstanding shares of Series Q Preferred Stock unless full cumulative dividends shall have been declared and paid or set apart for payment on all outstanding shares of Series Q Preferred Stock for all prior Dividend Periods; provided, however, that the foregoing shall not prevent, if otherwise permitted, the purchase or acquisition of shares of Series Q Preferred Stock pursuant to a tender or exchange offer made on the same terms to holders of all the outstanding shares of Series Q Preferred Stock and mailed to the holders of record of all such outstanding shares at such holders' addresses as the same appear on the books of the corporation; and provided further, however, that if some, but fewer than all, of the shares of Series Q Preferred Stock are to be purchased or otherwise acquired pursuant to such tender or exchange offer and the number of shares so tendered exceeds the number of shares so to be purchased or otherwise acquired by the corporation, the shares of Series Q Preferred Stock so tendered shall be Purchased or otherwise acquired by the corporation on a pro rata basis (with adjustments to eliminate fractions) according to the number of such shares duly tendered by each holder so tendering shares of Series Q Preferred Stock for such purchase or exchange. 7. Conversion and Exchange. The holders of shares of Series Q Preferred Stock shall not have any rights to convert such shares into or to exchange such shares for shares of Common Stock or any other stock of the corporation. 8. Voting Rights. (a) Except as hereinafter in this paragraph 8 expressly provided and as otherwise from time to time required by the laws of the State of New York, the Series Q Preferred Stock shall not have any voting rights. (b) Whenever, at any time or times, dividends payable on shares of Series Q Preferred Stock shall be in arrears in an amount equivalent to dividends for six full Dividend Periods, then, immediately upon the happening of such event, the number of directors of the corporation shall be increased by two and the holders of outstanding shares of Series Q Preferred Stock shall have the right, voting together as a single class with holders of shares of any other series of Series Preferred Stock then outstanding upon which like voting rights have been conferred and are then exercisable, to the exclusion of the holders of the 14 Common Stock, the holders of any other series of Series Preferred Stock upon which such voting rights have not been conferred or are not then exercisable, and the holders of any other stock of the corporation having general voting rights, to vote for the election of two members of the Board of Directors of the corporation to fill such newly created directorships, until all dividends in arrears on the Series Q Preferred Stock have been declared and paid or set apart for payment in full. The right of the holders of Series Q Preferred Stock to elect members of the Board of Directors of the corporation as aforesaid shall continue until such time as all dividends in arrears on the Series Q Preferred Stock shall have been declared and paid or set apart for payment in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent arrearage in the amount above mentioned. Upon any termination of the right of such holders to elect directors as herein provided, the term of office of all directors then in office elected thereby, and the vacancies created pursuant to this paragraph 8(b), shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph 8(b) may be removed at any time, with or without cause, and any vacancy thereby created may be filled, only by the affirmative vote of the holders of Series Q Preferred Stock voting together as a single class with the holders of shares of any other series of Series Preferred Stock upon which like voting rights have been conferred and are then exercisable. If the office of any director so elected pursuant to this paragraph 8(b) becomes vacant for any reason other than removal from office as aforesaid, the remaining director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (c) So long as any shares of Series Q Preferred Stock shall be outstanding, unless the vote or consent of the holders of a greater number of shares shall then be required by law, the affirmative vote or consent of (a) the holders of at least 66-2/3% of the shares of Series Q Preferred Stock and (b) the holders of at least a majority of the shares of Series Q Preferred Stock and of any other series of Series Preferred Stork then outstanding upon which like voting rights have been conferred and are then exercisable, voting together as a single class, in each case given in person or by proxy either in writing or by resolution at any special or annual meeting called for the purpose, shall be necessary to authorize, permit, effect or validate any one or more of the following: (i) the authorization or any increase in the authorized amount of any class of stock, or the establishment or designation of any series of stock (unless the class of which such series is a part has been authorized previously pursuant to this paragraph 8(c)(i)), or the issuance or sale of any obligation, security or instrument convertible into, exchangeable for, or evidencing the right to purchase, acquire or subscribe for shares of a class or series of stock, if such class or series of stock ranks prior to the Series Q Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up (unless the class or series has been authorized previously pursuant to this paragraph 8 (c) (i)), and 15 (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the certificate of incorporation as amended hereby, which would materially and adversely affect any right, preference, privilege or voting rights of the Series Preferred Stock then outstanding; provided, however, that in the event that any such amendment, alteration or repeal would materially and adversely affect the rights of only the Series Q Preferred Stock, then such amendment, alteration or repeal may be effected only with the affirmative vote or consent of the holders of at least 66-2/3% of the shares of Series Q Preferred Stock then outstanding; provided further, however, that the authorization, establishment, designation, issuance or sale of other Series Preferred Stock shall not have, or be deemed to have, such material adverse effect; and provided further, however, that an increase in the authorized amount of Series Preferred Stock, or the authorization, establishment, designation, issuance or sale of any shares of stock that do not rank prior to the Series Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, shall not have, or be deemed to have, such material adverse effect. In addition, unless the vote or consent of the holders of a greater number of shares shall then be required by law, the affirmative vote or consent of the holders of at least a majority of the shares of Series Q Preferred Stock and any other series of Series Preferred Stock then outstanding upon which like voting rights have been conferred and are then exercisable, voting together as a single class, given in person or by proxy either in writing or by resolution at any special or annual meeting called for the purpose, shall be necessary to authorize an increase in the authorized amount of the Series Preferred Stock or the new class of serial preferred stock of the corporation authorized by the stockholders of the corporation prior to the creation of the Series Q Preferred Stock (the "Serial Preferred Stock"), or the creation of a class of stock that would rank pari passu with the Series Preferred Stock or the Serial Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, or to authorize, permit, effect or validate the voluntary liquidation, dissolution or winding up of the corporation; provided, however, that a consolidation or merger of the corporation with or into another corporation or corporations, or a sale, lease or conveyance, whether for cash, shares of stock, securities or properties, of all or substantially all or any part of the assets of the corporation, shall not be deemed or construed to be a liquidation, dissolution or winding up of the corporation within the meaning of this paragraph. (d) The foregoing provisions regarding voting rights shall not apply if, at or prior to the time when the act with respect to which such provisions would otherwise apply to a vote required to effect such act, (i) all shares of Series Q Preferred Stock then outstanding shall have been redeemed or called for redemption and sufficient funds, together with irrevocable instructions to the Paying Agent to apply such funds, shall have been deposited in trust to effect such redemption in accordance with paragraph 6(b)(ii) and 6(b)(iii), or (ii) all shares of Series Q Preferred Stock have been purchased or otherwise acquired and canceled. 16 (e) Holders of Series Q Preferred Stock, and the holders of shares of any other series of Series Preferred Stock upon which like voting rights have been conferred and are then exercisable (other than the Series C Junior Participating Preferred Stock), shall be entitled to one vote for each share of such stock held on matters as to which such holders shall be entitled to vote. 9. Definitions. For purposes hereof, any class or series of stock of the corporation shall be deemed to rank: (i) prior to the Series Q Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series Q Preferred Stock; (ii) on a parity with the Series Q Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates, redemption prices or liquidation preferences per share thereof are different from those of the Series Q Preferred Stock, if the holders of such class or series of stock and of the Series Q Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend amounts or liquidation preferences, without preference or priority to the holders of Series Q Preferred Stock; and (iii) junior to the Series Q Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, if such stock shall be Common Stock or if the holders of the Series Q Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of such class or series. (C) Provisions relating to the Series R Preferred Stock. 1. Designation, The distinctive serial designation of the series established hereby shall be "Adjustable Rate Cumulative Preferred Stock, Series R" (hereinafter called the "Series R Preferred Stock"). 2. Number. The number of shares of Series R Preferred Stock shall initially be 60,000, which number may not be increased, but may from time to time be decreased (but not below the number of shares of Series R Preferred Stock then outstanding) by a resolution duly adopted by the Board of Directors of the corporation. Shares of Series R Preferred Stock redeemed, purchased or otherwise acquired by the corporation shall be 17 canceled and shall revert to authorized but unissued Series Preferred Stock undesignated as to series. 