BANKERS TRUST CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Pages 1-11 represent portions of the 1998 Annual Report to Stockholders which
are not required by the Form 10-K report and are not "filed" as part of the Form
10-K.
The Form 10-K cover page and cross reference index are on pages 108 and 109,
respectively.
<PAGE>
Table 1 Five-Year Summary of Selected Financial Data
<TABLE>
<CAPTION>
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($in millions, except per share data) 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
For the Year
Net interest revenue $ 1,372 $ 1,359 $ 1,057 $ 884 $ 1,216
Noninterest revenue 3,757 4,861 4,117 3,129 3,013
Net income (loss) $ (73) $ 866 $ 766 $ 311 $ 686
====================================================================================================================================
Per Common Share
Basic Earnings (Loss) Per Share $ (1.05) $ 8.15 $ 7.12 $ 2.62 $ 6.61
Diluted Earnings (Loss) Per Share $ (1.05) $ 7.66 $ 6.76 $ 2.54 $ 6.34
Cash dividends declared $ 4.00 $ 4.00 $ 4.00 $ 4.00 $ 3.70
--as a percentage of net income N/M 52% 59% 157% 63%
Book value, end of year 42.66 49.06 49.21 45.73 47.74
Market price
High 136 7/16 133 5/8 90 7/8 72 84 5/8
Low 45 74 61 49 3/4 54 3/4
End of year 85 7/16 112 7/16 86 1/4 66 1/2 55 3/8
Price/earnings ratio, end of year N/M 13.8x 12.1x 25.4x 8.4x
Cash dividend yield, end of year 4.7% 3.6% 4.6% 6.0% 7.2%
At Year End
Total assets $ 133,115 $ 140,102 $ 122,543 $ 106,199 $ 98,362
Long-term debt not included in
risk-based capital 14,890 11,275 8,732 7,127 4,317
Long-term debt included in
risk-based capital 3,113 3,312 2,576 2,360 2,225
Mandatorily redeemable capital securities
of subsidiary trusts holding solely
junior subordinated deferrable interest
debentures included
in risk-based capital 1,420 1,472 730 -- --
Preferred stock of subsidiary -- -- 250 250 250
Preferred stock (Corporation) 394 658 810 865 395
Common stockholders' equity 4,302 5,050 5,068 4,608 4,682
Total stockholders' equity 4,696 5,708 5,878 5,473 5,077
Profitability Ratios
Return on average common stockholders'
equity N/M 15.6% 14.5% 5.7% 14.0%
Return on average total stockholders'
equity N/M 14.6% 13.3% 5.9% 13.4%
Return on average total assets N/M .63% .63% .28% .65%
Capital Ratios
Common stockholders' equity to total
assets, end of year 3.2% 3.6% 4.1% 4.3% 4.8%
Total stockholders' equity to total
assets, end of year 3.5% 4.1% 4.8% 5.2% 5.2%
Average total stockholders' equity
to average total assets 3.3% 4.4% 4.7% 4.7% 4.8%
Bankers Trust Corporation:
Risk-Based Capital Ratios
Tier 1 Capital 7.5% 8.3% 9.3% 9.0% 9.5%
Total Capital 13.6% 14.1% 13.8% 14.0% 14.8%
Leverage Ratio 3.5% 4.4% 5.9% 5.4% 5.5%
Bankers Trust Company:
Risk-Based Capital Ratios
Tier 1 Capital 10.5% 9.0% 9.3% 9.5% 9.9%
Total Capital 13.4% 12.3% 12.9% 12.8% 12.9%
Leverage Ratio 5.7% 5.4% 5.3% 5.1% 5.9%
Employees, at December 31
In domestic offices 11,005 10,585 11,055 10,137 10,545
In foreign offices 9,536 8,070 6,881 6,365 6,314
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Total 20,541 18,655 17,936 16,502 16,859
====================================================================================================================================
</TABLE>
N/M Not Meaningful
12 Bankers Trust Corporation and its Subsidiaries
<PAGE>
FINANCIAL REVIEW
Management's discussion and analysis of Bankers Trust Corporation's results of
operations and financial condition appears on pages 13 through 40. The
discussion and analysis should be read in conjunction with the financial
statements and supplemental financial data, which begin on page 42.
Proposed Merger with Deutsche Bank
On November 30, 1998, Deutsche Bank AG ("Deutsche Bank") and Bankers Trust
Corporation entered into a definitive agreement under which Deutsche Bank will
acquire all outstanding shares of Bankers Trust Corporation's common stock (the
"Merger Agreement"). Each share of Bankers Trust Corporation's common stock, par
value $1.00 per share ("BT Common Stock"), will be converted into the right to
receive $93.00. The merger will be treated as a taxable purchase and sale of BT
Common Stock for U.S. income tax purposes and will be accounted for under the
purchase method. The merger, which is expected to be completed in the second
quarter of 1999, is subject to the approval of shareholders representing
two-thirds of Bankers Trust Corporation's common shares and of regulatory
authorities in a variety of jurisdictions.
On the day of the closing of the merger, the change-in-control ("COC")
date, all employee deferred compensation amounts to the extent unvested will be
vested in full. Bankers Trust Corporation will recognize such amounts, which are
estimated to be approximately $500 million after-tax, as compensation expense on
the COC date in the Consolidated Statement of Income. Employer contributions to
individual employee retirement accounts will also vest, to the extent unvested,
and remain in the employees' accounts. In addition, all bonus-eligible employees
who are active employees of the Corporation on the date of COC will be eligible
to receive a pro rata bonus paid in cash for that portion of the 1999
performance year ending on the COC date. The pro rata bonus will be 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.
Any 1999 performance bonus (which is awarded in the year 2000) will be reduced
by the amount of such pro rata bonus. It is estimated that this pro rata payout
will result in an after-tax charge of approximately $130 million to recognize
the cash payment of bonuses that otherwise would have been awarded as deferred
stock and amortized over a three-year vesting period.
If the merger does not occur under certain circumstances, Deutsche Bank
has an option to purchase up to approximately 19 million shares of BT Common
Stock at a price, subject to certain adjustments, of $74.625 per share, pursuant
to the stock option agreement dated November 30, 1998 entered into between
Bankers Trust Corporation and Deutsche Bank (the "Option"). In the event that
any additional shares of BT Common Stock are issued or otherwise become
outstanding after the date of the stock option agreement, the number of shares
of BT Common Stock subject to the Option shall be increased so that, after such
issuance, such number equals 19.9 percent of the number of shares of BT Common
Stock then issued and outstanding without giving effect to any shares subject or
issued pursuant to the Option.
Results of Operations
Summary of 1998 Results
For the year 1998, Bankers Trust Corporation and Subsidiaries (the
"Corporation," or the "Firm") reported a net loss of $73 million, or $1.05
diluted loss per share. For the year 1997, the Corporation earned $866 million,
or $7.66 diluted earnings per share.
For the year, total net revenue (net interest revenue after provision for
credit losses related to loans plus noninterest revenue) of $5.089 billion was
down $1.131 billion, from 1997 revenue of $6.220 billion. The decline was mainly
attributable to emerging markets portfolios.
Total noninterest expenses for the year increased $185 million, or 4
percent, from 1997. The current year reflects 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 record keeping problems that occurred between 1994
and early 1996. See "Litigation and Related Matters" on page 93. Salaries and
commissions expense increased due to a rise in the average number of employees
and higher annual salaries. Agency and other professional service fees also
increased due to integration and continuing costs of the acquisition of NatWest
Markets' European equities business.
At December 31, 1998, total cash basis loans amounted to $392 million, up
from $240 million at December 31, 1997. Excluding other real estate, other
nonperforming assets (primarily derivatives) at December 31, 1998 were $250
million, up from $38 million at December 31, 1997.
Business Segments
At December 31, 1998, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") 131, "Disclosures About Segments of an Enterprise and Related
Information." Prior period amounts have been restated to conform with the
requirements of SFAS 131. Management reports the results of operations of the
Corporation principally through six broad business segments. Four business
segments are organized around specific products and services: Investment
Banking, Trading & Sales, Private Client Services Group and Global Institutional
Services. Two additional business segments, Australia/New Zealand/International
Funds Management and Emerging Markets Group, are organized to deliver these same
types of financial products and services with the local expertise necessary to
operate in these markets. Other business segments include the income and
expenses of smaller businesses that are not included in the main business
segments. Refer to Note 21 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.
Bankers Trust Corporation and its Subsidiaries 13
<PAGE>
The information presented below reflects the results by business segment (in
millions):
<TABLE>
<CAPTION>
Total Non- Pretax Net
Year Ended Total Net interest Income/ Income/
December 31, 1998 Revenue Expenses (Loss) (Loss)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Banking $ 2,039 $ 1,660 $ 379 $ 249
Trading & Sales 781 574 207 133
Emerging Markets Group:
Latin America 340 525 (185) (121)
Emerging Europe,
Middle East & Africa (120) 88 (208) (142)
Asia (381) 169 (550) (356)
Private Client
Services Group 695 590 105 72
Global Institutional
Services 1,076 927 149 99
Australia/New Zealand/
International Funds
Management 631 425 206 138
Other business segments (1) 44 (45) (29)
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Total Business Segments 5,060 5,002 58 43
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Corporate Items 29 164 (135) (116)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 5,089 $ 5,166 $ (77) $ (73)
===================================================================================================================================
<CAPTION>
Total Non- Pretax Net
Year Ended Total Net interest Income/ Income/
December 31, 1997 Revenue Expenses (Loss) (Loss)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Banking $ 2,205 $ 1,501 $ 704 $ 493
Trading & Sales 692 492 200 140
Emerging Markets Group:
Latin America 660 527 133 92
Emerging Europe,
Middle East & Africa 121 93 28 20
Asia 80 191 (111) (80)
Private Client
Services Group 665 578 87 60
Global Institutional
Services 1,027 898 129 92
Australia/New Zealand/
International Funds
Management 574 420 154 107
Other business segments 12 61 (49) (34)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Business Segments 6,036 4,761 1,275 890
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Items 184 220 (36) (24)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 6,220 $ 4,981 $ 1,239 $ 866
===================================================================================================================================
<CAPTION>
Total Non- Pretax Net
Year Ended Total Net interest Income/ Income/
December 31, 1996 Revenue Expenses (Loss) (Loss)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Banking $ 1,711 $ 1,064 $ 647 $ 438
Trading & Sales 501 465 36 25
Emerging Markets Group:
Latin America 545 434 111 75
Emerging Europe,
Middle East & Africa 72 48 24 16
Asia 200 137 63 43
Private Client
Services Group 608 521 87 60
Global Institutional
Services 858 769 89 60
Australia/New Zealand/
International Funds
Management 528 338 190 128
Other business segments 2 62 (60) (41)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Business Segments 5,025 3,838 1,187 804
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Items 144 200 (56) (38)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 5,169 $ 4,038 $ 1,131 $ 766
===================================================================================================================================
</TABLE>
Investment Banking 1998 net income of $249 million was $244 million lower
than the $493 million earned in 1997. Losses related to widening credit spreads
on high-yield debt securities contributed to the decline from the prior year. In
addition, 1998 included charges related to the repositioning of its European
equity businesses and integration costs associated with the acquisition of
NatWest Markets' European equities business. The year-over-year decrease was
partially offset by higher corporate finance fees and higher revenue from
private equity investments. In 1997, Investment Banking net income was $493
million, up $55 million from 1996. The increase reflected higher revenue from
corporate finance activities in addition to higher revenue from private equity
investments.
Trading & Sales 1998 net income of $133 million was $7 million lower than
the $140 million earned in 1997. Widening credit spreads and increased market
volatility in global equity markets in the third quarter of 1998 negatively
impacted the current year. Higher revenue from client-related activities
partially offset the above-mentioned items. Trading & Sales net income of $140
million in 1997 increased $115 million from 1996 primarily due to higher revenue
from foreign exchange and arbitrage activities.
Emerging Markets Group 1998 net loss was $619 million, compared to net
income of $32 million in 1997. The 1998 net loss was primarily attributable to
deteriorating credit conditions in Asia and charges to reduce the carrying
amount of exposure of Russian Federation securities. The 1997 net income of $32
million compared to $134 million in 1996. The decrease was primarily due to the
economic conditions in Asia.
Latin America--Trading losses and losses on securities available for sale
negatively impacted the current year. The 1997 results included a $37 million
after-tax gain on the sale of fifty percent of the Corporation's stake in
Consorcio, a Chilean insurance company. The 1996 results included a $22 million
after-tax gain on the sale of Compensa, which was the smaller of the
Corporation's two Chilean insurance subsidiaries.
Emerging Europe, Middle East and Africa--Charges to reduce the carrying
amount of exposure of Russian Federation securities negatively impacted the
current year.
Asia--The results for 1998 included losses on securities available for
sale and trading losses resulting from the continuing weak economic conditions
in the region. The 1997 results included mark-to-market losses on fixed income
securities and swaps with Asian counterparties resulting from the market turmoil
and widening credit spreads in Asia. In addition, in 1997 the Corporation
recognized a decline in value for certain investments and took other
credit-related charges in Southeast Asia.
Private Client Services Group 1998 net income of $72 million increased $12
million from the $60 million earned in 1997. Higher global private banking
commissions, higher fees for brokerage services and improved funds management
revenue contributed to the increase. In 1997, net income of $60 million was
unchanged from net income in 1996.
Global Institutional Services 1998 net income of $99 million increased by
$7 million from the $92 million earned in 1997. Improved revenue from corporate
trust and agency services and cash management services contributed to this
increase. The current year's
14 Bankers Trust Corporation and its Subsidiaries
<PAGE>
results also included a benefit from a contingency payment related to the 1997
sale of the Corporation's defined contribution recordkeeping and participant
services business. In 1997, net income of $92 million increased $32 million from
1996 net income. The 1997 results, as compared to 1996, benefited from the
acquisition of NationsBank's institutional trust business. The 1997 results also
included a $41 million after-tax gain on the above-mentioned sale.
Australia/New Zealand/International Funds Management 1998 net income of
$138 million increased $31 million from the $107 million earned in 1997. The
increase was due to strong sales and trading performance and improved revenue
from funds management activities. Net income was $107 million in 1997, down $21
million from $128 million in 1996. The decline in net income from 1996 was
mainly attributable to an increase in personnel-related costs as a result of
higher staff levels offset partly by improved revenue from trading activities
and fiduciary and funds management.
Other business segments 1998 net loss was $29 million, compared to a net
loss of $34 million in 1997. The 1997 net loss of $34 million compared to a net
loss of $41 million in 1996.
Financial Reporting Matters
On January 1, 1998, the Corporation adopted SFAS 130, "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. It requires that a
company classify items of other comprehensive income by their nature in a
financial statement, and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
stockholders' equity section of a statement of financial position. All periods
presented have been restated to conform with SFAS 130.
At December 31, 1998, the Corporation adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders after the initial year of its application. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. All periods presented have been restated
to conform with SFAS 131.
At December 31, 1998, the Corporation adopted SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 revises
and standardizes the disclosure requirements but does not change the measurement
or recognition rules for pensions and other postretirement benefit plans.
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 1998 was $1.372 billion, up $13 million from 1997. Net
interest revenue for 1997 was $1.359 billion, up $302 million, or 29 percent
from 1996.
The Firm's trading and risk management businesses include significant
activities in 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 $787 million in 1998, compared to $818 million in 1997.
For the 1997 versus 1996 comparison, net interest revenue increased by
$302 million due to a $264 million, or a 95 percent increase in trading-related
net interest revenue, which totaled $541 million for 1997. Total
nontrading-related net interest revenue was $818 million for 1997 compared to
$780 million in 1996.
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.
In 1997, the interest rate spread was 1.09 percent compared to .74 percent
in 1996. Net interest margin increased to 1.33 percent from 1.13 percent. The
yield on interest-earning assets rose by 17 basis points. The cost of
interest-bearing liabilities declined by 18 basis points. Average
interest-earning assets totaled $104.3 billion at December 31, 1997, up $9.0
billion from December 31, 1996. The increase was primarily attributable to
increases in loans and securities borrowed. Average interest-bearing liabilities
totaled $100.2 billion at December 31, 1997, up $10.8 billion from December 31,
1996. The increase was primarily attributable to a rise in interest-bearing
deposits and other short-term borrowings.
Bankers Trust Corporation and its Subsidiaries 15
<PAGE>
Table 2 Net Interest Revenue Analysis
The table below presents the Corporation's trend of net interest revenue,
average balances and rates. For further details on these statistics, see pages
86 through 88.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
($in millions) Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest revenue
Book basis $ 1,372 $ 1,359 $ 1,057
Tax equivalent adjustment* 31 26 16
- -------------------------------------------------------------------------------
Fully taxable basis $ 1,403 $ 1,385 $ 1,073
===============================================================================
Average balances
Interest-earning assets $120,650 $104,334 $ 95,326
Interest-bearing liabilities 117,637 100,154 89,336
- -------------------------------------------------------------------------------
Earning assets financed by
noninterest-bearing funds $ 3,013 $ 4,180 $ 5,990
===============================================================================
Average rates (fully taxable basis)
Yield on interest-earning assets 6.90% 7.01% 6.84%
Cost of interest-bearing liabilities 5.88 5.92 6.10
- -------------------------------------------------------------------------------
Interest rate spread 1.02 1.09 .74
Contribution of noninterest-bearing funds .14 .24 .39
- -------------------------------------------------------------------------------
Net interest margin 1.16% 1.33% 1.13%
===============================================================================
</TABLE>
* 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
1998, 41 percent for 1997 and 42 percent for 1996.
Provision for Credit Losses--Loans
The provision for credit losses related to loans amounted to $40 million for
1998, compared with no provision for 1997 and $5 million in 1996. A discussion
of the Corporation's allowance for credit losses--loans appears on page 31.
Trading Revenue
Trading revenue is generated by both client-related activities and proprietary
activities. These activities include the Firm's dealer business of providing
risk management products for clients, including derivatives such as swaps,
options, forwards and other similar types of contracts. In addition, these
activities include the trading of U.S. government and agency securities, foreign
sovereign securities, foreign exchange and currency options and commodity
futures and options. The Firm also trades restructured loans, bonds, equities
and other instruments of emerging markets issuers.
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.
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, 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
- -------------------------------------------------------------------------------
Year Ended December 31, 1996
Interest rate risk $ 474 $ 321 $ 795
Foreign exchange risk 178 -- 178
Equity and commodity risk 362 (44) 318
- -------------------------------------------------------------------------------
Total $ 1,014 $ 277 $ 1,291
- -------------------------------------------------------------------------------
Interest Rate Risk
As indicated above, a significant portion of the Firm's trading and risk
management 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 1998 trading and trading-related net interest revenue was $166 million
compared to $1.036 billion in 1997. The decrease is 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.
In 1997 trading and trading-related net interest revenue was $1.036
billion, up $241 million, or 30 percent, compared to 1996.
16 Bankers Trust Corporation and its Subsidiaries
<PAGE>
The increase was principally due to improved performance in U.S., Asian, Russian
and Latin American markets.
Foreign Exchange Risk
The Firm's trading and risk management strategies also involve positions in
foreign exchange and currency-related derivatives such as swaps, options,
forwards and other similar types of contracts.
In 1998 trading revenue related to foreign exchange risk was $426 million,
up $149 million, or 54 percent, compared to 1997. The increase is principally
due to gains in the Asian and Australian foreign exchange markets.
The trading revenue related to foreign exchange risk increased $99
million, or 56 percent in 1997, compared to 1996. The increase was primarily
related to strong results from client-trading activities as well as gains in
Asian foreign exchange markets.
Equity and Commodity Risk
The Firm's trading and risk management activities also include positions in
equity securities and commodities and related derivatives.
Total trading and trading-related net interest revenue related to equity
and commodity risk decreased $474 million in 1998 compared to 1997. The decrease
is primarily attributable to losses within the global proprietary equity
portfolios due to increased market volatility, valuation adjustments related to
the Corporation's European Equity business as well as decreased activity in the
equity derivative books.
Total trading and trading-related net interest revenue related to equity
and commodity risk decreased $35 million in 1997 compared to 1996. This decrease
resulted from losses from equity derivatives and activities in Asian markets,
partially offset by improved performance in the commodity derivative books.
Noninterest Revenue (Excluding Trading)
The following table presents noninterest revenue (in millions):
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Fiduciary and funds management $ 1,108 $ 1,059 $ 876
Corporate finance fees 1,255 1,113 922
Other fees and commissions 817 606 534
Net revenue from equity
investments 302 224 230
Securities available for sale gains (losses) (56) 158 75
Insurance premiums 256 287 230
Other 259 359 236
- --------------------------------------------------------------------------------
Total $ 3,941 $ 3,806 $ 3,103
================================================================================
Fiduciary and funds management revenue was up $49 million, or 5 percent,
from 1997, which was up $183 million from 1996. Higher global private banking
commissions and improved funds management revenue contributed to the increase in
1998. Funds management, client processing services and global private banking
commissions contributed to the increase in 1997.
Corporate finance fees were up $142 million, or 13 percent, from 1997,
which were up $191 million from 1996. Higher merger and acquisition fees in
addition to higher financial advisory and commitment fees contributed to the
increase in 1998. The increase in 1997 was primarily due to higher fees for
arranging bond and equity financings, higher merger and acquisition fees and
higher loan syndication fees.
Other fees and commissions were up $211 million, or 35 percent, from 1997,
which were up $72 million from 1996. The increase in 1998 was primarily due to
higher fees for brokerage services principally resulting from the acquisition of
NatWest Markets' European equities business. The increase in 1997 as compared to
1996 was due to higher fees for brokerage services due to strong market activity
in the listed brokerage business.
Net revenue from equity investments was up $78 million, or 35 percent,
from 1997, which was down $6 million from 1996. The increase in 1998 was
primarily due to higher gains on direct equity investments.
Securities available for sale losses were $56 million compared to
securities available for sale gains of $158 million in 1997, a decrease of $214
million, from 1997. The current year included losses on Russian, Asian and Latin
American securities. Securities available for sale gains in 1997 increased $83
million from 1996 primarily due to higher gains on sales of equity securities.
Insurance premiums decreased $31 million, or 11 percent, from 1997. This
decrease was mainly due to decreasing annuity sales at Consorcio, the
Corporation's 50 percent owned Chilean insurance company. Insurance premiums in
1997 were $57 million higher than 1996 due to increased annuity and traditional
life insurance activity.
Other noninterest revenue was $259 million in 1998, a decrease of $100
million from 1997 which increased $123 million, or 52 percent, from 1996. The
1997 results included a pre-tax gain of $76 million on the sale of 280 Park
Avenue, 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 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, 1998 1997 1996
- --------------------------------------------------------------------------------
Salaries and commissions $1,421 $1,273 $1,154
Incentive compensation and
employee benefits 1,530 1,726 1,216
Agency and other professional
service fees 501 391 321
Communication and data services 252 231 237
Occupancy, net 218 181 174
Furniture and equipment 252 224 186
Travel and entertainment 171 142 113
Provision for policyholder benefits 322 333 280
Other 499 423 357
Restructuring charges -- 57 --
- --------------------------------------------------------------------------------
Total $5,166 $4,981 $4,038
================================================================================
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.
Bankers Trust Corporation and its Subsidiaries 17
<PAGE>
All other noninterest expenses totaled $2.215 billion compared with $1.982
billion in 1997. The current year reflects 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 record keeping 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.
Total noninterest expenses for 1997 increased $943 million, or 23 percent,
from 1996. Salaries and commissions expense increased $119 million, or 10
percent in 1997, due to an increase in the average number of employees and to
annual pay increases. Incentive compensation and employee benefits increased
$510 million, or 42 percent, due to higher profitability and an increase in the
average number of employees.
All other noninterest expenses totaled $1.982 billion in 1997, compared
with $1.668 billion for 1996. Included in the 1997 amount were $57 million of
restructuring charges associated with the Alex. Brown merger such as severance,
lease termination and direct costs of completing the merger, and other
integration-related costs of $42 million.
Income Taxes
The income tax benefit for 1998 amounted to $4 million, compared to income tax
expense of $373 million for 1997 and $365 million in 1996. The effective tax
rate for 1998 was 5 percent, while the 1997 and 1996 effective tax rates were 30
percent and 32 percent, respectively. The change in the 1998 effective tax rate
was primarily due to the effect of the nondeductible nature of the payments to
ferderal authorities and the State of New York.
Year 2000 Readiness Disclosure
The Corporation maintains a firm-wide program (the "Year 2000 Program") to
prepare its computer systems, applications and infrastructure for properly
processing dates after December 31, 1999. The Corporation's Year 2000 Program is
proceeding on schedule in accordance with regulatory guidelines.
Based on the Federal Financial Institutions Examination Council ("FFIEC")
guidelines, the Corporation's Year 2000 Program consists of the following phases
related to technology:
1) Awareness Phase--A strategic approach was developed to address the
Year 2000 problem in mid 1996.
2) Assessment Phase--Detailed plans and target dates were developed.
3) Renovation Phase--This phase includes code enhancements, hardware
and software upgrades, system replacements, vendor certification,
and other associated changes.
4) Validation Phase--This phase includes testing and conversion of
system applications.
5) Implementation Phase--This phase includes a review of Year 2000
compliance and user acceptance.
The Awareness and Assessment Phases have been completed. The Renovation
Phase is 99 percent complete. The Validation Phase is substantially complete.
The Corporation expects the Renovation, Validation and Implementation phases to
continue through the second quarter of 1999. The remainder of 1999 will focus on
the completion of firm-wide risk mitigation and contingency planning. Although
the priority given to Year 2000 issues may cause other technology projects to be
deferred, the deferral of these other projects is not expected to have a
material impact on the Corporation's business or operational controls.
The Corporation's Year 2000 Program includes a Business Support Group that
addresses Year 2000 issues not directly related to technology. This group, which
includes representatives from various areas of the Corporation, has subgroups
and task forces working on the following programs:
Facilities Compliance Program--The Year 2000 problem could affect building
management systems and other systems critical to the Corporation's business
operations. The Corporation's Facilities Year 2000 Compliance Program deals with
infrastructure components, including all applicable embedded systems, that are
used in a facility (e.g., elevators, HVAC, generators, security systems, etc.)
and third-party-provided facilities or services (utilities, landlord services,
etc.). The facilities assessment and inventory phases were completed in 1997.
Third-party service provider assessment began in mid 1998. The Facilities Year
2000 Compliance Program was substantially complete at the end of 1998 and
included the remediation and testing of critical facility systems as well as
independent testing by qualified third-party specialists. The remaining
remediation and testing of critical facility systems and the assessment of
critical service providers is expected to be complete by the end of the first
quarter of 1999.
Counterparty Assessment Program--This program addresses the Year 2000
readiness of counterparties. Counterparty Year 2000 assessment has been
incorporated into the standard credit process. At December 31, 1998, the
Corporation had substantially completed its assessment of the Year 2000
readiness of its material customers in accordance with FFIEC guidelines. The
counterparty assessment program is an ongoing process, which will continue
throughout 1999, and for as long as necessary thereafter.
Critical Vendor/Service Provider Program--This program assesses the Year
2000 readiness of the Corporation's critical vendors and service providers, as
well as dealing with related contractual issues. These third parties are
providers in such areas as telecommunications, hardware and software, office
equipment and market data as well as correspondent financial services. Risk
mitigation actions are in the process of being identified for any critical
vendor/service provider deficient in its Year 2000 readiness.
The Corporation is continuing to communicate with its significant
obligors, counterparties, other credit clients, vendors and entities in which
the Corporation holds a significant interest to determine the likely extent to
which the Corporation may be affected by third parties' Year 2000 plans and
target dates. In this regard, while the Corporation does not currently expect a
material loss as a result of the Year 2000 problem, there can be no guarantee
that the systems of other companies and counterparties on which the Corporation
relies will be remediated on a timely basis, or that a failure to remediate by
another party, or a remediation or conversion that is incompatible with the
Corporation's systems, would not have a material adverse effect on the
Corporation.
The Corporation has a business continuity program in place to manage
significant Year 2000 related failures. The Corporation antici-
18 Bankers Trust Corporation and its Subsidiaries
<PAGE>
pates that beginning on January 1, 2000, Year 2000 related failures may result
in sporadic disruption of communications, power, public transportation, or other
external infrastructure worldwide that could compromise the timely performance
of specific business functions and/or limit the flow of business opportunities
across the organization. It is unclear how long the periods of disruption might
last; there are likely to be considerable differences among various global
locations. The Corporation intends to have contingency plans and crisis
management teams in place to coordinate the Corporation's response to those
events likely to present material risks to the Corporation, whether they occur
in an isolated manner or on a country or more widespread basis. The
Corporation's business continuity program identifies significant Year 2000 risks
in the context of its core businesses from both internal and external failures,
assessing their probability of occurrence and taking the necessary actions to
mitigate the risks. This process will provide a platform for risk focused
contingency plans; however, there can be no assurances that any such contingency
plans will fully mitigate the effects of any internal or third-party failure.
The Corporation expects to comply with the FFIEC guidelines and the June 30,
1999 targets related to contingency planning.
The Corporation incurred approximately $130 million for the year ended
December 31, 1998 plus an additional $20 million prior to 1998 for Year 2000
expenditures. Based on information currently available, the Corporation expects
its remaining Year 2000 expenditures over the next two years to be approximately
$90 million to $130 million. A significant portion of these expenditures are not
likely to be incremental costs to the Corporation, but rather will represent the
redeployment of existing information technology resources.
The costs of the Year 2000 Program and the dates on which the Corporation
plans to complete the various stages of the Year 2000 Program are based on
management's current estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those plans.
The Corporation is currently evaluating its systems needs in connection
with the proposed merger with Deutsche Bank (see page 13 of Management's
Discussion and Analysis for further discussion of the proposed merger). As a
result of the merger, the Corporation's Year 2000 expenditures for 1999 and 2000
could differ from current estimates.
European Economic & Monetary Union ("EMU")
The Corporation has completed its global program to manage operational and other
business issues arising from the introduction of Economic & Monetary Union. All
conversion activities were completed on schedule, and all systems and groups
were fully functional and conducting business denominated in euro on the morning
of January 4, 1999. 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 EMU expenditures during 1998 aggregated
approximately $60 million and largely represented the redeployment of existing
operations and information technology resources. The cost of any remaining
efforts related to the original eleven currencies in EMU is not expected to be
material.
International Operations
The Corporation's assets and results of operations for 1998, 1997 and 1996 have
been allocated between domestic and international operations in Note 22 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 13. International net loss totaled $211 million for 1998,
compared with net income of $228 million for 1997. Net income from domestic
operations was positive during 1998, therefore, the ratio of international to
total net income is not meaningful. The contribution to net income from
international operations in 1997 was 26 percent.
The overall losses during 1998 from international operations are 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 is primarily due to trading losses and a decrease in net
interest margins. Net income for 1998 also reflects the previously mentioned
fine to federal authorities and payment to the State of New York.
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
is primarily due to a reduction in Asian trading assets, partially offset by an
increase in European assets.
During 1997, the Asian region suffered a loss of $44 million as compared
to a gain of $71 million during 1996. The loss was primarily caused by trading
losses on Asian securities and write downs and additional reserves related to
the Asian market crisis. Net income for Australia/New Zealand decreased from
$144 million in 1996 to $83 million in 1997. This decrease was primarily due to
personnel costs associated with the expansion of Australian investment banking.
These overall decreases were partially offset by an increase in income for the
United Kingdom. During 1997, the United Kingdom earned $79 million as compared
to nil during 1996. This increase was primarily due to positive trading results
on United Kingdom securities and increases in fee income.
International total assets were $72.7 billion at December 31, 1997
compared to $62.5 billion at December 31, 1996, which represented 52 percent and
51 percent of total consolidated assets, respectively. The $10.2 billion
increase was primarily due to increases of $8.6 billion for Asia and $3.9
billion in the United Kingdom. This increase was partially offset by a $5.5
billion increase in the elimination which is the balance of domestic assets due
from foreign affiliates. The increase in Asian assets is comprised of increases
in interest bearing balances with banks and trading assets. The increase in the
United Kingdom assets was primarily due to increases in trading assets. Domestic
total assets increased by $7.4 billion to $67.4 billion driven by increases in
loans and accounts receivable.
Bankers Trust Corporation and its Subsidiaries 19
<PAGE>
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
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest-earning
Interest-bearing deposits with banks $ 2,370 $ 6,211 $ 3,546
Federal funds sold 3,445 4,950 2,018
Securities purchased under resale agreements 19,316 23,074 22,401
Securities borrowed 17,903 16,588 15,850
Trading assets 25,206 30,447 31,569
Securities available for sale
Taxable 10,038 6,876 6,777
Exempt from federal income taxes 1,692 1,237 1,077
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 11,730 8,113 7,854
Loans
Domestic offices 12,847 10,800 8,226
Foreign offices 10,417 9,580 7,032
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 23,264 20,380 15,258
Customer receivables 1,622 1,612 1,517
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 104,856 111,375 100,013
Noninterest-earning
Cash and due from banks 2,721 1,476 1,394
Noninterest-earning trading assets 29,650 25,157 17,743
All other assets 11,853 10,694 8,671
Allowance for credit losses--loans (665) (780) (988)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 148,415 $ 147,922 $ 126,833
===================================================================================================================================
Liabilities
Interest-bearing
Interest-bearing deposits
Domestic offices $ 18,891 $ 21,881 $ 8,738
Foreign offices 16,650 20,966 18,812
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 35,541 42,847 27,550
Trading liabilities 5,918 5,587 9,716
Securities loaned and securities sold under repurchase agreements 20,650 24,200 26,173
Other short-term borrowings 19,247 20,078 18,950
Long-term debt 18,645 13,050 11,372
Mandatorily redeemable capital securities of subsidiary trusts holding
solely junior subordinated deferrable interest debentures 1,419 1,472 165
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 101,420 107,234 93,926
Noninterest-bearing
Noninterest-bearing deposits 4,362 3,366 3,518
Noninterest-bearing trading liabilities 26,454 20,803 15,755
All other liabilities 11,271 10,591 7,428
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 143,507 141,994 120,627
Preferred Stock of Subsidiary 144 -- 250
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock 394 688 815
Common stockholders' equity 4,370 5,240 5,141
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 4,764 5,928 5,956
Total $ 148,415 $ 147,922 $ 126,833
===================================================================================================================================
</TABLE>
20 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Liquidity and Capital Resources
Management believes that the Corporation has sufficient resources to meet the
needs of its business operations for liquidity and capital resources.
Liquidity
Liquidity is the ability to have funds available at all times to meet the
commitments of the Corporation. The Corporation has a formal process for
managing global liquidity for the Firm as a whole and for each of its
significant subsidiaries. Management's policy is to maintain conservative levels
of liquidity designed to ensure that the Firm has the ability to meet its
obligations under reasonably foreseeable circumstances. The fundamental
objective is to ensure that, even in the event of a complete loss of market
access, the Corporation will be able to fund those assets that cannot be
liquidated on a timely basis. While the Corporation manages its liquidity
position on a day-to-day basis to meet its ongoing funding needs at the lowest
possible cost, the Firm's planning and management process also encompasses
contingency planning to address even the most severe liquidity events.
The Corporation has a strong global funding presence, managing liquidity
through a hybrid centralized/local approach. This approach captures the best of
both central coordination and decentralized market responsiveness. The benefits
of a local approach are proximity to the local markets, diversity of customers
and market segments, and the flexibility to respond quickly to market
opportunities. This is augmented by the centralized management of global
strategy, information and pricing.
The Corporation assesses its liquidity profile on a continuous basis.
Asset and liability maturity characteristics, investor concentration and
available liquid assets are monitored on a daily basis. These factors, among
others, are monitored under various stress scenarios by virtue of a well
developed contingency funding plan. Management believes that the Corporation has
the ability to withstand severe and prolonged liquidity shocks, both systemic
and institution-specific.
One of the Corporation's principal liquidity strengths is its stock of
highly liquid assets. An important component of these liquid assets is the
"liquidity warehouse" and the aggregate warehouse size relative to maturing
liabilities. The "liquidity warehouse" is defined as liquid assets which are
under the direct control of the Treasury/ Funding area and which can be
liquidated at current market value on a timely basis.
The relationship between the liquidity warehouse and maturing liabilities
is expressed principally through the "liquidity barometer," which measures the
liquidity available to the Corporation after meeting maturing liabilities
without selling any "core" assets. Core assets are those not under direct
control of Treasury/Funding. The barometer also assumes complete loss of market
access and a loss of customer balances beyond certain thresholds. The barometer
illustrates how the Firm's ongoing liquidity needs can be met through its pool
of liquid assets.
To ensure unimpeded access to liquidity, the Firm maintains an array of
funding options diversified by instruments, markets, geography, legal vehicle
issuers and currencies. This diversification helps ensure that its access to
liquidity will remain unimpeded even if specific sources may disappear. In
particular, the Corporation monitors carefully its reliance on unsecured
short-term borrowings, so called "hot" money, to ensure that in the event of a
liquidity disruption, the Firm has alternative means through which to fund its
operations. The Corporation places particular emphasis on a large and diverse
base of stable customer deposits, which are generated incidentally from other
transactions or services provided in its Global Institutional Services business,
as well as through Private Banking and other client relationships. In addition,
the Corporation has a high proportion of unsecured funding provided by capital
and long-term debt.
One of the Corporation's principal sources of day-to-day liquidity is
secured funding provided by securities loaned and securities sold under
repurchase agreements. Generally these involve a wide variety of assets
including U.S. government and agency securities, OECD sovereign bonds, U.S. and
foreign equities, mortgage and asset-backed securities and money market
instruments. The Corporation's ability to borrow on a secured basis has
increased in the past few years.
Short-term unsecured financing for the Corporation is available under
domestic and euro commercial paper programs. In an effort to foster self-funding
in the Corporation's major subsidiaries, a number of subsidiaries maintain their
own short and long-term issuance capabilities. These include commercial paper
programs, medium-term note issuance facilities and private placement
capabilities.
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, 1998 totaled $19.4 billion, most of which
was unsecured, and consisted of $13.9 billion in senior borrowings, $4.1 billion
of subordinated debt, and $1.4 billion of trust preferred capital securities.
These liabilities mature between 1999 and 2037, as detailed in Notes 8 and 9 of
Notes to Financial Statements.
Bankers Trust Corporation and its Subsidiaries 21
<PAGE>
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.
Combined consolidated total stockholders' equity and preferred stock of
subsidiary totaled $4.696 billion on December 31, 1998, down $1.012 billion, or
18 percent, from year end 1997, which was down $420 million, or 7 percent, from
year end 1996. The decrease in 1998 was primarily due to dividends declared on
common and preferred stock and the repurchase of common and preferred stock. The
decrease in 1997 was primarily due to the repurchase of preferred stock of
subsidiary and the repurchase of common stock relating to deferred compensation
plans.
The Corporation's primary measure of capital strength is the RAROC
framework (see page 29 for further discussion), which quantifies and assigns
capital to business activities based upon their credit, interest rate, foreign
currency, equity, commodity, liquidity and operating risks. Changes in the
Corporation's global balance sheet are monitored centrally on a regular basis.
In addition, 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 which 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.
In March 1997, the Corporation 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").
Refer to the following Risk Management section for a detailed discussion
of the market risk amendment, including a summary of the quantitative and
qualitative standards required to manage market risk.
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. The Corporation's risk-weighted assets are presented in Table 5.
During 1998, the Corporation's Tier 1 and Total Capital ratios decreased
by 80 and 50 basis points, respectively. These decreases were driven by the
decrease in capital, as discussed above, partially offset by a decrease in
risk-weighted assets of $9.7 billion. The Leverage ratio also decreased during
1998 by 90 basis points due to the decrease in Tier 1 Capital.
During 1998, BTCo's Tier 1 Capital ratio, Total Capital ratio and Leverage
ratio increased by 150, 110 and 30 basis points, respectively, due primarily to
the increase in Tier 1 Capital of $683 million. This increase was driven by the
issuance of $776 million in common stock and $500 million in preferred stock,
offset by dividends paid of $304 million, and the increase in goodwill from the
acquisition of NatWest Markets' European equities business of $202 million.
Table 4 presents the regulatory capital ratios of the Corporation and BTCo
at December 31, 1998 and 1997 and the well capitalized guidelines.
Table 4 Regulatory Capital Ratios
Well
December 31, December 31, Capitalized
1998 1997 Guidelines
- -------------------------------------------------------------------------------
Corporation
Risk-Based Ratios
Tier 1 Capital 7.5% 8.3% 6.0%
Total Capital 13.6% 14.1% 10.0%
Leverage Ratio 3.5% 4.4% N/A
BTCo
Risk-Based Ratios
Tier 1 Capital 10.5% 9.0% 6.0%
Total Capital 13.4% 12.3% 10.0%
Leverage Ratio 5.7% 5.4% 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, 1998 1997
- --------------------------------------------------------------------------------
Corporation
Tier 1 Capital $ 5,069 $ 6,431
Tier 2 Capital 3,812 4,138
Tier 3 Capital 400 400
- --------------------------------------------------------------------------------
Total Capital $ 9,281 $10,969
================================================================================
Total risk-weighted assets $67,980 $77,726
================================================================================
BTCo
Tier 1 Capital $ 6,682 $ 5,999
Tier 2 Capital 1,858 2,262
================================================================================
Total Capital $ 8,540 $ 8,261
================================================================================
Total risk-weighted assets $63,748 $66,975
================================================================================
22 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Table 5 Risk-Weighted Assets--Corporation (in billions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Balance
sheet/ Risk- sheet/ Risk-
notional weighted notional weighted
amount amounts amount amounts
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks and interest-bearing deposits with banks $ 5.2 $ 0.9 $ 6.5 $ 1.0
Federal funds sold and securities purchased under resale agreements 19.5 1.3 20.5 1.6
Securities borrowed 14.7 4.0 16.8 9.0
Trading assets(1) 46.2 8.5 56.6 14.6
Securities available for sale 12.7 5.2 8.1 3.3
Loans 23.3 19.0 19.8 16.2
Allowance for credit losses on loans (0.7) -- (0.7) --
All other assets 12.2 8.7 12.5 10.2
- ----------------------------------------------------------------------------------------------------------------------------------
Assets $ 133.1 $ 47.6 $ 140.1 $ 55.9
==================================================================================================================================
Off-Balance Sheet Exposures
Derivatives $2,552.8 $ 10.5 $2,143.5 $ 10.4
Credit-related arrangements 23.1 10.3 23.7 10.4
Securities lending indemnifications 41.7 0.6 53.8 1.4
When-issued securities and other off-balance sheet exposures 0.2 0.2 1.1 0.2
- ----------------------------------------------------------------------------------------------------------------------------------
Off-Balance Sheet Exposures $2,617.8 $ 21.6 $2,222.1 $ 22.4
==================================================================================================================================
Less: applicable exposures of certain subsidiaries(2) 1.6 1.2 1.9 0.6
- ----------------------------------------------------------------------------------------------------------------------------------
Risk-Weighted Assets $ 68.0 $ 77.7
==================================================================================================================================
</TABLE>
(1) These assets, along with trading liabilities and covered market positions
represented by derivatives have been risk-weighted under the market
risk-based capital guidelines.
(2) Assets of certain foreign insurance subsidiaries are excluded from the
calculation in accordance with current guidelines.
Risk Management
Risk management remains an area of focus and investment for the Corporation. The
ability to measure and manage risk is a prime concern that guides business
decisions. The Corporation has been and remains committed to continual
innovation and investment in its risk management processes. A team of
risk-management professionals who track the Corporation's global portfolio leads
these processes. These risk managers are independent of the Corporation's
business lines, are found in each of the major trading centers, and report
directly to senior management through the Head of Corporate Portfolio
Management.
Market Risk
Each day the Corporation's risk management process assembles position and risk
information on financial instruments of the Corporation whose economic (fair)
value is a function of market-determined variables: interest rates, currency
exchange rates, equity prices, and commodity prices. This information is
consolidated into daily risk and limits reports for the Corporation and business
lines. In addition, an extensive set of scenarios, which are based on past
market turbulence, are run each week to analyze the exposure of the Corporation
to similar disturbances. The results of these scenarios together with risk
summaries and analyses of material exposures by market are consolidated into a
weekly report on the Corporation's risk profile. These daily and weekly reports
are reviewed by the Corporation's senior risk managers and provide them with a
consistent set of information upon which to base their business judgments.
One summary measure of market risk that is produced by this process is
Daily Price Volatility. 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 Daily Price Volatility is calculated using
proprietary simulation and risk modeling techniques and incorporates the
nonlinear payoffs, or convexity, and the volatility risk stemming from options
in the Corporation's portfolio. Table 6 provides information on the Daily Price
Volatility associated with the Corporation's positions during 1998. 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 positions captured by the Total Daily Price Volatility include
both derivative and cash positions that are reported as trading assets and
Bankers Trust Corporation and its Subsidiaries 23
<PAGE>
liabilities, repurchase and resale agreements, funding assets and
liabilities,deposits, assets held for sale and end-user derivatives. The table
also reports information on the Daily Price Volatility from the subset of cash
and derivative positions that are reported as trading assets and liabilities
according to financial accounting standards. 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.
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
===============================================================================
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 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.
Table 7 BTC Daily Price Volatility Statistics for 1997 (in millions)
Total Daily Price Volatility**
- -------------------------------------------------------------------------------
Average Minimum Maximum December 31,
Risk Class 1997 1997 1997 1997
- -------------------------------------------------------------------------------
Interest Rate $32.8 $17.1 $40.5 $29.6
Currency 8.8 4.7 14.7 10.1
Equity 21.0 15.6 28.0 28.0
Commodity 1.6 0.9 3.7 1.9
Diversification (14.6) -- -- (19.2)
- -------------------------------------------------------------------------------
Overall Portfolio $49.6 * * $50.4
===============================================================================
24 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Trading Daily Price Volatility**
- -------------------------------------------------------------------------------
Average Minimum Maximum December 31,
Risk Class 1997 1997 1997 1997
- -------------------------------------------------------------------------------
Interest Rate $17.2 $12.6 $22.7 $19.7
Currency 8.1 3.7 14.7 9.9
Equity 12.4 6.0 21.6 21.6
Commodity 1.6 0.9 3.7 1.9
Diversification (12.9) -- -- (16.5)
- -------------------------------------------------------------------------------
Overall Portfolio $26.4 * * $36.6
===============================================================================
Non-Trading Daily Price Volatility: Incremental impact of non-trading positions
on Total Daily Price Volatility**
- -------------------------------------------------------------------------------
Average Minimum Maximum December 31,
Risk Class 1997 1997 1997 1997
- -------------------------------------------------------------------------------
Interest Rate $15.6 $ 0.8 $22.8 $ 9.9
Currency 0.7 -- 2.5 0.2
Equity 8.6 5.9 12.6 6.4
Commodity -- -- -- --
Diversification (1.7) -- -- (2.7)
- -------------------------------------------------------------------------------
Overall Portfolio $23.2 * * $13.8
===============================================================================
* The minimum (maximum) for each risk category occurred on different days so
it is not meaningful to sum the amounts presented above. For example,
during 1997 the minimum Total Daily Price Volatility was $28.2 million and
the maximum Total Daily Price Volatility was $60.4 million.
** The positions of Alex. Brown Incorporated are included commencing
September 1, 1997. Prior to September 1, 1997, detailed risk information
in the format required for the computation of the Daily Price Volatility
is not available.
Each section in Table 6 shows the Corporation's market-risk profile by
risk class in 1998. The table shows that the Corporation's portfolio, on
average, in 1998 was most sensitive to changes in interest rates and equity
prices. Fixed income and equity positions in the United States and Western
Europe account for the majority of this sensitivity. These positions reflect
proprietary and client-related trading activities of the Corporation. The
Corporation manages its exposure to market risk from these as well as its other
positions through diversification and active hedging strategies. Diversification
(or avoiding concentration to individual securities, markets or risk dimensions)
enables an entity to improve its return for a given level of risk. For example,
the effect of diversification across risk classes is apparent in the Table as
diversification across risk classes reduced total risk by $21.7 million on
average in 1998. Hedging activities entail taking positions that tend to
neutralize one or more dimensions of risk from existing positions. For example,
the Corporation routinely takes positions in underlying securities that hedge
(or offset) the risk from positions associated with the risk intermediation
services it provides to its clients.
Table 7 contains information for 1997 that is comparable to the
information presented in Table 6 for 1998. A comparison of the risk profile
across years shows that the average and end-of-year total risk levels are quite
similar across years. The primary difference is that relatively more of the risk
at the end of 1998 came from non-trading positions. Using the year-end Daily
Price Volatility as the risk measure, the trading risk fell by approximately 28
percent while the non-trading risk rose by 52 percent. The rise in non-trading
risk came primarily from equities. The VaR for non-trading equities rose due to
the adoption of a more comprehensive treatment of private-equity risk within the
market VaR process rather than an increase in private equity exposures. Thus, if
one discounts the changes in VaR due to adopting a more comprehensive risk
measure, the most material change in the Corporation's risk profile from its
1997 profile was the reduction in the risk from trading positions that occurred
by year end.
Figure 1 shows the frequency distribution of the Trading Daily Price
Volatility for business days in 1998. The distribution was centered at $32.9
million and ranged between $15.5 million and $51.9 million during 1998. The
relatively large frequency of low risk exposures reflects the Corporation's
response to market turbulence during the third quarter.
Bankers Trust Corporation and its Subsidiaries 25
<PAGE>
Figure 1
1998 BTC Trading Daily Price Volatility Frequency Distribution
The Figure displays a histogram. Daily Price Volatility (DPV) amounts ranging
from $14 million to $52 million appear on the horizontal axis and Frequency
amounts ranging from 0 to 30 observations are displayed on the vertical axis.
The DPV frequencies are approximately bell-shaped, but the distribution exhibits
fat tails. The mode of 28 observations occurs at a DPV value of $30 million; the
median is $33.0 million; and the mean is $32.9 million. At the upper tail, the
frequencies are 11, 2, and 2 for DPV's of $48 million, $50 million, and $52
million, respectively. There are no observations above $52 million. At the lower
end of the distribution, the frequencies are 2, 20, and 11 for DPV's of $16
million, $18 million, and $20 million, respectively. There are no observations
below $16 million.
The methodology underlying these Daily Price Volatility calculations
relies on established asset pricing and statistical models. The Daily Price
Volatility is a loss amount that statistically would be exceeded only 1 percent
of the time. This implies that one would expect two or three instances each year
when the daily loss amount exceeded the Daily Price Volatility. A comparison
between the Trading Daily Price Volatility amounts and profit/loss flows
associated with trading activities for each business day during 1998 revealed
six instances in which a loss greater than the Trading Daily Price Volatility
occurred. This reflects the extraordinary market turbulence that occurred in
1998. Over the past three years, there have been 8 outliers, which is consistent
with the expected accuracy of the risk model.
The Daily Price Volatility, as a statistical measure of potential loss,
provides an objective benchmark of portfolio risk that complements, but does not
substitute for, management's judgment of the appropriate level and mix of risk
taken by the Corporation. Furthermore, the methodology employed in the
calculation of Daily Price Volatility will change due to enhancements in
risk-assessment and information-processing technologies and as new risks are
undertaken by the Corporation.
Daily Price Volatility is supplemented in the risk-management process by
the statistical measures of risk and return provided by the RAROC framework
(discussed below), by scenario analyses performed weekly by the risk management
group, and by a formal limits process that monitors and limits the risks from
market concentration and inadequate liquidity of financial instruments in the
portfolio. The RAROC framework provides information on the potential effect of
large changes in interest rates, currency, equity and commodity prices, and
volatilities. As such, it produces a stress test of the Corporation's positions
each business day. The exposure to market risk is also assessed through an
extensive set of historical scenarios that are run on a weekly basis as well as
tailored scenario analyses and stress tests performed periodically to highlight
exposure to a particular market or event. Scenario analyses and stress tests are
also employed to examine the cumulative effects of market and credit risk, as
well as potential reductions in fee income should specific events or scenarios
occur. These analyses motivate critical assessments of risk exposures and
business strategies and complement the risk information provided by statistical
measures such as Daily Price Volatility, which provide probabilistic assessments
of potential losses over short horizons under normal market conditions.
The risk information that is assembled by the risk-management group is
conveyed to senior management through a variety of reports. The two most
important of these reports are a daily risk report that summarizes the market
risks of the Corporation's positions worldwide as of the close of the previous
day and a weekly analysis of market risk and market-risk trends for the
Corporation. Taken together, the various risk measures and reports provide the
Corporation's senior management with timely and relevant risk information.
Regulatory Measures of Market Risk
In 1996 the Federal Reserve Board and the other U.S. federal bank regulatory
agencies jointly issued a final rule that amended the risk-based capital
guidelines to incorporate a measure for market risk ("the market risk
amendment"). The market risk amendment (which is described below) is consistent
with the amendment to the Basle Capital Accord adopted by the BIS. Essentially,
the market risk amendment changed the calculation of risk-weighted assets for
positions in the trading accounts.
The most innovative feature of the market risk amendment is its provision
to allow a bank to measure market risk using the bank's internal risk model.
Capital charges for market risk are calculated based upon the level of specific
risk and general market risk in the bank's trading portfolio. Specific risk
refers to the risk of variations in value due to changes in factors associated
with a particular security (for example, the credit rating of a corporate
debenture). General market risk refers to changes in value due to variations in
market conditions (i.e., levels of interest rates, prices, etc.). Banks may use
internal models to measure their exposure to these risks provided the models and
processes used to manage market risk meet a number of quantitative and
qualitative standards. The following is a summary of these standards:
Quantitative Standards
o the general market risk capital must be based on a Value at Risk
approach and computed daily;
o the Value at Risk must be calibrated to a ten-day holding period and
a 99 percent confidence level (i.e., if the Corporation maintained
an absolutely static portfolio for ten business days, there would be
a 1 percent chance that the portfolio would decline in value by more
than the Value at Risk);
o the risk model must capture the non-linear price characteristics of
option positions;
o the historical observation period for estimating risk factors must
be at least one year;
o for interest rates, there must be a set of risk factors
corresponding to each currency in which the bank has
interest-rate-sensitive on- or off-balance sheet positions;
o for interest rates, the risk measurement system must incorporate
separate risk factors to capture spread risk between government and
other fixed-income securities;
26 Bankers Trust Corporation and its Subsidiaries
<PAGE>
o for exchange rates, the risk measurement system should incorporate
risk factors corresponding to the individual foreign currencies in
which the bank's positions are denominated;
o for equity prices, there should be risk factors corresponding to
each of the equity markets in which the bank holds significant
positions;
o for commodity prices, there should be risk factors corresponding to
each of the commodity markets in which the bank holds significant
positions.
Qualitative Standards
o the bank should have an independent risk control unit that reports
directly to senior management;
o the unit should conduct regular back-testing;
o the bank's risk measurement model should be integrated into the
day-to-day risk management process of the bank;
o the risk measurement model should be complemented by a routine and
rigorous program of stress testing.
The Corporation was the first banking organization worldwide to receive
recognition for meeting these standards, which is an accomplishment that
reflects its strong risk-management culture and the integrity of its processes.
The Daily Price Volatility described previously is a Value at Risk measure
that is based on a one-day holding period instead of the ten-day holding period
stipulated for regulatory capital. Table 8 reports market risk information
calculated under the regulatory standard. These risk numbers are based on the
same proprietary methodologies as were employed in calculating the Daily Price
Volatility, except a ten-day holding period is used in their calculation. As in
the preceding table, Table 8 provides summary risk information for the total
portfolio as well as for trading and non-trading positions. Here again, the
non-trading risk numbers refer to the incremental impact of these positions.
Table 9 presents the same information for 1997 as Table 8 does for 1998.
Here again, for total market risk, the average ten-day value at risk and the
end-of-year ten-day value of risk are very similar for 1997 and 1998. For
end-of-year positions, the primary change was a decrease in the risk attributed
to trading positions and an offsetting increase in the risk from non-trading
positions. As with Daily Price Volatility, changes in the treatment of private
equity exposures account for most of this year-on-year change in this measure of
non-trading risk. More importantly, a comparison of these tables shows that
although the risk from trading positions was 24 percent higher on average during
1998, the Firm ended the year with trading risk reduced by 29 percent from the
previous year-end when measured using ten-day value at risk with a 99 percent
confidence level.
Table 8 BTC Ten-Day Value at Risk for 1998 (in millions)
Total Ten-Day Value at Risk
- -------------------------------------------------------------------------------
Average Minimum Maximum December 31,
Risk Class 1998 1998 1998 1998
- -------------------------------------------------------------------------------
Interest Rate $101.4 $ 60.9 $145.8 $ 77.4
Currency 35.5 15.4 67.7 26.0
Equity 88.0 50.2 113.8 105.0
Commodity 4.2 2.0 10.5 3.9
Diversification (67.9) -- -- (64.7)
- -------------------------------------------------------------------------------
Overall Portfolio $161.2 * * $147.6
===============================================================================
Trading Ten-Day Value at Risk
- -------------------------------------------------------------------------------
Average Minimum Maximum December 31,
Risk Class 1998 1998 1998 1998
- -------------------------------------------------------------------------------
Interest Rate $ 61.1 $ 35.9 $ 99.4 $ 52.2
Currency 34.8 15.4 67.4 22.0
Equity 57.0 25.9 87.7 51.2
Commodity 4.2 2.0 10.5 3.9
Diversification (53.7) -- -- (47.5)
- -------------------------------------------------------------------------------
Overall Portfolio $103.4 * * $ 81.8
===============================================================================
Bankers Trust Corporation and its Subsidiaries 27
<PAGE>
Non-Trading Ten-Day Value at Risk: Incremental impact of non-trading positions
on Total Ten-Day Value at Risk
- -------------------------------------------------------------------------------
Average Minimum Maximum December 31,
Risk Class 1998 1998 1998 1998
- -------------------------------------------------------------------------------
Interest Rate $40.3 $ 4.4 $72.7 $25.2
Currency 0.7 0.0 4.7 4.0
Equity 31.0 14.9 54.1 53.8
Commodity -- -- -- --
Diversification (14.2) -- -- (17.2)
- -------------------------------------------------------------------------------
Overall Portfolio $57.8 * * $65.8
===============================================================================
* The minimum (maximum) for each risk category occurred on different days so
it is not meaningful to sum the amounts presented above. For example,
during 1998 the minimum Total Ten-Day Value at Risk was $102.2 million and
the maximum Total Ten-Day Value at Risk was $225.1 million.
Table 9 BTC Ten-Day Value at Risk for 1997 (in millions)
Total Ten-Day Value at Risk**
- -------------------------------------------------------------------------------
Average Minimum Maximum December 31,
Risk Class 1997 1997 1997 1997
- -------------------------------------------------------------------------------
Interest Rate $104.0 $ 53.9 $128.1 $ 94.3
Currency 28.1 14.9 48.1 33.1
Equity 66.1 49.3 87.1 87.1
Commodity 5.2 2.9 11.9 6.0
Diversification (46.6) -- -- (61.1)
- -------------------------------------------------------------------------------
Overall Portfolio $156.8 * * $159.4
===============================================================================
Trading Ten-Day Value at Risk**
- -------------------------------------------------------------------------------
Average Minimum Maximum December 31,
Risk Class 1997 1997 1997 1997
- -------------------------------------------------------------------------------
Interest Rate $ 54.5 $ 39.8 $ 72.5 $ 62.9
Currency 25.8 11.6 48.0 32.4
Equity 39.0 19.1 67.3 67.3
Commodity 5.2 2.9 11.9 6.0
Diversification (41.1) -- -- (53.0)
- -------------------------------------------------------------------------------
Overall Portfolio $ 83.4 * * $115.6
===============================================================================
Non-Trading Ten-Day Value at Risk: Incremental impact of non-trading positions
on Total Ten-Day Value at Risk**
- -------------------------------------------------------------------------------
Average Minimum Maximum December 31,
Risk Class 1997 1997 1997 1997
- -------------------------------------------------------------------------------
Interest Rate $49.5 $ 2.2 $72.1 $31.4
Currency 2.3 -- 8.0 0.7
Equity 27.1 18.4 39.8 19.8
Commodity -- -- -- --
Diversification (5.5) -- -- (8.1)
- -------------------------------------------------------------------------------
Overall Portfolio $73.4 * * $43.8
===============================================================================
* The minimum (maximum) for each risk category occurred on different days so
it is not meaningful to sum the amounts presented above. For example,
during 1997 the minimum Total Ten-Day Value at Risk was $89 million and
the maximum Total Ten-Day Value at Risk was $191.4 million.
** The positions of Alex. Brown are included commencing September 1, 1997.
Prior to September 1, 1997, detailed risk information in the format
required for the computation of the Daily Price Volatility is not
available.
28 Bankers Trust Corporation and its Subsidiaries
<PAGE>
RAROC--Performance Measurement and Capital Adequacy
The Corporation pioneered the development of risk-based capital attribution
processes. The Corporation's risk capital model, RAROC, is integral to
management's conceptual framework for strategic decision making. This framework
has as its objective maximizing return on risk capital, where risk capital is
attributed to a business activity according to the level of risk it assumes.
Risk capital that is calculated by the RAROC framework is used to support
decisions on the allocation of human and financial resources. In addition, the
framework results in a disciplined assessment of risk, which produces a
benchmark for assessing capital adequacy both for the Corporation and for its
major businesses.
The definition of risk capital produced by the RAROC process is the amount
of funds required 99 percent of the time to cover a potential after-tax loss
over a one-year holding period. Specifically, if the Corporation maintained an
absolutely static portfolio (of assets, counterparties and businesses) for one
year, there would be a 1 percent chance that the portfolio would decline in
value by more than the RAROC risk capital amount after adjusting for taxes.
RAROC is designed to assess the following general classes of risk: market
risk, credit risk and operational risk. Market risk is the potential loss in
economic (fair) value due to changes in interest rates, currency, equity and
commodity prices, and volatilities. Financial instruments of the Corporation
whose fair values are functions of these market variables are included in the
assessment of market risk irrespective of accounting designation. Credit risk is
defined as the potential loss in economic value due to a change in the
likelihood that the obligor will not perform as agreed on a payment obligation.
Operational risk is defined by the Corporation in the context of five risk
classes: Relationship, People, Technology, Physical Assets, and Other External.
Losses that are characterized as operational include but are not limited to the
following examples: losses due to a failure of internal controls, personnel
unavailability or injury, and external events including natural disasters or the
failure of external systems such as an exchange. A process using actuarial and
other proprietary models has been implemented to provide an estimate of the
potential losses from these risks, and attribute capital to the Corporation's
business lines. The attribution process is designed as an incentive for
effective operational risk management.
Credit Risk Management
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. One 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 assigns country risk ratings. It also monitors country, industry,
borrower/issuer/counterparty, product and regional risk concentrations in order
to evaluate the degree of diversification in the portfolio.
RAROC credit capital represents the translation into potential losses of
the exposure of the overall portfolio of the Corporation, both on- and
off-balance sheet, to changes in the likelihood that obligors will not perform
as agreed on payment obligations. This translation is accomplished using
proprietary statistical models. These statistical models incorporate information
on the duration of the exposure, the potential magnitude of the exposure, and
the creditworthiness of the borrower/issuer/counterparty. The Corporation's
senior risk managers regularly review and actively manage the credit risks at
the portfolio level to ensure that the risk characteristics and degree of
diversification as reflected in RAROC capital calculations conform with the
Corporation's policies.
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 23 of
Notes to Financial Statements. Derivatives may be used for either trading or
end-user purposes.
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, as a risk manager of its own trading positions
resulting from these client-driven transactions and, finally, as a position
taker in the expectation of profiting from favorable movements in prices, rates
or indices. As a result, the Corporation may build up sizable positions in
derivatives. The risks of derivative positions are managed in accordance with
the Corporation's risk management policies.
Substantially all of the Corporation's derivative positions at December
31, 1998 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 1998 were $17.8 billion and $16.5
billion, respectively. The notional amounts, which are not recorded on the
balance sheet, of trading derivatives totaled $2,449 billion at December 31,
1998 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, foreign currency and equity market risks associated with certain
liabilities and assets such as interest-bearing deposits,
Bankers Trust Corporation and its Subsidiaries 29
<PAGE>
short-term borrowings and long-term debt, as well as securities available for
sale, loans, investments in non-marketable equity securities and net investments
in foreign subsidiaries. For example, the Corporation's Treasury Department,
which manages the majority of the Corporation's end-user derivatives, utilizes
certain instruments (principally interest rate and currency swaps) to transform
fixed-rate-paying liabilities into variable-rate-paying liabilities. See Note 23
and Note 25 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 $104 billion at December 31, 1998 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 4 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. The Corporation generally
manages its exposures 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 in the
Corporation's RAROC framework and are included in the Daily Price Volatility
amounts discussed in the preceding Risk Management section. Commencing in 1997,
the market risk of positions represented by derivatives is also included in the
regulatory risk-based capital ratios.
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 positions 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 the Corporation's centralized credit
risk management and RAROC 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. The Corporation monitors
credit risk exposure on a gross and a net basis and on a collateralized and an
uncollateralized basis, as appropriate.
Table 10 summarizes the Corporation's derivatives-related credit risk. It
displays, by internal rating, the Corporation's current credit risk to
customers. The majority of the Corporation's derivative transactions are with
foreign and U.S. commercial banks, as well as other financial institutions,
corporations, securities firms and governments and their agencies. 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 and
collateral, of $12.894 billion more accurately portray the credit risk
associated with the Corporation's derivatives activities with external customers
at December 31, 1998 than do the gross replacement costs. Approximately 83
percent of the derivatives-related credit risk at December 31, 1998 was to
investment-grade customers.
Internal ratings are based upon the Corporation's assessment of the
customer's creditworthiness. Ratings of 1 to 4 generally equate to
investment-grade ratings (BBB/Baa and higher) from rating agencies in the U.S.
markets. A rating of 5 usually approximates long-term debt ratings of BB/Ba.
Ratings of 6 to 8 are generally equivalent to B/B and below. Customers in the 6
to 8 category may be internally designated for special monitoring by the Credit
Audit Department. Factors such as guarantors and collateral held, as well as the
impact of country risk on private foreign companies, may differentiate the
Corporation's ratings from those of the rating agencies.
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
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).
30 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Table 10 Derivatives-Related Credit Risk(1)
- -------------------------------------------------------------------------------
Internal Rating For Customer
--------------------------------
(in millions) December 31, 1998 1 to 4 5 6 to 8 Total
- -------------------------------------------------------------------------------
Replacement costs (gross) $ 47,085 $ 5,591 $ 1,254 $ 53,930
Impact of netting agreements (34,376) (3,367) (388) (38,131)
- -------------------------------------------------------------------------------
Replacement costs (after
netting agreements) 12,709 2,224 866 15,799
Collateral held and applied (2,040) (863) (2) (2,905)
===============================================================================
Replacement costs after
netting and collateral $ 10,669 $ 1,361 $ 864 $ 12,894
===============================================================================
Replacement costs after
netting and collateral,
December 31, 1997 $ 11,922 $ 2,475 $ 284 $ 14,681
===============================================================================
(1) End-user derivatives and exchange-traded contracts are not included.
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, 1998, this add-on was
$13.2 billion before application of risk weightings, of which 85 percent, 12
percent, and 3 percent related to customers internally rated 1 to 4, 5, and 6 to
8, respectively. At December 31, 1998, 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
$10.5 billion after application of risk weightings.
Presented in Table 11 below is a maturity profile of the Corporation's
trading derivative products. This profile indicates the extent of the
Corporation's involvement in derivative transactions of specific maturities and
also provides the basis for calculating the estimate of potential future credit
exposure (the add-on) under the international bank regulatory standards. The
percentages in Table 11 are based on notional amounts which do not necessarily
represent cash flows and do not represent a quantification of the market risk or
credit risk of these positions.
Table 11 Maturity Profile of Trading Derivatives(1)(2)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Foreign Equity- Commodity
Rate Exchange Related and Other
Remaining Maturity at December 31, 1998 Total Contracts Contracts Contracts Contracts
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Within 12 months 52% 18% 33% 1% --
After 1 but within 5 years 34 31 2 1 --
After 5 years 14 13 1 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total 100% 62% 36% 2% --
====================================================================================================================================
</TABLE>
(1) Based on notional amounts. Includes both purchase and sale contracts and
contracts for which the fair values are recorded as trading assets and as
trading liabilities. The leveraging effects of leveraged derivative
transactions are reflected above.
(2) Presented in accordance with the risk-based capital standards, this
maturity profile does not include futures contracts, spot foreign exchange
contracts, or options written. These types of contracts are considered in
the Corporation's market and credit risk management processes.
Further information applicable to derivatives in general may be found in
the following sections:
<TABLE>
<CAPTION>
Relevant Information Page Title
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Risk-weighted amounts 22 Capital Resources
Revenue by risk category 16 Trading Revenue
Market risk, Value at Risk, RAROC
and credit management 23 Risk Management
Nonperforming amounts 36 Nonperforming Assets
Certain foreign exposures 38 Cross-Border Outstandings
Hedge Fund Exposures 40 Hedge Fund Exposures
Accounting 47 Significant Accounting Policies
Balance sheet amounts 50 Trading Assets and Trading Liabilities
Product descriptions, fair
values and notional amounts 70 Derivatives and Financial Instruments
with Off-Balance Sheet Risk
Significant counterparties 73 Concentrations of Credit Risk
End-user derivatives 74 Fair Value of Financial Instruments
===========================================================================================================
</TABLE>
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
Credit Audit Department is charged with the responsibility for performing an
ongoing independent examination of the loan portfolio. The Credit Audit review
program is designed to identify at the earliest possible stage, counterparties
who might be facing financial difficulties. All significant counterparty
relationships are reviewed annually, meaning that individual loans to a
particular
Bankers Trust Corporation and its Subsidiaries 31
<PAGE>
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 Credit Audit under regulatory
guidelines (i.e. those loans classified as Special Mention, Substandard and
Doubtful) are reviewed quarterly. In addition, all levels of management are
required to bring to the attention of the Credit Audit Department any credit
risk where an additional review of the counterparty's financial position is
believed to be warranted. The Credit Audit Department reports at least quarterly
on the portfolio to the Audit 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 Credit Audit Department with the
Audit Committee.
Determination of the Allowance for Credit Losses--Loans
The allowance for credit losses--loans represent management's subjective
estimate of probable loan losses that have occurred as of the date of the
financial statements. As noted above, all significant counterparty relationships
are reviewed annually, and loans under special supervision, such as criticized,
cash basis and renegotiated loans are reviewed quarterly to allow management to
determine the level of the allowance for credit losses--loans. This management
process results in three components of the overall allowance as reflected in the
table below:
(in millions) December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Specific allowance $ 61 $ 13 $ 57
General allowance 585 622 435
- --------------------------------------------------------------------------------
Total allocated allowance 646 635 492
Total unallocated allowance 6 64 281
- --------------------------------------------------------------------------------
Total allowance for credit
losses--loans $652 $699 $773
================================================================================
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. This specific allowance is measured using the guidance set forth
in SFAS No. 114.