3. Dividends. (a) Holders of shares of Series R Preferred Stock shall be entitled to receive cumulative cash dividends when, as and if declared by the Board of Directors of the corporation, out of funds legally available therefor, from the date of original issuance of such shares to and including November 30, 1994 (the "Initial Dividend Period"), and for each dividend period commencing on each March 1, June 1, September 1 and December 1 thereafter, and ending on and including the day next preceding the first day of the next dividend period (such Initial Dividend Period and each of such other periods being hereinafter referred to as a "Dividend Period") at a rate per annum for each Dividend Period equal to the Applicable Rate (as defined in paragraph 4 below) in respect of such Dividend Period. The amount of dividends per share payable for the Initial Dividend Period and for any portion of any other Dividend Period less than a full Dividend Period shall be computed on the basis of a 360-day year and the actual number of days elapsed in the Dividend Period for which the dividends are payable, and by multiplying the Applicable Rate with respect to each Dividend Period, by $2,500. Dividends as provided for in this paragraph 3 will accrue from the date of original issuance and will be payable when, as and if declared by the Board of Directors of the corporation, out of funds legally available therefor, quarterly on March 1, June 1, September 1 and December 1 in each year, commencing December 1, 1994 (each, a "Dividend Payment Date"), to the holders of record on such respective dates, not exceeding 30 days preceding the related Dividend Payment Date, as may be determined by the Board of Directors of the corporation, or a duly authorized committee of the Board of Directors, in advance of such Dividend Payment Date. Dividends as provided for in this paragraph 3, to the extent not declared and paid for any past Dividend Periods, may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not exceeding 30 days preceding the payment date therefor, as may be fixed by the Board of Directors of the corporation, or a duly authorized committee of the Board of Directors. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend that is not paid when it accrues. (b) No dividend shall be declared and paid or set apart for payment on any share of Series R Preferred Stock or any share of any other series of Series Preferred Stock or any share of any class of stock, or series thereof, ranking on a parity with the Series R Preferred Stock as to dividends, for any Dividend Period unless at the same time a like proportionate dividend for the same Dividend Period, ratably in proportion to the respective dividends applicable thereto (adjusted in the case of the Initial Dividend Period to reflect the length of such period), shall be declared and paid or set apart for payment on all shares of Series R Preferred Stock and all shares of all other series of Series Preferred Stock and all shares of any class, or series thereof, ranking on a parity with the Series R Preferred Stock as 18 to dividends, then issued and outstanding and entitled to receive dividends. Holders of shares of Series R Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided, on the Series R Preferred Stock. (c) So long as any shares of Series R Preferred Stock shall be outstanding, unless the full cumulative dividends on all outstanding shares of Series R Preferred Stock shall have been declared and paid or set apart for payment for all past Dividend Periods and except as provided in paragraph 3(b), (i) no dividend (other than a dividend in Common Stock or in any other stock of the corporation ranking junior to the Series R Preferred Stock as to dividends and distribution of assets upon liquidation, dissolution or winding up) shall be declared and paid or set apart for payment, or other distribution declared or made, on the Common Stock or on any other stock ranking junior to or on a parity with Series R Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, and (ii) no shares of Common Stock or shares of any other stock of the corporation ranking junior to or on a parity with Series R Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up shall be redeemed, purchased or otherwise acquired for any consideration by the corporation or any subsidiary of the corporation (nor shall any moneys be paid to or made available for a sinking or other fund for the redemption, purchase or other acquisition of any shares of any such stock), other than by conversion into or exchange for Common Stock or any other stock of the corporation ranking junior to Series R Preferred Stock as to dividends and distribution of assets upon liquidation, dissolution or winding up. 4. Applicable Rate. (a) The dividend rate per annum referred to in paragraph 3(a) for any Dividend Period (the "Applicable Rate") shall be equal to (i) in the case of the Initial Dividend Period, 6.42% per annum and (ii) in the case of any Dividend Period subsequent to the Initial Dividend Period, 10-1/2% per annum; provided, however, that if a lower dividend rate for any such Dividend Period would result, then the Applicable Rate for such Dividend Period shall be equal to 84.5% of the Effective Rate (as defined below), but in no event less than 4-1/2% per annum. The "Effective Rate" for any Dividend Period shall be equal to the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate (each as hereinafter defined) for such Dividend Period. If the corporation determines in good faith that for any reason: (i) any one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate cannot be determined for any Dividend Period, then the Effective Rate for such Dividend Period will be equal to the higher of whichever two such Rates can be so determined; (ii) only one of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate can be determined for any Dividend 19 Period, then the Effective Rate for such Dividend Period will be equal to whichever such Rate can be so determined; or (iii) none of the Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate can be determined for any Dividend Period, then the Effective Rate for the preceding Dividend Period will be continued for such Dividend Period. Except as provided below in this paragraph, the "Treasury Bill Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period, as defined below) for three-month U.S. Treasury bills, as published weekly by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") during the Calendar Period immediately preceding the last ten calendar days preceding the Dividend Period for which the dividend rate on the Series R Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum market discount rate during any such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for three-month U.S. Treasury bills, as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a weekly per annum market discount rate for three-month U.S. Treasury bills shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum market discount rates (or the one weekly per annum market discount rate, if only one such rate shall be published during the relevant Calendar Period) for all of the U.S. Treasury bills then having remaining maturities of not less than 80 nor more than 100 days, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such rates, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason no such U.S. Treasury bill rates are published as provided above during such Calendar Period, then the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable noninterest-bearing U.S. Treasury securities with a remaining maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in The City of New York (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Treasury Bill Rate for any Dividend Period as provided 20 above in this paragraph, the Treasury Bill Rate for such Dividend Period shall be the arithmetic average of the per annum market discount rates based upon the closing bids during such Calendar Period for each of the issues of marketable interest-bearing U.S. Treasury securities with a remaining maturity of not less than 80 nor more than 100 days from the date of each such quotation, as chosen and quoted daily for each business day in The City of New York (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. Except as provided below in this paragraph the "Ten Year Constant Maturity Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields, as defined below (or the one weekly per annum Ten year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly by the Federal Reserve Board during the Calendar Period immediately preceding the last ten calendar days preceding the Dividend Period for which the dividend rate on the Series R Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum Ten Year Average Yield during any such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum Ten Year Average Yields (or the one weekly per annum Ten Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a weekly per annum Ten Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all of the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities, as defined below) then having remaining maturities of not less than eight nor more than twelve years, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Ten Year Constant Maturity Rate for any Dividend Period as provided above in this paragraph, then the Ten Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than eight nor more than twelve years from the date of each such quotation, as chosen and quoted daily for each business day in The City of New York (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. Government securities selected by the corporation. 21 Except as provided below in this paragraph, the "Thirty Year Constant Maturity Rate" for each Dividend Period shall be the arithmetic average of the two most recent weekly per annum Thirty Year Average Yields, as defined below (or the one weekly per annum Thirty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly by the Federal Reserve Board during the Calendar Period immediately preceding the last ten calendar days preceding the Dividend Period for which the dividend rate on the Series R Preferred Stock is being determined. If the Federal Reserve Board does not publish such a weekly per annum Thirty Year Average Yield during any such Calendar Period, then the Thirty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum Thirty Year Average Yields (or the one weekly per annum Thirty Year Average Yield, if only one such Yield shall be published during the relevant Calendar Period), as published weekly during such Calendar Period by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If a per annum Thirty Year Average Yield shall not be published by the Federal Reserve Board or by any Federal Reserve Bank or by any U.S. Government department or agency during such Calendar Period, then the Thirty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the two most recent weekly per annum average yields to maturity (or the one weekly per annum average yield to maturity, if only one such yield shall be published during the relevant Calendar Period) for all the actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) then having remaining maturities of not less than twenty-eight nor more than thirty years, as published during such Calendar Period by the Federal Reserve Board or, if the Federal Reserve Board shall not publish such yields, by any Federal Reserve Bank or by any U.S. Government department or agency selected by the corporation. If the corporation determines in good faith that for any reason the corporation cannot determine the Thirty Year Constant Maturity Rate for any Dividend Period as provided above in this paragraph, then the Thirty Year Constant Maturity Rate for such Dividend Period shall be the arithmetic average of the per annum average yields to maturity based upon the closing bids during such Calendar Period for each of the issues of actively traded marketable U.S. Treasury fixed interest rate securities (other than Special Securities) with a final maturity date not less than twenty-eight nor more than thirty years from the date of each such quotation, as chosen and quoted daily for each business day in The City of New York (or less frequently if daily quotations shall not be generally available) to the corporation by at least three recognized dealers in U.S. government securities selected by the corporation. The Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate shall each be rounded to the nearest five hundredths of a percentage point. (b) The Applicable Rate with respect to each Dividend Period commencing after the Initial Dividend Period will be calculated as promptly as practicable by the corporation according to the appropriate method described herein. The corporation will cause 22 each such Applicable Rate to be published in a daily newspaper of general circulation in The City of New York prior to the commencement of the first Dividend Period to which it applies and will cause notice of such Applicable Rate to be included with the dividend payment checks next mailed to the holders of the Series R Preferred Stock . (c) For purposes of this paragraph 4, the per annum market discount rates for three-month U.S. Treasury bills shall be secondary market rates (quoted on a bank-discount basis), and the term: (i) "Calendar Period" shall mean 14 calendar days; (ii) "Special Securities" shall mean securities which can, at the option of the holder, be surrendered at face value in payment of any federal estate tax or which provide tax benefits to the holder and are priced to reflect such tax benefits or which were originally issued at a deep or substantial discount; (iii) "Ten Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years); and (iv) "Thirty Year Average Yield" shall mean the average yield to maturity for actively traded marketable U.S. Treasury fixed interest rate securities (adjusted to constant maturities of thirty years). 5. Liquidation. (a) Upon any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, the holders of the shares of Series R Preferred Stock shall be entitled to receive in full out of the net assets of the corporation or the proceeds thereof, whether from capital or surplus, before any payment or distribution shall be made or set aside for payment on the Common Stock or on any other class or series of stock ranking junior to Series R Preferred Stock as to distribution of assets upon such liquidation, dissolution or winding up, liquidating distributions in the amount of $2,500.00 per share, plus in each case an amount equal to accrued and unpaid dividends (whether or not declared) to the date of final distribution (the "Liquidation Preference"). (b) In the event the assets of the corporation, or the proceeds thereof, available for distribution to the holders of shares of Series R Preferred Stock upon any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, shall be insufficient to pay the full Liquidation Preference to which such holders are entitled pursuant to paragraph 5(a), no such distribution shall be made on account of any shares of any other series of Series Preferred Stock or any other class of stock, or series thereof, ranking on a parity with the shares of Series R Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up, unless proportionate distributive amounts shall be paid on account of the shares of Series R Preferred Stock, ratably in proportion to the preferential 23 sums which would be payable in such distribution if all sums payable in respect of the shares of all series of Series Preferred Stock and any such other class or series as aforesaid were paid in full. (c) After the payment to the holders of the shares of Series R Preferred Stock of the full Liquidation Preference, the holders of shares of Series R Preferred Stock, as such, shall have no right or claim to any of the remaining assets of the corporation, or the proceeds thereof. (d) A consolidation or merger of the corporation with or into another corporation or corporations, or a sale, lease or conveyance, whether for cash, shares of stock, securities or properties, of all or substantially all or any part of the assets of the corporation, shall not be deemed or construed to be a liquidation, dissolution or winding up of the corporation within the meaning of this paragraph 5. 6. Redemption. (a) Issued and outstanding shares of Series R Preferred Stock shall be redeemable, at the option of the corporation, as a whole or from time to time in part, at any time on or after September 1, 1999 at a redemption price of $2,500.00 per share, plus, in each case, an amount equal to accrued and unpaid dividends (whether or not declared) to the date fixed for redemption. (b)(i) In the event the corporation shall redeem shares of Series R Preferred Stock, notice of such redemption shall be given by first-class mail, postage prepaid, mailed not more than 60 nor less thin 30 days prior to the date fixed for redemption, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the books of the corporation. Each such notice shall state: (A) the date fixed for redemption; (B) the number of shares of Series R preferred Stock to be redeemed and, if less than all of the shares of Series R Preferred Stock held by such holder are to be redeemed, the number of such shares (and the certificate numbers of such shares) to be redeemed from such holder, (C) the redemption price (specifying the amount of accrued and unpaid dividends to be included therein) and the manner in which such redemption price is to be paid and delivered, (D) the place or places (which shall include a place in the Borough of Manhattan, The City of New York) where certificates for such shares are to be surrendered for payment of the redemption price; and (E) that dividends on the shares to be redeemed will cease to accrue on such date fixed for redemption. No defect in the notice of redemption or in the mailing thereof shall affect the validity of the redemption proceedings, and the failure to give notice to any holder of shares of Series R Preferred Stock to be so redeemed shall not affect the validity of the notice given to the other holders of shares of Series R Preferred Stock to be so redeemed. (ii) Notice having been mailed as aforesaid, from and after the date fixed for redemption (unless default shall be made by the corporation in providing funds for the 24 payment of the redemption price), dividends on the shares of Series R Preferred Stock so called for redemption shall cease to accrue, and such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as holders of Series R Preferred Stock (except the right to receive from the corporation the redemption price, but without interest) shall cease. The corporation's obligation to provide funds in accordance with the preceding sentence shall be deemed fulfilled if, on or before 12:00 noon, New York City time on the date fixed for redemption, the corporation shall deposit with a paying agent (which may be an affiliate of the corporation) (a "Paying Agent"), which shall be a bank or trust company organized and in good standing under the laws of the United States or the State of New York having an office or agency in the Borough of Manhattan, The City of New York, and having, together with its corporate parent, capital, surplus and undivided profits aggregating at least $50,000,000, funds necessary for such redemption, in trust, with irrevocable instructions and authorization that such funds be applied to the redemption of the shares of Series R Preferred Stock so called for redemption upon surrender of certificates for such shares (properly endorsed or assigned for transfer). (iii) If such notice of redemption shall have been duly mailed or if the corporation shall have given to a Paying Agent irrevocable authorization promptly to mail such notice, and if, on or before 12:00 noon, New York City time on the redemption date specified therein, the funds necessary for such redemption shall have been deposited by the corporation with such Paying Agent in trust for the pro rata benefit of the holders of the shares of Series R Preferred Stock called for redemption, together with irrevocable instructions that such funds be applied to such redemption, then, notwithstanding that any certificate for shares of Series R Preferred Stock so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit, all shares of Series R Preferred Stock so called for redemption shall no longer be deemed to be outstanding and all rights with respect to such shares of Series R Preferred Stock shall forthwith cease and terminate, except only the right of the holders thereof to receive from such Paying Agent at any time after the time of such deposit the funds so deposited, without any interest thereon. (iv) Any interest accrued on funds deposited with a Paying Agent in connection with any redemption of shares of Series R Preferred Stock shall be paid to the corporation from time to time and the holders of any such shares to be redeemed with such money shall have no claim to any such interest. Any funds deposited and unclaimed at the end of two years from any redemption date shall be repaid or released to the corporation, after which the holder or holders of shares of Series R Preferred Stock so called for redemption shall look only to the corporation for payment of the redemption price, without any interest thereon. (c) Upon surrender in accordance with such notice of the certificates for any shares to be redeemed (properly endorsed or assigned for transfer), such shares shall be redeemed by the corporation at the applicable redemption price. If fewer than all the 25 outstanding shares of Series R Preferred Stock are to be redeemed, the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors of the Corporation. (d) In no event shall the corporation redeem, purchase or otherwise acquire fewer than all the outstanding shares of Series R Preferred Stock unless full cumulative dividends shall have been declared and paid or set apart for payment on all outstanding shares of Series R Preferred Stock for all prior Dividend Periods; provided, however, that the foregoing shall not prevent, if otherwise permitted, the purchase or acquisition of shares of Series R Preferred Stock pursuant to a tender or exchange offer made on the same terms to holders of all the outstanding shares of Series R Preferred Stock and mailed to the holders of record of all such outstanding shares at such holders' addresses as the same appear on the books of the corporation; and provided further, however, that if some, but fewer than all, of the shares of Series R Preferred Stock are to be purchased or otherwise acquired pursuant to such tender or exchange offer and the number of shares so tendered exceeds the number of shares so to be purchased or otherwise acquired by the corporation, the shares of Series R Preferred Stock so tendered shall be purchased or otherwise acquired by the corporation on a pro rata basis (with adjustments to eliminate fractions) according to the number of such shares duly tendered by each holder so tendering shares of Series R Preferred Stock for such purchase or exchange. 