The general component of the allowance is more subjective in nature but is
the result of a rigorous process performed by the Corporation's Credit Audit
Department along with the Credit Risk Management Department. This process
entails the following steps:
1. All material credit exposures are given credit quality ratings (e.g.
Pass, Special Mention, Substandard and Doubtful) based on the Credit
Audit examination process referred to above. This rating exercise
includes consideration of obligor domicile, secondary support, and
economic or industry conditions and trends directly affecting the
obligor.
2. Total exposures are divided into portfolios primarily based on
industry and geography. Currently, this segmentation results in 14
different portfolios, each with a separate set of relative risk
characteristics.
3. On a quarterly basis, Credit Audit and the Credit Risk Management
Department meet to discuss each of the 14 portfolios. Each portfolio
is analyzed with specific discussions of each significant obligor.
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.
Based on this evaluation, an allowance adequacy range representing
management's subjective judgment regarding inherent losses in the
respective portfolios is developed. The mechanics of this process
involve development of range estimates of inherent losses in each
portfolio based on the aforementioned evaluation process. The
individual portfolio ranges are then summed together and a further
discussion is held to estimate the inherent loss range for the
overall portfolio. It is the high end of this loss range that is
used to determine the general component of the overall allowance.
4. Additionally, a "calculated loss" amount for each portfolio is
determined by applying loss factors that reflect ten-year historical
weighted-average loss outcomes for the respective credit quality
groupings (e.g. Special Mention, Substandard and Doubtful) existing
in each portfolio. The outcome of this exercise is compared to the
results of step 3 above, and as such, the loss ranges may be
modified upward or downward.
Management determines the unallocated component of the overall allowance
for credit losses--loans based on subjective judgments that cannot be directly
associated with specific loans. These judgements include management's evaluation
of trends in the loan portfolio, portfolio concentrations, trends in the
allowance adequacy range, trends in the economic outlook, trends in charge-offs
(actual and potential), and recoveries, in order to determine the overall level
of the allowance at period end. As such, the unallocated portion of the
allowance is management's attempt to ensure that the overall allowance
appropriately reflects a margin for the imprecision necessarily inherent in the
loss estimation process.
The independent examination process performed by the Credit Audit
Department and the quarterly portfolio review performed by Credit Audit and the
Credit Risk Management Department are the principal activities relied upon by
management to ensure that changes in estimated credit loss levels are adjusted
on a timely basis. The consideration of historical loss factors as a benchmark
tool in the process of determining the allocated component of the allowance for
credit losses--loans also acts as a self-correcting mechanism within
management's overall estimation process. In its development and analysis of the
respective components of the allowance for credit losses--loans, management also
considers the experience of peer institutions (e.g. by comparison, on a
quarterly basis, of five relevant credit quality ratios for 12 competitors in
the banking industry) and regulatory guidance, in addition to the Corporation's
own historical experience.
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
32 Bankers Trust Corporation and its Subsidiaries
<PAGE>
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 Credit Audit 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.
Table 12 Analysis of the Allowances for Credit Losses
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
($ in millions) Year Ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans
Allowance, beginning of year $ 699 $ 773 $ 992 $ 1,252 $ 1,324
- ----------------------------------------------------------------------------------------------------------------------------------
Charge-offs
Domestic
Commercial and industrial 24 19 46 177 55
Financial institutions -- -- -- -- 11
Real estate
Construction -- 11 3 10 1
Mortgage -- 2 18 22 23
International 83 46 22 121 78
- ----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 107 78 89 330 168
- ----------------------------------------------------------------------------------------------------------------------------------
Recoveries
Domestic
Commercial and industrial 5 23 32 11 24
Real estate
Construction 1 1 -- -- 1
Mortgage 8 13 7 4 --
International 6 7 26 24 46
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 20 44 65 39 71
- ----------------------------------------------------------------------------------------------------------------------------------
Total net charge-offs(1) 87 34 24 291 97
Allowance related to acquisition -- 17 -- -- --
Provision for credit losses 40 -- 5 31 25
Reclassification -- (57) (200) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance, end of year $ 652 $ 699 $ 773 $ 992 $ 1,252
==================================================================================================================================
Percentage of total net charge-offs
to average loans for the year 0.39% 0.19% 0.18% 2.47% 0.78%
==================================================================================================================================
(1) Components:
Secured by real estate $ (13) $ 5 $ 14 $ 23 $ 24
Real estate related 8 (2) 3 2 23
Highly leveraged 11 12 11 30 (5)
Other 81 19 (4) 236 55
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 87 $ 34 $ 24 $ 291 $ 97
==================================================================================================================================
Other Liabilities
Allowance, beginning of year $ 13 $ 10 $ -- $ -- $ --
Provision for credit losses 5 -- -- -- --
Reclassification -- 3 10 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance, end of year $ 18 $ 13 $ 10 $ -- $ --
==================================================================================================================================
</TABLE>
Bankers Trust Corporation and its Subsidiaries 33
<PAGE>
Loans
The following table summarizes the composition of the loan portfolio at the end
of each of the last five years:
<TABLE>
<CAPTION>
(in millions) December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic
Commercial and industrial $ 6,448 $ 4,244 $ 3,422 $ 2,520 $ 2,218
Financial institutions 2,441 2,148 1,631 1,778 2,221
Real estate 1,449 2,196 1,695 1,430 1,360
Other 3,558 1,427 1,436 1,490 1,078
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic 13,896 10,015 8,184 7,218 6,877
- ------------------------------------------------------------------------------------------------------------------------------------
International
Governments and
official institutions 190 252 237 227 184
Banks and other
financial institutions 3,599 3,175 3,482 1,543 2,994
Commercial and industrial 3,931 4,931 2,759 1,934 1,428
Real estate 166 195 130 178 140
Other 1,813 1,402 1,290 1,701 1,014
- ------------------------------------------------------------------------------------------------------------------------------------
Total international 9,699 9,955 7,898 5,583 5,760
- ------------------------------------------------------------------------------------------------------------------------------------
Gross loans 23,595 19,970 16,082 12,801 12,637
Less: unearned income 310 165 202 120 102
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $23,285 $19,805 $15,880 $12,681 $12,535
====================================================================================================================================
</TABLE>
Total loans increased to $23.3 billion at December 31, 1998 up from $19.8
billion at year-end 1997 and $15.9 billion at December 31, 1996. The 1998
increase of $3.5 billion 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. Total loans outstanding
to REIT borrowers approximated $0.9 billion at December 31, 1998.
Domestic cash basis loans increased to $192 million at December 31, 1998,
up from $141 million at year end 1997.
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 international loan portfolio was primarily concentrated in
Australia/New Zealand, Western Europe, Latin America, and non-Japan Asia.
International cash basis loans increased to $200 million at December 31, 1998,
up from $99 million at year-end 1997. While cash basis loans increased, the
allocated portion of the allowance attributable to international loans was down
slightly in 1998, as compared to 1997, based on 1998 international loan
charge-off activity.
During 1997, the loan portfolio increased $3.9 billion or 25 percent, to
$19.8 billion at December 31, 1997 from $15.9 billion at December 31, 1996. The
increase was primarily attributable to an increase in commercial and industrial
lending in both the domestic and international segments of the loan portfolio.
During 1997, international loans increased from $7.9 billion in 1996 to
$10.0 billion or 26 percent. This increase was due to a 79 percent increase in
loans to commercial and industrial counterparties which totaled $4.9 billion at
December 31, 1997 and reflects a significant increase in loan volumes relating
to emerging markets countries. Commensurate with this increase in emerging
markets loan levels and the deterioration in credit quality of certain Asian
counterparties which began to manifest itself in the latter half of 1997, the
Corporation's criticized (i.e. those loans internally classified as Special
Mention, Substandard and Doubtful) international loans increased significantly
in 1997, although cash basis loans were basically unchanged as compared to
year-end 1996. However, as a result of the economic conditions that existed at
year end 1997 in the emerging markets, primarily in Asia, the allocated
allowance for credit losses for international loans increased $179 million from
$212 million to $391 million, as shown in the table below.
The table below provides 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.
<TABLE>
<CAPTION>
(in millions) December 31, 1998 1997 1996 1995* 1994*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic
Commercial and industrial $ 162 $ 117 $ 153 $ 222 $ 178
Financial institutions 20 38 20 40 40
Real estate and real-estate related 84 89 107 100 72
- -----------------------------------------------------------------------------------------------------------------------------------
Total domestic 266 244 280 362 290
International 380 391 212 377 416
- -----------------------------------------------------------------------------------------------------------------------------------
Total allocated 646 635 492 739 706
Unallocated portion 6 64 281 253 546
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 652 $ 699 $ 773 $ 992 $1,252
===================================================================================================================================
</TABLE>
* Not comparable to other years presented in the table as 1995 and 1994
include allowance amounts related to derivatives and other credit-related
commitments.
34 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Prior to year-end 1998, the Corporation disclosed the allocated portion of
the allowance based on an average of certain of the internal measures used to
assess the adequacy of the allowance. At year-end 1998, the Corporation began
disclosing the allocated portion of the allowance for credit losses--loans based
on identified risks in individual portfolio credit exposures. All amounts for
prior periods have been similarly presented.
The allowance for credit losses--loans decreased to $652 million at
December 31, 1998, from $699 million at year-end 1997 and $773 million at
December 31, 1996. 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 $74 million decline in the allowance for credit losses--loans during 1997
was primarily due to $78 million in charge-offs and a $54 million
reclassification to derivative trading assets, offset in part by $44 million in
recoveries. The decline in the 1997 allowance level was also attributable, in
part, to the decline in domestic commercial and industrial and real estate cash
basis loans.
The unallocated amount of the allowance represents the difference between
the total allowance for loan losses and amounts identified as allocated. The
relative size of the unallocated portion is dependent on the types of loss
exposures that are inherent in certain sectors of the portfolio but may be
difficult to associate with individual credits. For example, during 1997, and
continuing in 1998, additional information regarding the collectibility of
specific exposures in the portfolio, primarily Asian counterparties, became
known, resulting in an increase in impaired international loans and the
allocated portion of the allowance and a decrease in the unallocated allowance.
The following table presents an analysis of the changes in the
international component of the allocated allowance for credit losses for loans:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1998 1997 1996 1995* 1994*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 391 $ 212 $ 377 $ 416 $ 324
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs
Charge-offs 83 46 22 121 78
Recoveries 6 7 26 24 46
- -----------------------------------------------------------------------------------------------------------------------------------
Total net charge-offs (recoveries)
to the allowance 77 39 (4) 97 32
Allowance related to acquisition -- 17 -- -- --
Provision and increases (decreases)
in allocated portion of allowance 66 258 (10) 58 124
Reclassifications -- (57) (159) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 380 $ 391 $ 212 $ 377 $ 416
===================================================================================================================================
</TABLE>
* Not comparable to other years presented in the table as 1995 and 1994
include allowance amounts related to derivatives and other credit-related
commitments.
Bankers Trust Corporation and its Subsidiaries 35
<PAGE>
Nonperforming Assets
Table 13 Nonperforming Assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
($in millions) December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash basis loans
Domestic
Commercial and industrial $ 91 $ 49 $117 $263 $316
Secured by real estate 86 92 233 297 277
Financial institutions 15 -- -- 10 25
- -----------------------------------------------------------------------------------------------------------------------------------
Total domestic 192 141 350 570 618
- ------------------------------------------------------------------------------------------------------------------------------------
International
Commercial and industrial 135 65 57 106 248
Secured by real estate 18 25 39 65 79
Financial institutions 2 -- 4 3 48
Foreign governments 23 -- -- -- 1
Lease financings 7 2 2 -- --
Other 15 7 -- -- 2
- -----------------------------------------------------------------------------------------------------------------------------------
Total international 200 99 102 174 378
- -----------------------------------------------------------------------------------------------------------------------------------
Total cash basis loans $392 $240 $452 $744 $996
===================================================================================================================================
Ratio of cash basis loans to
total gross loans 1.7% 1.2% 2.8% 5.9% 7.9%
===================================================================================================================================
Ratio of allowance for credit
losses--loans to cash basis loans 166% 291% 171% 133% 126%
===================================================================================================================================
Renegotiated loans
Secured by real estate $ 25 $ 25 $ 37 $ 88 $ 65
Other 1 -- -- 12 1
- -----------------------------------------------------------------------------------------------------------------------------------
Total renegotiated loans $ 26 $ 25 $ 37 $100 $ 66
===================================================================================================================================
Other real estate $ 87 $194 $213 $259 $301
===================================================================================================================================
Other nonperforming assets
Derivatives $242 $ 34 $ -- $ 1 $ 2
Assets acquired in credit workouts 8 4 10 66 61
- -----------------------------------------------------------------------------------------------------------------------------------
Total other nonperforming assets $250 $ 38 $ 10 $ 67 $ 63
===================================================================================================================================
Loans 90 days or more past due and
still accruing interest(1) $ -- $ -- $ -- $ 26 $ --
===================================================================================================================================
</TABLE>
(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.
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
Credit Audit 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, our 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 $392 million at
December 31, 1998, an increase of $152 million, or 63 percent, from 1997, which
had decreased $212 million, or 47 percent, from 1996. The specific allowance
related to impaired loans amounted to $61 million at December 31, 1998, an
increase of $48 million from 1997 which had decreased $44 million from 1996.
Cash basis loans increased $152 million during 1998, primarily due to an
increase in both domestic and international commercial and industrial loans.
Cash basis loans decreased $212 million during 1997, primarily due to a $155
million decrease in loans secured by real estate. This decline in loans secured
by real estate was primarily attributable to net paydowns and loan sales.
Within cash basis loans, loans secured by real estate were $104 million at
December 31, 1998 compared to $117 million at December 31, 1997. Commercial and
industrial loans to highly leveraged borrowers increased $25 million in 1998 to
$66 million.
In 1997, renegotiated loans decreased $12 million.
In 1998, other real estate decreased $107 million, mainly due to sales of
properties. Other real estate decreased $19 million, to $194 million at December
31, 1997.
36 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Derivative contracts are classified as nonperforming when payments are 90
days past due, or earlier based upon management's judgment as to the probability
of collection of all amounts due under the contracts. Nonperforming derivatives
increased $208 million in 1998 as a result of contracts with Asian
counterparties.
An analysis of the changes in the Corporation's total cash basis loans
follows:
<TABLE>
<CAPTION>
(in millions)
Year Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 240 $ 452 $ 744 $ 996 $ 974
Net transfers to cash basis loans 365 111 96 314 520
Net paydowns (64) (146) (241) (221) (130)
Charge-offs (107) (78) (87) (330) (163)
Net transfers from (to) other
real estate (2) (16) (14) 13 (72)
Transfers to other
nonperforming assets -- -- -- -- (7)
Loan sales (24) (47) (38) (1) (49)
Other (16) (36) (8) (27) (77)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 392 $ 240 $ 452 $ 744 $ 996
===================================================================================================================================
</TABLE>
Highly Leveraged Transactions
The Corporation enters into highly leveraged transactions ("HLTs") that involve
loans, commitments to lend, guarantees, equity investments and commitments to
invest.
For purposes of monitoring the extent of its exposure to HLTs, the
Corporation utilizes the following definition. HLTs are financing transactions
the purpose of which involves a buyout, acquisition or recapitalization and
which (i) doubles the subject company's liabilities and results in a leverage
ratio higher than 50 percent or (ii) results in a leverage ratio higher than 75
percent or (iii) is designated an HLT by a syndication agent. Borrowers are
delisted from HLT status when (1) cash flow tests, relative to their industry or
peer group, are met, or (2) they are no longer highly leveraged upon emergence
from Chapter 11 bankruptcy or similar proceeding. In addition, certain loans
which are fully collateralized by cash or cash equivalent securities are
excluded from HLT reporting.
Amounts included in the table and discussion which follow generally
reflect the above definition.
Table 14 Highly Leveraged Transactions
(in millions) December 31, 1998 1997
- --------------------------------------------------------------------------------
Loans
Senior debt $3,546 $2,376
Subordinated debt -- 36
- --------------------------------------------------------------------------------
Total loans $3,546 $2,412
================================================================================
Unfunded commitments
Commitments to lend $1,970 $1,420
Letters of credit 118 186
- --------------------------------------------------------------------------------
Total unfunded commtments $2,088 $1,606
================================================================================
Equity investments $1,057 $ 884
================================================================================
Commitments to invest $1,338 $ 949
================================================================================
The Corporation's outstanding loans were to 190 separate borrowers in 46
separate industry groups at December 31, 1998, compared to 174 separate
borrowers in 47 separate industry groups at December 31, 1997. There were no
industry concentrations which exceeded 10 percent of total HLT loans outstanding
at December 31, 1998.
In addition to the amounts shown in Table 14, at December 31, 1998, the
Corporation had issued commitment letters which had been accepted, subject to
documentation and certain other conditions, of $128 million (which were in
various stages of syndication) and had additional HLTs in various stages of
discussion and negotiation.
During 1998, the Corporation originated $11.0 billion of HLT commitments.
It should be noted that the Corporation's loans and commitments in connection
with HLTs fluctuate as new loans and commitments are made and as loans and
commitments are syndicated, participated or paid.
All loans and commitments to finance HLTs are reviewed and approved by
senior credit officers of the Corporation. In addition to a strict transactional
and credit approval process, the portfolio of leveraged loans and commitments is
actively monitored and managed to minimize risk through diversification among
borrowers and industries. As part of this strategy, sell and hold targets are
regularly updated in connection with market opportunities and the addition of
new HLTs. Retention by the Corporation after syndication and sales of loan
participations has typically been less than $50 million, and the average
outstanding per borrower for the portfolio at December 31, 1998 was less than
$19 million. However, at December 31, 1998, the Corporation had total exposure
(loans outstanding plus unfunded commitments) in excess of $50 million to 17
separate highly leveraged borrowers.
At December 31, 1998, $66 million of the HLT loan portfolio was on a cash
basis. In addition, $4 million of the equity investments in HLT companies
represented assets acquired in credit workouts, which are reported as other
nonperforming assets. Net charge-offs of $11 million of HLT loans were recorded
in 1998. In addition, the Corporation recorded a net gain of $291 million in
connection with the sales and/or write-offs of certain equity investments in
highly leveraged companies during 1998.
Generally, fees (typically 2 to 4 percent of the principal amount
committed) and interest charged (typically LIBOR plus 1.5 to 3 percent) on HLT
loans are higher than on other credits. The Corporation does not account for
revenue or expenses from HLTs separately from its other corporate lending
activities. However, it is estimated that transaction fees recognized for
lending activities relating to HLTs were approximately $114 million during 1998
and that as of December 31, 1998, approximately $98 million of fees were
deferred.
Bankers Trust Corporation and its Subsidiaries 37
<PAGE>
Cross-Border Outstandings
The Corporation's cross-border outstandings reflect certain additional economic
and political risks beyond those associated with its domestic outstandings, such
as risks arising from funds transfer restrictions and balance-of-payments
issues, as well as risks arising from operating in different legal and
regulatory jurisdictions.
The following table presents the Corporation's cross-border outstandings
at December 31, 1998 and 1997 for each foreign country where such outstandings
exceeded .75 percent of the Corporation's total assets. The outstanding balances
are presented in accordance with the reporting guidelines adopted by the Federal
Financial Institutions Examination Council (FFIEC) as of March 1997. (See Table
16 on page 39 for Securities Act Guide 3 disclosure of Cross Border
Outstandings).
Table 15 Cross-Border Outstandings
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Governments Banks and
% of and Other Commercial
Total Total Official Financial and
($in millions) Outstandings Assets Institutions Institutions Industrial Other
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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(1) 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(1) $ 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(2) 1,917 1.37 809 588 520 --
Republic of Korea(3) 1,583 1.13 186 929 468 --
Netherlands 1,322 0.94 -- 879 443 --
Indonesia(2) 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
====================================================================================================================================
</TABLE>
(1) 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. While for 1997, the cross-border outstandings
primarily consisted of interest-bearing deposits with banks and trading
account assets carried at fair value.
(2) The Corporation's cross-border outstandings with Brazil and Indonesia
primarily consisted of trading account assets carried at fair value.
(3) The Corporation's cross-border outstandings with the Republic of Korea
primarily consisted of trading account assets carried at fair value and
acceptances outstanding.
The cross-border claims outstandings in Table 15 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 15 exclude local
country claims. Local country claims, as defined by the FFIEC's March 1997
reporting guidelines, include claims on
38 Bankers Trust Corporation and its Subsidiaries
<PAGE>
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, 1998, total cross-border commitments to borrowers or
counterparties domiciled in the countries presented in Table 15 were: France $54
million; Germany $116 million; United Kingdom $67 million; Japan $36 million;
Canada $79 million; Switzerland $43 million; Netherlands $107 million and Italy
$151 million.
The amendments to the FFIEC's cross-border reporting guidelines as adopted
in March 1997 included the addition of net revaluation gains on foreign exchange
and derivative products to the definition of claims outstanding, and the
elimination of the currency denomination criteria when segregating local from
cross-border country claims.
Presented in Table 16 below are the 1998 and 1997 cross-border
outstandings excluding the net revaluation gains on foreign exchange and
derivative products for comparative purposes with the 1996 outstanding balances,
as previously reported in accordance with the FFIEC's cross-border definition at
that time as well as in accordance with Securities Act Guide 3 disclosure, for
each foreign country where such outstandings exceeded one percent of total
assets.
Table 16 Cross-Border Claims Outstanding (excluding net revaluation gains on FX
and derivatives)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Governments Banks and
% of and Other Commercial
Total Total Official Financial and
($in millions) Outstandings Assets Institutions Institutions Industrial Other
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1998
France $3,542 2.66% $ 368 $2,648 $ 526 --
Germany 2,200 1.65 162 1,828 210 --
United Kingdom 2,135 1.60 4 1,355 772 4
Japan(1) 1,907 1.43 1,120 388 399 --
====================================================================================================================================
At December 31, 1997
Japan(1) $4,222 3.01% $ 881 $2,364 $ 977 --
Spain 3,290 2.35 302 2,734 254 --
France 2,948 2.10 2 2,696 250 --
Brazil(2) 1,915 1.37 809 587 519 --
Germany 1,890 1.35 281 1,450 159 --
Canada 1,509 1.08 264 890 353 2
====================================================================================================================================
At December 31, 1996
United Kingdom $3,904 3.19% $ 12 $3,461 $ 430 $ 1
Switzerland 3,598 2.94 -- 3,332 266 --
France 3,485 2.84 63 3,005 416 1
Spain 2,670 2.18 960 1,667 43 --
Japan(1) 2,523 2.06 477 979 1,067 --
Germany 1,700 1.39 537 758 405 --
Mexico(3) 1,332 1.09 676 329 327 --
Italy 1,285 1.05 751 384 150 --
Brazil(2) 1,266 1.03 569 454 243
====================================================================================================================================
</TABLE>
(1) 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. While for 1997 and 1996, the cross-border
outstandings primarily consisted of interest-bearing deposits with banks
and trading assets carried at fair value.
(2) The Corporation's cross-border outstandings as presented above for Brazil
primarily consisted of trading assets which are carried at fair value.
(3) The Corporation's cross-border outstandings for Mexico primarily consisted
of trading assets carried at fair value and securities purchased under
resale agreements.
On this basis Canada, Italy, Netherlands and Switzerland are the only
countries whose cross-border outstandings were between .75 percent and 1.00
percent of total assets at December 31, 1998. The aggregate cross-border
outstandings for these countries amounted to $1.2 billion, or .92 percent of
total assets for Canada, $1.2 billion, or .91 percent of total assets for Italy,
$1.2 billion, or .89 percent of total assets for Netherlands and $1.1 billion,
or .85 percent of total assets for Switzerland.
Switzerland is the only country whose cross-border outstandings were
between .75 percent and 1.00 percent of total assets at December 31, 1997. The
aggregate cross-border outstandings for Switzerland amounted to $1.3 billion, or
.95 percent of total assets.
Hong Kong and Canada were the only countries whose cross-border
outstandings were between .75 percent and 1.00 percent of total assets at
December 31, 1996. The aggregate cross-border outstandings for these countries
amounted to $1.1 billion, or .92 percent of total assets for Hong Kong and $914
million, or .75 percent of total assets for Canada.
Bankers Trust Corporation and its Subsidiaries 39
<PAGE>
The following table details the cash basis loans of the outstandings for
those countries presented in Tables 15 and 16.
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
================================================================================
At December 31, 1996
Italy $ 3
Spain 2
- --------------------------------------------------------------------------------
Total $ 5
================================================================================
There were no cross-border renegotiated loans for the years ended December
31, 1998, 1997 and 1996.
In addition to the foregoing disclosure regarding cross-border
outstandings, the following table presents specific disclosure regarding
cross-border exposure to significant Emerging Market countries:
Table 17 Emerging Markets Cross-Border Exposures(1)
% Change from
December 31, December 31, December 31,
($in billions) 1998 1997 1997
- --------------------------------------------------------------------------------
Korea, Republic of $ 0.8 $ 1.6 (50)%
Indonesia 0.4 1.3 (69)%
Hong Kong 0.4 1.0 (60)%
Thailand 0.2 0.6 (67)%
Malaysia 0.1 0.3 (67)%
Other(2) 0.8 1.1 (27)%
- --------------------------------------------------------------------------------
Total Emerging Asia $ 2.7 $ 5.9 (54)%
- --------------------------------------------------------------------------------
Brazil $ 0.7 $ 1.9 (63)%
Mexico 0.6 1.0 (40)%
Argentina 0.5 0.8 (38)%
Venezuela 0.1 0.3 (67)%
Other(3) 0.6 0.8 (25)%
- --------------------------------------------------------------------------------
Total Latin America $ 2.5 $ 4.8 (48)%
- --------------------------------------------------------------------------------
Russian Federation $ 0.2 $ 1.1 (82)%
- --------------------------------------------------------------------------------
Total $ 5.4 $ 11.8 (54)%
================================================================================
As a % of Total Assets 4.1% 8.4%
================================================================================
(1) Based on FFIEC instructions. Shown by country of ultimate risk. Excludes
local country claims on local residents.
(2) Includes Peoples Republic of China, Republic of Taiwan, India,
Philippines, Singapore and Sri Lanka.
(3) Includes Chile, Colombia, Peru, Ecuador, Nicaragua, Panama and Uruguay.
At December 31, 1998, the Corporation's Emerging Markets cross-border
exposures to Asia, Latin America and Russia were $5.4 billion, down 54 percent
from $11.8 billion at December 31, 1997.
Hedge Fund Exposures
The amount owed to the Firm by hedge funds under foreign exchange and derivative
contracts on a pre-collateral basis was $674 million at December 31, 1998. This
entire amount is under daily mark-to-market agreements that require cash or U.S.
Treasury securities as collateral. All collateral calls under these agreements
have been met. In September 1998, the Corporation made a $300 million equity
investment in Long-Term Capital Management, L.P. in connection with the
recapitalization of that entity. As of December 31, 1998 the Corporation had
approximately $225 million of additional proprietary equity investments in
approximately 50 hedge funds with no single investment larger than $20 million.
The Corporation also finances trading positions for hedge funds through reverse
repurchase agreements, all of which are fully collateralized. Also the
Corporation structures for other clients, principally large pension funds,
certain transactions that facilitate their investments in hedge funds. The
Corporation's credit risk in these structures lies with the client investor and
not with the hedge fund.
Accounting Developments
In March 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1), which provides guidance as
to when it is or is not appropriate to capitalize the cost of software developed
or obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The adoption as of January 1,
1999 of SOP 98-1 will not have a material impact on the Corporation's net
income, stockholders' equity or total assets.
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 133 is effective on January 1, 2000 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 is in the process of
evaluating the potential impact of the new standard.
In November 1998, the Securities and Exchange Commission, Federal Deposit
Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the
Currency, and Office of Thrift Supervision (the "Agencies") issued a Joint
Interagency Statement which underscored the requirement that depository
institutions record and report their allowance for loan and lease losses in
accordance with generally accepted accounting principles. In March 1999, the
Agencies announced the establishment of a Joint Working Group to gain a better
understanding of the procedures and processes, including sound practices, used
by banking organizations to determine the allowance for credit losses with the
objective of issuing parallel guidelines on the appropriate methodologies and
supporting documentation and enhanced disclosures regarding the allowance for
credit losses. When the final guidance is issued, the Corporation will evaluate
the potential impact of the guidelines on its consolidated financial statements.
40 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Financial Reports Section
Financial Statements
CONSOLIDATED STATEMENT
OF INCOME 42
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME 43
CONSOLIDATED BALANCE SHEET 44
CONSOLIDATED STATEMENT
OF CHANGES IN
STOCKHOLDERS' EQUITY 45
CONSOLIDATED STATEMENT
OF CASH FLOWS 46
NOTES TO FINANCIAL
STATEMENTS 47
MANAGEMENT'S REPORT ON
RESPONSIBILITY FOR
FINANCIAL REPORTING 82
REPORTS OF
INDEPENDENT AUDITORS 83-84
Supplemental Financial Data
CONDENSED QUARTERLY
CONSOLIDATED STATEMENT
OF INCOME 85
STOCKHOLDER DATA 85
AVERAGE BALANCES, INTEREST
AND AVERAGE RATES 86
VOLUME/RATE ANALYSIS
OF CHANGES IN NET
INTEREST REVENUE 88
INTEREST RATE SENSITIVITY 89
DEPOSITS 90
10-K Report
This Annual Report includes the Corporation's
SEC Report on Form 10-K. However, portions of
the Annual Report, such as pages 1-11, are not
required by the Form 10-K report and are not
part of the Corporation's Form 10-K. Only those
sections of the Annual Report referenced in the
cross-reference index on page 109 are
incorporated in the Form 10-K.
Bankers Trust Corporation and its Subsidiaries 41
<PAGE>
Consolidated Statement of Income (in millions, except per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Revenue
Interest revenue $ 8,291 $ 7,285 $ 6,508
Interest expense 6,919 5,926 5,451
- --------------------------------------------------------------------------------------------
Net Interest Revenue 1,372 1,359 1,057
Provision for credit losses--loans 40 -- 5
- --------------------------------------------------------------------------------------------
Net Interest Revenue after Provision for Credit Losses--Loans 1,332 1,359 1,052
Noninterest Revenue
Trading (184) 1,055 1,014
Fiduciary and funds management 1,108 1,059 876
Corporate finance fees 1,255 1,113 922
Other fees and commissions 817 606 534
Net revenue from equity investments 302 224 230
Securities available for sale gains (losses) (56) 158 75
Insurance premiums 256 287 230
Other 259 359 236
- --------------------------------------------------------------------------------------------
Total noninterest revenue 3,757 4,861 4,117
- --------------------------------------------------------------------------------------------
Noninterest Expenses
Salaries and commissions 1,421 1,273 1,154
Incentive compensation and employee benefits 1,530 1,726 1,216
Agency and other professional service fees 501 391 321
Communication and data services 252 231 237
Occupancy, net 218 181 174
Furniture and equipment 252 224 186
Travel and entertainment 171 142 113
Provision for policyholder benefits 322 333 280
Other 499 423 357
Restructuring charges -- 57 --
- --------------------------------------------------------------------------------------------
Total noninterest expenses 5,166 4,981 4,038
- --------------------------------------------------------------------------------------------
Income (loss) before income taxes (77) 1,239 1,131
Income taxes (benefit) (4) 373 365
- --------------------------------------------------------------------------------------------
Net Income (Loss) $ (73) $ 866 $ 766
============================================================================================
Net Income (Loss) Applicable to Common Stock* $ (105) $ 817 $ 715
============================================================================================
Earnings (Loss) per Common Share:
Basic $ (1.05) $ 8.15 $ 7.12
============================================================================================
Diluted $ (1.05) $ 7.66 $ 6.76
============================================================================================
Cash dividends declared per common share $ 4.00 $ 4.00 $ 4.00
============================================================================================
</TABLE>
* Amounts shown are used to calculate basic earnings per common share.
The accompanying notes are an integral part of the financial statements.
42 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Consolidated Statement of Comprehensive Income (in millions)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income (Loss) $ (73) $ 866 $ 766
- ---------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax* (36) 2 (16)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax** (90) 6 92
Reclassification adjustment for realized (gains) losses, net of tax*** 57 (95) (54)
- ---------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (69) (87) 22
Comprehensive Income (Loss) $(142) $ 779 $ 788
===================================================================================================
</TABLE>
* Amounts are net of an income tax (benefit) expense of $(10) million, $76
million and $(24) million at December 31, 1998, 1997 and 1996,
respectively.
** Amounts are net of an income tax (benefit) expense of $(12) million, $6
million and $53 million at December 31, 1998, 1997 and 1996, respectively.
*** Amounts are net of income tax expense of $1 million, $63 million and $21
million at December 31, 1998, 1997 and 1996, respectively.
The accompanying notes are an integral part of the financial statements.
Bankers Trust Corporation and its Subsidiaries 43
<PAGE>
Consolidated Balance Sheet ($ in millions, except par value)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
December 31, 1998 1997
- ------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and due from banks $ 2,837 $ 2,188
Interest-bearing deposits with banks 2,382 4,272
Federal funds sold 2,484 1,382
Securities purchased under resale agreements 17,053 19,163
Securities borrowed 14,709 16,751
Trading assets:
Government securities 5,731 11,397
Corporate debt securities 5,519 8,128
Equity securities 5,810 7,914
Swaps, options and other derivatives 17,376 17,673
Other trading assets 11,734 11,460
- ------------------------------------------------------------------------------------
Total trading assets 46,170 56,572
Securities available for sale 12,748 8,081
Loans, net 22,633 19,106
Customer receivables 1,524 1,547
Due from customers on acceptances 232 633
Accounts receivable and accrued interest 3,815 4,785
Other assets 6,528 5,622
- ------------------------------------------------------------------------------------
Total $ 133,115 $ 140,102
====================================================================================
Liabilities
Noninterest-bearing deposits
Domestic offices $ 2,784 $ 2,776
Foreign offices 1,689 1,952
Interest-bearing deposits
Domestic offices 18,259 22,353
Foreign offices 14,602 15,749
- ------------------------------------------------------------------------------------
Total deposits 37,334 42,830
Trading liabilities:
Securities sold, not yet purchased
Government securities 4,149 4,389
Equity securities 6,458 5,273
Other trading liabilities 789 519
Swaps, options and other derivatives 15,857 17,065
- ------------------------------------------------------------------------------------
Total trading liabilities 27,253 27,246
Securities loaned and securities sold
under repurchase agreements 17,420 17,896
Other short-term borrowings 16,313 19,577
Acceptances outstanding 232 633
Accounts payable and accrued expenses 5,210 6,536
Other liabilities 5,234 3,617
Long-term debt not included in risk-based capital 14,890 11,275
Long-term debt included in risk-based capital 3,113 3,312
Mandatorily redeemable capital securities of
subsidiary trusts holding solely junior
subordinated deferrable interest debentures
included in risk-based capital 1,420 1,472
- ------------------------------------------------------------------------------------
Total liabilities 128,419 134,394
====================================================================================
Commitments and contingent liabilities (Notes 6, 23 and 28)
Stockholders' Equity
Preferred stock 394 658
Common stock, $1 par value
Authorized, 300,000,000 shares
Issued: 1998, 105,380,175 shares;
1997, 105,378,741 shares 105 105
Capital surplus 1,613 1,563
Retained earnings 3,504 4,202
Common stock in treasury, at cost: 1998, 9,666,055 shares;
1997, 8,422,401 shares (1,056) (889)
Other stockholders' equity 599 463
Accumulated other comprehensive income:
Net unrealized gains (losses) on securities
available for sale, net of taxes (65) (32)
Foreign currency translation, net of taxes (398) (362)
- ------------------------------------------------------------------------------------
Total stockholders' equity 4,696 5,708
- ------------------------------------------------------------------------------------
Total $ 133,115 $ 140,102
====================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
44 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Consolidated Statement of Changes in Stockholders' Equity (in millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred Stock
Balance, beginning of year $ 658 $ 810 $ 865
Preferred stock issued -- 1 1
Preferred stock repurchased (16) (8) (56)
Preferred stock redeemed (248) (145) --
- -----------------------------------------------------------------------------------------
Balance, end of year 394 658 810
- -----------------------------------------------------------------------------------------
Common Stock
Balance, beginning of year 105 104 103
Issuance of common stock -- 1 1
- -----------------------------------------------------------------------------------------
Balance, end of year 105 105 104
- -----------------------------------------------------------------------------------------
Capital Surplus
Balance, beginning of year 1,563 1,437 1,386
Issuance of common stock -- 59 19
Repurchase and retirement of common stock -- (6) (16)
Common stock distributed under employee benefit plans 50 73 41
Preferred stock repurchased -- -- 7
- -----------------------------------------------------------------------------------------
Balance, end of year 1,613 1,563 1,437
- -----------------------------------------------------------------------------------------
Retained Earnings
Balance, beginning of year 4,202 3,988 3,702
Net income (loss) (73) 866 766
Cash dividends declared
Preferred stock (35) (50) (58)
Common stock (384) (366) (335)
Treasury stock distributed under employee benefit plans (206) (236) (80)
Treasury stock associated with acquisition -- -- (7)
- -----------------------------------------------------------------------------------------
Balance, end of year 3,504 4,202 3,988
- -----------------------------------------------------------------------------------------
Common Stock in Treasury, at cost
Balance, beginning of year (889) (372) (336)
Purchases of stock (618) (1,038) (608)
Treasury stock distributed under employee benefit plans 451 521 362
Treasury stock associated with acquisition -- -- 210
- -----------------------------------------------------------------------------------------
Balance, end of year (1,056) (889) (372)
- -----------------------------------------------------------------------------------------
Common Stock Issuable--Stock Awards
Balance, beginning of year 901 526 233
Deferred stock awards granted, net 54 401 294
Deferred stock distributed (138) (26) (1)
- -----------------------------------------------------------------------------------------
Balance, end of year 817 901 526
- -----------------------------------------------------------------------------------------
Deferred Compensation--Stock Awards
Balance, beginning of year (438) (308) (151)
Deferred stock awards granted, net (55) (404) (331)
Amortization of deferred compensation, net 275 274 174
- -----------------------------------------------------------------------------------------
Balance, end of year (218) (438) (308)
- -----------------------------------------------------------------------------------------
Cumulative Translation Adjustments
Balance, beginning of year (362) (364) (348)
Translation adjustments (46) 78 (40)
Income taxes applicable to translation adjustments 10 (76) 24
- -----------------------------------------------------------------------------------------
Balance, end of year (398) (362) (364)
- -----------------------------------------------------------------------------------------
Securities Valuation Allowance
Balance, beginning of year (32) 57 19
Change in unrealized net gains (losses), after applicable
income taxes and minority interest (33) (89) 38
- -----------------------------------------------------------------------------------------
Balance, end of year (65) (32) 57
- -----------------------------------------------------------------------------------------
Total stockholders' equity, end of year $ 4,696 $ 5,708 $ 5,878
=========================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Bankers Trust Corporation and its Subsidiaries 45
<PAGE>
Consolidated Statement of Cash Flows (in millions)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (73) $ 866 $ 766
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for credit losses--loans 40 -- 5
Provision for credit losses--other 5 -- --
Provision for policyholder benefits 322 333 280
Restructuring charges -- 57 --
Deferred income taxes, net (276) (272) 72
Depreciation and other amortization and accretion 379 415 280
Other, net 13 (61) (108)
- ----------------------------------------------------------------------------------------------------------------------
Earnings adjusted for noncash charges and credits 410 1,338 1,295
Net change in:
Trading assets 8,554 (8,825) (2,742)
Trading liabilities 245 4,525 (2,361)
Receivables and payables from securities transactions (528) 477 1,196
Customer receivables 23 (18) (41)
Other operating assets and liabilities, net (1,724) (79) (1,073)
Securities available for sale losses (gains) 56 (158) (75)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 7,036 (2,740) (3,801)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net change in:
Interest-bearing deposits with banks 1,886 (2,171) (217)
Federal funds sold (1,102) 302 (830)
Securities purchased under resale agreements 2,110 (1,197) (4,750)
Securities borrowed 2,042 254 (5,697)
Loans (1,906) (4,637) (2,914)
Securities available for sale:
Purchases (22,041) (6,430) (5,910)
Maturities and other redemptions 2,794 3,845 3,191
Sales 15,102 1,511 1,571
Acquisitions of premises and equipment (447) (237) (215)
Other, net 1,183 911 105
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (379) (7,849) (15,666)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in:
Deposits (5,474) 12,651 4,708
Securities loaned and securities sold under repurchase agreements (277) (5,399) 8,334
Other short-term borrowings (2,879) 1,125 3,425
Issuances of long-term debt* 7,746 9,645 4,262
Repayments of long-term debt** (3,973) (5,188) (1,312)
Issuances of common stock -- 48 19
Repurchase and retirement of common stock -- (6) (17)
Issuance of preferred stock of subsidiary 304 -- --
Redemptions of preferred stock of subsidiary (304) (250) --
Redemptions and repurchases of preferred stock (264) (152) (49)
Purchases of treasury stock (618) (1,038) (608)
Cash dividends paid (421) (397) (392)
Other, net 128 248 258
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (6,032) 11,287 18,628
- ----------------------------------------------------------------------------------------------------------------------
Net effect of exchange rate changes on cash 24 (78) 8
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Due from Banks 649 620 (831)
Cash and due from banks, beginning of year 2,188 1,568 2,399
- ----------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of year $ 2,837 $ 2,188 $ 1,568
======================================================================================================================
Interest paid $ 6,868 $ 5,515 $ 5,513
======================================================================================================================
Income taxes paid, net $ 76 $ 260 $ 329
======================================================================================================================
Noncash investing activities:
Conversions of loans to other real estate and assets acquired in credit workouts $ 6 $ 64 $ 24
Exchanges of Chilean government bonds for annuity contracts 9 57 76
Other*** -- -- 203
- ----------------------------------------------------------------------------------------------------------------------
Total noncash investing activities $ 15 $ 121 $ 303
======================================================================================================================
Noncash financing activity: conversion of debt to equity $ 15 $ 63 $ 3
======================================================================================================================
</TABLE>
* Includes $739 million and $730 million related to mandatorily redeemable
capital securities of subsidiary trusts holding solely junior subordinated
deferrable interest debentures included in risk-based capital for the
years ended December 31, 1997 and 1996, respectively.
** 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.
*** 1996 amount related to treasury stock associated with acquisition.
The accompanying notes are an integral part of the financial statements.
46 Bankers Trust Corporation and its Subsidiaries
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1--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 Bankers
Trust Corporation together with its subsidiaries (the "Corporation" or the
"Firm") as if the merger had been in effect for all the periods presented.
The Corporation is a global provider of a wide range of financial
services. 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 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
Corporation (the "Parent Company"), 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 Corporation 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.
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; Securities Borrowed and Loaned
Resale and repurchase agreements and securities borrowed and loaned 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 borrowed or
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 borrowed or 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 lent or 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.
Nonmarketable Equity Investments
Nonmarketable equity investments, which include venture capital activities, are
included in other assets and carried at cost, net of other-than-temporary
impairment losses.
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.
Bankers Trust Corporation and its Subsidiaries 47
<PAGE>
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. Hedges of nonmarketable equity
securities are carried at cost. 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, except for hedges carried at cost,
are 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 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.
Derivative contracts are classified as nonperforming when payments are
past due 90 days or earlier based upon management's judgment. Thereafter, the
contracts are accounted for at the lower of adjusted cost or fair value with any
decline in fair value charged to trading revenue.
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 related to loans.
Allowance For Credit Losses--Loans
The allowance for credit losses--loans represents management's subjective
estimate of probable loan losses that have occurred as of the date of the
financial statements. All significant counterparty relationships are reviewed
annually, and loans under special supervision, such as criticized, cash basis
and renegotiated loans are reviewed quarterly to allow management to determine
the level of the allowance for credit losses--loans. This management process
results in three components of the overall allowance.
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. This specific allowance is measured using the guidance set forth
in Statement of Financial Accounting Standards ("SFAS") No. 114.
The general component of the allowance is more subjective in nature but is
the result of a rigorous process performed by the Corporation's Credit Audit
Department along with the Credit Risk Management Department. This process
entails the following steps:
1. All material credit exposures are given credit quality ratings (e.g.
Pass, Special Mention, Substandard and Doubtful) based on the Credit
Audit examination process. This rating exercise includes
consideration of obligor domicile, secondary support, and economic
or industry conditions and trends directly affecting the obligor.
2. Total exposures are divided into portfolios primarily based on
industry and geography. Currently, this segmentation results in 14
different portfolios, each with a separate set of relative risk
characteristics.
3. On a quarterly basis, Credit Audit and the Credit Risk Management
Department meet to discuss each of the 14 portfolios. Each portfolio
is analyzed with specific discussions of each significant obligor.
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.
Based on this evaluation, an allowance adequacy range representing
management's
48 Bankers Trust Corporation and its Subsidiaries
<PAGE>
subjective judgment regarding inherent losses in the respective
portfolios is developed. The mechanics of this process involve
development of range estimates of inherent losses in each portfolio
based on the aforementioned evaluation process. The individual
portfolio ranges are then summed together and a further discussion
is held to estimate the inherent loss range for the overall
portfolio. It is the high end of this loss range that is used to
determine the general component of the overall allowance.
4. Additionally, a "calculated loss" amount for each portfolio is
determined by applying loss factors that reflect ten-year historical
weighted-average loss outcomes for the respective credit quality
groupings (e.g. Special Mention, Substandard and Doubtful) existing
in each portfolio. The outcome of this exercise is compared to the
results of step 3 above, and as such, the loss ranges may be
modified upward or downward.
Management determines the unallocated component of the overall allowance
for credit losses--loans based on subjective judgments that cannot be directly
associated with specific loans. These judgements include management's evaluation
of trends in the loan portfolio, portfolio concentrations, trends in the
allowance adequacy range, trends in the economic outlook, trends in charge-offs
(actual and potential), and recoveries, in order to determine the overall level
of the allowance at period end. As such, the unallocated portion of the
allowance is management's attempt to ensure that the overall allowance
appropriately reflects a margin for the imprecision necessarily inherent in the
loss estimation process.
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.
Insurance Revenue and Expense
For the Corporation's life insurance subsidiaries, premiums are recognized as
revenue over the premium paying period of the related disability, annuity and
other life insurance policies and are recorded in noninterest revenue as
insurance premiums. Liabilities for future insurance benefits and the related
provision for policyholder benefits reflect the present value of actuarially
determined obligations net of future premiums. The liabilities for future
benefits are included in other liabilities and the expense is recorded in
noninterest expenses as provision for policyholder benefits.
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
The Corporation accounts 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." Under the intrinsic
value-based method, compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. The Corporation makes 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."
The Corporation records its obligations under outstanding deferred stock
awards in stockholders' equity as common stock issuable-stock awards. The
related deferred compensation is also included in stockholders' equity. These
classifications are based upon the Corporation's intent to settle these awards
with its common stock.
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.
Bankers Trust Corporation and its Subsidiaries 49
<PAGE>
Note 2--Trading Assets and Trading Liabilities
The components of these accounts, which are carried at fair value, were as
follows:
(in millions) December 31, 1998 1997
- --------------------------------------------------------------------------------
Trading assets
U.S. government and agency securities $ 686 $ 4,096
Obligations of U.S. states and political subdivisions 246 350
Foreign government securities 4,799 6,951
Corporate debt securities 5,519 8,128
Equity securities 5,810 7,914
Swaps, options and other derivative contracts(1) 17,376 17,673
Bankers acceptances and certificates of deposit 2,844 2,741
Other 8,890 8,719
- --------------------------------------------------------------------------------
Total trading assets $46,170 $56,572
================================================================================
Trading liabilities
Securities sold, not yet purchased
U.S. government and agency securities $ 1,504 $ 1,660
Foreign government securities 2,616 2,729
Equity securities 6,458 5,273
Other 818 519
Swaps, options and other derivative contracts(1) 15,857 17,065
- --------------------------------------------------------------------------------
Total trading liabilities $27,253 $27,246
================================================================================
(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 3--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:
<TABLE>
<CAPTION>
(in millions) December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Holding Unrealized Holding
Fair ------------------ Amortized Fair ------------------
Value Gains (Losses) Cost Value Gains (Losses)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt securities
U.S. government and agencies $ 1,431 $ 14 $ (11) $ 1,428 $ 525 $ 3 $ --
States of the U.S. and
political subdivisions 1,770 91 (72) 1,751 1,392 78 (50)
Asset-backed 107 8 (1) 100 156 -- --
Certificates of deposit 108 1 -- 107 135 -- --
Foreign governments 3,182 23 (114) 3,273 2,122 5 (46)
Corporate debt 2,431 6 (81) 2,506 3,135 1 (61)
Mortgage-backed 3,125 52 (69) 3,142 113 -- --
Equity securities 594 69 (71) 596 503 41 (18)
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $12,748 $ 264 $ (419) $12,903 $ 8,081 $ 128 $ (175)
====================================================================================================================================
<CAPTION>
(in millions) December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------
Gross
Unrealized Holding
Amortized Fair ------------------ Amortized
Cost Value Gains (Losses) Cost
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Debt securities
U.S. government and agencies $ 522 $ 332 $ -- $ -- $ 332
States of the U.S. and
political subdivisions 1,364 1,261 51 (37) 1,247
Asset-backed 156 1,352 1 (1) 1,352
Certificates of deposit 135 -- -- -- --
Foreign governments 2,163 1,455 33 (4) 1,426
Corporate debt 3,195 2,872 22 (26) 2,876
Mortgage-backed 113 12 -- -- 12
Equity securities 480 636 138 (12) 510
- -----------------------------------------------------------------------------------------------------
Total securities available for sale $ 8,128 $ 7,920 $ 245 $ (80) $ 7,755
=====================================================================================================
</TABLE>
Except for securities of the Government of Chile and the Government of
Japan, 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, 1998. The Chilean securities have an
amortized cost and fair value of $667 million and $608 million, respectively.
The Japanese securities have an amortized cost and fair value of $792 million
and $793 million, respectively.
The components of securities available for sale gains (losses) as reported
in the consolidated statement of income follow:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities--gross realized gains $ 163 $ 53 $ 39
Debt securities--gross realized losses (248) (18) (11)
Equity securities--net realized gains 29 123 47
- -------------------------------------------------------------------------------------
Total securities available for sale gains (losses) $ (56) $ 158 $ 75
=====================================================================================
</TABLE>
50 Bankers Trust Corporation and its Subsidiaries
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and agencies $ 66 6.45% $ 1,119 5.71% $ 225 4.22% $ 21 6.43%
States of the U.S. and political
subdivisions 68 5.41 397 4.99 847 5.07 458 6.01
Asset-backed securities -- -- 70 5.34 37 5.55 -- --
Certificates of deposit 35 6.58 73 5.98 -- -- -- --
Foreign government securities 222 5.66 1,457 3.13 436 7.09 1,067 9.24
Corporate debt securities 775 6.94 1,264 6.82 267 6.68 125 8.62
Mortgage-backed securities -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total fair value $ 1,166 $ 4,380 $ 1,812 $ 1,671
============================================= ======= ======= =======
Total amortized cost $ 1,183 $ 4,429 $ 1,849 $ 1,704
============================================= ======= ======= =======
<CAPTION>
- -----------------------------------------------------------------------------------
Maturity Distribution
----------------------------------------------
Mortgage-
Backed Total
- -----------------------------------------------------------------------------------
($ in millions) Amount Yield Amount Yield
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agencies $ -- --% $ 1,431 5.52%
States of the U.S. and political
subdivisions -- -- 1,770 5.30
Asset-backed securities -- -- 107 5.42
Certificates of deposit -- -- 108 6.17
Foreign government securities -- -- 3,182 5.93
Corporate debt securities -- -- 2,431 6.94
Mortgage-backed securities 3,125 10.28 3,125 10.28
- -----------------------------------------------------------------------------------
Total fair value $ 3,125 $12,154
===================================== ======= =======
Total amortized cost $ 3,142 $12,307
===================================== ======= =======
</TABLE>
Note 4--Loans
The following table summarizes the composition of loans at the end of each of
the last five years:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
( $in millions) December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Commercial and industrial $ 6,448 27% $ 4,244 21% $ 3,422 21% $ 2,520 20% $ 2,218 18%
Financial institutions 2,441 10 2,148 11 1,631 10 1,778 14 2,221 17
Real estate
Construction 134 1 108 1 133 1 154 1 234 2
Mortgage 1,315 6 2,088 10 1,562 10 1,276 10 1,126 9
Other 3,558 15 1,427 7 1,436 9 1,490 11 1,078 8
- -----------------------------------------------------------------------------------------------------------------------------------
Total domestic 13,896 59 10,015 50 8,184 51 7,218 56 6,877 54
- -----------------------------------------------------------------------------------------------------------------------------------
International
Governments and official
institutions 190 1 252 1 237 1 227 2 184 2
Banks and other financial
institutions 3,599 15 3,175 16 3,482 22 1,543 13 2,994 24
Commercial and industrial 3,931 17 4,931 25 2,759 17 1,934 15 1,428 11
Real estate
Construction 71 -- -- -- -- -- 2 -- 2 --
Mortgage 95 -- 195 1 130 1 176 1 138 1
Other 1,813 8 1,402 7 1,290 8 1,701 13 1,014 8
- -----------------------------------------------------------------------------------------------------------------------------------
Total international 9,699 41 9,955 50 7,898 49 5,583 44 5,760 46
- -----------------------------------------------------------------------------------------------------------------------------------
Gross loans 23,595 100% 19,970 100% 16,082 100% 12,801 100% 12,637 100%
=== === === === ===
Less: unearned income 310 165 202 120 102
- -------------------------------------- ------- ------- ------- -------
Total loans $23,285 $19,805 $15,880 $12,681 $12,535
====================================== ======= ======= ======= =======
</TABLE>
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,
1998.
Bankers Trust Corporation and its Subsidiaries 51
<PAGE>
Certain contractual maturity information for the Corporation's loans at
December 31, 1998, 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.
<TABLE>
<CAPTION>
Remaining Maturity
- ----------------------------------------------------------------------------------------
Within After One After
One But Within Five
(in millions) Year Five Years Years Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic
Commercial and industrial $ 656 $ 4,257 $ 1,535 $ 6,448
Financial institutions 2,158 283 -- 2,441
Real estate
Construction 16 112 6 134
Mortgage 281 730 96 1,107
Other 1,710 907 36 2,653
- ----------------------------------------------------------------------------------------
Total domestic 4,821 6,289 1,673 12,783
International 7,335 1,493 181 9,009
- ----------------------------------------------------------------------------------------
Total $12,156 $ 7,782 $ 1,854 $21,792
========================================================================================
Loans due after one year
With predetermined interest rates $ 1,399 $ 301
============================================================================
With floating or adjustable
interest rates $ 6,383 $ 1,553
============================================================================
</TABLE>
Cash Basis Loans and Renegotiated Loans
The Corporation's cash basis loans and renegotiated loans are summarized as
follows:
(in millions) December 31, 1998 1997
- --------------------------------------------------------------------------------
Cash basis loans
Domestic $192 $141
International 200 99
- --------------------------------------------------------------------------------
Total cash basis loans $392 $240
================================================================================
Renegotiated loans
Domestic $ 25 $ 25
International 1 --
- --------------------------------------------------------------------------------
Total renegotiated loans $ 26 $ 25
================================================================================
At December 31, 1998 and 1997, the Corporation had commitments to make
additional loans to borrowers on a cash basis or renegotiated status of $39
million and $11 million, respectively.
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 which 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 which would have been recorded at the
original rate were not necessarily representative of current market rates.
(in millions) Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Domestic loans
Gross amount of interest that would
have been recorded at original rate $16 $16 $38
Less, interest, net of reversals,
recognized in interest revenue 8 3 7
- --------------------------------------------------------------------------------
Reduction of interest revenue 8 13 31
- --------------------------------------------------------------------------------
International loans
Gross amount of interest that would
have been recorded at original rate 16 5 9
Less, interest, net of reversals,
recognized in interest revenue 11 -- --
- --------------------------------------------------------------------------------
Reduction of interest revenue 5 5 9
- --------------------------------------------------------------------------------
Total reduction of interest revenue $13 $18 $40
================================================================================
At December 31, 1998 and 1997, the recorded investment in loans that was
considered to be impaired under SFAS 114 was $418 million and $265 million,
respectively, which consisted of total cash basis loans and renegotiated loans.
Included in these amounts were $295 million and $78 million of loans which
required a valuation allowance of $61 million and $13 million at those same
dates, respectively. The average recorded investment in impaired loans during
the years ended December 31, 1998 and December 31, 1997 was approximately $295
million and $356 million, respectively. For the years ended December 31, 1998,
1997 and 1996, the Corporation recognized interest income on impaired loans of
$19 million, $3 million and $7 million, respectively, using the cash basis
method of income recognition described above and in Note 1.
52 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Note 5--Allowances for Credit Losses
An analysis of the changes in the Corporation's allowances for credit losses
follows:
(in millions) Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Loans
Balance, beginning of year $ 699 $ 773 $ 992
Provision for credit losses 40 -- 5
Reclassification -- (57) (200)
Allowance related to acquisition -- 17 --
Net charge-offs
Charge-offs 107 78 89
Recoveries 20 44 65
- -------------------------------------------------------------------------------
Total net charge-offs 87 34 24
- -------------------------------------------------------------------------------
Balance, end of year $ 652 $ 699 $ 773
===============================================================================
Other liabilities
Balance, beginning of year $ 13 $ 10 $ --
Provision for credit losses 5 -- --
Reclassification -- 3 10
- -------------------------------------------------------------------------------
Balance, end of year $ 18 $ 13 $ 10
===============================================================================
Note 6--Premises and Equipment; Leases
An analysis of premises and equipment follows:
(in millions) December 31, 1998 1997
- --------------------------------------------------------------------------------
Land $ 85 $ 83
Buildings 338 318
Leasehold improvements 416 373
Furniture and equipment 1,389 1,142
Construction-in-progress 36 17
- --------------------------------------------------------------------------------
Total 2,264 1,933
Less accumulated depreciation and amortization 1,131 1,031
- --------------------------------------------------------------------------------
Net book value $1,133 $ 902
================================================================================
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 1998 were as follows:
(in millions) Year Ended December 31,
- --------------------------------------------------------------------------------
1999 $109
2000 109
2001 93
2002 86
2003 82
2004 and later 442
- --------------------------------------------------------------------------------
Total minimum lease payments 921
Less minimum noncancelable sublease rentals 11
- --------------------------------------------------------------------------------
Net minimum lease payments $910
================================================================================
The following shows the net rental expense for all operating leases:
(in millions) Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Gross rental expense $131 $107 $103
Less sublease rental income 4 3 3
- --------------------------------------------------------------------------------
Net rental expense $127 $104 $100
================================================================================
Bankers Trust Corporation and its Subsidiaries 53
<PAGE>
Note 7--Securities Loaned and Securities Sold Under Repurchase Agreements and
Other Short-term Borrowings
Short-term borrowings are borrowed funds generally with an original maturity of
one year or less. Debt instruments which contain a provision for early
redemption, exercisable at the option of the security holder, are classified on
the basis of the earliest possible redemption date.
Securities loaned and securities sold under repurchase agreements and
federal funds purchased generally mature in one day; commercial paper generally
matures within 90 days.
The details of these borrowings for the years 1998, 1997 and 1996 are
presented below:
($ in millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Securities loaned and securities sold
under repurchase agreements
Balance at year end $17,420 $17,896 $23,454
Average amount outstanding 28,732 23,897 26,964
Maximum amount outstanding at
any month end 37,140 27,878 30,471
Average interest rate for the year 6.60% 5.91% 5.93%
Average interest rate on year-end balance 5.06% 5.30% 5.81%
Federal funds purchased
Balance at year end $ 3,686 $ 3,260 $ 5,475
Average amount outstanding 3,840 4,097 3,684
Maximum amount outstanding at
any month end 10,036 8,444 6,982
Average interest rate for the year 4.83% 5.03% 4.97%
Average interest rate on year-end balance 3.90% 5.42% 5.77%
Commercial paper
Balance at year end $ 5,110 $ 8,733 $ 8,080
Average amount outstanding 9,708 8,881 7,399
Maximum amount outstanding at
any month end 15,293 9,584 9,076
Average interest rate for the year 5.98% 5.79% 5.78%
Average interest rate on year-end balance 5.41% 5.94% 5.61%
Other
Balance at year end $ 7,517 $ 7,584 $ 5,854
Average amount outstanding 8,049 7,190 5,378
Maximum amount outstanding at
any month end 8,885 8,249 6,534
Average interest rate for the year 6.97% 6.58% 7.25%
Average interest rate on year-end balance 5.54% 5.93% 6.08%
===============================================================================
Note 8--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.
Risk-based capital includes Tier 3 capital. Tier 3 capital is defined as
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
principal or interest if the payment would cause the issuing organization's
risk-based capital ratios to fall below the minimum required level.
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
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
Subordinated Subordinated 1998 1997
(in millions) Fixed Rate Floating Rate Total Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Parent Company
Due in 1998 $ -- $ -- $ -- $ --
Due in 1999 99 48 147 250
Due in 2000 196 -- 196 200
Due in 2001 212 -- 212 210
Due in 2002 613 80 693 706
Due in 2003 102 194 296 295
Due in 2004-2008 773 99 872 894
Thereafter 886 -- 886 787
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 2,881 $ 421 $ 3,302 $ 3,342
- -----------------------------------------------------------------------------------------------------------------------------------
BTCo
Due in 1998 $ -- $ -- $ -- $ 25
Due in 1999 9 -- 9 9
Due in 2000 8 -- 8 8
Due in 2001 8 -- 8 7
Due in 2002 7 -- 7 7
Due in 2003 7 -- 7 6
Due in 2004-2008 17 348 365 114
Thereafter -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 56 $ 348 $ 404 $ 176
- -----------------------------------------------------------------------------------------------------------------------------------
BT Alex. Brown Incorporated
Due in 1998 $ -- $ -- $ -- $ --
Due in 1999 -- 200 200 200
Due in 2000 -- 200 200 200
Due in 2001 -- -- -- --
Due in 2002 -- -- -- --
Due in 2003 -- -- -- --
Due in 2004-2008 -- -- -- --
Thereafter -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ -- $ 400 $ 400 $ 400
- -----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt $ 4,106 $ 3,918
- -----------------------------------------------------------------------------------------------------------------------------------
Less: Amortization for risk-based capital purposes (882) (606)
- -----------------------------------------------------------------------------------------------------------------------------------
Less: Subordinated debt in excess of risk-based
capital limitations (111) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt included in risk-based capital $ 3,113 $ 3,312
===================================================================================================================================
</TABLE>
54 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Long-term debt not included in risk-based capital
<TABLE>
<CAPTION>
Subordinated
--------------- Senior Senior Dec. 31, Dec. 31,
Fixed Floating Fixed Floating 1998 1997
(in millions) Rate Rate Rate Rate Total Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Parent Company
Due in 1998 $ -- $ -- $ -- $ -- $ -- $ 219
Due in 1999 -- -- 348 488 836 835
Due in 2000 -- -- 194 543 737 526
Due in 2001 4 -- 249 875 1,128 837
Due in 2002 -- -- 4 560 564 601
Due in 2003 -- -- -- 663 663 7
Due in 2004-2008 -- -- 112 578 690 240
Thereafter -- -- -- 8 8 7
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 4 $ -- $ 907 $ 3,715 $ 4,626 $ 3,272
- ------------------------------------------------------------------------------------------------------------------------------------
BTCo
Due in 1998 $ -- $ -- $ -- $ 217
Due in 1999 599 1,206 1,805 967
Due in 2000 288 825 1,113 3,101
Due in 2001 73 586 659 656
Due in 2002 130 592 722 699
Due in 2003 101 2 103 73
Due in 2004-2008 685 1,237 1,922 709
Thereafter 83 19 102 228
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,959 $ 4,467 $ 6,426 $ 6,650
- ------------------------------------------------------------------------------------------------------------------------------------
BT Alex. Brown Incorporated
Senior Floating Rate Note due Mar. 1999 to Aug. 2001 $ 694 $ 705
BTC Mortgage Investors Trust (fixed rate) 21 42
Other (floating rate) 2,130 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt $13,897 $10,669
Add: Amortization for risk-based capital purposes 882 606
Add: Subordinated debt in excess of risk-based
capital limitations 111 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt not included in risk-based capital $14,890 $11,275
====================================================================================================================================
</TABLE>
Based solely on the contractual terms of the debt issues, at December 31,
1998 and 1997 the Corporation's total fixed rate long-term debt had a
weighted-average interest rate of 6.98 percent and 7.42 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 5.06 percent and 6.38
percent at December 31, 1998 and 1997, respectively.
The Corporation issued $25 million convertible subordinated debentures in
June 1986. The debentures are due June 2001, bear interest at 5 3/4% and are
convertible into the Corporation's common stock at the rate of one share of
common stock for each $20.90 of principal amount of debentures. The debentures
were redeemable at the option of the Corporation at 100.5% through June 11, 1997
and at par thereafter. During 1998 and 1997, $30,000 and $8,320,000 par value,
respectively, of the debentures were converted into 1,434 and 399,450 shares,
respectively, of the Corporation's common stock.
Mandatory convertible securities (equity commitment and equity contract
notes) include covenants requiring the Parent Company, from time to time or at
maturity, as appropriate, to issue common stock or other securities in an amount
equal to the principal amount of the debt securities, in order to comply with
capital adequacy guidelines. In this regard, at December 31, 1998 and 1997, the
Parent Company had dedicated $147 million and $250 million, respectively of net
proceeds from such issuances.
At December 31, 1998 and 1997, certain subsidiaries of Bankers Trust
Company had outstanding $3.54 billion and $3.69 billion, respectively of
mandatory redeemable preference securities as included in the table above which
are not included in risk-based capital. Maturities at December 31, 1998 range
from February 1999 to December 2005 and maturities at December 31, 1997 ranged
from January 1999 to February 2001. Additionally, a subsidiary of the
Corporation, had outstanding $2.13 billion of mandatory redeemable preference
securities included in the table above which are not included in risk-based
capital. These securities mature in December 2003.
Bankers Trust Corporation and its Subsidiaries 55
<PAGE>
Note 9--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 the Parent Company 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 the
Parent Company or BTCo, as applicable (the "debentures"). The debentures are
unsecured and subordinated to all senior indebtedness of the Parent Company or
BTCo, as applicable, and are the sole assets of the trusts. Payments under the
debentures by either the Parent Company 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 the Parent Company 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 the Parent Company or BTCo upon
concurrent repayment of the related debentures.
The Parent Company 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 the Parent Company 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 the Parent Company 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 the Parent
Company's ability to deduct, for federal income tax purposes, interest expense
on the corresponding debentures, provides the Parent Company 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:
<TABLE>
<CAPTION>
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) 1998 1997 Securities Dates
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Parent Company--Obligated
BT Institutional Capital Trust A(3) $ 290 $ 300 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) 203 250 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) $1,500(1)
========================================================================================================================
<CAPTION>
Stated
Maturity of
Debentures
and Trust
Preferred Earlier Redemption
Capital Maturity Period of
($ in millions) Securities Date(2) Debentures
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Parent Company--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
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes $23 million and $28 million of deferred issuance costs and
unamortized discount at December 31, 1998 and December 31, 1997,
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.
56 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Note 10--Preferred Stock of Subsidiary
On January 9, 1998, BT Holdings (Europe) Limited ("BTH"), an indirect
wholly-owned subsidiary of BTCo issued $304 million, or 3,040 shares, of Money
Market Cumulative Preferred Stock in four series of 760 shares each--Series A-D
("BTH Preferred"). In the fourth quarter of 1998, BTH redeemed all 3,040 shares
of the BTH Preferred at a price of $100,000 per share plus accrued and unpaid
dividends on such shares to the redemption date. Dividends on these shares
ceased to accumulate on the applicable redemption date.
On January 22, 1993, BT Overseas Finance N.V. ("BTOF"), an indirect,
wholly-owned subsidiary of the Parent Company authorized to issue 10,000
preferred shares, $.01 par value, issued $250 million, or 2,500 shares, of
Auction Rate Cumulative Preferred Stock in four series of 625 shares
each--Series A-D ("BTOF Preferred"). In the first quarter of 1997, BTOF redeemed
all 2,500 shares of the BTOF Preferred at a price of $100,000 per share plus
accrued and unpaid dividends on such shares to the redemption date. Dividends on
these shares ceased to accumulate on the applicable redemption date.
Note 11--Preferred Stock
Series Preferred Stock
The Parent Company is authorized to issue 10 million 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,
--------------
1998 1997 Liquidation Earliest
-------------- Preference Redemption
(in millions) Per Share Date(1)
- -----------------------------------------------------------------------------
Adjustable Rate
Cumulative, Series Q(2) $ 160 $ 159 $2,500 03/01/99
Adjustable Rate
Cumulative, Series R(2) 109 126 2,500 09/01/99
7 5/8% Cumulative,
Series O -- 149 -- --
7.50% Cumulative,
Series P -- 99 -- --
7.75% Cumulative,
Series S 125 125 2,500 06/01/00
- -----------------------------------------------------------------------------
Total preferred stock $ 394 $ 658
=============================================================================
(1) At the option of the Parent Company, 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 4 1/2
percent or more than 10 1/2 percent per annum. The rates in effect for
Series Q were 4.50 percent and 5.24 percent at December 31, 1998 and 1997,
respectively. The rates in effect for Series R were 4.50 percent and 5.21
percent at December 31, 1998 and 1997, respectively.
Series C Junior Participating Preferred Stock
The Parent Company has designated 1 million shares of the Series Preferred Stock
as Series C Junior Participating Preferred Stock ("Series C"), which are
issuable on the exercise of Preferred Share Purchase Rights pursuant to a Rights
Agreement adopted by the Corporation in February 1988 and amended, November 26,
1997. See Note 12 for a more detailed discussion of this agreement. No Series C
shares have ever been issued.
Bankers Trust Corporation and its Subsidiaries 57
<PAGE>
The number of shares of Series Preferred Stock issued, repurchased and redeemed
during 1996, 1997 and 1998 was as follows (number of shares in thousands):
<TABLE>
<CAPTION>
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)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995 1,000 447 589 98 80 60 50
- ---------------------------------------------------------------------------------------------------------------------------------
Issued -- -- 3 1 -- -- --
Repurchased -- -- -- -- (15) (8) --
Redeemed -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
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
=================================================================================================================================
</TABLE>
(1) On March 1, 1995, the Parent Company reset the interest rate on $150
million of 7 5/8% Convertible Capital Securities to a rate of 6 1/8% 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, the Parent Company 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.
Serial Preferred Stock
In 1990, stockholders voted in favor of an amendment to the Restated Certificate
of Incorporation of Bankers Trust Corporation to increase the number of shares
of authorized preferred stock from 10 million to 20 million and created a new
class of preferred stock called Serial Preferred Stock which would have equal
rank as the Series Preferred Stock as well as priority over common stockholders
as to dividends and in the event of liquidation. No serial preferred stock has
ever been issued.
Note 12--Preferred Share Purchase Rights
On February 16, 1988, the Board of Directors of the Parent Company 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 attach to each share of common stock
issued after February 26, 1988.