7. Conversion and Exchange. The holders of shares of Series R Preferred Stock shall not have any rights to convert such shares into or to exchange such shares for shares of Common Stock or any other stock of the corporation. 8. Voting Rights. (a) Except as hereinafter in this paragraph 8 expressly provided and as otherwise from time to time required by the laws of the State of New York, the Series R Preferred Stock shall not have any voting rights. (b) Whenever, at any time or times, dividends payable on shares of Series R Preferred Stock shall be in arrears in an amount equivalent to dividends for six full Dividend Periods, then, immediately upon the happening of such event, the number of directors of the corporation shall be increased by two and the holders of outstanding shares of Series R Preferred Stock shall have the right, voting together as a single class with holders of shares of any other series of Series Preferred Stock then outstanding upon which like voting rights have been conferred and are then exercisable, to the exclusion of the holders of the Common Stock, the holders of any other series of Series Preferred Stock upon which such voting rights have not been conferred or are not then exercisable, and the holders of any other stock of the corporation having general voting rights, to vote for the election of two members of the Board of Directors of the corporation to fill such newly created directorships, until all dividends in arrears on the Series R Preferred Stock have been declared and paid or set apart for payment in full. The right of the holders of Series R Preferred Stock to elect members of 26 the Board of Directors of the corporation as aforesaid shall continue until such time as all dividends in arrears on the Series R Preferred Stock shall have been declared and paid or set apart for payment in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent arrearage in the amount above mentioned. Upon any termination of the right of such holders to elect directors as herein provided, the term of office of all directors then in office elected thereby, and the vacancies created pursuant to this paragraph 8(b), shall terminate immediately. Any director who shall have been so elected pursuant to this paragraph 8(b) may be removed at any time, with or without cause, and any vacancy thereby created may be filled, only by the affirmative vote of the holders of Series R Preferred Stock voting together as a single class with the holders of shares of any other series of Series Preferred Stock upon which like voting rights have been conferred and are then exercisable. If the office of any director so elected pursuant to this paragraph 8(b) becomes vacant for any reason other than removal from office as aforesaid, the remaining director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (c) So long as any shares of Series R Preferred Stock shall be outstanding, unless the vote or consent of the holders of a greater number of shares shall then be required by law, the affirmative vote or consent of (a) the holders of at least 66-2/3% of the shares of Series R Preferred Stock and (b) the holders of at least a majority of the shares of Series R Preferred Stock and of any other series of Series Preferred Stock then outstanding upon which like voting rights have been conferred and are then exercisable, voting together as a single class, in each case given in person or by proxy either in writing or by resolution at any special or annual meeting called for the purpose, shall be necessary to authorize, permit, effect or validate any one or more of the following: (i) the authorization or any increase in the authorized amount of any class of stock, or the establishment or designation of any series of stock (unless the class of which such series is a pan has been authorized previously pursuant to this paragraph 8(c) (i)), or the issuance or sale of any obligation, security or instrument convertible into, exchangeable for, or evidencing the right to purchase, acquire or subscribe for shares of a class or series of stock, if such class or series of stock ranks prior to the Series R Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up (unless the class or series has been authorized previously pursuant to this paragraph 8 (c) (i)), and (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the certificate of incorporation, as amended hereby, which would materially and adversely affect any right, preference, privilege or voting rights of the Series Preferred Stock then outstanding; provided, however, that in the event that any such amendment, alteration or repeal would materially and adversely affect the rights of only the Series R Preferred Stock, then such amendment, 27 alteration or repeal may be effected only with the affirmative vote or consent of the holders of at least 66-2/3% of the shares of Series R Preferred Stock then outstanding; provided further, however, that the authorization, establishment, designation, issuance or sale of other Series Preferred Stock shall not have, or be deemed to have, such material adverse effect; and provided further, however, that an increase in the authorized amount of Series Preferred Stock, or the authorization, establishment, designation, issuance or sale of any shares of stock that do not rank prior to the Series Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, shall not have, or be deemed to have, such material adverse effect. In addition, unless the vote or consent of the holders of a greater number of shares shall then be required by law, the affirmative vote or consent of the holders of at least a majority of the shares of Series R Preferred Stock and any other series of Series Preferred Stock then outstanding upon which like voting rights have been conferred and are then exercisable, voting together as a single class, given in person or by proxy either in writing or by resolution at any special or annual meeting called for the purpose, shall be necessary to authorize an increase in the authorized amount of the Series Preferred Stock or the new class of serial preferred stock of the corporation authorized by the shareholders of the corporation prior to the creation of the Series R Preferred Stock (the "Serial Preferred Stock"), or the creation of a class of stock that would rank pari passu with the Series Preferred Stock or the Serial Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, or to authorize, permit, effect or validate the voluntary liquidation, dissolution or winding up of the corporation; provided, however, that a consolidation or merger of the corporation with or into another corporation or corporations, or a sale, lease or conveyance, whether for cash, shares of stock, securities or properties, of all or substantially all or any part of the assets of the corporation, shall not be deemed or construed to be a liquidation, dissolution or winding up of the corporation within the meaning of this paragraph. (d) The foregoing provisions regarding voting rights shall not apply if, at or prior to the time when the act with respect to which such provisions would otherwise apply to a vote required to effect such act, (i) all shares of Series R Preferred Stock then outstanding shall have been redeemed or called for redemption and sufficient funds, together with irrevocable instructions to the Paying Agent to apply such funds, shall have been deposited in trust to effect such redemption in accordance with paragraph 6 (b) (ii) and 6 (b) (iii), or (ii) all shares of Series R Preferred Stock have been purchased or otherwise acquired and canceled. (e) Holders of Series R Preferred Stock, and the holders of shares of any other series of Series Preferred Stock upon which like voting rights have been conferred and are then exercisable (other than the Series C Junior Participating Preferred Stock), shall be entitled to one vote for each share of such stock held on matters as to which such holders shall be entitled to vote. 28 9. Definitions. For purposes hereof, any class or series of stock of the corporation shall be deemed to rank: (i) prior to the Series R Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding, up, as the case may be, in preference or priority to the holders of Series R Preferred Stock; (ii) on a parity with the Series R Preferred Stock to its dividends or distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates, redemption prices or liquidation preferences per share thereof are different from those of the Series R Preferred Stock, if the holders of such class or series of stock and of the Series R Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend amounts or liquidation preferences, without preference or priority to the holders of Series R Preferred Stock; and (iii) junior to the Series R Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, if such stock shall be Common Stock or if the holders of the Series R Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of such class or series (D) Provisions relating to the Series S Preferred Stock. 1. Designation. The distinctive serial designation of the series established hereby shall be "7-3/4% Cumulative Preferred Stock, Series S" (hereinafter called the "Series S Preferred Stock"). 2. Number. The number of shares of Series S Preferred Stock without par value shall initially be 50,000, which number may not be increased, but may from time to time be decreased (but not below the sum of the number of shares of Series S Preferred Stock then outstanding ) by a resolution duly adopted by the Board of Directors of the corporation. Shares of Series S Preferred Stock redeemed, purchased or otherwise acquired by the corporation shall be canceled and shall revert to authorized but unissued Series Preferred Stock undesignated as to series. 3. Dividends (a) Holders of shares of Series S Preferred Stock shall be entitled to receive cumulative cash dividends when, as and if declared by the Board of Directors of the corporation, out of funds legally available therefor, from the date of original 29 issuance of such shares to (but excluding) the March 1, June 1, September 1 or December 1 next succeeding such date of original issuance of such shares (the "Initial Dividend Period"), and for each dividend period commencing on each March 1, June 1, September 1 or December 1 thereafter, and ending on and including the day next preceding the first day of the next dividend period (such Initial Dividend Period and each of such other periods being hereinafter referred to as a "Dividend Period") at a rate of 7-3/4% per annum (the "Dividend Rate"). The amount of dividends per share of Series S Preferred Stock payable for any portion of any Dividend Period less than a full quarter shall be computed on the basis of a 360-day year consisting of twelve 30-day months and the actual number of days elapsed in the Dividend Period for which the dividends are payable, and by multiplying the Dividend Rate by $2,500.00 Dividends as provided for in this Paragraph 3 will accrue from the date of original issuance of a share of Series S Preferred Stock and will be payable when, as and if declared by the Board of Directors of the corporation, out of funds legally available therefor, quarterly on March 1, June 1, September 1 and December 1 in each year (each, a "Dividend Payment Date"), commencing on the Dividend Payment Date next succeeding the date of original issuance of such share, to the holder of record at the close of business on the fifteenth day of the month next preceding the month in which such Dividend Payment Date occurs. Dividends as provided for in this Paragraph 3, to the extent not declared and paid for any past Dividend Periods, may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not exceeding 30 days preceding the payment date therefor, as may be fixed by the Board of Directors of the corporation, or a duly authorized committee of the Board of Directors. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend that is not paid when it accrues. (b) No dividend shall be declared and paid or set apart for payment on any share of Series S Preferred Stock or any share of any other series of Series Preferred Stock or any share of any class of stock, or series thereof, ranking on a parity with the Series S Preferred Stock as to dividends, for any Dividend Period unless at the same time a like proportionate dividend for the same Dividend Period, ratably in proportion to the respective dividends applicable thereto, shall be declared and paid or set apart for payment on all shares of Series S Preferred Stock and all shares of all other series of Series Preferred Stock and all shares of any class of stock, or series thereof, ranking on a parity with the Series S Preferred Stock as to dividends, then issued and outstanding and entitled to receive dividends. Holders of shares of Series S Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided, on the Series S Preferred Stock. (c) So long as any shares of Series S Preferred Stock shall be outstanding, unless the full cumulative dividends on all outstanding shares of Series S Preferred Stock shall have been declared and paid or set apart for payment for all past Dividend Periods and 30 except as provided in Paragraph 3 (b), (i) no dividend (other than a dividend in Common Stock or in any other stock of the corporation ranking junior to the Series S Preferred Stock as to dividends and distribution of assets upon liquidation, dissolution or winding up) shall be declared and paid or set aside for payment, or other distribution declared or made, on the Common Stock or on any other stock ranking junior to or on a parity with the Series S Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, and (ii) no shares of Common Stock or shares of any other stock of the corporation ranking junior to or on a parity with the Series S Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up shall be redeemed, purchased or otherwise acquired for any consideration by the corporation or any subsidiary of the corporation (nor shall any moneys be paid to or made available for a sinking or other fund for the redemption, purchase or other acquisition of any shares of any such stock), other than by conversion into or exchange for Common Stock or any other stock of the corporation ranking junior to the Series S Preferred Stock as to dividends and distribution of assets upon liquidation, dissolution or winding up. 4. Liquidation. (a) Upon any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, the holders of the shares of Series S Preferred Stock shall be entitled to receive in full out of the net assets of the corporation or the proceeds thereof, whether from capital or surplus, before any payment or distribution shall be made or set aside for payment on the Common Stock or on any other class or series of stock ranking junior to the Series S Preferred Stock as to distribution of assets upon such liquidation, dissolution or winding up, the amount of $2,500.00 per share, plus in each case an amount equal to accrued and unpaid dividends (whether or not declared) to the date of final distribution (the "Liquidation Preference"). (b) In the event that the assets of the corporation, or the proceeds thereof, available for distribution to the holders of shares of Series S Preferred Stock upon any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, shall be insufficient to pay the full Liquidation Preference to which such holders are entitled pursuant to Paragraph 4 (a), no such distribution shall be made on account of any shares of any other series of Series S Preferred Stock or any other class of stock, or series thereof, ranking on a parity with the shares of Series S Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up, unless proportionate distributive amounts shall be paid on account of the shares of Series S Preferred Stock, ratably in proportion to the preferential sums which would be payable in such distribution if all sums payable in respect of the shares of all series of Series Preferred Stock and any such other class or series as aforesaid were paid in full. (c) After the payment to the holders of the shares of Series S Preferred Stock of the full Liquidation Preference, the holders of shares of Series S Preferred Stock, as 31 such, shall have no right or claim to any of the remaining assets of the corporation, or the proceeds thereof. (d) A consolidation or merger of the corporation with or into another corporation or corporations, or a sale, lease or conveyance, whether for cash, shares of stock, securities or properties, of all or substantially all or any part of the assets of the corporation, shall not be deemed or construed to be a liquidation, dissolution or winding up of the corporation within the meaning of this Paragraph 4. 5. Redemption. (a) Issued and outstanding shares of Series S Preferred Stock shall be redeemable, at the option of the corporation, as a whole or from time to time in part, at any time on or after June 1, 2000 at a redemption price of $2,500.00 per share, plus in each case an amount equal to accrued and unpaid dividends (whether or not declared) to the date fixed for redemption. (b)(i) In the event the corporation shall redeem shares of Series S Preferred Stock, notice of such redemption shall be given by first-class mail, postage prepaid, mailed not more than 60 nor less than 30 days prior to the date fixed for redemption, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the books of the corporation. Each such notice shall state: (A) the date fixed for redemption; (B) the number of shares of Series S Preferred Stock to be redeemed and, if less than all of the shares of Series S Preferred Stock held by such holder are to be redeemed, the number of such shares (and the certificate numbers of such shares) to be redeemed from such holder; (C) the redemption price (specifying the amount of accrued and unpaid dividends to be included therein) and the manner in which such redemption price is to be paid and delivered; (D) the place or places (which shall include a place in the Borough of Manhattan, The City of New York) where certificates for such shares are to be surrendered for payment of the redemption price; and (E) that dividends an the shares to be redeemed will cease to accrue on such date fixed for redemption. No defect in the notice of redemption or in the mailing thereof shall affect the validity of the redemption proceedings, and the failure to give notice to any holder of share of Series S Preferred Stock to be so redeemed shall not affect the validity of the notice given to the other holders of shares of Series S Preferred Stock to be so redeemed. (ii) Notice having been mailed as aforesaid, from and after the date fixed for redemption (unless default shall be made by the corporation in providing funds for the payment of the redemption price), dividends on the shares of Series S Preferred Stock so called for redemption shall cease to accrue, and such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as holders of Series S Preferred Stock (except the right to receive from the corporation the redemption price, but without interest) shall cease. The corporation's obligation to provide funds in accordance with the preceding sentence shall be deemed fulfilled if, on or before 12:00 noon, New York City time on the date fixed for redemption, the corporation shall deposit with a paying agent (which may be an 32 affiliate of the corporation) (a "Paying Agent"), which shall be a bank or trust company organized and in good standing under the laws of the United States or the State of New York having an office or agency in the Borough of Manhattan, The City of New York, and having (together with its immediate parent) capital, surplus and undivided profits aggregating at least $50,000,000, funds necessary for such redemption, in trust, with irrevocable instructions and authorization that such funds be applied to the redemption of the shares of Series S Preferred Stock so called for redemption upon surrender of certificates for such shares (properly endorsed or assigned for transfer). (iii) If such notice of redemption shall have been duly mailed or if the corporation shall have given to a Paying Agent irrevocable authorization promptly to mail such notice, and if on or before the redemption date specified therein the funds necessary for such redemption shall have been deposited by the corporation with such Paying Agent in trust for the pro rata benefit of the holders of the shares of Series S Preferred Stock called for redemption, together with irrevocable instructions that such funds be applied to such redemption, then, notwithstanding that any certificate for shares of Series S Preferred Stock so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit, all shares of Series S Preferred Stock so called for redemption shall no longer be deemed to be outstanding and all rights with respect to such shares of Series S Preferred Stock shall forthwith cease and terminate, except only the right of the holders thereof to receive from such Paying Agent at any time after the time of such deposit the funds so deposited, without any interest thereon. (iv) Any interest accrued on funds deposited with a Paying Agent in connection with any redemption of shares of Series S Preferred Stock shall be paid to the corporation from time to time and the holders of any such shares to be redeemed with such money shall have no claim to any such interest. Any funds deposited and unclaimed at the end of two years from any redemption date shall be repaid or released to the corporation, after which the holder or holders of shares of Series S Preferred Stock so called for redemption shall look only to the corporation for payment of the redemption price, without any interest thereon. (c) Upon surrender in accordance with such notice of the certificates for any shares to be redeemed (properly endorsed or assigned for transfer), such shares shall be redeemed by the corporation at the applicable redemption price. If less than all the outstanding shares of Series S Preferred Stock are to be redeemed, the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors of the corporation. (d) In no event shall the corporation redeem less than all the outstanding shares of Series S Preferred Stock unless full cumulative dividends shall have been declared and paid or set apart for payment on all outstanding shares of Series S Preferred Stock for all 33 prior Dividend Periods; provided, however, that the foregoing shall not prevent, if otherwise permitted, the purchase or acquisition of shares of Series S Preferred Stock pursuant to a tender or exchange offer made on the same terms to holders of all the outstanding shares of Series S Preferred Stock and mailed to the holders of record of all such outstanding shares at such holders' addresses as the same appear on the books of the corporation; and provided, further, however, that if some, but less than all, of the shares of Series S Preferred are to be purchased or otherwise acquired pursuant to such tender or exchange offer and the number of shares so tendered exceeds the number of shares so to be purchased or otherwise acquired by the corporation, the shares of Series S Preferred Stock so tendered shall be purchased or otherwise acquired by the corporation on a pro rata basis (with adjustments to eliminate fractions) according to the number of such shares duly tendered by each holder so tendering shares of Series S Preferred Stock for such purchase or exchange. 