Each Right entitles the registered holder to purchase from the Parent
Company a one-hundredth interest in a share of the Parent Company's Series C
Junior Participating Preferred Stock at an exercise price of $480, as amended,
subject to certain adjustments. The Rights will not be exercisable or
transferable apart from the common stock until the 10th day after either a
public announcement that a person or group (an "Acquiring Person") has acquired
beneficial ownership of 20 percent or more of the common stock, or the
announcement or commencement of a tender or exchange offer for 20 percent or
more of the common stock. If the Corporation is acquired or 50 percent or more
of its consolidated assets or earning power are sold, each holder of a Right
will have the right to receive, upon the exercise at the then current exercise
price of the Right, that number of shares of common stock of the acquiring
company which have a market value of two times the exercise price of the Right.
If any person becomes an Acquiring Person, each holder of a Right other than
Rights beneficially owned by the Acquiring Person (which will be void), will
have the right to receive upon exercise that number of common shares having a
market value of two times the exercise price of the Right. The Rights will
expire on February 26, 2008, as amended, but may be redeemed at any time prior
to a person or group acquiring the beneficial ownership of 20 percent or more of
the common stock. Until a Right is exercised, the holder will have no rights as
a stockholder of the Parent Company.
58 Bankers Trust Corporation and its Subsidiaries
<PAGE>
After the acquisition by a person or group of beneficial ownership of 20
percent or more of the outstanding common shares and prior to the acquisition by
such person or group of 50 percent or more of the outstanding common shares, the
Board of Directors of the Parent Company may exchange the Rights (other than
Rights owned by such person or group), in whole or in part, at an exchange ratio
of one common share, or a one-hundredth interest in a share of Series C Junior
Participating Preferred Stock (or a share of a class or series of the Parent
Company's preferred stock having equivalent rights, preferences and privileges),
per Right (subject to adjustment).
If issued, each share of Series C Junior Participating Preferred Stock
will be entitled, subject to adjustment, to (i) a quarterly dividend of the
greater of $1 per share or 100 times the quarterly dividend declared on each
share of common stock, (ii) in the event of liquidation, dissolution or winding
up, a preferential liquidation payment of the greater of $100 per share or 100
times the liquidation payment made per share of common stock, and (iii) 100
votes per share voting together with the holders of the Parent Company's common
stock on all matters.
These statements are qualified in their entirety by reference to the
Rights Agreement, as amended as of November 26, 1997. In connection with
entering into the merger agreement with Deutsche Bank, the Rights Agreement was
further amended so that neither Deutsche Bank nor any affiliate thereof shall be
deemed to be an acquiring person. Copies of the foregoing documents have been
filed with the Securities and Exchange Commission.
Note 13--Common Stock and Stock-Based Compensation Plans
Common stock issued, distributed from treasury and purchased for treasury during
1998, 1997 and 1996 were as follows(1):
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Common shares outstanding,
beginning of year 96,956,340 99,189,329 98,414,325
- -------------------------------------------------------------------------------
Shares issued or distributed under
employee benefit plans 4,192,633 7,167,221 5,831,852
Conversion of 5 3/4% Convertible
Subordinated Debentures 1,434 399,450 3,586
Shares issued for acquisitions -- 14,678 2,881,476
Shares purchased for treasury (5,436,287) (9,735,358) (7,493,395)
Shares purchased and retired -- (78,980) (448,515)
- -------------------------------------------------------------------------------
Common shares outstanding,
end of year 95,714,120 96,956,340 99,189,329
===============================================================================
(1) The information presented reflects the additional shares issued in
conjunction with the Alex. Brown merger.
At December 31, 1998 shares of common stock were reserved for issuance or
distribution under the following: Dividend Reinvestment and Common Stock
Purchase Plan--2,512,549, PartnerShare Plan--2,274,330 and various Stock Option
and Stock Award Plans (the "Plans")--30,717,957.
The Plans, approved by the stockholders at Annual Meetings of
Stockholders, permit the granting of nonqualified and incentive stock options,
deferred stock and other stock-based awards (collectively, the "Awards"). These
Plans are administered by the Human Resources Committee of the Board of
Directors (the "Committee"), none of whom is eligible to participate therein.
The Committee determines whether, to what extent and under what circumstances
the Awards may be settled in cash. Awards granted under these plans may be
satisfied through the use of the Parent Company's authorized but unissued shares
or shares held in the Parent Company's treasury.
Stock options are granted to purchase stock at a price not less than the
fair market value on the date of grant and may be outstanding for any period up
to 10 years and one day from the date of grant. Generally, no stock option may
be exercised until the employee has remained in the continuous employ of the
Corporation for one year after the option is granted.
The following is a summary of stock option transactions which occurred
during 1996, 1997 and 1998 (number of shares in thousands):
<TABLE>
<CAPTION>
Weighted-Average
Exercise Price Exercise Price
Options Per Option Per Option
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1995 11,141 $ 6.83-80.75 $54.89
=====================================
Granted 3,947 38.84-83.3125 71.15
Exercised (4,729) 6.83-70.4375 55.15
Cancelled (500) 58.86
- -------------------------------------
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
===================================== ======
Exercisable at:
December 31, 1997 5,622 $62.65
=====================================
December 31, 1998 7,581 $76.72
===================================== ======
</TABLE>
Bankers Trust Corporation and its Subsidiaries 59
<PAGE>
The following table sets forth information about stock options outstanding
at December 31, 1998 (number of shares in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Range of Exercise Prices Total
--------------------------------- -------
$21.59- $ 56.25- $ 99.375-
53.625 92.6563 134.50
---------------------------------
<S> <C> <C> <C> <C>
Options outstanding
Number of shares 746 6,871 3,179 10,796
Weighted average remaining
contractual life (years) 4.9 7.6 8.8 7.8
Weighted average exercise price $ 35.21 $ 80.85 $ 106.66 $ 85.29
Options exercisable
Number of shares 746 6,782 53 7,581
Weighted average exercise price $ 35.21 $ 81.08 $ 102.76 $ 76.72
- ----------------------------------------------------------------------------------------
</TABLE>
Deferred stock awards are the right to receive common stock of the
Corporation at a specified future date. The awards vest from one to three years
from the date of the award. For certain awards, shares of stock are not
distributed until after a specified deferral period extending up to five years
from the vesting date. Prior to distribution, awards may earn amounts equivalent
to quarterly dividends declared by the Corporation and certain awards may also
earn the equivalent of the excess of quarterly earnings per common share over
the cash dividends. At December 31, 1998 and 1997, there were deferred stock
awards outstanding of 8,698,216 shares and 9,871,227 shares, respectively.
Deferred stock awards of approximately 6.5 million shares were granted in
January 1999 related to the 1998 performance year.
In accordance with the plan documents, upon change-in-control, the stock
option and deferred compensation plans are subject to immediate vesting.
After providing for stock options and deferred stock awards granted, there
were 9,369,785, and 10,090,128 shares available for future grant under the Plans
at December 31, 1998 and 1997, respectively. Compensation expense recognized for
deferred stock awards was $275 million and $274 million in 1998 and 1997,
respectively. The weighted-average grant-date fair value of deferred stock
awards granted during 1998 was $113.18.
Pursuant to an Alex. Brown predecessor plan, the 1991 Equity Incentive
Plan (the "Plan"), stock based awards, including stock options and convertible
debentures were made to certain key employees. The Corporation has also sold
convertible subordinated debentures to certain employees pursuant to the Plan.
The debentures were generally convertible into the Corporation's common stock
three years after the date issued or in stages beginning four years after the
date issued. The debentures may be redeemed at par if the employee terminates
employment with the Corporation. The Corporation made loans to the employees to
finance the entire purchase price of the stock and debentures. Loan forgiveness
resulted in no compensation expense in 1998 and $27 million and $9 million in
1997 and 1996, respectively. Debentures outstanding at December 31, 1998 totaled
$4 million.
60 Bankers Trust Corporation and its Subsidiaries
<PAGE>
SFAS 123 Pro Forma Information
The Corporation applies 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 equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Corporation had
accounted for its employee stock options under the fair value method of SFAS
123.
The weighted-average fair value of options granted during 1998 was $38.02
per option. The fair value for these options was estimated at the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998; risk-free interest rate of 5.99 percent; annual dividends
of $4.00; volatility factor of the expected market price of the Corporation's
common stock of 40 percent; and a weighted-average expected life of the option
of 5 years.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period.
(in millions except earnings per share) 1998 1997 1996*
- -------------------------------------------------------------------------------
Net income (loss):
As reported $ (73) $ 866 $ 766
Pro forma $ (129) $ 807 $ 739
Basic earnings (loss) per share:
As reported $ (1.05) $ 8.15 $ 7.12
Pro forma $ (1.61) $ 7.56 $ 6.86
Diluted earnings (loss) per share:
As reported $ (1.05) $ 7.66 $ 6.76
Pro forma $ (1.61) $ 7.11 $ 6.51
===============================================================================
* Reflects the compensation expense that would have been recognized under
SFAS 123 for both Alex. Brown and the Corporation on an historical basis.
The fair values of options have not been restated to reflect the Alex.
Brown merger.
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 $200 million and $294 million at December
31, 1998 and 1997, respectively. For the years 1998 and 1997, the average
reserve balances of these banks amounted to $148 million and $200 million,
respectively.
Assets, principally trading assets and securities available for sale, of
approximately $11.420 billion at December 31, 1998 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
the Parent Company, 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 interaffiliate transactions.
Limitations exist on the availability of BTCo's undistributed earnings for
the payment of dividends to the Parent Company without prior approval of the
bank regulatory authorities. In this regard, BTCo can declare dividends in 1999
without approval of the regulatory authorities of $13 million of its retained
earnings at December 31, 1998, plus an additional amount equal to net profits,
as defined, for 1999 up to the date of any such dividend declaration. 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 which may limit cash dividends and advances to the Parent Company.
Bankers Trust Corporation and its Subsidiaries 61
<PAGE>
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 which 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.
In 1997, the Corporation adopted the new 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 accordance with current Federal Reserve Board (FRB) guidelines, the
stockholder's equity and risk-weighted assets of certain foreign insurance
subsidiaries are excluded from the calculation of the regulatory capital ratios.
In computing these ratios, 50 percent of the stockholder's equity of the foreign
insurance subsidiaries is deducted from the Corporation's Tier 1 Capital, and 50
percent is deducted from Tier 2 Capital.
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 threshold for the Leverage ratio is not
applicable at the bank holding company level.
Based on their respective regulatory capital ratios at December 31, 1998
and December 31, 1997, 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.
62 Bankers Trust Corporation and its Subsidiaries
<PAGE>
The Corporation's and BTCo's actual capital amounts and ratios are
presented in the table below.
<TABLE>
<CAPTION>
FRB
Minimum To Be Well
For Capitalized
Capital Under
Actual as of Actual as of Adequacy Regulatory
12/31/98 12/31/97 Purposes: Guidelines:
- ----------------------------------------------------------------------------------------------------------------------
($ in millions) Amount Ratio Amount Ratio Ratio Ratio
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporation (1)
Risk-Based Capital Ratios
Tier 1 Capital (2) $5,069 7.5% $ 6,431 8.3% 4.0% 6.0%
Total Capital (2) 9,281 13.6% 10,969 14.1% 8.0% 10.0%
Leverage Ratio (3) $5,069 3.5% $ 6,431 4.4% 3.0% N/A
BTCo
Risk-Based Capital Ratios
Tier 1 Capital (2) $6,682 10.5% $ 5,999 9.0% 4.0% 6.0%
Total Capital (2) 8,540 13.4% 8,261 12.3% 8.0% 10.0%
Leverage Ratio (3) $6,682 5.7% $ 5,999 5.4% 3.0% 5.0%
</TABLE>
(1) Capital and risk-weighted assets of certain subsidiaries of the
Corporation have been excluded in accordance with Federal Reserve Board
guidelines.
(2) Ratios are calculated on Tier 1 Capital and Total Capital as a percentage
of risk-weighted assets.
(3) 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, 1998 1997 1996
- --------------------------------------------------------------------------------
Interest Revenue
Interest-bearing deposits with banks $ 310 $ 395 $ 214
Federal funds sold 211 266 119
Securities purchased under
resale agreements 1,635 1,352 1,313
Securities borrowed 1,222 746 825
Trading assets 2,388 2,488 2,411
Securities available for sale
Taxable 633 436 424
Exempt from federal income taxes 43 32 35
Loans 1,711 1,437 1,046
Customer receivables 138 133 121
- --------------------------------------------------------------------------------
Total interest revenue 8,291 7,285 6,508
- --------------------------------------------------------------------------------
Interest Expense
Interest-bearing deposits
Domestic offices 1,183 895 384
Foreign offices 1,012 1,181 971
Trading liabilities 462 476 862
Securities loaned and securities sold
under repurchase agreements 1,897 1,413 1,598
Other short-term borrowings 1,327 1,193 1,000
Long-term debt 921 655 633
Mandatorily redeemable capital
securities of subsidiary trusts holding
solely junior subordinated deferrable
interest debentures included in
risk-based capital 117 113 3
- --------------------------------------------------------------------------------
Total interest expense 6,919 5,926 5,451
- --------------------------------------------------------------------------------
Net interest revenue $1,372 $1,359 $1,057
================================================================================
Note 17--Trading Revenue
The following are the components of trading revenue:
(in millions) Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Interest rate risk $ (427) $ 433 $ 474
Foreign exchange risk 426 277 178
Equity and commodity risk (183) 345 362
- --------------------------------------------------------------------------------
Total trading revenue $ (184) $1,055 $1,014
================================================================================
Note 18--Pension and Other Employee Benefit Plans
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," revises and standardizes the disclosure requirements but does not
change the measurement or recognition rules for pensions and other
postretirement benefit plans. Prior year amounts have been reclassified to
conform with the disclosure requirements of SFAS 132.
The Corporation has a trusteed, noncontributory, defined benefit pension
plan covering substantially all domestic employees. The Corporation also has a
domestic, unfunded defined contribution plan as well as 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.
The Corporation maintains a 401 (k) deferred compensation and profit
sharing plan (the "Plan") for certain employees. Employees are permitted within
limitations imposed by tax law to make pretax contributions to the Plan pursuant
to salary reduction agreements. The Corporation may make discretionary matching
and profit sharing contributions to the Plan and may make additional
contributions to preserve the Plan's tax exempt status.
Bankers Trust Corporation and its Subsidiaries 63
<PAGE>
The Corporation also provides health care benefits to employees (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 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, 1998 and a statement of the funded status as of December 31 of both
years:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
- -----------------------------------------------------------------------------------------------------
(in millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 685 $ 586 $ 126 $ 130
Service cost 23 21 1 1
Interest cost 48 45 7 8
Plan amendments 25 -- -- --
Acquisitions 13 -- -- --
Actuarial (gain) loss 28 61 (19) (7)
Benefits paid (21) (20) (7) (6)
Curtailment/settlement -- (3) (7) --
Foreign currency exchange rate changes 2 (5) -- --
- -----------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 803 $ 685 $ 101 $ 126
=====================================================================================================
Change in plan assets
Fair value of plan assets at beginning
of year $ 973 $ 864 $ 4 $ 4
Actual return on plan assets 144 133 -- --
Employer contributions 2 2 7 6
Acquisitions 13 -- -- --
Benefits paid (21) (20) (7) (6)
Curtailment/settlement (5) (3) -- --
Foreign currency exchange rate changes 1 (3) -- --
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 1,107 $ 973 $ 4 $ 4
=====================================================================================================
Funded Status $ 304 $ 288 $ (97) $ (122)
Unrecognized net (gain) loss (143) (116) (28) (8)
Unrecognized prior service cost 35 13 2 7
Unrecognized net (assets) obligations (11) (17) -- --
Additional minimum liability -- (4) -- --
- -----------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost at end of year* $ 185 $ 164 $ (123) $ (123)
=====================================================================================================
</TABLE>
* Prepaid pension costs totaled $210 million and $190 million at December
31, 1998 and 1997, 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 $24 million, $23
million and $3 million, respectively, as of December 31, 1998 and $22 million,
$21 million and $3 million, respectively, as of December 31, 1997.
Pension and postretirement benefits expense for 1998, 1997 and 1996
included the following components:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
- -----------------------------------------------------------------------------------------------------------
(in millions) Year Ended December 31, 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 23 $ 21 $ 23 $ 1 $ 1 $ 1
Interest cost 48 45 42 7 8 9
Expected return on plan assets (84) (81) (67) -- -- --
Net amortization and deferral (6) (1) (6) (3) -- --
- -----------------------------------------------------------------------------------------------------------
Total defined benefit plans (19) (16) (8) 5 9 10
===========================================================================================================
Defined contribution plans 52 29 37 -- -- --
Other plans 4 6 4 -- -- --
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit expense $ 37 $ 19 $ 33 $ 5 $ 9 $ 10
===========================================================================================================
</TABLE>
Effective September 30, 1997, a foreign defined benefit plan was changed
to a defined contribution plan. As a result of this change, the Corporation
recognized a $2 million curtailment/settlement gain in other noninterest
revenue.
64 Bankers Trust Corporation and its Subsidiaries
<PAGE>
The actuarial assumptions used for the principal domestic defined benefit
plan and postretirement benefit plan were as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate in determining expense 7.00% 7.50% 7.00% 7.00% 7.50% 7.00%
Discount rate in determining benefit obligations at year end 6.75% 7.00% 7.50% 6.75% 7.00% 7.50%
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%
</TABLE>
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, an 8.00 percent annual
rate of increase in the per capita cost of covered health care benefits was
assumed for 1999. The rate was assumed to decrease gradually to 5.50 percent for
4 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-per centage-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) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Effect on total of service and interest
cost components $ 1 $ 1 $(1) $(1)
Effect on accumulated postretirement
benefit obligation $ 6 $ 9 $(6) $(9)
Profit Sharing Plans
The Corporation maintains a noncontributory profit sharing plan, called
PartnerShare, covering certain domestic employees. The Corporation's
contribution consists of a fixed contribution equal to six percent of eligible
domestic employees' annual salary (the "Fixed Contribution") as well as an
additional contribution of from zero to nine percent of eligible employees'
annual salary, which percentage is calculated using a formula based on the
Corporation's consolidated income before income taxes (the "Profit-Driven
Contribution"). There was no Profit-Driven Contribution for 1998. The
contribution for 1997 and 1996 was 7.08 percent and 4.75 percent, respectively.
The sum of the Fixed Contribution and the Profit- Driven Contribution amounted
to $27 million, $53 million and $41 million for the years 1998, 1997 and 1996,
respectively.
The Corporation also has a profit sharing plan (called the "UK Profit
Scheme") covering certain of its employees in the United Kingdom. The
Corporation's contributions to this plan range from zero to 14 percent of
eligible employees' annual salary, which percentage is calculated using a
formula based on the Corporation's consolidated income before income taxes.
There was no contribution for 1998. The contribution for 1997 and 1996 was 11.05
percent and 8.72 percent, respectively. There was no expense recognized for the
UK Profit Scheme for 1998. The amount of expense recognized for the UK Profit
Scheme was $6 million and $7 million for 1997 and 1996, respectively.
Benefit Plan Changes
Effective January 1, 1999, the Corporation implemented a 401 (k) Savings Plan
covering substantially all domestic employees, which replaced the PartnerShare
Plan and the 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 will make 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 under certain
circumstances match an additional zero percent to 200 percent of the employees'
contribution up to 3 percent of eligible salary.
Note 19--Income Taxes
The Corporation files consolidated income tax returns which include all
significant domestic subsidiaries.
The domestic and foreign components of consolidated income (loss) before
income taxes (benefit) follow:
(in millions) Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Domestic $ (83) $ 640 $ 347
Foreign 6 599 784
- --------------------------------------------------------------------------------
Total $ (77) $1,239 $1,131
================================================================================
For purposes of determining the above amounts, foreign income is defined
as income recorded by operations located outside of the U.S.
Undistributed earnings of certain foreign subsidiaries amounted to
approximately $900 million at December 31, 1998. Federal taxes which would have
approximated $200 million, assuming utilization of foreign tax credits, have not
been provided on these earnings, as they are permanently reinvested outside 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, 1998 1997 1996
- -------------------------------------------------------------------------------
Income taxes (benefit) applicable to:
Income (loss) before income
taxes (benefit)* $ (4) $ 373 $ 365
Capital surplus (50) (73) (26)
Cumulative translation adjustments (10) 76 (24)
Securities valuation allowance (13) (57) 32
- -------------------------------------------------------------------------------
Total $ (77) $ 319 $ 347
===============================================================================
* Includes income tax expense (benefit) related to securities available for
sale transactions of $(7) million, $68 million and $30 million in 1998,
1997 and 1996, respectively.
Bankers Trust Corporation and its Subsidiaries 65
<PAGE>
The components of consolidated income taxes (benefit) follow:
(in millions) Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Current
Federal $ (9) $ 198 $ 107
Foreign 175 232 124
State and local 33 161 44
- -------------------------------------------------------------------------------
Total current 199 591 275
- -------------------------------------------------------------------------------
Deferred
Federal (229) (203) (52)
Foreign 10 (31) 125
State and local (57) (38) (1)
- -------------------------------------------------------------------------------
Total deferred (276) (272) 72
- -------------------------------------------------------------------------------
Total $ (77) $ 319 $ 347
===============================================================================
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, 1998 1997 1996
- -------------------------------------------------------------------------------
Computed expected tax expense (benefit) $ (27) $ 434 $ 396
State and local income taxes (benefit) (15) 55 30
Tax-exempt income (17) (58) (13)
Foreign subsidiary earnings 54 (47) (20)
Valuation allowance -- (20) --
Nondeductible penalty 22 -- --
Other (21) 9 (28)
- -------------------------------------------------------------------------------
Effective income tax (benefit) $ (4) $ 373 $ 365
===============================================================================
The following is an analysis of the Corporation's net deferred tax assets:
(in millions) December 31, 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets $1,486 $1,291
Valuation allowance 207 207
- --------------------------------------------------------------------------------
Deferred tax assets net of valuation allowance 1,279 1,084
Deferred tax liabilities 307 388
- --------------------------------------------------------------------------------
Net deferred tax assets $ 972 $ 696
================================================================================
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).
At December 31, 1997, the Corporation's deferred tax assets were primarily
related to credit losses ($385 million), employee benefits ($267 million) and
international operations ($181 million). Deferred tax liabilities were
primarily related to certain trading activities ($193 million) and lease
financing activities ($112 million).
Note 20--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. The
1996 amounts have been restated to conform with SFAS 128.
Basic earnings (loss) per common share amounts were computed by
subtracting from net income (loss) the dividend requirements on preferred stock
to arrive at net income (loss) applicable to common stockholders and dividing
this amount by the average number of common shares outstanding during the year.
The average number of common shares outstanding was the sum of the average
number of shares of common stock outstanding and undistributed vested shares
awarded under deferred stock plans.
Diluted earnings (loss) per share amounts were calculated by adding back
to net income (loss) applicable to common stockholders the interest expense on
the convertible subordinated debentures and dividing this amount by the average
number of common shares and dilutive potential common shares outstanding during
the year.
Diluted earnings (loss) per share assumes the conversion into common stock
of outstanding stock options, deferred stock awards and convertible subordinated
debentures, as computed under the treasury stock method, if dilutive. Under the
treasury stock method, the number of incremental shares is determined by
assuming the issuance of the outstanding stock options, deferred stock awards,
and shares from convertible subordinated debentures, reduced by the number of
shares assumed to be repurchased from the issuance proceeds, using the average
market price for the year of the Parent Company's common stock.
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in millions, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator
Net income (loss) $ (73) $ 866 $ 766
Preferred stock dividends (32) (49) (51)
- -----------------------------------------------------------------------------------
Numerator for basic earnings (loss) per
share--net income (loss) applicable
to common stockholders (105) 817 715
Effect of dilutive securities
Convertible subordinated debentures -- 3 3
- -----------------------------------------------------------------------------------
Numerator for diluted earnings (loss) per
share--net income (loss) applicable to
common stockholders after
assumed conversions $ (105) $ 820 $ 718
===================================================================================
Denominator
Denominator for basic earnings (loss) per
share--weighted-average shares
outstanding 100.152 100.286 100.417
Effect of dilutive securities*
Options -- 1.839 1.111
Convertible subordinated
debentures -- 2.457 3.019
Deferred stock -- 2.408 1.618
- -----------------------------------------------------------------------------------
Dilutive potential common shares -- 6.704 5.748
Denominator for diluted earnings (loss)
per share--adjusted weighted-
average shares after assumed
conversions 100.152 106.990 106.165
===================================================================================
Basic earnings (loss) per share $ (1.05) $ 8.15 $ 7.12
===================================================================================
Diluted earnings (loss) per share $ (1.05) $ 7.66 $ 6.76
===================================================================================
</TABLE>
* 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.
66 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Note 21--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. Prior year amounts
have been restated to conform with the requirements of SFAS No. 131.
The Corporation delivers a wide range of financial products and services
worldwide principally through six broad business segments. Four business
segments are organized around specific products and services: Investment
Banking, Trading & Sales, Private Client Services Group and Global Institutional
Services. Two additional business segments, Australia/New Zealand/International
Funds Management and Emerging Markets Group, are organized to deliver these same
types of financial products and services with the local expertise necessary to
operate in these markets.
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 the same as those described in Note 1 except that each business segment does
not separately maintain and provide for allowances for credit losses for loans
and other credit-related commitments. Instead, the results of operations for
each business segment reflect actual net charge-offs (recoveries). Any
difference between the consolidated provisions for credit losses (loans and
other credit-related commitments) and total business segments' net charge-offs
(recoveries) is recorded in a non-business segment.
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.
Investment Banking delivers the Firm's full range of financing, advisory
and research products and services to corporate, financial institution and
investor clients. Services include underwriting, distribution and trading of
public equity and debt (both investment grade and high-yield); private
placements and structured finance; and merger and acquisition advisory services.
The segment is also responsible for the Firm's private equity investments and
asset-based lending activities.
Trading & Sales provides financial products and services to the
Corporation's clients and enters into securities, currency, commodity, and
derivatives transactions on a proprietary basis. The segment is also responsible
for the Corporation's worldwide funding as well as its capital and liquidity
management.
Emerging Markets Group, which includes Latin America, Emerging Europe,
Middle East & Africa, and Asia, engages in trading and distribution, origination
and underwriting of corporate finance securities, mergers and acquisition
services, advisory services and private equity investments in developing local
markets. In addition, this segment, through the Corporation's fifty-percent
owned Chilean insurance subsidiary, underwrites pension-related life and
disability insurance and sells pension-related life annuities.
Private Client Services Group provides investment management services in
the global securities markets, financial planning services and market research
and investment strategies for high net worth individuals.
Global Institutional Services provides asset management services,
corporate trust and agency services, cash management services and trade finance
services to financial institutions, corporations and governments and their
agencies around the world. Asset management services include: custody,
investment management, securities lending, brokerage, retirement administration,
performance and risk measurement. The segment also provides trustee, depository
and agency services for issuers of debt securities and depository receipts. Cash
and trade services include global payments and collections, cash concentration
and investments and trade finance products.
Australia/New Zealand/International Funds Management provides funds
management, corporate finance, and financial markets services to local and
international clients, and trades for its own account in related markets.
Other business segments include the income and expenses of smaller
businesses that are not included in the main business segments.
<TABLE>
<CAPTION>
Emerging Markets Group
---------------------------------
Emerging
Europe, Private
Year Ended Middle Client
December 31, 1998 Investment Trading Latin East & Services
(in millions) Banking & Sales America Africa Asia Group
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external customers* $ 2,039 $ 781 $ 340 $ (120) $(381) $ 695
Net interest revenue 278 300 280 52 21 95
Credit quality expense--loans 41 -- 8 8 35 2
Provision for policyholder benefits -- -- 322 -- -- --
Income tax expense (benefit) 130 74 (64) (66) (194) 33
Net income (loss) 249 133 (121) (142) (356) 72
Total assets* 22,126 71,231 4,572 3,624 2,664 4,745
<CAPTION>
Australia/
Year Ended Global New Zealand/ Other Total
December 31, 1998 Institutional Int'l Funds Business Business
(in millions) Services Management Segments Segments
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues from external customers* $1,076 $ 631 $ (1) $5,060
Net interest revenue 250 110 (15) 1,371
Credit quality expense--loans 1 -- (11) 84
Provision for policyholder benefits -- -- -- 322
Income tax expense (benefit) 50 68 (16) 15
Net income (loss) 99 138 (29) 43
Total assets* 7,660 12,941 220 129,783
</TABLE>
* There were no material intersegment revenues or intersegment assets among
the business segments.
Bankers Trust Corporation and its Subsidiaries 67
<PAGE>
<TABLE>
<CAPTION>
Emerging Markets Group
---------------------------------
Emerging
Europe, Private
Year Ended Middle Client
December 31, 1997 Investment Trading Latin East & Services
(in millions) Banking & Sales America Africa Asia Group
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external customers* $2,205 $692 $660 $121 $ 80 $665
Net interest revenue 283 293 190 103 (19) 106
Credit quality expense--loans 2 1 5 -- 5 --
Provision for policyholder benefits -- -- 333 -- -- --
Income tax expense (benefit) 211 60 41 8 (31) 27
Net income (loss) 493 140 92 20 (80) 60
Total assets* 38,153 58,156 2,735 10,043 1,686 2,827
<CAPTION>
Australia/
Year Ended Global New Zealand/ Other Total
December 31, 1997 Institutional Int'l Funds Business Business
(in millions) Services Management Segments Segments
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues from external customers* $1,027 $574 $ 12 $6,036
Net interest revenue 227 89 (5) 1,267
Credit quality expense--loans 5 -- 15 33
Provision for policyholder benefits -- -- -- 333
Income tax expense (benefit) 37 47 (15) 385
Net income (loss) 92 107 (34) 890
Total assets* 6,507 10,802 354 131,263
</TABLE>
* There were no material intersegment revenues or intersegment assets among
the business segments.
<TABLE>
<CAPTION>
Emerging Markets Group
---------------------------------
Emerging
Europe, Private
Year Ended Middle Client
December 31, 1996 Investment Trading Latin East & Services
(in millions) Banking & Sales America Africa Asia Group
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external customers* $1,711 $501 $545 $72 $200 $608
Net interest revenue 181 258 120 5 (6) 97
Credit quality expense--loans 10 -- -- -- -- --
Provision for policyholder benefits -- -- 280 -- -- --
Income tax expense (benefit) 209 11 36 8 20 27
Net income (loss) 438 25 75 16 43 60
<CAPTION>
Australia/
Year Ended Global New Zealand/ Other Total
December 31, 1996 Institutional Int'l Funds Business Business
(in millions) Services Management Segments Segments
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues from external customers* $858 $528 $ 2 $5,025
Net interest revenue 220 71 (16) 930
Credit quality expense--loans -- (1) (1) 8
Provision for policyholder benefits -- -- -- 280
Income tax expense (benefit) 29 62 (19) 383
Net income (loss) 60 128 (41) 804
</TABLE>
* There were no material intersegment revenues among the business segments.
The following table reconciles total net revenue for business segments to
consolidated net revenue (in millions):
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Total net revenue reported for business
segments $ 5,060 $ 6,036 $ 5,025
Earnings associated with unassigned
capital 46 129 191
Gain on sale of business -- -- 30
Gain on sale of office building -- 76 --
Loan net charge-offs in excess of the total
provision for credit losses--loans 44 33 3
Other (61) (54) (80)
- -------------------------------------------------------------------------------
Consolidated net revenue(1) $ 5,089 $ 6,220 $ 5,169
===============================================================================
(1) Consolidated net revenue includes net interest revenue after provision for
credit losses--loans and noninterest revenue.
The following table reconciles total net income (loss) for business
segments to consolidated net income (loss) (in millions):
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Total net income (loss) reported for
business segments $ 43 $ 890 $ 804
Earnings associated with unassigned capital 33 90 129
Gain on sale of business -- -- 18
Gain on sale of office building -- 51 --
Loan net charge-offs in excess of the total
provision for credit losses--loans 27 23 2
Legal settlement (67) -- --
Restructuring charges and other integration
costs associated with the
Alex. Brown merger -- (69) --
Legal fees -- (27) (20)
Unallocated costs of corporate staff (48) (48) (79)
Other unallocated amounts (61) (44) (88)
- -------------------------------------------------------------------------------
Consolidated net income (loss) $ (73) $ 866 $ 766
===============================================================================
The following table reconciles total assets for business segments to
consolidated assets (in millions):
December 31, 1998 1997
- --------------------------------------------------------------------------------
Total assets reported for business segments $129,783 $131,263
Premises and equipment 417 408
Securities available for sale 413 268
Goodwill not allocated to business segments 398 206
Investments in unconsolidated companies
accounted for at equity 303 3
Venture capital assets 40 11
Other unallocated amounts 1,761 7,943
- --------------------------------------------------------------------------------
Consolidated assets $133,115 $140,102
================================================================================
68 Bankers Trust Corporation and its Subsidiaries
<PAGE>
The following table reconciles the other significant items reported for
the business segments to the consolidated financial statements:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Total Total
Business Total Business Total
Segments Adjustments Consolidated Segments Adjustments Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest revenue(1) $ 1,371 $ 1 $ 1,372 $ 1,267 $ 92 $ 1,359
Credit quality expense--loans(2) 84 (44) 40 33 (33) --
Provision for policyholder benefits 322 -- 322 333 -- 333
Income tax expense (benefit)(3) 15 (19) (4) 385 (12) 373
====================================================================================================================================
<CAPTION>
(in millions) Year Ended December 31, 1996
- --------------------------------------------------------------------------------
Total
Business Total
Segments Adjustments Consolidated
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest revenue(1) $ 930 $ 127 $1,057
Credit quality expense--loans(2) 8 (3) 5
Provision for policyholder benefits 280 -- 280
Income tax expense (benefit)(3) 383 (18) 365
===============================================================================
</TABLE>
(1) Adjustments primarily represent earnings associated with unassigned
capital partially offset by unallocated funding costs.
(2) Adjustments represent the difference between actual loan net charge-offs
(recoveries) reported for the business segments and the consolidated
provision for credit losses--loans.
(3) Adjustments represent the tax effects of the reconciling items between
total net income (loss) for business segments and consolidated net income
(loss).
The following table presents net revenue by geographical location (in
millions):
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
United States $2,666 $3,529 $2,816
England 868 992 904
Australia 519 514 551
Chile 375 441 402
Other foreign countries 661 744 496
- --------------------------------------------------------------------------------
Consolidated net revenue(1) $5,089 $6,220 $5,169
================================================================================
(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 transactions are recorded.
The following table presents net revenue of the Corporation organized
around specific products and services (in millions):
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Corporate Finance $1,460 $1,325 $1,205
Debt Investments 44 71 34
Private Equity 452 428 266
Risk Management 60 592 537
Trading 411 1,027 674
Processing Services 1,176 949 864
Investment Management 496 479 419
Private Banking 596 568 558
Insurance 331 394 339
Other 63 387 273
- --------------------------------------------------------------------------------
Consolidated net revenue $5,089 $6,220 $5,169
================================================================================
Note 22--International Operations
Management views the operations of the Corporation on a business segment basis,
as disclosed in Note 21. 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.
Bankers Trust Corporation and its Subsidiaries 69
<PAGE>
Subject to the above limitations, estimates and assumptions, the
following tables present information attributable to international operations ($
in millions):
<TABLE>
<CAPTION>
Income
(loss) Net
Total Total Total before income
assets revenue(1) expenses(1) taxes (loss)
- ------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
================================================================================================
</TABLE>
(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.