6. Conversion and Exchange. The holders of shares of Series S Preferred Stock shall not have any rights to convert such shares into or to exchange such shares for shares of Common Stock or any other stock of the corporation. 7. Voting Rights. (a) Except as hereinafter in this Paragraph 7 expressly provided and as otherwise from time to time required by the laws of the State of New York, the Series S Preferred Stock shall not have any voting rights. (b) Whenever, at any time or times, dividends payable on shares of Series S Preferred Stock shall be in arrears in an amount equivalent to dividends for six full Dividend Periods, then, immediately upon the happening of such event, the number of directors of the corporations shall be increased by two and the holders of outstanding shares of Series S Preferred Stock shall have the right, voting together as a single class with holders of shares of any other series of Series Preferred Stock then outstanding upon which like voting rights have been conferred and are then exercisable, to the exclusion of the holders of the Common Stock, the holders of any other series of Series Preferred Stock upon which such voting rights have not been conferred or are not then exercisable, and the holders of any other stock of the corporation having general voting rights, to vote for the election of two members of the Board of Directors of the corporation to fill such newly created directorships, until all dividends in arrears on the Series S Preferred Stock have been declared and paid or set apart for payment in full. The right of the holders of Series S Preferred Stock to elect members of the Board of Directors of the corporation as aforesaid shall continue until such time as all dividends in arrears on the Series S Preferred Stock shall have been declared and paid or set apart for payment in full, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent arrearage in the amount above mentioned. Upon any termination of the right of such holders to elect directors as herein provided, the term of office of all directors then in office elected thereby, and the vacancies created pursuant to this Paragraph 7(b), shall terminate immediately. Any director who shall have been so elected pursuant to this Paragraph 7(b) may be removed at any time, 34 with or without cause, and any vacancy thereby created may be filled, only by the affirmative vote of the holders of Series S Preferred Stock voting together as a single class with the holders of shares of any other series of Series Preferred Stock upon which like voting rights have been conferred and are then exercisable. If the office of any director so elected pursuant to this Paragraph 7 (b) becomes vacant for any reason other than removal from office as aforesaid, the remaining director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (c) So long as any shares of Series S Preferred Stock shall be outstanding, unless the vote or consent of the holders of a greater number of shares shall then be required by law and subject to any other voting rights that may be conferred on other series of Series Preferred Stock or greater percentage that may be required under the terms of such series of Series Preferred Stock, the affirmative vote or consent of (a) the holders of at least 66-2/3% of the shares of Series S Preferred Stock and (b) the holders of at least a majority of the shares of Series S Preferred Stock and of any other series of Series Preferred Stock then outstanding upon which like voting rights have been conferred and are then exercisable, voting together as a single class, in each case given in person or by proxy either in writing or by resolution at any special or annual meeting called for the purpose, shall be necessary to authorize, permit, effect or validate any one or more of the following: (i) the authorization or any increase in the authorized amount of any class of stock, or the establishment or designation of any series of stock (unless the class of which such series is a part has been authorized previously pursuant to this Paragraph 7 (c) (i)), or the issuance or sale of any obligation, security or instrument convertible into, exchangeable for, or evidencing the right to purchase, acquire or subscribe for shares of a class or series of stock, if such class or series of stock ranks prior to the Series S Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up (unless the class or series has been authorized previously pursuant to this Paragraph 7(c)(i)), and (ii) the amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the certificate of incorporation, as amended hereby, which would materially and adversely affect any right, preference, privilege or voting rights of the Series Preferred Stock then outstanding provided; however, that in the event that any such amendment, alteration or repeal would materially and adversely affect the rights of only the Series S Preferred Stock, then such amendment, alteration or repeal may be effected only with the affirmative vote or consent of the holders of at least 66-2/3% of the shares of Series S Preferred Stock then outstanding; provided further, however, that the authorization, establishment, designation, issuance or sale of other Series Preferred Stock shall not have, or be deemed to have, such material adverse effect; and provided further, however, that an increase in the authorized amount of Series Preferred Stock, or the amount of authorization, establishment, designation, issuance or sale of any shares of stock that do not rank prior to the Series Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, shall not have, or be deemed to have, such material adverse effect. 35 In addition, unless the vote or consent of the holders of a greater number of shares shall then be required by law, the affirmative vote or consent of the holders of at least a majority of the shares of Series S Preferred Stock and any other series of Series Preferred Stock then outstanding upon which like voting rights have been conferred and are then exercisable, voting together as a single class, given in person or by proxy either in writing or by resolution at any special or annual meeting called for the purpose, shall be necessary to authorize an increase in the authorized amount of the Series Preferred Stock or the new class of serial preferred stock of the corporation authorized by the stockholders of the corporation prior to the creation of the Series S Preferred Stock (the "Serial Preferred Stock"), or the creation of a class of stock that would rank pari passu with the Series Preferred Stock or the Serial Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, or to authorize, permit, effect or validate the voluntary liquidation, dissolution or winding up of the corporation; provided, however, that a consolidation or merger of the corporation with or into another corporation or corporations, or a sale, lease or conveyance, whether for cash, shares of stock, securities or properties, of all or substantially all or any part of the assets of the corporation, shall not be deemed or construed to be a liquidation, dissolution or winding up of the corporation within the meaning of this Paragraph. (d) The foregoing provisions regarding voting rights shall not apply if, at or prior to the time when the act with respect to which such provisions would otherwise apply to a vote required to effect such act, (i) all shares of Series S Preferred Stock then outstanding shall have been redeemed or called for redemption and sufficient funds, together with irrevocable instructions to the Paying Agent to apply such funds shall have been deposited in trust to effect such redemption in accordance with Paragraph 5(b)(ii) or 5(b)(iii) or (ii) all shares of Series S Preferred Stock have been purchased or otherwise acquired and canceled (e) Holders of Series S Preferred Stock, and the holders of shares of any other series of Series Preferred Stock upon which like voting rights have been conferred and are then exercisable (other than the Series C Junior Participating Preferred Stock), shall be entitled to one vote for each share of such stock held on matters as to which such holders shall be entitled to vote. 8. Definitions. For purposes hereof, any class or series of stock of the corporation shall be deemed to rank: (i) prior to Series S Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series S Preferred Stock; 36 (ii) on a parity or pari passu with the Series S Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates, redemption prices or liquidation preferences per share thereof are different from those of the Series S Preferred Stock, if the holders of such class or series of stock and of the Series S Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend amounts or liquidation preferences, without preference or priority to the holders of Series S Preferred Stock; and (iii) junior to the Series S Preferred Stock as to dividends or distribution of assets upon liquidation, dissolution or winding up, if such stock shall be Common Stock or if the holders of the Series S Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of such class or series. FIFTH: The Secretary of State is designated as the agent of the corporation upon whom process against the corporation may be served, and the address to which the Secretary of State shall mail a copy of any process against the corporation served upon him is c/o CT Corporation System, 1633 Broadway, New York, New York 10019. SIXTH: The registered agent of the corporation is CT Corporation System, whose address is 1633 Broadway, New York, New York 10019. The registered agent is the agent of the corporation upon whom process against it may be served. SEVENTH: A director of the corporation shall not be personally liable to the corporation or its shareholders for damages for any breach of duty in such capacity except that the liability of a director shall not be eliminated (1) if a judgment or other final adjudication adverse to him establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled or that his acts violated. Section 719 of 37 the New York Business Corporation Law, or (2) his acts or omissions occurred prior to the adoption of this provision. 4. This Restatement of the certificate. of Incorporation was authorized by the affirmative unanimous written consent of the Board of Directors of the corporation, dated June 4, 1999, and the favorable written consent of the sole shareholder, dated June 4, 1999. 38 IN WITNESS WHEREOF, the undersigned have signed this Restatement of the Certificate of Incorporation and affirm that the statements made herein are true under the penalties of perjury this 4th day of June, 1999. ----------------------------------- Name: Frank N. Newman Title: President ----------------------------------- Name: James T. Byrne Title: Senior Vice President and Secretary 39 EX-3.II 5 BY-LAWS Exhibit 3(ii) BY-LAWS JUNE 22, 1999 Bankers Trust Corporation (Incorporated under the New York Business Corporation Law) BANKERS TRUST CORPORATION ------------------------------- BY-LAWS ------------------------------- ARTICLE I SHAREHOLDERS SECTION 1.01 Annual Meetings. The annual meetings of shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on the third Tuesday in April of each year, if not a legal holiday, and if a legal holiday then on the next succeeding business day, at such hour as shall be designated by the Board of Directors. If no other hour shall be so designated such meeting shall be held at 3 P.M. SECTION 1.02 Special Meetings. Special meetings of the shareholders, except those regulated otherwise by statute, may be called at any time by the Board of Directors, or by any person or committee expressly so authorized by the Board of Directors and by no other person or persons. SECTION 1.03 Place of Meetings. Meetings of shareholders shall be held at such place within or without the State of New York as shall be determined from time to time by the Board of Directors or, in the case of special meetings, by such person or persons as may be authorized to call a meeting. The place in which each meeting is to be held shall be specified in the notice of such meeting. SECTION 1.04 Notice of Meetings. A copy of the written notice of the place, date and hour of each meeting of shareholders shall be given personally or by mail, not less than ten nor more than fifty days before the date of the meeting, to each shareholder entitled to vote at such meeting. Notice of a special meeting shall indicate that it is being issued by or at the direction of the person or persons calling the meeting and shall also state the purpose or purposes for which the meeting is called. Notice of any meeting at which is proposed to take action which would entitle shareholders to receive payment for their shares pursuant to statutory provisions must include a statement of that purpose and to that effect. If mailed, such notices of the annual and each special meeting are given when deposited in the United States mail, postage prepaid, directed to the shareholder at his address as it appears in the record of shareholders unless he shall have filed with the Secretary of the corporation a written request that notices intended for him shall be mailed to some other address, in which case it shall be directed to him at such other address. 1 SECTION 1.05 Record Date. For the purpose of determining the shareholders entitled to notice of or to vote any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than fifty nor less than ten days before the date of such meeting, nor more than fifty days prior to any other action. SECTION 1.06 Quorum. The presence, in person or by proxy, of the holders of a majority of the shares entitled to vote thereat shall constitute a quorum at a meeting of shareholders for the transaction of business, except as otherwise provided by statute, by the Certificate of Incorporation or by the By-Laws. The shareholders present in person or by proxy and entitled to vote at any meeting, despite the absence of a quorum, shall have power to adjourn the meeting from time to time, to a designated time and place, without notice other than by announcement at the meeting, and at any adjourned meeting any business may be transacted that might have been transacted on the original date of the meeting. However, if after the adjournment the Board of Directors fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record on the new record date entitled to notice. SECTION 1.07 Notice of Shareholder Business at Annual Meeting. At an annual meeting of shareholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any shareholder of the corporation who complies with the notice procedures set forth in this Section 1.07. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than thirty days nor more than fifty days prior to the meeting; provided, however, that in the event that less than forty days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the shareholder and (d) any material interest of the shareholder in such business. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 1.07 and Section 2.03. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 1.07 and Section 2.03, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2 ARTICLE II BOARD OF DIRECTORS SECTION 2.01 Number and Qualifications. The business of the corporation shall be managed by its Board of Directors. The number of directors constituting the entire Board of Directors shall be not less than seven nor more than fifteen, as shall be fixed from time to time by vote of a majority of the entire Board of Directors. Each director shall be at least 21 years of age. Directors need not be shareholders. No Officer-Director who shall have attained age 65, or earlier relinquishes his responsibilities and title, shall be eligible to serve as a director. SECTION 2.02 Election. At each annual meeting of shareholders, directors shall be elected by a plurality of the votes to hold office until the next annual meeting. Subject to the provisions of the statute, of the Certificate of Incorporation and of the By-Laws, each director shall hold office until the expiration of the term for which elected, and until his successor has been elected and qualified. SECTION 2.03 Nomination and Notification of Nomination. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, nominations for the election of directors may be made by the Board of Directors or to any committee appointed by the Board of Directors or by any shareholder entitled to vote in the election of directors generally. However, any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the corporation not later than (i) with respect to an election to be held at an annual meeting of shareholders ninety days in advance of such meeting, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the corporation if so elected. At the request of the Board 3 of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in the By-Laws. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 2.04 Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such places and times as may be fixed from time to time by resolution of the Board and a regular meeting for the purpose of organization and transaction of other business shall be held each year after the adjournment of the annual meeting of shareholders. SECTION 2.05 Special Meetings. The Chairman of the Board, the Chief Executive Officer, the President, the Senior Vice Chairman or any Vice Chairman may, and at the request of three directors shall, call a special meeting of the Board of Directors, two days' notice of which shall be given in person or by mail, telegraph, radio, telephone or cable. Notice of a special meeting need not be given to any director who submits a signed waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. SECTION 2.06 Place of Meeting. The directors may hold their meetings, have one or more offices, and keep the books of the corporation (except as may be provided by law) at any place, either within or without the State of New York, as they may from time to time determine. SECTION 2.07 Quorum and Vote. At all meetings of the Board of Directors the presence of one-third of the entire Board, but not less than two directors, shall constitute a quorum for the transaction of business. Any one or more members of the Board of Directors or of any committee thereof may participate in a meeting of the Board of Directors or a committee thereof by means of a conference telephone or similar communications equipment which allows all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at such a meeting. The vote of a majority of the directors present at the time of the vote, if a quorum is present at such time, shall be the act of the Board of Directors, except as may be otherwise provided by statute or the By-Laws. SECTION 2.08 Vacancies. Newly created directorships resulting from increase in the number of directors and vacancies in the Board of Directors, whether caused by resignation, death, removal or otherwise, may be filled by vote of a majority of the directors then in office, although less than a quorum exists. 4 ARTICLE III EXECUTIVE AND OTHER COMMITTEES SECTION 3.01 Designation and Authority. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from among its members an Executive Committee and other committees, each consisting of three or more directors. Each such committee, to the extent provided in the resolution or the By-Laws, shall have all the authority of the Board, except that no such committee shall have authority as to: (i) the submission to shareholders of any action as to which shareholders' authorization is required by law. (ii) the filling of vacancies in the Board of Directors or any committee. (iii) the fixing of compensation of directors for serving on the Board or on any committee. (iv) the amendment or appeal of the By-Laws, or the adoption of new By-Laws. (v) the amendment or repeal of any resolution of the Board which by its terms shall not be so amendable or repealable. The Board may designate one or more directors as alternate members of any such committee, who may replace any absent member or members at any meeting of such committee. Each such committee shall serve at the pleasure of the Board of Directors. SECTION 3.02 Procedure. Except as may be otherwise provided by statute, by the By-Laws or by resolution of the Board of Directors, each committee may make rules for the call and conduct of its meetings. Each committee shall keep a record of its acts and proceedings and shall report the same from time to time to the Board of Directors. ARTICLE IV OFFICERS SECTION 4.01 Titles and General. The Board of Directors shall elect from among their number a Chairman of the Board and a Chief Executive Officer, and may also elect a President, a Senior Vice Chairman, one or more Vice Chairmen, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Principals, one or more Vice Presidents, a Secretary, a Controller, a Treasurer, a General Counsel, a General Auditor, and a General Credit Auditor, who need not be directors. The officers of the corporation may also include such other officers or assistant officers as shall from time to time be elected or appointed by the Board. The Chairman of the Board or the Chief Executive Officer or, in their absence, the President, the Senior Vice Chairman or any Vice 5 Chairman, may from time to time appoint assistant officers. All officers elected or appointed by the Board of Directors shall hold their