<TABLE>
<CAPTION>
Income Net
Total Total Total before income
assets revenue(1) expenses(1) taxes (loss)
- ------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
================================================================================================
</TABLE>
(1) Total revenue includes interest revenue and noninterest revenue. Total
expenses includes interest expense, noninterest expenses and provision for
credit losses-loans.
<TABLE>
<CAPTION>
Income
Total Total Total before Net
assets revenue(1) expenses(1) taxes income
- ------------------------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
International operations
Asia $ 9,622 $ 613 $ 516 $ 97 $ 71
Australia/New Zealand 10,488 1,031 834 197 144
Western Hemisphere 14,631 1,275 1,193 82 60
Europe 14,354 965 941 24 18
United Kingdom 25,447 1,027 1,027 -- --
Middle East/Africa 691 40 35 5 4
Eliminations (12,759) (591) (591) -- --
- ------------------------------------------------------------------------------------------------
Total international 62,474 4,360 3,955 405 297
Domestic operations 60,069 6,265 5,539 726 469
- ------------------------------------------------------------------------------------------------
Total $ 122,543 $ 10,625 $ 9,494 $ 1,131 $ 766
================================================================================================
International as a percentage
of total 51% 41% 42% 36% 39%
================================================================================================
</TABLE>
(1) Total revenue includes interest revenue and noninterest revenue. Total
expenses includes interest expense, noninterest expenses and provision for
credit losses-loans.
Note 23--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, to manage its exposure to interest rate and other risks, and to take
trading positions. These financial instruments consist of derivatives (such as
swaps, forwards and options), when-issued securities, 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.
For a further discussion of derivative financial instruments, the related
market and credit risks, and controls used to monitor such risks, which is
unaudited and not included as part of these financial statements, see "Risk
Management" on page 23, "Derivatives" on page 29, and "Nonperforming Assets" on
page 36. For the risk-weighted amounts under the risk-based capital guidelines
of the Corporation's derivative and off-balance sheet exposures, which also are
unaudited and not included as part of these financial statements, see "Capital
Resources" on page 22.
Trading Derivative Financial Instruments
The Corporation actively manages trading positions in a variety of derivative
contracts. Many of the Corporation's trading positions are established as a
result of providing derivative products to meet customers' demands. To
anticipate customer demand for such transactions, the Corporation also carries
an inventory of capital markets instruments and maintains its access to market
liquidity by quoting bid and offer prices to, and trading with, other market
makers. These two activities are essential to provide customers with capital
market products at competitive prices. All positions are reported at fair value
and changes in fair values are reflected in trading revenue as they occur.
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.
70 Bankers Trust Corporation and its Subsidiaries
<PAGE>
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. The Corporation considers such factors in its RAROC
framework and in other 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.
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:
<TABLE>
<CAPTION>
At December 31, 1998 Average during 1998
------------------------- ------------------------
(in millions) Assets (Liabilities) Assets (Liabilities)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1997 Average during 1997
------------------------- ------------------------
(in millions) Assets (Liabilities) Assets (Liabilities)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTC Financial Instruments
Interest Rate and Currency
Swap Contracts $ 20,508 $(19,103) $ 16,873 $(15,611)
Interest Rate Contracts
Forwards 48 (40) 52 (56)
Options purchased 1,147 1,114
Options written (1,355) (1,238)
Foreign Exchange Rate Contracts
Spot and Forwards 17,846 (18,031) 13,881 (14,386)
Options purchased 1,299 1,090
Options written (1,192) (1,058)
Equity-related contracts 4,082 (4,607) 3,372 (3,827)
Commodity-related and
other contracts 597 (680) 643 (677)
Exchange-Traded Options
Interest Rate 4 (3) 12 (7)
Foreign Exchange (5) (1)
Equity 411 (318) 313 (199)
- ------------------------------------------------------------------------------------------------
Total Gross Fair Values 45,942 (45,334) 37,350 (37,060)
- ------------------------------------------------------------------------------------------------
Impact of Netting Agreements (28,269) 28,269 (23,816) 23,816
- ------------------------------------------------------------------------------------------------
$ 17,673(1) $(17,065)(1) $ 13,534 $(13,244)
========== ======== ======== ========
</TABLE>
(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. For
information as to the credit risk of OTC trading derivatives, which is unaudited
and not included as part of these financial statements, see "Derivatives" on
page 29. 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 and assets
such as interest-bearing deposits, short-term borrowings and long-term debt, as
well as securities available for sale, loans, investments in non-marketable
equity instruments and net investments in foreign entities. 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 purchases assets and issues liabilities at fixed
interest rates it subjects itself to fair value fluctuations as market interest
rates change. These fluctuations in fair value are managed by entering into
interest rate contracts which change the fixed rate cash flows into variable
rate cash flows.
When the Corporation purchases foreign currency denominated assets, issues
foreign currency denominated debt or has foreign net investments, it subjects
itself to changes in value as exchange rates move. These fluctuations are
managed by entering into currency swaps and forwards.
The fair values and other information related to end-user derivatives are
disclosed in Note 25.
Bankers Trust Corporation and its Subsidiaries 71
<PAGE>
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 effects of leveraged derivative transactions are
reflected in the table below.
<TABLE>
<CAPTION>
Notional Amounts
(in millions) December 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------
End End
Trading User(1) Trading User(1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts
Swaps $1,079,450 $ 94,041 $ 693,322 $ 108,053
Futures 110,995 -- 130,884 --
Forwards 84,741 600 71,243 2,950
Options purchased
Exchange traded 22,362 -- 27,157 --
OTC 135,671 146 103,765 427
Options written
Exchange traded 15,873 -- 17,665 --
OTC 122,497 -- 100,357 --
- -----------------------------------------------------------------------------------------
Total $1,571,589 $ 94,787 $1,144,393 $ 111,430
=========================================================================================
Foreign exchange rate contracts
Spot, forwards, futures $ 647,221 $ 5,063 $ 684,039 $ 3,023
Swaps 67,059 4,425 69,941 3,468
OTC options purchased 38,179 -- 28,525 --
OTC options written 37,932 -- 30,405 --
- -----------------------------------------------------------------------------------------
Total $ 790,391 $ 9,488 $ 812,910 $ 6,491
=========================================================================================
Equity derivative contracts
Swaps $ 5,851 -- $ 7,401 $ 12
Futures and forwards 5,026 -- 6,734 --
Options purchased
Exchange traded 10,124 -- 3,680 --
OTC 31,035 -- 15,923 --
Options written
Exchange traded 8,164 -- 6,264 --
OTC 14,354 -- 17,399 --
- -----------------------------------------------------------------------------------------
Total $ 74,554 -- $ 57,401 $ 12
=========================================================================================
Commodity and other contracts (2)
Swaps $ 4,974 -- $ 3,882 $ --
Futures 534 -- 1,023 --
Forwards 843 -- 2,179 --
Options purchased
Exchange traded 81 -- 152 --
OTC 2,666 -- 1,386 --
Options written
Exchange traded 264 -- 366 --
OTC 2,596 -- 1,915 --
- -----------------------------------------------------------------------------------------
Total $ 11,958 -- $ 10,903 $ --
=========================================================================================
</TABLE>
(1) These are hedges of securities available for sale, loans, other assets,
interest-bearing deposits, other short-term borrowings, long-term debt and
net investments in foreign subsidiaries. These are primarily transacted
with derivatives traders within the Corporation who are intermediaries to
external markets.
(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 $11.0 billion and $11.5 billion at
December 31, 1998 and 1997, 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 available at the inception of the contract on two
different currency principal balances that are exchanged. The principal balances
are re-exchanged at an agreed upon rate at a specified future date. 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, except as noted below, since the customer has
already performed according to the terms of the contract by paying a cash
premium up front. How-
72 Bankers Trust Corporation and its Subsidiaries
<PAGE>
ever, for SFAS 105 purposes, credit risk arises to the extent that the option
contract requires or permits settlement in the underlying instrument, and that
instrument is subject to credit risk. Such amounts related to certain written
put option contracts on debt securities and certain forward contracts to
purchase debt securities were $491 million and $2.850 billion at December 31,
1998 and 1997, respectively. The underlying debt securities were primarily
obligations of the U.S. and foreign central and local governments and U.S.
federal agencies.
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 when-issued securities for all
obligors (including governments); securities lending indemnifications; and
undrawn commitments, standby letters of credit and similar arrangements.
Securities and Money Market Activities
(in millions) December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
Contract Credit Risk Contract Credit Risk
Amount Amount Amount Amount
- --------------------------------------------------------------------------------
When-issued securities
and other Commitments
to sell $ 2 $ -- $ 71 $ --
Commitments to purchase (1) 80 80 1,047 1,047
Securities lending
indemnifications 41,695 41,695 53,842 53,842
- -------------------------------------------------------------------------------
(1) Includes $65 million and $947 million of forward-dated money market assets
at December 31, 1998 and 1997, respectively.
When-issued securities normally begin trading when the U.S. Treasury or
some other issuer of securities announces a forth-coming issue. (In some cases,
trading may begin in anticipation of such an announcement.) Such transactions
are contingent upon the actual issuance of the security. Since the exact price
and terms of the security are unknown before the issue date, trading prior to
that date is on a "yield" basis. On the issue date the exact terms and price of
the security become known and when-issued trading continues until settlement
date, when the securities are delivered and the issuer is paid. On settlement
date, the securities purchased by the Corporation are reported on the balance
sheet.
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 $43
billion at December 31, 1998 and $56 billion at December 31, 1997.
Credit-Related Arrangements
(in millions) December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
Credit Credit
Contract Risk Contract Risk
Amount Amount Amount Amount
- --------------------------------------------------------------------------------
Commitments to
extend credit (1) $19,707 $19,707 $19,079 $19,079
Standby letters of credit and
similar arrangements (2) 3,422 3,422 4,605 4,605
- --------------------------------------------------------------------------------
(1) Includes participations to other entities of approximately $2 billion at
December 31, 1998 and 1997. Of the non-participated amount, approximately
$5 billion and $4 billion expire in one year or less at December 31, 1998
and 1997, respectively. Additionally, both the contract amount and the
credit risk amount include commitments to enter into securities resale
agreements of $.6 billion and $1.7 billion at December 31, 1998 and 1997,
respectively.
(2) Includes participations to other entities of approximately $1 billion at
December 31, 1998 and 1997.
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. Since 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, 1998 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, 1998, $2.328
billion will expire within one year, $881 million from one to four years and
$213 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 24--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 28
percent and 24 percent of total credit risk at December 31, 1998 and 1997,
respectively. The Organization for Economic Cooperation and Development (OECD)
is an
Bankers Trust Corporation and its Subsidiaries 73
<PAGE>
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 risk-based 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 56 percent of the OECD
country governments category. Within all other counterparties, approximately 41
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, 1998 and 1997.
Credit Risk
On-Balance Off-Balance
(in millions) Sheet Sheet Total
- --------------------------------------------------------------------------------
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
================================================================================
1997
- --------------------------------------------------------------------------------
Significant concentrations (1)
OECD country banks (2) $ 32,765 $ 4,213 $ 36,978
OECD country governments 10,717 2,363 13,080
- --------------------------------------------------------------------------------
Total significant concentrations 43,482 6,576 50,058
All other (3) 82,540 74,847 157,387
- --------------------------------------------------------------------------------
Total $126,022 $ 81,423 $207,445
================================================================================
(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 both December 31, 1998 and 1997, respectively,
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 $13 billion and $12 billion
at December 31, 1998 and 1997, respectively, that was collateralized by
cash and U.S. government securities. Included in the off-balance sheet
component of this category at December 31, 1998 was approximately $42
billion that was collateralized by cash and U.S. government securities and
approximately $19 billion of unused commitments to extend credit,
approximately $7 billion of which expire in one year or less. The
corresponding amounts for December 31, 1997 were $53 billion, $19 billion
and $7 billion, respectively.
Note 25--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.
SFAS 119 amended SFAS 107 disclosure requirements as of December 31, 1994.
The amendments, among others, require that 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.
Bankers Trust Corporation and its Subsidiaries 74
<PAGE>
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
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of Fair Value
Underlying End-User Total Over(Under)
(in millions) December 31, 1998 Book Value Fair Value Derivative Fair Value Book Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 2 and 23) 46,170 46,170 -- 46,170 --
Securities available for sale (see Note 3) 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 2 and 23) 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)
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Assets, Including Hedges
Cash and due from banks $ 2,188 $ 2,188 $ -- $ 2,188 $ --
Interest-bearing deposits with banks 4,272 4,273 -- 4,273 1
Federal funds sold 1,382 1,382 -- 1,382 --
Securities purchased under resale agreements 19,163 19,179 -- 19,179 16
Securities borrowed 16,751 16,751 -- 16,751 --
Trading assets (see Notes 2 and 23) 56,572 56,572 -- 56,572 --
Securities available for sale (see Note 3) 8,081 8,117 (36) 8,081 --
Loans (excluding leases), commitments to
extend credit and standby letters of credit, net 18,842 19,559 (171) 19,388 546
Customer receivables 1,547 1,547 -- 1,547 --
Due from customers on acceptances 633 633 -- 633 --
Accounts receivable and accrued interest 4,785 4,785 -- 4,785 --
Other financial assets 2,696 2,737 1 2,738 42
Financial Liabilities, Including Hedges
Noninterest-bearing deposits 4,728 4,728 -- 4,728 --
Interest-bearing deposits 38,102 38,264 (62) 38,202 100
Trading liabilities (see Notes 2 and 23) 27,246 27,246 -- 27,246 --
Securities loaned and securities sold
under repurchase agreements 17,896 17,904 -- 17,904 8
Other short-term borrowings 19,577 19,591 8 19,599 22
Acceptances outstanding 633 633 -- 633 --
Other financial liabilities 8,634 8,621 -- 8,621 (13)
Long-term debt* 16,059 16,433 (381) 16,052 (7)
Net investments in foreign subsidiaries -- -- (6) (6) (6)
====================================================================================================================================
</TABLE>
* Includes trust preferred capital securities.
A discussion of the nature, objectives and strategies for using end-user
derivatives can be found in Note 23.
Bankers Trust Corporation and its Subsidiaries 75
<PAGE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Securities Interest- Other
available Other bearing short-term
(in millions) December 31, 1998 for sale Loans assets deposits borrowings
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Rate Swaps (3)
Pay Variable
Unrealized Gain $ 64 $ 8 $ -- $ 149 $ 17
Unrealized (Loss) (3) (7) -- (13) (14)
- -----------------------------------------------------------------------------------------------------------------------------
Pay Variable Net 61 1 -- 136 3
- -----------------------------------------------------------------------------------------------------------------------------
Pay Fixed
Unrealized Gain 6 -- -- 3 --
Unrealized (Loss) (129) (76) (13) (70) (16)
- -----------------------------------------------------------------------------------------------------------------------------
Pay Fixed Net (123) (76) (13) (67) (16)
- -----------------------------------------------------------------------------------------------------------------------------
Total Unrealized Gain 70 8 -- 152 17
- -----------------------------------------------------------------------------------------------------------------------------
Total Unrealized (Loss) (132) (83) (13) (83) (30)
- -----------------------------------------------------------------------------------------------------------------------------
Total Net $ (62) $ (75) $ (13) $ 69 $ (13)
=============================================================================================================================
Forward Rate Agreements
Unrealized Gain $ -- $ -- $ -- $ -- $ --
Unrealized (Loss) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net $ -- $ -- $ -- $ -- $ --
=============================================================================================================================
Currency Swaps and Forwards
Unrealized Gain $ 6 $ -- $ -- $ 5 $ 1
Unrealized (Loss) (7) (3) (1) (4) (1)
- -----------------------------------------------------------------------------------------------------------------------------
Net $ (1) $ (3) $ (1) $ 1 $ --
=============================================================================================================================
Other Contracts
Unrealized Gain $ -- $ -- $ -- $ -- $ --
Unrealized (Loss) (3) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net $ (3) $ -- $ -- $ -- $ --
=============================================================================================================================
Total Unrealized Gain $ 76 $ 8 $ -- $ 157 $ 18
Total Unrealized (Loss) (142) (86) (14) (87) (31)
- -----------------------------------------------------------------------------------------------------------------------------
Total Net $ (66) $ (78) $ (14) $ 70 $ (13)
=============================================================================================================================
(in millions) December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
Interest Rate Swaps
Pay Variable
Unrealized Gain $ 3 $ 8 $ -- $ 61 $ 20
Unrealized (Loss) -- (3) -- (13) (27)
- -----------------------------------------------------------------------------------------------------------------------------
Pay Variable Net 3 5 -- 48 (7)
- -----------------------------------------------------------------------------------------------------------------------------
Pay Fixed
Unrealized Gain 2 1 -- 32 11
Unrealized (Loss) (51) (184) -- (42) (30)
- -----------------------------------------------------------------------------------------------------------------------------
Pay Fixed Net (49) (183) -- (10) (19)
- -----------------------------------------------------------------------------------------------------------------------------
Total Unrealized Gain 5 9 -- 93 31
- -----------------------------------------------------------------------------------------------------------------------------
Total Unrealized (Loss) (51) (187) -- (55) (57)
- -----------------------------------------------------------------------------------------------------------------------------
Total Net $ (46) $ (178) $ -- $ 38 $ (26)
=============================================================================================================================
Forward Rate Agreements
Unrealized Gain $ -- $ -- $ -- $ -- $ --
Unrealized (Loss) -- -- -- (1) --
- -----------------------------------------------------------------------------------------------------------------------------
Net $ -- $ -- $ -- $ (1) $ --
=============================================================================================================================
Currency Swaps and Forwards
Unrealized Gain $ 14 $ 6 $ 2 $ 25 $ 34
Unrealized (Loss) -- -- -- -- (16)
- -----------------------------------------------------------------------------------------------------------------------------
Net $ 14 $ 6 $ 2 $ 25 $ 18
=============================================================================================================================
Other Contracts (2)
Unrealized Gain $ -- $ 1 $ -- $ -- $ --
Unrealized (Loss) (4) -- (1) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net $ (4) $ 1 $ (1) $ -- $ --
=============================================================================================================================
Total Unrealized Gain $ 19 $ 16 $ 2 $ 118 $ 65
Total Unrealized (Loss) (55) (187) (1) (56) (73)
- -----------------------------------------------------------------------------------------------------------------------------
Total Net $ (36) $ (171) $ 1 $ 62 $ (8)
=============================================================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Net
investments
Long- in foreign
(in millions) December 31, 1998 term debt(1) subsidiaries Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Rate Swaps (3)
Pay Variable
Unrealized Gain $ 471 $ -- $ 709
Unrealized (Loss) (55) -- (92)
- -------------------------------------------------------------------------------------
Pay Variable Net 416 -- 617
- -------------------------------------------------------------------------------------
Pay Fixed
Unrealized Gain 7 -- 16
Unrealized (Loss) (30) -- (334)
- -------------------------------------------------------------------------------------
Pay Fixed Net (23) -- (318)
- -------------------------------------------------------------------------------------
Total Unrealized Gain 478 -- 725
- -------------------------------------------------------------------------------------
Total Unrealized (Loss) (85) -- (426)
- -------------------------------------------------------------------------------------
Total Net $ 393 $ -- $ 299
=====================================================================================
Forward Rate Agreements
Unrealized Gain $ -- $ -- $ --
Unrealized (Loss) -- -- --
- -------------------------------------------------------------------------------------
Net $ -- $ -- $ --
=====================================================================================
Currency Swaps and Forwards
Unrealized Gain $ 76 $ 19 $ 107
Unrealized (Loss) (89) (34) (139)
- -------------------------------------------------------------------------------------
Net $ (13) $ (15) $ (32)
=====================================================================================
Other Contracts
Unrealized Gain $ -- $ -- $ --
Unrealized (Loss) -- -- (3)
- -------------------------------------------------------------------------------------
Net $ -- $ -- $ (3)
=====================================================================================
Total Unrealized Gain $ 554 $ 19 $ 832
Total Unrealized (Loss) (174) (34) (568)
- -------------------------------------------------------------------------------------
Total Net $ 380 $ (15) $ 264
=====================================================================================
(in millions) December 31, 1997
- -------------------------------------------------------------------------------------
Interest Rate Swaps
Pay Variable
Unrealized Gain $ 524 $ -- $ 616
Unrealized (Loss) (94) -- (137)
- -------------------------------------------------------------------------------------
Pay Variable Net 430 -- 479
- -------------------------------------------------------------------------------------
Pay Fixed
Unrealized Gain 3 -- 49
Unrealized (Loss) (25) -- (332)
- -------------------------------------------------------------------------------------
Pay Fixed Net (22) -- (283)
- -------------------------------------------------------------------------------------
Total Unrealized Gain 527 -- 665
- -------------------------------------------------------------------------------------
Total Unrealized (Loss) (119) -- (469)
- -------------------------------------------------------------------------------------
Total Net $ 408 $ -- $ 196
=====================================================================================
Forward Rate Agreements
Unrealized Gain $ -- $ -- $ --
Unrealized (Loss) -- -- (1)
- -------------------------------------------------------------------------------------
Net $ -- $ -- $ (1)
=====================================================================================
Currency Swaps and Forwards
Unrealized Gain $ 36 $ 40 $ 157
Unrealized (Loss) (63) (46) (125)
- -------------------------------------------------------------------------------------
Net $ (27) $ (6) $ 32
=====================================================================================
Other Contracts (2)
Unrealized Gain $ -- $ -- $ 1
Unrealized (Loss) -- -- (5)
- -------------------------------------------------------------------------------------
Net $ -- $ -- $ (4)
=====================================================================================
Total Unrealized Gain $ 563 $ 40 $ 823
Total Unrealized (Loss) (182) (46) (600)
- -------------------------------------------------------------------------------------
Total Net $ 381 $ (6) $ 223
=====================================================================================
</TABLE>
(1) Includes trust preferred capital securities.
(2) Other contracts are principally equity swaps and collars.
(3) Includes swaps with embedded options to cancel.
76 Bankers Trust Corporation and its Subsidiaries
<PAGE>
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, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
December 31, 1998 Interest Foreign Total
(in millions) Rate Currency Equity Notional
Notional Amount Maturing In: Risk Risk* Risk Amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
====================================================================================================
<CAPTION>
December 31, 1997 Interest Foreign Total
(in millions) Rate Currency Equity Notional
Notional Amount Maturing In: Risk Risk* Risk Amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ 84,500 $ 3,843 $ 12 $ 88,355
1999-2000 14,367 1,849 -- 16,216
2001-2002 4,727 453 -- 5,180
2003 and thereafter 7,836 346 -- 8,182
- ----------------------------------------------------------------------------------------------------
Total $111,430 $ 6,491 $ 12 $117,933
====================================================================================================
</TABLE>
* Currency swaps and currency forwards are primarily based upon Australian
dollar/U.S. dollar and Japanese yen/U.S. dollar contracts.
For pay variable and pay fixed interest rate swaps entered into as an end
user, the weighted average receive rate and pay rate (interest rates were based
on the weighted averages of both U.S. and non-U.S. currencies) by maturity and
corresponding notional amounts at December 31, 1998 and December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Paying Variable Paying Fixed
December 31, 1998 --------------- ------------
($ in millions) Notional Receive Pay Notional Receive Pay Total
Notional Amount Maturing In: Amount Rate Rate Amount Rate Rate Notional
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
===================================================================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Paying Variable Paying Fixed
December 31, 1997 --------------- ------------
($ in millions) Notional Receive Pay Notional Receive Pay Total
Notional Amount Maturing In: Amount Rate Rate Amount Rate Rate Notional
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 $ 74,471 5.79% 5.84% $ 6,799 5.83% 6.00% $ 81,270
1999-2000 11,222 5.97 5.72 3,006 5.04 5.62 14,228
2001-2002 3,282 6.56 5.75 1,437 5.32 9.66 4,719
2003 and thereafter 6,730 6.89 5.43 1,106 5.75 7.26 7,836
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 95,705 $ 12,348 $ 108,053
===================================================================================================================================
</TABLE>
All rates were those in effect at December 31, 1997. Variable rates are
primarily based on LIBOR and may change significantly, affecting future cash
flows.
Bankers Trust Corporation and its Subsidiaries 77
<PAGE>
The effect of these end-user derivatives was a net increase in revenue of
$175 million for the year ended December 31, 1998 and a net increase in revenue
of $180 million for the year ended December 31, 1997.
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, 1998 and 1997 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.
As indicated in Note 1, 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, 1998 and 1997.
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.
78 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Note 26--Condensed Parent Company Financial Statements
Condensed Statement of Income
(in millions) Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Revenue
Dividends
Banks $ 502 $ 93 $ 48
Nonbanks 537 404 196
Interest from subsidiaries 816 615 503
Other interest 314 275 157
Trading (535) (103) --
Securities available for sale gains (losses) 39 45 (7)
Other 40 80 18
- -------------------------------------------------------------------------------
Total revenue 1,713 1,409 915
- -------------------------------------------------------------------------------
Expenses
Interest to subsidiaries 362 217 109
Other interest 1,017 834 643
Other 175 216 33
- -------------------------------------------------------------------------------
Total expenses 1,554 1,267 785
- -------------------------------------------------------------------------------
Income before income taxes and
equity in undistributed income
of subsidiaries and affiliates 159 142 130
Income taxes (benefit) (465) (222) (99)
Income before equity in undistributed
income of subsidiaries and affiliates 624 364 229
Equity in undistributed (loss) income
of subsidiaries and affiliates (697) 502 537
- -------------------------------------------------------------------------------
Net Income (Loss) $ (73) $ 866 $ 766
===============================================================================
Condensed Balance Sheet
(in millions) December 31, 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 29 $ 97
Interest-bearing deposits with bank subsidiaries 3,237 2,204
Securities purchased under resale agreements
with nonbank subsidiary 2 492
Trading assets 957 5,773
Securities available for sale 2,180 1,766
Loans 76 172
Investments in subsidiaries and affiliates
Banks 6,501 5,804
Nonbanks 1,848 2,032
Receivables from subsidiaries and affiliates
Banks 1,520 1,811
Nonbanks 10,191 8,535
Accounts receivable and accrued interest 308 461
Other assets 594 440
- --------------------------------------------------------------------------------
Total assets $27,443 $29,587
================================================================================
Liabilities and Stockholders' Equity
Trading liabilities $ 72 $ 312
Commercial paper 3,411 6,641
Other short-term borrowings 5,057 3,436
Payables to subsidiaries and affiliates
Banks 326 727
Nonbanks 5,505 5,722
Other liabilities 461 443
Long-term debt 7,915 6,598
- --------------------------------------------------------------------------------
Total liabilities 22,747 23,879
- --------------------------------------------------------------------------------
Total stockholders' equity 4,696 5,708
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $27,443 $29,587
================================================================================
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (73) $ 866 $ 766
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Equity in undistributed loss
(income) of subsidiaries and affiliates 697 (502) (537)
Deferred income taxes (165) (82) (29)
Net change in trading assets 4,816 (2,964) (1,334)
Net change in trading liabilities (240) (166) 130
Securities available for sale
(gains) losses (39) (45) 7
Other, net (29) (632) (323)
- ----------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 4,967 (3,525) (1,320)
- ----------------------------------------------------------------------------------
Cash Flows From Investing Activities
Net change in:
Interest-bearing deposits with
bank subsidiaries (1,033) 1,093 (757)
Securities purchased under resale agreements
with nonbank subsidiary (475) (209) (1,512)
Securities purchased under resale agreements
with third party -- -- 48
Short-term notes receivable from
subsidiaries and affiliates 2,304 (1,255) 2,557
Securities available for sale:
Purchases (5,627) (650) (746)
Maturities and other redemptions 268 345 229
Sales 4,924 158 260
Increases in long-term notes receivable
from subsidiaries (9,843) (2,301) (2,015)
Decreases in long-term notes receivable
from subsidiaries 7,607 1,037 871
Capital contributed to subsidiaries and affiliates (1,158) (688) (867)
Return of capital from subsidiaries and affiliates 25 300 700
Other, net 90 75 (223)
- ----------------------------------------------------------------------------------
Net cash used in investing activities (2,918) (2,095) (1,455)
- ----------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net change in:
Commercial paper and other
short-term borrowings (1,609) 2,449 1,363
Short-term notes payable to subsidiaries (618) 2,326 878
Issuance of long-term notes payable
to subsidiaries (1) 770 512
Issuance of long-term debt 2,078 2,387 1,680
Repayments of long-term debt (792) (913) (864)
Redemption/repurchase of preferred stock (264) (152) (49)
Purchases of treasury stock (618) (1,038) (608)
Cash dividends paid (421) (384) (378)
Other, net 128 248 257
- ----------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (2,117) 5,693 2,791
- ----------------------------------------------------------------------------------
Net Increase (Decrease) In Cash and
Due From Banks (68) 73 16
Cash and due from banks, beginning of year 97 24 8
- ----------------------------------------------------------------------------------
Cash and due from banks, end of year $ 29 $ 97 $ 24
==================================================================================
Interest paid $ 1,388 $ 1,007 $ 737
==================================================================================
Income taxes paid $ 81 $ 131 $ 19
==================================================================================
Noncash financing activity:
Conversion of debt to equity $ 15 $ 63 $ 3
==================================================================================
Noncash investing activity:
Treasury stock associated with acquisition $ -- $ -- $ 203
==================================================================================
</TABLE>
Bankers Trust Corporation and its Subsidiaries 79
<PAGE>
Note 27--Bankers Trust Company Consolidated Summarized Financial Information
Consolidated Statement of Income
(in millions) Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Net Interest Revenue
Interest revenue $ 5,727 $ 5,287 $ 4,124
Interest expense 4,371 4,070 3,346
- -------------------------------------------------------------------------------
Net Interest Revenue 1,356 1,217 778
Provision for credit losses--loans 40 -- (9)
- -------------------------------------------------------------------------------
Net Interest Revenue After Provision
For Credit Losses--Loans 1,316 1,217 787
- -------------------------------------------------------------------------------
Noninterest Revenue
Trading -- 584 670
Fiduciary and funds management 919 886 720
Corporate finance fees 473 354 285
Other fees and commissions 480 299 277
Securities available for sale gains (losses) (141) 28 23
Other 427 415 295
- -------------------------------------------------------------------------------
Total noninterest revenue 2,158 2,566 2,270
- -------------------------------------------------------------------------------
Noninterest Expenses
Salaries and commissions 947 812 729
Incentive compensation and
employee benefits 950 1,004 716
Agency and other professional service fees 549 357 269
Communication and data services 164 153 167
Occupancy, net 183 149 142
Furniture and equipment 213 185 155
Travel and entertainment 112 94 75
Other 393 396 345
Restructuring charges -- 4 --
- -------------------------------------------------------------------------------
Total noninterest expenses 3,511 3,154 2,598
- -------------------------------------------------------------------------------
Income (loss) before income taxes (37) 629 459
Income taxes 41 182 115
- -------------------------------------------------------------------------------
Net Income (Loss) $ (78) $ 447 $ 344
===============================================================================
In the normal course of business, BTCo enters into various transactions
with the Parent Company and the Parent Company's other subsidiaries. Included in
the above financial statements were the following transactions and balances with
such affiliates.
(in millions) Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Interest revenue $ 824 $ 349 $ 174
Interest expense 346 239 249
Noninterest revenue 343 326 112
Noninterest expenses 321 285 228
(in millions) December 31, 1998 1997
- --------------------------------------------------------------------------------
Interest-earning assets $11,370 $11,331
Noninterest-earning assets 706 841
Interest-bearing liabilities 7,286 5,652
Noninterest-bearing liabilities 1,602 973
Consolidated Balance Sheet
($ in millions, except par values) December 31, 1998 1997
- -------------------------------------------------------------------------------
Assets
Cash and due from banks $ 2,772 $ 2,121
Interest-bearing deposits with banks 2,423 4,416
Federal funds sold 2,484 1,897
Securities purchased under resale agreements 11,374 17,836
Securities borrowed 8,994 9,193
Trading assets 39,982 45,488
Securities available for sale 8,564 4,154
Loans, net of allowance for credit losses of $620
at December 31, 1998 and $659 at December 31, 1997 21,262 17,033
Due from customers on acceptances 232 633
Accounts receivable and accrued interest 2,648 3,709
Other assets 3,823 3,559
- -------------------------------------------------------------------------------
Total assets $ 104,558 $ 110,039
===============================================================================
Liabilities
Noninterest-bearing deposits
Domestic offices $ 3,124 $ 2,856
Foreign offices 1,781 2,122
Interest-bearing deposits
Domestic offices 17,285 21,752
Foreign offices 18,386 18,407
- -------------------------------------------------------------------------------
Total deposits 40,576 45,137
Trading liabilities 26,175 24,967
Securities loaned and securities sold under
repurchase agreements 9,667 10,755
Other short-term borrowings 7,867 8,610
Acceptances outstanding 232 633
Accounts payable and accrued expenses 2,862 3,411
Other liabilities, including allowance for credit
losses of $18 at December 31, 1998 and $3
at December 31, 1997 2,616 2,308
Long-term debt not included in risk-based capital 6,594 6,753
Long-term debt included in risk-based capital 846 1,228
Mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated deferrable
interest debentures included in risk-based capital 244 243
- -------------------------------------------------------------------------------
Total liabilities 97,679 104,045
- -------------------------------------------------------------------------------
Stockholders' Equity
Floating rate non-cumulative preferred stock--
Series A, $1 million par value
Authorized, issued and outstanding:
1998, 1,500 shares; 1997, 1,000 shares 1,500 1,000
Common stock, $10 par value
Authorized, issued and outstanding:
1998, 212,730,867 shares; 1997, 135,166,667 shares 2,127 1,351
Capital surplus 541 540
Retained earnings 3,136 3,528
Accumulated other comprehensive income:
Net unrealized gains (losses) on securities available
for sale, net of taxes (36) (46)
Foreign currency translation, net of taxes (389) (379)
- -------------------------------------------------------------------------------
Total stockholders' equity 6,879 5,994
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 104,558 $ 110,039
===============================================================================
See Note 8 for details of BTCo's long-term debt issued to nonaffiliates.
80 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Note 28--Litigation and Subsequent Events
On March 11, 1999, BTCo announced that it had reached an agreement (the
"Agreement") with the United States Attorney's Office in the Southern District
of New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record keeping problems that occurred between 1994
and early 1996 in businesses of BTCo. Pursuant to the Agreement with the U.S.
Attorney's Office, 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 will pay a $60 million fine to federal authorities.
Separately, BTCo will pay $3.5 million to the State of New York pursuant to an
agreement with the New York State Banking Department. These amounts have been
reflected in the 1998 Consolidated Statement of Income of the Corporation.
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 are seeking exemptions from regulatory agencies and authorities,
including the Commission and the Department of Labor, to continue providing
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.
In addition, on March 10, 1999, unrelated to the above, the Corporation
paid $5.6 million in connection with an arbitration award. Such amount has been
reflected in the 1998 Consolidated Statement of Income.
In addition to the matters described above, various legal actions and
proceedings involving the Parent Company 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 81
<PAGE>
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Bankers Trust Corporation and its subsidiaries (the
"Corporation") is responsible for preparing the accompanying financial
statements. The financial statements were prepared in accordance with generally
accepted accounting principles and prevailing industry practices, as applicable
to the Corporation. The financial statements include amounts that are based on
management's best estimates and judgments. Management also prepared the other
information in the Annual Report and is responsible for its accuracy and
consistency with the financial statements.
The management of the Corporation has established and maintains an
internal control structure and monitors that structure for compliance with
established policies and procedures. The objectives of an internal control
structure are to provide reasonable, but not absolute, assurance as to the
integrity and reliability of the financial statements, the protection of assets
from unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization. The Corporation maintains an
Internal Audit Department that independently monitors and assesses the
effectiveness of the internal controls and recommends possible improvements
thereto. The Corporation also maintains a Credit Risk Management Department
which develops and administers procedures to measure, monitor and control credit
risks across all businesses and recommends to management specific measures for
portfolio restructuring designed to reduce the risk of loss. In addition,
management recognizes its responsibility to foster a strong ethical environment
within the Corporation to ensure that its business affairs are conducted with
integrity and in accordance with high standards of personal and corporate
conduct. This responsibility is characterized and reflected in the Corporation's
Rules for Business Conduct, which are distributed to all employees of the
Corporation. As part of the monitoring system, the Corporation maintains a
Corporate Compliance Department having oversight responsibilities for
administering and coordinating the application of these standards of conduct.
The Corporation's Board of Directors appoints an Audit Committee composed
solely of outside directors. The function of the Audit Committee is to oversee
the accounting, reporting, audit and internal control policies and procedures
established by the Corporation's management. The Committee meets regularly with
management and the internal, credit and independent auditors. The auditors have
free access to the Audit Committee without the presence of management. The
Committee reports regularly to the Board of Directors on its activities, and
such other matters as it deems necessary.
The Corporation's annual financial statements for 1998 have been audited
by KPMG LLP, independent auditors, whose appointment by the Board of Directors
was approved by the stockholders. Management has made available to KPMG LLP all
the Corporation's financial records and related data, as well as the minutes of
stockholders' and directors' meetings. Furthermore, management believes that all
its representations to KPMG LLP are valid and appropriate. In addition, KPMG
LLP, in determining the nature and extent of their auditing procedures,
evaluated the Corporation's accounting procedures and policies and the
effectiveness of the related internal control structure.
Management believes that, as of December 31, 1998, the Corporation's
internal control structure was adequate to accomplish the objectives discussed
herein.
/s/ Frank N. Newman
Frank N. Newman
Chairman of the Board,
Chief Executive Officer and President
/s/ Richard H. Daniel
Richard H. Daniel
Vice Chairman and
Chief Financial Officer
March 19, 1999
82 Bankers Trust Corporation and its Subsidiaries
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Bankers Trust Corporation
We have audited the consolidated balance sheet of Bankers Trust Corporation
(formerly Bankers Trust New York Corporation) and Subsidiaries (the
"Corporation") at December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in stockholders' equity,
comprehensive income and cash flows for each of the years in the two-year period
ended December 31, 1998. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Bankers Trust
Corporation and Subsidiaries at December 31, 1998 and December 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet of
Alex. Brown Incorporated as of December 31, 1996 and the related consolidated
statements of earnings, stockholders' equity and cash flows for the year then
ended, prior to their restatement for the 1997 pooling-of-interests with the
Corporation, and have issued our report thereon dated January 20, 1997. The
contribution of Alex. Brown Incorporated to both combined restated revenues and
to combined restated net income represented 20 percent for the year ended
December 31, 1996. Separate consolidated financial statements of the
Corporation included in the restated financial statements for 1996 were audited
and reported on separately by other auditors who have issued their report
thereon dated January 23, 1997 except for Note 28, as to which the date is March
6, 1997. We also audited the combination of the consolidated balance sheet of
the Corporation as of December 31, 1996 and the related consolidated statements
of income, changes in stockholders' equity, comprehensive income and cash flows
for the year then ended, after restatement for the 1997 pooling-of-interests; in
our opinion, such consolidated financial statements have been properly combined
on the basis described in Note 1 of the notes to the consolidated financial
statements.
/s/ KPMG LLP
KPMG LLP
New York, New York
January 21, 1999 except for Note 28,
as to which the date is March 12, 1999
Bankers Trust Corporation and its Subsidiaries 83
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Bankers Trust Corporation
We have audited the consolidated statements of income, comprehensive income,
changes in stockholders' equity, and cash flows for the year ended December 31,
1996 of Bankers Trust Corporation (formerly Bankers Trust New York Corporation)
and Subsidiaries (the "Corporation") (not presented herein), prior to their
restatement for the 1997 pooling-of-interests with Alex. Brown Incorporated.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Bankers Trust Corporation (formerly Bankers Trust New York
Corporation) and Subsidiaries for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
New York, New York
January 23, 1997
except for Note 28, as to
which the date is March 6, 1997
84 Bankers Trust Corporation and its Subsidiaries
<PAGE>
================================================================================
SUPPLEMENTARY FINANCIAL DATA
================================================================================
The statistical data on pages 85 through 90 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. All such adjustments were of a normal recurring nature.
Condensed Quarterly Consolidated Statement of Income
<TABLE>
<CAPTION>
(in millions, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997(1)
----------------------------------------- ------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter(2) Quarter(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest revenue $1,716 $2,281 $2,305 $1,989 $2,085 $1,789 $1,731 $1,680
Interest expense 1,448 1,945 1,939 1,587 1,712 1,474 1,391 1,349
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest revenue 268 336 366 402 373 315 340 331
Provision for credit losses--loans 20 20 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest revenue after
provision for credit losses--loans 248 316 366 402 373 315 340 331
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue 1,189 155 1,182 1,231 1,146 1,455 1,194 1,066
Total noninterest expenses 1,343 1,178 1,320 1,325 1,233 1,419 1,225 1,104
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 94 (707) 228 308 286 351 309 293
Income taxes (benefit) 65 (219) 64 86 79 105 96 93
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 29 $ (488) $ 164 $ 222 $ 207 $ 246 $ 213 $ 200
====================================================================================================================================
Net income (loss) applicable to
common stock $ 23 $ (494) $ 155 $ 211 $ 195 $ 235 $ 201 $ 186
====================================================================================================================================
Earnings (Loss) Per
Common Share:(3)
Basic $ 0.24 $(4.98) $ 1.54 $ 2.08 $ 1.95 $ 2.33 $ 2.00 $ 1.86
Diluted $ 0.23 $(4.98) $ 1.46 $ 2.01 $ 1.82 $ 2.19 $ 1.89 $ 1.76
====================================================================================================================================
Cash dividends declared per
common share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================================================================================================================
</TABLE>
(1) Amounts have been restated to conform to the current year's presentation.
(2) Amounts have been restated to reflect the merger with Alex. Brown
Incorporated.
(3) Due to changes in the number of average shares outstanding, quarterly
earnings per share do not necessarily add to the totals for the years.
Stockholder Data
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market price(1)
High $ 87-7/8 $ 123-1/2 $ 136-7/16 $ 124-1/4 $ 131-1/2 $ 133-5/8 $ 91-1/2 $ 96-3/8
Low 45 53 109-3/8 99-1/4 106 86 74 81-1/4
End of quarter 85-7/16 59 116-1/16 120-5/16 112-7/16 122-3/8 87-1/8 82
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the Composite Tape. Market prices at March 1, 1999 for common
stock were as follows: High, $87 1/16; Low, $86 3/8; Close, $86 15/16.
Dividends
Cash dividends on common stock were paid quarterly in 1998 on the 25th of
January, April, July and October.
Number of Security Holders
At March 1, 1999, the approximate number of holders of record of common stock
was 21,607.
Stock Listings
The principal markets on which the common stock is traded are the New York Stock
Exchange (Symbol: BT) and the London Stock Exchange.
Bankers Trust Corporation and its Subsidiaries 85
<PAGE>
Average Balances, Interest and Average Rates
The following table shows the major consolidated assets and liabilities,
together with their respective interest amounts and rates earned or paid by the
Corporation. Cash basis and renegotiated loans are included in the averages to
determine an effective yield on all loans. The average balances are principally
daily averages.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ -------------------------- --------------------------
Average Average Average Average Average Average
($ in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits with banks
(primarily in foreign offices) $ 3,316 $ 310 9.35% $ 4,662 $ 395 8.47% $ 2,786 $ 214 7.68%
Federal funds sold
(in domestic offices) 3,865 211 5.46% 4,758 266 5.59% 2,179 119 5.46%
Securities purchased under resale
agreements
In domestic offices 15,254 1,200 7.87% 14,076 847 6.02% 14,368 799 5.56%
In foreign offices 8,175 435 5.32% 9,158 505 5.51% 7,444 514 6.90%
- ------------------------------------------------------------- ---------------- ----------------
Total securities purchased
under resale agreements 23,429 1,635 6.98% 23,234 1,352 5.82% 21,812 1,313 6.02%
Securities borrowed
In domestic offices 21,080 1,096 5.20% 13,128 653 4.97% 13,563 678 5.00%
In foreign offices 2,640 126 4.77% 1,763 93 5.28% 2,241 147 6.56%
- ------------------------------------------------------------- ---------------- ----------------
Total securities borrowed 23,720 1,222 5.15% 14,891 746 5.01% 15,804 825 5.22%
Trading assets
In domestic offices (1) 10,334 973 9.42% 9,578 850 8.87% 14,458 1,165 8.06%
In foreign offices 19,685 1,423 7.23% 19,449 1,646 8.46% 16,140 1,251 7.75%
- ------------------------------------------------------------- ---------------- ----------------
Total trading assets (1) 30,019 2,396 7.98% 29,027 2,496 8.60% 30,598 2,416 7.90%
Securities available for sale
In domestic offices
Taxable 6,090 403 6.62% 2,635 206 7.82% 2,674 195 7.29%
Exempt from federal
income taxes (1) 1,602 56 3.50% 1,076 40 3.72% 1,029 29 2.82%
In foreign offices
Taxable 4,319 230 5.33% 4,011 230 5.73% 3,151 229 7.27%
Exempt from federal
income taxes (1) 84 10 11.90% 92 10 10.87% 142 16 11.27%
- ------------------------------------------------------------- ---------------- ----------------
Total securities available for sale (1) 12,095 699 5.78% 7,814 486 6.22% 6,996 469 6.70%
Loans
In domestic offices
Commercial and industrial 5,182 386 7.45% 4,029 312 7.74% 2,894 221 7.64%
Financial institutions 1,306 89 6.81% 1,269 92 7.25% 942 64 6.79%
Secured by real estate 1,650 132 8.00% 1,561 131 8.39% 1,409 97 6.88%
Other (1) 3,651 230 6.30% 2,577 175 6.79% 2,177 124 5.70%
- ------------------------------------------------------------- ---------------- ----------------
Total in domestic offices (1) 11,789 837 7.10% 9,436 710 7.52% 7,422 506 6.82%
In foreign offices 10,789 844 7.82% 8,923 695 7.79% 6,253 517 8.27%
- ------------------------------------------------------------- ---------------- ----------------
Total loans, excluding fees (1) 22,578 1,681 7.45% 18,359 1,405 7.65% 13,675 1,023 7.48%
Loan fees -- 30 -- 32 -- 24
- ------------------------------------------------------------- ---------------- ----------------
Total loans, including fees (1) 22,578 1,711 7.58% 18,359 1,437 7.83% 13,675 1,047 7.66%
- ------------------------------------------------------------- ---------------- ----------------
Customer receivables
In domestic offices 1,628 138 8.48% 1,589 133 8.37% 1,476 121 8.20%
In foreign offices -- -- -- -- --
- ------------------------------------------------------------- ---------------- ----------------
Total customer receivables 1,628 138 8.48% 1,589 133 8.37% 1,476 121 8.20%
- ------------------------------------------------------------- ---------------- ----------------
Total Interest-Earning
Assets(1) 120,650 $8,322 6.90% 104,334 $7,311 7.01% 95,326 $6,524 6.84%
====== ====== ======
Cash and due from banks 2,448 1,496 1,347
Noninterest-earning trading assets 28,233 21,712 17,104
Due from customers on acceptances 485 682 554
All other assets 10,741 9,058 8,416
Allowance for credit losses--loans (686) (776) (986)
- -------------------------------------------------- -------- --------
Total Assets $161,871 $136,506 $121,761
================================================== ======== ========
% of assets attributable to foreign offices 46% 50% 48%
</TABLE>
(1) Interest and average rates are presented on a fully taxable basis. The
applicable combined federal, state and local incremental tax rate used to
determine the amounts of the tax equivalent adjustments to interest
revenue (which recognize the income tax savings on tax-exempt assets) was
41 percent for 1998, 41 percent for 1997 and 42 percent for 1996.
86 Bankers Trust Corporation and its Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ -------------------------- --------------------------
Average Average Average Average Average Average
($ in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities and
Stockholders' Equity
Interest-bearing deposits
In domestic offices
Time deposits $15,203 $ 879 5.78% $12,133 $ 679 5.60% $ 3,088 $ 180 5.83%
Other 6,993 304 4.35% 4,707 216 4.59% 3,824 204 5.33%
- ------------------------------------------------------------ ----------------- -----------------
Total in domestic offices 22,196 1,183 5.33% 16,840 895 5.31% 6,912 384 5.56%
In foreign offices
Deposits from banks in
foreign countries 6,430 471 7.33% 7,628 480 6.29% 7,045 401 5.69%
Other time and savings deposits 10,474 458 4.37% 11,022 611 5.54% 7,802 466 5.97%
Other 1,694 83 4.90% 1,952 90 4.61% 2,039 104 5.10%
- ------------------------------------------------------------ ----------------- -----------------
Total in foreign offices 18,598 1,012 5.44% 20,602 1,181 5.73% 16,886 971 5.75%
- ------------------------------------------------------------ ----------------- -----------------
Total interest-bearing deposits 40,794 2,195 5.38% 37,442 2,076 5.54% 23,798 1,355 5.69%
Trading liabilities
In domestic offices 1,957 147 7.51% 1,699 181 10.65% 7,840 595 7.59%
In foreign offices 5,762 315 5.47% 3,966 295 7.44% 3,576 267 7.47%
- ------------------------------------------------------------ ----------------- -----------------
Total trading liabilities 7,719 462 5.99% 5,665 476 8.40% 11,416 862 7.55%
Securities loaned and securities sold
under repurchase agreements
In domestic offices 19,881 1,458 7.33% 13,679 837 6.12% 19,109 1,049 5.49%
In foreign offices 8,851 439 4.96% 10,218 576 5.64% 7,855 549 6.99%
- ------------------------------------------------------------ ----------------- -----------------
Total securities loaned and securities
sold under repurchase agreements 28,732 1,897 6.60% 23,897 1,413 5.91% 26,964 1,598 5.93%
Other short-term borrowings
In domestic offices 16,488 961 5.83% 14,429 881 6.11% 11,266 633 5.62%
In foreign offices 5,109 366 7.16% 5,739 312 5.44% 5,195 367 7.06%
- ------------------------------------------------------------ ----------------- -----------------
Total other short-term borrowings 21,597 1,327 6.14% 20,168 1,193 5.92% 16,461 1,000 6.07%
Long-term debt
In domestic offices 10,056 581 5.78% 7,725 455 5.89% 6,748 411 6.09%
In foreign offices 7,284 340 4.67% 3,856 200 5.19% 3,907 222 5.68%
- ------------------------------------------------------------ ----------------- -----------------
Total long-term debt 17,340 921 5.31% 11,581 655 5.66% 10,655 633 5.94%
- ------------------------------------------------------------ ----------------- -----------------
Trust preferred capital securities 1,455 117 8.04% 1,401 113 8.07% 42 3 7.14%
- ------------------------------------------------------------ ----------------- -----------------
Total Interest-Bearing
Liabilities 117,637 $ 6,919 5.88% 100,154 $ 5,926 5.92% 89,336 $ 5,451 6.10%
======= ======= =======
Noninterest-bearing deposits
In domestic offices 2,766 2,331 2,661
In foreign offices 1,497 842 600
- ------------------------------------------------- -------- --------
Total noninterest-bearing deposits 4,263 3,173 3,261
Noninterest-bearing trading liabilities 23,706 18,199 15,470
Acceptances outstanding 471 682 555
All other liabilities 10,183 8,311 7,108
Preferred stock of subsidiary 253 45 250
Stockholders' equity
Preferred stock 522 717 853
Common stockholders' equity 4,836 5,225 4,928
- ------------------------------------------------- -------- --------
Total Liabilities and
Stockholders' Equity $161,871 $136,506 $121,761
================================================= ======== ========
% of liabilities attributable
to foreign offices 46% 49% 50%
Rate spread 1.02% 1.09% .74%
Net interest margin (net interest
revenue to total interest-
earning assets)
In domestic offices $71,763 $ 545 0.76% $ 56,367 $ 427 .76% $57,234 $ 597 1.04%
In foreign offices 48,887 858 1.76% 47,967 958 2.00% 38,092 476 1.25%
- ------------------------------------------------------------ ------------------ -----------------
Total $120,650 $ 1,403 1.16% $104,334 $ 1,385 1.33% $95,326 $ 1,073 1.13%
============================================================ ================== =================
</TABLE>
Bankers Trust Corporation and its Subsidiaries 87
<PAGE>
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 which 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998/97 1997/96
--------------------------- ---------------------------
Increase (decrease) Increase (decrease)
due to change in: due to change in:
--------------------------- ---------------------------
Average Average Average Average
(in millions) Balance Rate Total Balance Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated
Interest Revenue
Interest-bearing deposits with banks $ (123) $ 38 $ (85) $ 157 $ 24 $ 181
Federal funds sold (49) (6) (55) 144 3 147
Securities purchased under resale agreements 11 272 283 84 (45) 39
Securities borrowed 454 22 476 (47) (32) (79)
Trading assets 83 (183) (100) (128) 208 80
Securities available for sale 250 (37) 213 52 (35) 17
Loans 321 (47) 274 366 24 390
Customer receivables 3 2 5 9 3 12
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest revenue 950 61 $1,011 637 150 787
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest-bearing deposits 182 (63) 119 757 (36) 721
Trading liabilities 145 (159) (14) (474) 88 (386)
Securities loaned and securities sold under repurchase agreements 307 177 484 (181) (4) (185)
Other short-term borrowings 87 47 134 220 (27) 193
Long-term debt 308 (42) 266 53 (31) 22
Trust preferred capital securities 4 -- 4 110 -- 110
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,033 (40) 993 485 (10) 475
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in net interest revenue $ (83) $ 101 $ 18 $ 152 $ 160 $ 312
====================================================================================================================================
Domestic Offices
Interest Revenue
Interest-bearing deposits with banks $ 15 $ (21) $ (6) $ 15 $ 1 $ 16
Federal funds sold (49) (6) (55) 144 3 147
Securities purchased under resale agreements 76 277 353 (17) 65 48
Securities borrowed 412 31 443 (22) (3) (25)
Trading assets 69 54 123 (424) 109 (315)
Securities available for sale 240 (27) 213 -- 22 22
Loans 174 (47) 127 153 55 208
Customer receivables 3 2 5 9 3 12
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest revenue 940 263 1,203 (142) 255 113
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest-bearing deposits 285 3 288 528 (17) 511
Trading liabilities 25 (59) (34) (590) 176 (414)
Securities loaned and securities sold under repurchase agreements 432 189 621 (322) 110 (212)
Other short-term borrowings 121 (41) 80 189 59 248
Long-term debt 135 (9) 126 58 (14) 44
Trust preferred capital securities 4 -- 4 110 -- 110
Funds provided to foreign offices (297) (47) (344) (139) (352) (491)
Funds provided by foreign offices 475 150 625 57 322 379
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,180 186 1,366 (109) 284 175
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in net interest revenue $ (240) $ 77 $ (163) $ (33) $ (29) $ (62)
====================================================================================================================================
Foreign Offices
Interest Revenue
Interest-bearing deposits with banks $ (111) $ 32 $ (79) $ 136 $ 29 $ 165
Securities purchased under resale agreements (53) (17) (70) 106 (115) (9)
Securities borrowed 43 (10) 33 (28) (26) (54)
Trading assets 20 (243) (223) 273 122 395
Securities available for sale 17 (17) -- 53 (58) (5)
Loans 147 -- 147 211 (29) 182
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest revenue 63 (255) (192) 751 (77) 674
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest-bearing deposits (111) (58) (169) 213 (3) 210
Trading liabilities 111 (91) 20 29 (1) 28
Securities loaned and securities sold under repurchase agreements (72) (65) (137) 146 (119) 27
Other short-term borrowings (37) 91 54 36 (91) (55)
Long-term debt 162 (22) 140 (3) (19) (22)
Funds provided by domestic offices 297 47 344 139 352 491
Funds provided to domestic offices (475) (150) (625) (57) (322) (379)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense (125) (248) (373) 503 (203) 300
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in net interest revenue $ 188 $ (7) $ 181 $ 248 $ 126 $ 374
====================================================================================================================================
</TABLE>
88 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Interest Rate Sensitivity
Interest rate sensitivity data for the Corporation at December 31, 1998 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
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, 1998 months six months one year five years years funds Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits with banks $ 2,338 $ 18 $ 16 $ -- $ 10 $ -- $ 2,382
Federal funds sold 2,484 -- -- -- -- -- 2,484
Securities purchased under resale agreements 12,220 1,862 2,971 -- -- -- 17,053
Securities borrowed 14,709 -- -- -- -- -- 14,709
Trading assets 21,295 -- -- -- -- 24,875 46,170
Securities available for sale 938 366 389 4,056 6,999 -- 12,748
Customer receivables 1,524 -- -- -- -- -- 1,524
Gross loans 17,400 2,907 508 1,782 688 -- 23,285
Noninterest-earning assets
and allowance for credit losses -- -- -- -- -- 12,760 12,760
- ------------------------------------------------------------------------------------------------------------------------------------
Total 72,908 5,153 3,884 5,838 7,697 37,635 133,115
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing deposits 22,450 3,963 3,703 497 2,248 -- 32,861
Trading liabilities 4,936 -- -- -- -- 22,317 27,253
Securities loaned and securities sold under
repurchase agreements 16,922 498 -- -- -- -- 17,420
Other short-term borrowings 13,607 1,901 805 -- -- -- 16,313
Long-term debt 8,264 1,350 1,430 3,190 3,769 -- 18,003
Mandatorily redeemable capital securities of
subsidiary trusts holding solely junior
subordinated deferrable interest debentures -- -- -- -- 1,420 -- 1,420
Preferred stock 160 -- 109 125 -- -- 394
Noninterest-bearing liabilities, including
allowance for credit losses, and common
stockholders' equity -- -- -- -- -- 19,451 19,451
- ------------------------------------------------------------------------------------------------------------------------------------
Total 66,339 7,712 6,047 3,812 7,437 41,768 133,115
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of off-balance sheet hedging instruments (14,414) 3,564 5,486 $ 4,255 1,109 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap $ (7,845) $ 1,005 $ 3,323 $ 6,281 $ 1,369 $ (4,133) $ --
====================================================================================================================================
Cumulative Interest Rate Sensitivity Gap $ (7,845) $ (6,840) $ (3,517) $ 2,764 $ 4,133 $ -- $ --
====================================================================================================================================
</TABLE>
Bankers Trust Corporation and its Subsidiaries 89
<PAGE>
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, 1998
were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(in millions) Domestic Foreign Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Certificates of deposit of $100,000 or more
3 months or less $ 2,919 $ 3,643 $ 6,562
Over 3 through 6 months 2,971 1,472 4,443
Over 6 through 12 months 1,754 1,436 3,190
Over 12 months 560 -- 560
- -------------------------------------------------------------------------------------------------------------------------
Total 8,204 6,551 14,755
- -------------------------------------------------------------------------------------------------------------------------
Other time deposits of $100,000 or more
3 months or less 206 4,971 5,177
Over 3 through 6 months 31 485 516
Over 6 through 12 months 2 612 614
Over 12 months 117 62 179
- -------------------------------------------------------------------------------------------------------------------------
Total 356 6,130 6,486
- -------------------------------------------------------------------------------------------------------------------------
Other 9,699 1,921 11,620
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits $ 18,259 $ 14,602 $ 32,861
=========================================================================================================================
</TABLE>
Deposits by foreign depositors in domestic offices amounted to $1.4 billion,
$1.0 billion and $1.2 billion at December 31, 1998, 1997 and 1996, respectively.
90 Bankers Trust Corporation and its Subsidiaries
<PAGE>
================================================================================
DESCRIPTION OF BUSINESS
================================================================================
Bankers Trust Corporation
Bankers Trust Corporation is a registered bank holding company which was
incorporated in 1965. The Parent Company, which accounted for 3 percent of
consolidated assets at December 31, 1998, supplies Bankers Trust Company
("BTCo"), BT Alex. Brown Incorporated ("BT Alex. Brown"), and its other
subsidiaries with various advisory services and coordinates their general
policies and activities.
The Parent Company is a legal entity separate and distinct from its
subsidiaries, including BTCo. There are various legal limitations governing the
extent to which certain of the Parent Company's subsidiaries may extend credit,
pay dividends or otherwise supply funds to, or engage in transactions with, the
Parent Company or certain of its other subsidiaries. The rights of the Parent
Company 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
the Parent Company may itself be a creditor of that subsidiary and its claims
are recognized. Claims on the Parent Company's subsidiaries by creditors other
than the Parent Company 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
Management reports the results of operations of the Corporation principally
through six broad business segments. Four business segments are organized around
specific products and services: Investment Banking, Trading & Sales, Private
Client Services Group and Global Institutional Services. Two additional business
segments, Australia/New Zealand/International Funds Management and Emerging
Markets Group, are organized to deliver these same types of financial products
and services with the local expertise necessary to operate in these markets.
Other business segments include the income and expenses of smaller businesses
that are not included in the main business segments. See Note 21 of Notes to
Financial Statements for a description of these Business Segments.
Insurance Activities
The Corporation has a 50 percent interest in a Chilean company known as
Consorcio. Consorcio underwrites pension-related life and disability insurance,
and sells pension-related life annuities.
Bankers Trust Company
The Parent Company's principal banking subsidiary is Bankers Trust Company,
which, along with its subsidiaries accounted for 69 percent of the Corporation's
consolidated assets at December 31, 1998. BTCo, founded in 1903, is among the
largest commercial banks in New York City and the United States, based on total
assets. BTCo originates loans and other forms of credit, accepts deposits,
arranges financings and provides numerous other commercial banking and financial
services. BTCo provides a broad range of financial advisory services to its
clients. It also engages in the trading of currencies, securities, derivatives
and commodities.
BT Alex. Brown Incorporated
On September 1, 1997, the Corporation acquired Alex. Brown Incorporated ("ABI"),
the parent of Alex. Brown & Sons Incorporated ("Alex. Brown"). The acquisition
was effected by the merger of ABI with and into a wholly-owned subsidiary of the
Corporation, which subsidiary was then renamed BT Alex. Brown Holdings
Incorporated ("BT Alex. Brown Holdings"). The Corporation contributed all of the
stock of BT Securities Corporation ("BT Securities"), the Corporation's existing
broker-dealer subsidiary, to BT Alex. Brown Holdings, which as a result became
the immediate parent of BT Securities. At the same time, Alex. Brown was merged
into BT Securities, which was then renamed "BT Alex. Brown Incorporated." As a
result of these transactions, BT Alex. Brown Incorporated is a direct
wholly-owned subsidiary of BT Alex. Brown Holdings and an indirect wholly-owned
subsidiary of the Corporation, and combines the operations of BT Securities with
those of Alex. Brown.
BT Alex. Brown Incorporated, a securities broker-dealer registered with
the Securities and Exchange Commission and a member of the New York Stock
Exchange, is an indirect wholly-owned subsidiary of the Parent Company. It
accounted for 21 percent of the Corporation's consolidated assets at December
31, 1998. BT Alex. Brown provides origination, advisory and execution services
for a broad range of domestic and international clients. It is a leading
underwriter of debt and equity securities for corporations and other issuers and
furnishes industry-focused research. It also provides securities brokerage and
investment advisory services to private clients and institutions and
correspondent clearing services to broker-dealers. BT Alex. Brown is a primary
dealer in U.S. Government securities, a municipal securities broker-dealer and
an underwriter or placement agent for commercial paper, money market
instruments, asset-backed and convertible securities. BT Alex. Brown also
provides global merger, acquisition, corporate and other financial advisory
expertise, structures a broad range of derivative transactions and syndicates
loans for its affiliates and other lenders.
Bankers Trust (Delaware)
Bankers Trust (Delaware) is a state bank chartered under the laws of Delaware,
which, along with its subsidiaries, accounted for 1 percent of the Corporation's
consolidated assets at December 31, 1998. Bankers Trust (Delaware) engages in
commercial banking activities, with an emphasis on lending, funding and
corporate finance.
Supervision and Regulation
The Parent Company 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, the Parent Company
is required to file with the Federal Reserve Board certain reports and
information and is restricted in its acquisitions, certain of which are subject
to approval by the Federal Reserve Board. In addition, the Parent Company 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.
The Parent Company and its nonbank subsidiaries are affiliates of BTCo and
Bankers Trust (Delaware) within the meaning of applica-
Bankers Trust Corporation and its Subsidiaries 91
<PAGE>
ble federal statutes, and such banks are therefore subject to restrictions on
loans and other extensions of credit to the Parent Company 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.
BT Alex. Brown is registered as a broker-dealer in all 50 states, the
District of Columbia and Puerto Rico and with the Securities and Exchange
Commission, and is a member of the New York Stock Exchange and the National
Association of Securities Dealers, Inc. and is therefore subject to supervision
by those regulators. As a securities affiliate of a bank, BT Alex. Brown is
subject to the supervision of the Federal Reserve Board, which has imposed
limitations on the gross revenue from certain activities of such affiliates and
certain other conditions governing their operations.
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, 1998,
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 new 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 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. Furthermore, various proposals, bills and
regulations have been and are being 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. It cannot be predicted whether new legislation or
regulations will be adopted and, if so, how they would affect 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.
92 Bankers Trust Corporation and its Subsidiaries
<PAGE>
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 its ability to access the financial markets for
its funding needs.
The Corporation's international operations, which are widely diversified
geographically and vary from country to country, involve certain economic,
political and legal risks which differ from those associated with its domestic
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
Corporation's operations may involve legal uncertainties. See "Cross-Border
Outstandings" on page 38. Further, certain domestic, as well as foreign,
financial institutions with which the Corporation competes may not be subject to
the same regulatory restrictions as the Corporation which may make it more
difficult for the Corporation to compete with those institutions for business.
As noted in "Supervision and Regulation" on page 91, 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 or within the
broader financial systems infrastructure. See "Year 2000 Readiness Disclosure"
on page 18.
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 known as One Bankers Trust Plaza and a 10-story
office building at 4 Albany Street, both in Manhattan, a 16-story office
building in Santiago, Chile 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, 13 stories of an office building in Baltimore,
Maryland, an eight-story building in Jersey City, New Jersey, a three-story
building in Nashville, Tennessee and a significant portion of a 42-story office
building in Sydney, Australia. 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 6
of Notes to Financial Statements for additional information concerning lease
commitments.
Litigation and Related Matters
An appeal was recently argued in the Arizona State court action against the
Corporation arising from the 1986 leveraged buyout of the Kroy Company. In
January of 1998, a jury awarded the plaintiffs in this action $18.3 million in
compensatory damages and punitive damages of $30 million. Plaintiffs assert that
any compensatory damages in this matter are subject to trebling, and seek
interest on any judgment. The Corporation's post-trial motion for reduction of
the jury's award was granted in part, giving plaintiffs the option of either
accepting a judgment for $15 million or a new trial on damages if they declined
that amount. The plaintiffs did not accept the reduced judgment and appealed the
judge's ruling. The Corporation has filed a cross appeal. That appeal was argued
before the Arizona Court of Appeals on February 3, 1999. There has been no
ruling yet on the appeal.
On March 11, 1999, BTCo announced that it had reached an agreement (the
"Agreement") with the United States Attorney's Office in the Southern District
of New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record keeping problems that occurred between 1994
and early 1996 in businesses of BTCo. Pursuant to the Agreement with the U.S.
Attorney's Office, 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 will pay a
Bankers Trust Corporation and its Subsidiaries 93
<PAGE>
$60 million fine to federal authorities. Separately, BTCo will pay $3.5 million
to the State of New York pursuant to an agreement with the New York State
Banking Department. These amounts have been reflected in the 1998 Consolidated
Statement of Income of the Corporation. 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 are seeking exemptions from
regulatory agencies and authorities, including the Commission and the Department
of Labor, to continue providing 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 December of 1998, a purported class action on behalf of mortgage
borrowers pending in New York federal court names Bankers Trust Company of
California, N.A. ("BT California") as a defendant. The lawsuit focuses on the
action of a finance company and certain mortgage brokers involved in originating
and servicing certain mortgages; BT California is named as a defendant solely in
its role as trustee for securitizations of these mortgages. The lawsuit alleges
breaches of federal statutes and various deceptive practices by the lenders,
brokers and servicers of the mortgages in question. BT California believes that
it has carried out appropriately its limited role as a trustee. The judge
presiding over this matter has granted certain plaintiffs' motions for
preliminary injunctions against foreclosure. BT California's time to answer or
to move to dismiss the complaint in this matter has not yet elapsed.
In November and December 1998, several purported shareholder class action
complaints were filed in the United States District Court for the Southern
District of New York, naming as defendants Deutsche Bank and Dr. Rolf-E Breuer
(spokesperson of the Vorstand of Deutsche Bank) (collectively, the "Federal
Actions"). The Federal Actions allege that the defendants violated the federal
securities laws by making allegedly false and/or misleading statements, or by
failing to correct prior public statements, regarding the status of negotiations
between the Corporation and Deutsche Bank prior to the public disclosure of the
merger, and seek unspecified damages. Four other purported shareholder class
actions have been filed in the Supreme Court of the State of New York, naming as
defendants the Corporation and certain of its officers and directors and, in one
instance, Deutsche Bank as well (the "State Actions"). One of the State Actions
was filed prior to the announcement of the merger and seeks to compel defendants
to undertake certain acts in connection with any sale of the Corporation
allegedly in order to maximize the price to be received by the Bankers Trust
Shareholders. The other State Actions allege that the directors breached their
fiduciary duties to such Shareholders by agreeing to enter into the Merger
Agreement allegedly without taking affirmative steps to inform themselves as to
the value of the Corporation or to facilitate and evaluate possible
alternatives. One of the State Actions also alleges that defendants did not take
into account the future performance of the Corporation or give adequate
consideration to other strategic alternatives, and that value was allegedly
misappropriated to the Corporation's executives and employees in the form of
compensation and other benefits rather than included in the merger
consideration. The State Actions each seek injunctive relief and unspecified
damages.
Commencing in June 1998, several purported class action complaints were
filed in the United States District Court for the Southern District of New York,
the United States District Court for the Eastern District of New York and the
United States District Court for the District of New Jersey naming as defendant
Deutsche Bank and, in some cases, certain other banks. The allegations raised in
these complaints relate to Deutsche Bank's conduct during World War II. In
general, the plaintiffs allege that Deutsche Bank aided the wartime German
government, and otherwise participated, in wrongful and illegal activities. The
complaints further allege that Deutsche Bank profited from these activities by
accepting assets unlawfully seized by the German government, retaining assets
deposited by wartime victims and financing or controlling companies that
employed forced laborers. Plaintiffs seek compensatory and punitive damages as
well as disgorgement of any profit stemming from the foregoing activities.
Attorneys representing certain of these plaintiffs have petitioned the Federal
Reserve Bank of New York to (i) refuse to approve the merger until an
investigation has been performed as to Deutsche Bank's wartime activities and
(ii) condition any approval of the merger on a complete disgorgement by Deutsche
Bank of all assets found to have been improperly obtained from wartime victims
as well as profits obtained from Deutsche Bank's financing and control of
companies that utilized forced wartime laborers.
The status of the litigation described in paragraph one above and the
investigation mentioned in paragraph two above was disclosed to and discussed
with Deutsche Bank prior to entering into the Merger Agreement, and Deutsche
Bank has been kept current on these matters. The Corporation believes, and in
the case of the Federal Actions is informed by Deutsche Bank that Deutsche Bank
believes, that the allegations in the class action lawsuits described in
paragraphs three, four and five are without merit and each intends to vigorously
defend against them. The impact of these matters on the merger, including any
potential delays, cannot be determined at this time. See "Supervision and
Regulation."