respective offices during the pleasure of the Board of Directors, and all assistant officers shall hold office at the pleasure of the Board or the Chairman of the Board or the Chief Executive Officer or, in their absence, the President, the Senior Vice Chairman or any Vice Chairman. The Board of Directors may require any and all officers and employees to give security for the faithful performance of their duties. SECTION 4.02 Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and of the Board of Directors. Subject to the Board of Directors, he shall exercise all the powers and perform all the duties usual to such office and shall have such other powers as may be prescribed by the Board of Directors or the Executive Committee or vested in him by the By-Laws. SECTION 4.03 Chief Executive Officer. The Board of Directors shall designate the Chief Executive Officer of the corporation, which person may also hold the additional title of Chairman of the Board, President, Senior Vice Chairman or Vice Chairman. Subject to the Board of Directors, he shall exercise all the powers and perform all the duties usual to such office and shall have such other powers as may be prescribed by the Board of Directors or the Executive Committee or vested in him by the By-Laws. SECTION 4.04 Chairman of the Board, President, Senior Vice Chairman, Vice Chairmen, Executive Vice Presidents, Senior Vice Presidents, Principals and Vice Presidents. The Chairman of the Board or, in his absence or incapacity the President or, in his absence or incapacity, the Senior Vice Chairman, the Vice Chairmen, the Executive Vice Presidents, or in their absence, the Senior Vice Presidents, in the order established by the Board of Directors shall, in the absence or incapacity of the Chief Executive Officer perform the duties of the Chief Executive Officer. The President, the Senior Vice Chairman, the Vice Chairmen, the Executive Vice Presidents, the Senior Vice Presidents, the Principals, and the Vice Presidents shall also perform such other duties and have such other powers as may be prescribed or assigned to them, respectively, from time to time by the Board of Directors, the Executive Committee, the Chief Executive Officer, or the By-Laws. SECTION 4.05 Controller. The Controller shall perform all the duties customary to that office and except as may be otherwise provided by the Board of Directors shall have the general supervision of the books of account of the corporation and shall also perform such other duties and have such powers as may be prescribed or assigned to him from time to time by the Board of Directors, the Executive Committee, the Chief Executive Officer, or the By-Laws. SECTION 4.06 Secretary. The Secretary shall keep the minutes of the meetings of the Board of Directors and of the shareholders and shall have the custody of the seal of the corporation. He shall perform all other duties usual to that office, and shall also perform such other duties and have such powers as may be prescribed or assigned to him from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board, the Chief Executive Officer, or the By-Laws. 6 ARTICLE V INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS SECTION 5.01 The corporation shall, to the fullest extent permitted by Section 721 of the New York Business Corporation Law, indemnify any person who is or was made, or threatened to be made, a party to an action or proceeding, whether civil or criminal, whether involving any actual or alleged breach of duty, neglect or error, any accountability, or any actual or alleged misstatement, misleading statement or other act or omission and whether brought or threatened in any court or administrative or legislative body or agency, including an action by or in the right of the corporation to procure a judgment in its favor and an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director or officer of the corporation is serving or served in any capacity at the request of the corporation by reason of the fact that he, his testator or intestate, is or was a director or officer of the corporation, or is serving or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement, and costs, charges and expenses, including attorneys' fees, or any appeal therein; provided, however, that no indemnification shall be provided to any such person if a judgment or other final adjudication adverse to the director or officer establishes that (i) his acts were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated, or (ii) he personally gained in fact a financial profit or other advantage to which he was not legally entitled. SECTION 5.02 The corporation may indemnify any other person to whom the corporation is permitted to provide indemnification or the advancement of expenses by applicable law, whether pursuant to rights granted pursuant to, or provided by, the New York Business Corporation Law or other rights created by (i) a resolution of shareholders, (ii) a resolution of directors, or (iii) an agreement providing for such indemnification, it being expressly intended that these By-Laws authorize the creation of other rights in any such manner. SECTION 5.03 The corporation shall, from time to time, reimburse or advance to any person referred to in Section 5.01 the funds necessary for payment of expenses, including attorneys' fees, incurred in connection with any action or proceeding referred to in Section 5.01, upon receipt of a written undertaking by or on behalf of such person to repay such amount(s) if a judgment or other final adjudication adverse to the director or officer establishes that (i) his acts were committed in bad faith or were the result of active and deliberate dishonesty and, in either case, were material to the cause of action so adjudicated, or (ii) he personally gained in fact a financial profit or other advantage to which he was not legally entitled. SECTION 5.04 Any director or officer of the corporation serving (i) another corporation, of which a majority of the shares entitled to vote in the election of its directors 7 is held by the corporation, or (ii) any employee benefit plan of the corporation or any corporation referred to in clause (i), in any capacity shall be deemed to be doing so at the request of the corporation. In all other cases, the provisions of this Article V will apply (i) only if the person serving another corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise so served at the specific request of the corporation, evidenced by a written communication signed by the Chairman of the Board, the Chief Executive Officer, the President, the Senior Vice Chairman or any Vice Chairman, and (ii) only if and to the extent that, after making such efforts as the Chairman of the Board, the Chief Executive Officer, or the President shall deem adequate in the circumstances, such person shall be unable to obtain indemnification from such other enterprise or its insurer. SECTION 5.05 Any person entitled to be indemnified or to the reimbursement or advancement of expenses as a matter of right pursuant to this Article V may elect to have the right to indemnification (or advancement of expenses) interpreted on the basis of the applicable law in effect at the time of the occurrence of the event or events giving rise to the action or proceeding, to the extent permitted by law, or on the basis of the applicable law in effect at the time indemnification is sought. SECTION 5.06 The right to be indemnified or to the reimbursement or advancement of expenses pursuant to this Article V (i) is a contract right pursuant to which the person entitled thereto may bring suit as if the provisions hereof were set forth in a separate written contract between the corporation and the director or officer, (ii) is intended to be retroactive and shall be available with respect to events occurring prior to the adoption hereof, and (iii) shall continue to exist after the rescission or restrictive modification hereof with respect to events occurring prior thereto. SECTION 5.07 If a request to be indemnified or for the reimbursement or advancement of expenses pursuant hereto is not paid in full by the corporation within thirty days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled also to be paid the expenses of prosecuting such claim. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the claimant is not so entitled. SECTION 5.08 A person who has been successful, on the merits or otherwise, in the defense of a civil or criminal action or proceeding of the character described in Section 5.01 shall be entitled to indemnification only as provided in Sections 5.01 and 5.03, notwithstanding any provision of the New York Business Corporation Law to the contrary. 8 ARTICLE VI SEAL SECTION 6.01 Corporate Seal. The corporate seal shall contain the name of the corporation and the year and state of its incorporation. The seal may be altered from time to time at the discretion of the Board of Directors. ARTICLE VII SHARE CERTIFICATES SECTION 7.01 Form. The certificates for shares of the corporation shall be in such form as shall be approved by the Board of Directors and shall be signed by the Chairman of the Board, the Chief Executive Officer, the President, the Senior Vice Chairman or any Vice Chairman and the Secretary or an Assistant Secretary, and shall be sealed with the seal of the corporation or a facsimile thereof. The signatures of the officers upon the certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the corporation itself or its employees. ARTICLE VIII CHECKS SECTION 8.01 Signatures. All checks, drafts and other orders for the payment of money shall be signed by such officer or officers or agent or agents as the Board of Directors may designate from time to time. ARTICLE IX AMENDMENT SECTION 9.01 Amendment of By-Laws. The By-Laws may be amended, repealed or added to by vote of the holders of the shares at the time entitled to vote in the election of any directors. The Board of Directors may also amend, repeal or add to the By-Laws, but any By-Laws adopted by the Board of Directors may be amended or repealed by the shareholders entitled to vote thereon as provided herein. If any By-Law regulating an impending election of directors is adopted, amended or repealed by the Board, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the 9 By-Laws so adopted, amended or repealed, together with concise statement of the changes made. ARTICLE X SECTION 10.01 Construction. The masculine gender, when appearing in these By-Laws, shall be deemed to include the feminine gender. I, ______________________________________________________, [Assistant] Secretary of Bankers Trust Corporation, New York, New York, hereby certify that the foregoing is a complete, true and correct copy of the By-Laws of Bankers Trust Corporation, and that the same are in full force and effect at this date. ---------------------------------------- [ASSISTANT] SECRETARY DATED: ----------------------------- 10 State of New York Department of State I hereby certify that the annexed copy has been compared with the original document in the custody of the Secretary of State and that the same is a true copy of said original. Witness my hand and seal of the Department of State on Special Deputy Secretary of State 11 -----END PRIVACY-ENHANCED MESSAGE-----