In addition to the matters described above, various legal actions and
proceedings involving the Parent Company 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.
94 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Directors of the Registrant
Lee A. Ault III
Director since 1997
Private Investor
Director of Bankers Trust Company. Former Chairman and Chief Executive Officer,
Telecredit, Inc. Also a director of Equifax, Inc., Office Depot, Inc., Sunrise
Medical Inc. and Pacific Crest Outward Bound School. Age 62.
Neil R. Austrian
Director since 1997
President and Chief Operating Officer, National Football League
Director of Bankers Trust Company. Also a director of Rafac Technology and
Office Depot, Inc., and trustee of Swarthmore College. Age 59.
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, Phillips Petroleum Company, and Staff Leasing; chairman emeritus of
Amherst College; and chairman emeritus of the Colonial Williamsburg Foundation.
Age 70.
Phillip A. Griffiths
Director since 1994
Director, Institute for Advanced Study
Director of Bankers Trust Company. Chairman, Committee on Science, Engineering
and Public Policy of the National Academies of Sciences and Engineering & the
Institute of Medicine; member, National Academy of Sciences, American Academy of
Arts and Sciences and American Philosophical Society; chairman and member,
Nominations Committee and Committee on Science and Engineering indicators,
National Science Board; and trustee of North Carolina School of Science and
Mathematics and the Woodward Academy. Former member of the board of directors,
Research Triangle Institute. Age 60.
William R. Howell
Director since 1986
Chairman Emeritus, J.C. Penney Company, Inc.
Director of Bankers Trust Company. Also a director of Exxon Corporation,
Halliburton Company, Warner-Lambert Company, Williams, Inc., Central & South
West Corp., and the National Retail Federation; and chairman, Southern Methodist
University Board of Trustees. Age 63.
Vernon E. Jordan, Jr.
Director since 1972
Senior Partner, Akin, Gump, Strauss, Hauer & Feld, LLP, Attorneys-at-law,
Washington, D.C. and Dallas, Texas
Director of Bankers Trust Company. Former President of the National Urban
League, Inc. Also a director of American Express Company, Chancellor Media
Corporation, Dow Jones, Inc., J.C. Penney Company, Inc., Revlon Group
Incorporated, Ryder System, Inc., Sara Lee Corporation, Union Carbide
Corporation and Xerox Corporation; and a trustee of The Ford Foundation and
Howard University. Age 63.
Hamish Maxwell
Director since 1984
Retired Chairman and Chief Executive Officer, Philip Morris Companies Inc.
Director of Bankers Trust Company. Also a director of Sola International Inc.,
and chairman of WPP Group plc. Age 72.
Frank N. Newman
Director since 1995
Chairman of the Board, Chief Executive Officer and President of the Corporation
and Bankers Trust Company
Former Deputy Secretary of the United States Treasury and former Vice Chairman
of the Board and director of BankAmerica Corporation and Bank of America NT&SA.
Also a director of Dow Jones, Inc.; trustee of Carnegie Hall; and member, Board
of Overseers, Joan & Sanford I Weill Medical College and Joan & Sanford I. Weill
Graduate School of Medical Sciences of Cornell University. Age 56.
N.J. Nicholas Jr.
Director since 1989
Investor
Director of Bankers Trust Company. Former Co-chief Executive Officer of Time
Warner Inc. Also a director of Boston Scientific Corporation, Priceline.com Inc.
and Xerox Corporation. Age 59.
Russell E. Palmer
Director since 1988
Chairman and Chief Executive Officer, The Palmer Group
Director of Bankers Trust Company. Former Dean of The Wharton School, University
of Pennsylvania and former Chief Executive Officer of Touche Ross & Co. (now
Deloitte & Touche). Also a director of Allied-Signal Inc., Federal Home Loan
Mortgage Corporation, GTE Corporation, The May Department Stores Company and
Safeguard Scientifics, Inc.; and a trustee, the University of Pennsylvania. Age
64.
Donald L. Staheli
Director since 1996
Retired Chairman of the Board and Chief Executive Officer, Continental Grain
Company
Director of Bankers Trust Company. Also a director of Continental Grain Company,
ContiFinancial Corporation, Prudential Insurance Company of America and
America's Promise; and chairman of The Points of The Light Foundation. Age 67.
Patricia Carry Stewart
Director since 1977
Former Vice President, The Edna McConnell Clark Foundation (a charitable
foundation)
Director of Bankers Trust Company. Also chair of the Community Foundation for
Palm Beach and Martin Counties; and a trustee emerita of Cornell University and
a life member, Board of Overseers, Joan & Sanford I Weill Medical College and
Joan & Sanford I. Weill Graduate School of Medical Sciences of Cornell
University. Age 70.
G. Richard Thoman
Director since 1997
President, Chief Operating Officer and Director, Xerox Corporation
Director of Bankers Trust Company. Also a director of DaimlerChrysler AG, Fuji
Xerox Corporation, Ltd. and Union Bancaire Privee (Switzerland); director,
General Electric Investments Equity Advisory Board, Yale School of Management
Advisory Board, Fletcher School of Law and Diplomacy Advisory Board, and the
INSEAD U.S. Advisory Board and The Americas Society; and member, Council on
Foreign Relations. Age 54.
George J. Vojta
Director since 1997
Vice Chairman of the Board of the Corporation and Bankers Trust Company Also a
director of Alicorp, S.A., Globeset and Private Export Funding Corp.; member of
the New York State Banking Board; vice chairman of the Board of Trustees of St.
Luke's-Roosevelt Hospital Center; a partner of New York City Partnership;
chairman, Wharton Financial Services Center; and a member of the Bretton Woods
Committee. Age 63.
Paul A. Volcker
Director since 1996
Director of Various Corporations
Director of Bankers Trust Company. Former Chairman and Chief Executive Officer
of Wolfensohn & Co., Inc. and former Chairman of the Board of Governors of the
Federal Reserve System. Also a director of Nestle S.A., and Prudential Insurance
Company of America; director of American Council on Germany, Council on Foreign
Relations and The Japan Society; trustee of The American Assembly; and member of
the advisory boards of several international corporations. Age 71.
Bankers Trust Corporation and its Subsidiaries 95
<PAGE>
================================================================================
EXECUTIVE OFFICERS OF THE REGISTRANT
================================================================================
Set forth below are the names and ages of the executive officers of the Parent
Company, 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.*
- --------------------------------------------------------------------------------
Frank N. Newman, 56
Chairman of the Board and Chief Executive Officer and President
Chairman of the Board and Chief Executive Officer of the Parent Company and BTCo
since 1996. President of the Parent Company and BTCo since 1995. Mr. Newman,
former Deputy Secretary of the United States Treasury, joined the Treasury in
1993 after six years with BankAmerica Corporation where he was the chief
financial officer and vice chairman of the board.
George J. Vojta, 63
Vice Chairman of the Board
Vice Chairman of the Board of the Parent Company and BTCo since January 1992;
Executive Vice President 1984-1992. He is in charge of BT Ventures and
concentrates on the Corporation's external client and institutional
relationships.
Mark Bieler, 53
Executive Vice President
Executive Vice President of the Parent Company since 1987 and Managing Director
of BTCo since 1992; Executive Vice President of BTCo 1987-1992; Senior Vice
President and head of the Human Resources Department since 1985.
Mary Cirillo, 51
Executive Vice President
Executive Vice President of the Parent Company and Managing Director of BTCo
since June 1997. 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. She is head of BTCo's Global Institutional Services business.
Richard H. Daniel, 52
Vice Chairman and Chief Financial Officer
Chief Financial Officer (Principal Financial Officer) of the Parent Company and
BTCo since 1996. Vice Chairman of the Parent Company since April 1997.
Controller of the Parent Company and BTCo from 1996 to July 1998. Executive Vice
President of the Parent Company from 1996 to April 1997. Vice Chairman of BTCo
since September 1997, Managing Director from 1996 to September 1997. Mr. Daniel
formerly held the positions of chief financial officer of Federal Home Loan
Mortgage Corporation from 1994 to 1996, and executive vice president and
director of financial analysis and planning at BankAmerica Corporation from 1987
to 1994.
Yves C. de Balmann, 52
Vice Chairman
Vice Chairman of the Parent Company since April 1997. Senior Vice President of
the Parent Company 1995-1997. Managing Director of BTCo from 1988 to September
1997. He is Co-Chairman and Co-Chief Executive Officer of BT Alex. Brown
Incorporated.
Robert A. Ferguson, 53
Executive Vice President
Executive Vice President of the Parent Company since April 1997. Senior Vice
President of the Parent Company 1995-1997. Managing Director of BTCo since 1985
and of Bankers Trust Australia Limited since 1986.
Duncan P. Hennes, 42
Executive Vice President and Treasurer
Executive Vice President of the Parent Company since September 1998. Treasurer
of the Parent Company and BTCo since September 1998. Senior Vice President of
the Parent Company 1990-1998. Managing Director of BTCo since 1990. Mr. Hennes
is head of BTCo's Trading and Sales business and responsible for
Treasury/Funding and Arbitrage.
Eugene A. Ludwig, 52
Vice Chairman
Vice Chairman of the Parent Company 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 is head of the Control Committee and
Capital Commitment Committee and 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 is responsible for the Firm's corporate responsibility
area.
Joseph A. Manganello, Jr., 63
Executive Vice President and Chief Credit Officer
Executive Vice President and Chief Credit Officer of the Parent Company since
1988; Managing Director of BTCo since 1992; and Chief Credit Officer of BTCo
since 1984; Executive Vice President of BTCo 1982-1992; Department Head of the
United States Department of BTCo prior to 1984. He is in charge of the Credit
Risk Management Department.
I. David Marshall, 52
Executive Vice President and Chief Information Officer
Executive Vice President and Chief Information Officer of the Parent Company and
Managing Director and Chief Information Officer of BTCo since October 1996. Mr.
Marshall formerly held the positions of executive vice president and chief
information officer of Canadian Imperial Bank of Commerce from June 1995 to
October 1996; group executive for Information Systems & Operations and a member
of the Executive Committee at Unitel Communications, Inc., the operating arm of
AT&T in Canada from 1993 to 1995; and from 1977 to 1993 he served with the
Canadian Government consecutively as assistant auditor general; assistant deputy
minister, Information Technology for Revenue Canada and assistant deputy
minister, Information Technology for Employment and Immigration Canada.
Rodney A. McLauchlan, 45
Executive Vice President
Executive Vice President of the Parent Company since April 1997. Senior Vice
President of the Parent Company from 1992 to April 1997. Managing Director of BT
Alex. Brown since September 1997. Managing Director of BT Securities Corporation
1995-1997; Managing Director of BTCo 1987-1995. As of 1998, he is Chairman of
the Global Banking Group and is head of BTCo's Latin American Investment Banking
business. Mr. McLauchlan also chairs the Latin American and Asian Advisory
Boards and the Client Committee.
Mayo A. Shattuck III, 44
Vice Chairman
Vice Chairman of the Parent Company 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
BT Alex. Brown Incorporated.
Melvin A. Yellin, 56
Executive Vice President and General Counsel
Executive Vice President and General Counsel of the Parent Company and Managing
Director and General Counsel of BTCo since 1996; Senior Vice President (Chief
Legal Officer) of the Parent Company and Managing Director (Chief Legal Officer)
of BTCo since 1995; Managing Director and Deputy General Counsel of BTCo
1992-1995. Vice President and Counsel 1981-1992. He is in charge of the Legal
Department.
* 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.
96 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Security Ownership of Directors and Management
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Name of Beneficial Amount and Nature Percent of
Title of Class Owner of Beneficial Ownership (1)(2) Class (3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Ault, Lee A. III 16,779 (D)
190 (I)(DSAP)
Common Stock Austrian, Neil R. 7,728 (D)(4)
178 (I)(DSAP)
Common Stock Beitzel, George B. 6,031 (D)
6,000 (I)(As Trustee)
1,301 (I)(DSAP)
Common Stock Cirillo, Mary 71,950 (D)(4)(5)(6)
Common Stock de Balmann, Yves C. 342,283 (D)(4)(5)(6)
Common Stock Griffiths, Phillip A. 1,800 (D)
384 (I)(DSAP)
Common Stock Hennes, Duncan P. 116,281 (D)(4)(5)(6)
Common Stock Howell, William R. 2,675 (D)
914 (I)(DSAP)
Common Stock Jordan, Vernon E. Jr. 7,813 (D)
914 (I)(DSAP)
Common Stock Maxwell, Hamish 6,635 (D)
1,443 (I)(DSAP)
Common Stock Newman, Frank N. 294,609 (D)(4)(5)(6)
Common Stock Nicholas, N.J. Jr. 3,500 (D)
10,139 (I)(DCP)
752 (I)(DSAP)
Common Stock Palmer, Russell E. 2,600 (D)
960 (I)(DSAP)
Common Stock Shattuck, Mayo A. III 357,825 (D)(4)(6)
Common Stock Staheli, Donald L. 2,000 (D)
314 (I)(DSAP)
Common Stock Stewart, Patricia C. 6,300 (D)
1,301 (I)(DSAP)
Common Stock Thoman, G. Richard 1,533 (D)
162 (I)(DSAP)
Common Stock Vojta, George J. 298,176 (D)(4)(5)(6)
46 (I)(EBP)
Common Stock Volcker, Paul A. 268,894 (D)
365 (I)(DSAP)
Common Stock Directors and Executive 4,285,004 (D)(7)
Officers as a group 6,000 (I)(As Trustee)
9,178 (I)(DSAP)
10,139 (I)(DCP)
46 (I)(EBP)
</TABLE>
(1) Ownership as of March 1, 1999. Shares of Bankers Trust Common Stock have
been rounded to the nearest full share.
(2) As noted next to share amount: (D) represents shares directly held; (I)
represents shares indirectly held; (EBP) represents shares held in the
Bankers Trust Qualified Employee Benefit Plans and/or in the Bankers Trust
Employee Stock Ownership Plan; (DCP) represents share equivalents accrued
in the Bankers Trust deferred compensation plan for non-officer directors;
(DSAP) represents shares equivalents accrued in the Bankers Trust
Directors' Stock Award Plans.
(3) Based on March 1, 1999, outstanding securities of 97,566,226 and the
exercisable options, vested PEP shares and vested EPP shares of each of
the Directors and Named Executive Officers set forth in footnotes 4, 5 and
6 below, the number of shares of Common Stock owned by any Director or
member of Management constitutes less than 1% of the total outstandings of
the class.
(4) Includes options now exercisable and those that become exercisable within
sixty days for the following: Austrian--5,601; Cirillo--50,000; de
Balmann--215,000; Hennes--70,000; Newman--210,000; Shattuck--26,667; and
Vojta--122,876.
(5) Includes vested (non-forfeitable) shares which are mandatorily deferred
for five years (commencing with the end of the performance year) under
PEP, a component of the 1991, 1994 and 1997 Stock Option and Stock Award
Plans, for the following: Cirillo--10,916; de Balmann--51,924;
Hennes--24,528; Newman--67,685; and Vojta--44,630.
(6) Includes vested (non-forfeitable) shares which are deferred for three
years (commencing with the end of the performance year) under EPP for the
following: Cirillo--1,034; de Balmann--15,675; Hennes--0; Newman--16,924;
Shattuck--2,953; and Vojta--8,510.
(7) Includes 1,591,847 vested and unvested options, 456,540 vested and
unvested shares under the PEP and 532,887 vested and unvested shares under
the EPP.
Bankers Trust Corporation and its Subsidiaries 97
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act") requires the Corporation's executive officers and directors and
holders of 10% of the Corporation's common stock (the "Common Stock") to file
initial reports of ownership and reports of changes in ownership of the Common
Stock with the Securities and Exchange Commission ("SEC"). Executive officers,
directors and holders of more than 10% of the Common Stock are required by
Secretary regulations to furnish the Corporation with copies of all such
reports.
Based on a review of the copies of the reports furnished to the
Corporation from the Corporation's executive officers and directors, the
Corporation believes that in 1998 all Section 16(a) requirements applicable to
its executive officers and directors were met, with the following exceptions.
The Form 5 filed by Mr. Nicholas in February 1998 underreported by 98.94
deferred share equivalents held in his Deferred Compensation account. These
share equivalents were included in the Form 5 filed in February 1999. The Form 5
filed by Mr. Jordan in February 1999 included 396 previously unreported shares
acquired for Mr. Jordan's custodian account during the period December 1996
through November 1998, which, inadvertently, had been omitted from previous
filings. Two late Form 4 filings for Mr. Ferguson, disclosing distribution and
conversion of derivative stock units in December 1998 and January 1999.
Security Ownership of Certain Beneficial Owners
Amount and
Name and Nature of
Address of Beneficial Percent of
Title of Class Beneficial Owner Ownership Class
- --------------------------------------------------------------------------------
Common Stock Capital Research and
Management Company
333 South Hope Street
Los Angeles, CA 90071 7,578,800 (a) 8.0%
Common Stock Barrow, Hanley, Mewhinney
& Strauss, Inc.
One McKinney Plaza
3232 McKinney Avenue--
15th Floor
Dallas, TX 75204-2429 5,190,550 (b) 5.4%
- --------------------------------------------------------------------------------
(a) In a Schedule 13G filed under the Exchange Act, Capital Research and
Management Company disclosed that, as of December 31, 1998, it had sole
investment power and no voting power with respect to all of said shares;
that the shares were acquired in the ordinary course of business, were not
acquired for the purpose of, and do not have the effect of, changing or
influencing the control of Bankers Trust; and that the shares were not
acquired in connection with or as a participant in any transaction having
such purpose or effect.
(b) In a Schedule 13G filed under the Exchange Act, Barrow, Hanley, Mewhinney
& Strauss, Inc. disclosed that, as of December 31, 1998, it had sole
investment power with respect to all of said shares, sole voting power
with respect to 1,050,050 of said shares and shared voting power with
respect to 4,140,500 of said shares; that the shares were acquired in the
ordinary course of business, were not acquired for the purpose of, and do
not have the effect of changing or influencing the control of Bankers
Trust; and that the shares were not acquired in connection with or as a
participant in any transaction having such purpose or effect.
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.
Vernon E. Jordan, Jr. is a senior partner of the law firm of Akin, Gump,
Strauss, Hauer & Feld, LLP, which performed legal services for a subsidiary of
the Corporation in 1998 and was paid its usual and customary fees for those
services. In addition, Mr. Jordan provided consultancy services to BT
Wolfensohn, the mergers and acquisitions division of BT Alex. Brown
Incorporated, during 1998, for which he will receive a fee of $100,000 in 1999.
Mr. Jordan also is a member of the Fuji-Wolfensohn International European
Advisory Board (the "Advisory Board"), on which he served prior to the
Corporation's acquisition of Wolfensohn & Co. In 1998, he received a fee in the
amount of $25,000 in connection with his services to Fuji-Wolfensohn.
Paul A. Volcker is a member of the Fuji-Wolfensohn International board of
directors, a joint venture continued by the Corporation after the acquisition of
Wolfensohn & Co., and of the Advisory Board. Mr. Volcker received a fee of
$50,000 in 1998 in connection with his position on the Advisory Board.
Extension of Directors and Officers Liability Insurance Program
The Directors and Officers Liability Insurance Program, which the Corporation
has maintained since June 1, 1972, was extended on July 1, 1998 to July 1, 2001.
This program will reimburse the Corporation 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 the Corporation
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 National Union
Fire Insurance Company of Pittsburgh and other independent insurance companies
at an annual premium of $2,960,775. A settlement amount of $8.5 million was paid
by the program in 1998 in connection with a 1994 Consolidated Shareholder D&O
suit relating to leveraged derivative transactions.
Committees of the Board of Directors
The Corporation and the Bank each maintains the Board Committees described
below. Included with the descriptions are the number of times each Committee met
during 1998 and a list of the current members of each such Committee:
98 Bankers Trust Corporation and its Subsidiaries
<PAGE>
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 or approval. This Committee also serves as the Dividend Committee
to declare and set aside contractually required dividends (such as those
declared from time to time on preferred stock issues) which may become due
during the periods between scheduled Board meetings. Current Members: Frank N.
Newman, Chair; Vernon E. Jordan, Jr.; Hamish Maxwell; N.J. Nicholas Jr.; Russell
E. Palmer; Donald L. Staheli; Patricia C. Stewart; and Paul A. Volcker.
Audit Committee--8 Meetings
The Audit 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 Committee, which
meets at least quarterly, 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 auditors (the
"Auditors") and reports regularly to the Board of Directors on its activities
and such other matters as it deems necessary. The Auditors have free access to
the Audit Committee without the presence of Management. Current Members: Russell
E. Palmer, Chair; Lee A. Ault III; Phillip A. Griffiths; William R. Howell; G.
Richard Thoman; and Paul A. Volcker.
Committee on Directors--4 Meetings
The Committee on Directors is comprised entirely of independent outside
directors and is responsible for nominating directors and reviewing the
effectiveness and procedures of the Board, the Board Committees and corporate
governance. The Committee also has the responsibility to make recommendations
regarding these issues to the Board. The Committee will consider a director
nominee recommended by a shareholder by a written notification to it, provided
that such written notice is received by the Secretary of the Corporation not
later than 90 days before the Annual Meeting of Shareholders and contains the
name of such person, together with appropriate biographical data and that
person's written consent to submission of his or her name to the Committee for
its consideration. Current Members: Donald L. Staheli, Chair; George B. Beitzel;
William R. Howell; Vernon E. Jordan, Jr.; and N.J. Nicholas Jr.
Committee on Public Responsibility and Concern--3 Meetings
The Committee on Public Responsibility and Concern 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 political action committee. Current Members: Paul A. Volcker, Chair;
Neil R. Austrian; Hamish Maxwell; Patricia C. Stewart; G. Richard Thoman; and
George J. Vojta.
Fiduciary Committee--2 Meetings
The Fiduciary Committee 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 and 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. Current
Members: Patricia C. Stewart, Chair; Neil R. Austrian; George B. Beitzel; Vernon
E. Jordan, Jr.; Russell E. Palmer; and George J. Vojta.
Human Resources Committee--7 Meetings
The Human Resources Committee is comprised entirely of independent outside
directors and reviews and evaluates, in comparison with the Corporation's
competitors, the Corporation's performance and executive compensation and
benefits. The Committee is updated periodically with information provided to the
Corporation by independent compensation and benefit consultants and is
responsible for approving and monitoring those policies which support corporate
strategic objectives and govern both cash compensation and stock ownership
programs. Key aspects of this process require the Committee to compare the
Corporation's pay practices to its long-term goals and to assess ways in which
compensation incentives support the creation of value for the Corporation's
shareholders. Current Members: N.J. Nicholas Jr., Chair; Lee A. Ault III;
Phillip A. Griffiths; Donald L. Staheli; and Patricia C. Stewart.
Transaction Authorization Committee--2 Meetings
The Transaction Authorization Committee, which is comprised of the Chief
Executive Officer and the Vice Chairman of the Board, acts for the Board of
Directors to approve certain transactions, including securitizations. Current
Members: Frank N. Newman, Chair; and George J. Vojta.
In addition to the Committee meetings shown above, there were 11 regularly
scheduled and 5 special meetings of the Board of Directors during 1998. Director
attendance at Board meetings averaged 96% during the year; aggregate attendance
at Committee meetings averaged 92%. Meeting attendance was below 75% for George
J. Vojta, due to illness.
Compensation of Non-Officer Directors
Each director who is not also an employee (each, a "non-officer director")
receives an annual retainer, comprised of cash and the fair market value of 400
shares of Common Stock. The 1998 annual retainer totaled $68,181.24 for each
such director. For each Board meeting and Executive Committee he or she attends,
a non-officer
Bankers Trust Corporation and its Subsidiaries 99
<PAGE>
director receives a fee of $1,000. Each such director who is a member of the
Human Resources Committee, the Committee on Public Responsibility and Concern,
the Fiduciary Committee, or the Committee on Directors receives a fee of $1,000
for each Committee meeting he or she attends and the Chairman of each of those
committees receives an additional annual fee of $3,000. The Chairman of the
Audit Committee receives an annual fee of $15,000 and its other members receive
an annual fee of $7,500. Members of the Audit Committee do not receive meeting
fees. 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 Corporation.
In October 1998, the Board of Directors established an Ad Hoc Advisory
Group, comprised of Messrs. Austrian, Maxwell, Nicholas and Volcker, whose
function was to provide assistance to the Chairman of the Board in developing
and implementing corporate strategic alternatives. Each of the directors
received a fee of $1,000 for each meeting of the advisory group that he
attended, as follows: Austrian--$3,000; Maxwell--$4,000; Nicholas--$4,000; and
Volcker--$3,000.
Effective March 31, 1998, the Corporation implemented the Directors' Stock
Award Plan to replace the benefits, both accrued and prospective, to which the
non-officer directors were entitled under the former Non-Employee Director
Retirement Plan of Bankers Trust Corporation with share equivalents of the
Corporation's Common Stock. Under the new plan, the accrued present value of
each such director's benefit was actuarially converted into a deferred award
consisting of share equivalents of the Common Stock. The amount of share
equivalents each director received was determined by a present value calculation
based on an assumed payout to commence at age 72 and benefit accrual
proportionate to years of service, rounded up to the next full year (up to ten
years of service) and divided by an amount equal to the average of the
Corporation's high and low Common Stock prices on March 31, 1998. Pursuant to
the plan, each participating director's Stock Award Plan account is credited
with an additional 150 share equivalents per year, prorated quarterly. When they
leave the Board, a cash only payment will be made, at the director's discretion,
either in a lump sum, or in annual installments not to exceed ten years. Until
paid, dividend equivalents will be credited on the share equivalents and treated
as investments in additional share equivalents or fractional share equivalents.
At March 1, 1999, the Stock Award Plan account for each director held share
equivalents, as follows (rounded to the next full number): Ault--190;
Austrian--178; Beitzel--1,301; Griffiths--384; Howell--914; Jordan--914;
Maxwell--1,443; Nicholas--752; Palmer--960; Staheli--314; Stewart--1,301;
Thoman--162; and Volcker--365.
100 Bankers Trust Corporation and its Subsidiaries
<PAGE>
1999 Human Resources Committee Report on Executive Compensation
The Human Resources Committee of the Board of Directors (the "Committee") is
comprised entirely of outside directors, none of whom is a former or current
officer or employee of Bankers Trust Corporation or its subsidiaries (for
purposes of this report, the "Corporation").
The Committee reviews and approves all major policies relating to
compensation and benefits programs, to ensure that they are designed and carried
out to maximize individual and team performance. The Committee is authorized by
the Board to approve all compensation actions for the Chief Executive Officer,
members of the Management Committee and other key officers designated by the
Chairman. In addition, the Committee is authorized to review and approve bonus
funding and spending for all annual plans. The Committee is also charged with
administering the Corporation's Stock Option and Stock Award Plans.
During 1998, the Committee met seven times to review and evaluate
executive compensation and benefit programs, including information periodically
provided to the Corporation by independent compensation and benefit consultants.
Compensation Policies
The Committee's executive compensation policies are designed (a) to attract and
retain the best individuals available in each area of global financial services
in which the Corporation competes for profits, as well as in the areas that
support these businesses, (b) to motivate and reward such individuals based on
corporate, business unit and individual performance, and (c) to align
executives' and stockholders' interests through equity-based incentives. Named
Executive Officer pay, including that of the Chief Executive Officer, is
generally determined and administered by the Committee on the basis of total
compensation rather than as separate free-standing components.
The determination of each Executive Officer's total compensation package
begins with an evaluation by the Committee of the Corporation's annual and long
term performance compared to a group of investment and commercial banks which
the Committee deems comparable. Among the key determinants of the overall levels
of compensation are the pay practices of this group. As part of this process,
the Committee considers quantitative as well as qualitative factors without
assigning uniform relative weights to them. The Corporation's performance
relative to the investment and commercial banks is reviewed using the following
factors: level, quality, consistency and growth of earnings, return on equity,
and total stockholder return. The Committee also considers prevailing economic
conditions and business opportunities available to firms in the financial
services industry.
In arriving at total compensation levels, the Committee evaluates each
Executive Officer's long-term commitment and contribution to the overall
performance of the Corporation. Also, the Committee takes into account such
factors as leadership and technical skills, future potential, teamwork,
recruiting and other management contributions to the Corporation. In addition,
the Committee recognizes that the Corporation's success is dependent on its key
resource--highly talented individuals--whom it must attract and retain in an
extremely competitive environment. The Committee exercises its judgment in
setting an appropriate balance of current cash and equity within each
individual's compensation package.
It is the Committee's policy to maximize the effectiveness, as well as the
tax-efficiency, of the Corporation's executive compensation programs. In
addition, the Committee's policy is to maintain the flexibility to take actions
that it deems to be in the best interests of the Corporation and its
stockholders but which may not necessarily qualify for tax deductibility under
Section 162(m) or other Sections of the Internal Revenue Code. For example, in
order to motivate and retain certain key executives, in 1995, the Company
instituted the Partnership for One-Hundred Plan which is not deductible under
Section 162(m).
Compensation Components
Salary levels, although reviewed annually by the Committee for appropriateness,
are not ordinarily adjusted each year. Salary levels for the Named Executive
Officers are determined by the Committee on the basis of what, in its
discretion, it deems to be appropriate pay for the responsibilities involved.
Partnership Equity Plan Awards are granted in the form of performance
units, the value of which is determined by a quantitative formula directly
related to the earnings of the Corporation. The formula produces a schedule that
assigns a dollar value to the performance units.
Prior to or at the beginning of each year, the Committee will review the
formula in the context of the Corporation's strategic direction and current
business conditions. If deemed appropriate by the Committee, the performance
formula is revised at that time. Also, prior to or at the beginning of the year,
and based on the sole discretion of the Committee, performance units are granted
to each participant under this plan. In determining the number of units granted,
the Committee considers each participant's level of responsibility, individual
performance and contributions to the long-term success of the Corporation
without assigning uniform relative weights to them. The number of units awarded
multiplied by the Plan formula's unit value results in a dollar amount that is
converted into book-entry shares. In accordance with the performance formula for
1998, no book-entry shares were awarded to any Named Executive Officers under
the Plan.
Bankers Trust Corporation and its Subsidiaries 101
<PAGE>
Under the terms of the Partnership Equity Plan, book-entry shares are
deferred for five additional years. While deferred, the shares yield to
participants the greater of the equivalent of the quarterly earnings per share
amount or the quarterly dividend on common stock of the Corporation (the "Common
Stock"). An amount equal to the quarterly dividend is paid currently in cash and
the balance, if any, is deferred into additional Partnership Equity Plan shares.
At the end of the deferral period, all book-entry shares are distributable in
Common Stock. All book entry shares under the Plan are subject to a floor equal
to 75% of the fair market value as of the award date.
Employee Stock Options are generally granted at consistent share levels
from year to year without reference to present holdings of unexercised options
or appreciation thereon. Individual share grant levels are reviewed annually and
are periodically adjusted to reflect a number of factors, including the
individual's current responsibilities and contributions to the long term success
of the Corporation. For compensation planning purposes, stock options are valued
at one-fourth of the option's exercise price. In light of the announced merger
with Deutsche Bank, no options were granted to the Corporation's Named Executive
Officers for 1998 except for options granted to Mr. Shattuck in accordance with
his employment agreement. (see "Summary Compensation Table").
Annual Bonus. As discussed above, the Committee uses a total compensation
approach in determining appropriate pay levels for each Named Executive Officer.
At the end of each performance year, the annual bonus award is determined with
reference to the factors outlined above and by taking into consideration the
value of all other components of the executive's compensation package. Annual
bonuses may be paid in cash, stock, or a combination of cash and stock, as
determined by the Committee. Bonuses are funded based on a formula using annual
corporate net income under the Incentive Bonus Plan for Corporate Officers. Due
to the Corporation's 1998 overall performance, no amounts were payable under
this Plan. In light of the unusual market conditions that lead to the
Corporation's loss for 1998, and the pending Deutsche Bank transaction, the
Committee determined that it was nevertheless appropriate to grant bonuses on a
discretionary basis. The bonuses were based on the Committee's evaluation of
each individuals' performance and contributions to the Corporation.
In 1995, the Corporation adopted the Equity Participation Plan. Under the
terms of the Plan, a portion of each participant's bonus award is granted as
three-year deferred equity. While deferred, equity awarded earns and pays the
equivalent of the greater of the Corporation's quarterly earnings per share
amount or dividend and vests one-third per year. The value of the deferred
equity is also subject to a floor equal to 75% of the fair market value of the
equity awarded.
Long-Term Incentive Plan. As part of a special initiative to attract,
retain and motivate approximately 35 senior executives of the Corporation, with
particular emphasis on increasing the share price of the Common Stock, in
December 1995, the Committee adopted a long-term stock based incentive program,
the Partnership for One-hundred Plan or ("POP"). Under the Plan, participants
were granted units which are valued at $4 when the stock price equaled $76 and
increased by $4 for each additional $1 increase in the stock price. At the time
POP was adopted, the Common Stock was trading at $67.00 per share. The units
vest and payout at their maximum value of $100 each when the stock price reaches
$100. Otherwise, plan units vest one-third per year on the third, fourth and
fifth anniversaries of the award date and payouts will occur at the end of the
five-year performance period.
In December, 1996, the POP Plan was amended and the value of each unit was
fixed at $41.25 under the Plan formula, based on the stock's December 13, 1996
average trading price of $85.3125. Vesting and payout were to remain as stated
in the original Plan unless the stock traded at $100 prior to December 31, 1997
in which event vesting and payout would be accelerated. Because the stock did
trade at $100 during 1997, units vested and started to be paid out annually in
1/4 increments on December 31, 1997. In addition, the value of outstanding units
will accrue interest at the rate of prime plus 1% until paid out.
In June 1997, the Committee approved the POP II Plan to renew the original
POP Plan's incentive to increase stock price appreciation. Units under the POP
II Plan will have a maximum potential benefit of $58.75. If the stock price
trades at $100 for three consecutive days or 5 non-consecutive days during the
period January 1, 1998 to December 31, 2000, the value of the units becomes
fixed at this maximum. This condition was met in January 1998. The combination
of the original Plan as amended in December 1996 and the new Plan, produced a
maximum potential payout of $100 ($41.25 + 58.75) which equals the potential
maximum payout of the plan first approved by the Committee in December 1995.
Participants were awarded the same number of units under POP II as they held in
the original Plan and vest in their POP II units in 1/3 increments on December
31, 1998, 1999, and 2000.
Upon the closing of the merger with Deutsche Bank, all deferred
compensation amounts of the Named Executive Officers will be vested and paid out
in full, including awards under the Partnership Equity Plan, the Equity
Participation Plan, the POP I Plan and the POP II Plan.
102 Bankers Trust Corporation and its Subsidiaries
<PAGE>
1998 Chief Executive Officer Compensation Actions
For 1998, the Corporation incurred a loss of $73 million, which was primarily
due to significant losses in its emerging markets portfolios during a year of
extraordinary financial turmoil. The Corporation realized continued profitable
results in our Investment Banking, Global Institutional Services, Trading and
Sales, Australia and New Zealand, and Private Client businesses. Mr. Newman
played the main role in planning and coordinating the proposed merger with
Deutsche Bank.
In light of the overall results for the Corporation over the past year,
Mr. Newman requested that the Committee not consider a bonus amount for him in
1998, but instead, re-allocate any amount that might have been considered for
him to the overall bonus pool for Bankers Trust employees. The Committee agreed
with Mr. Newman's proposal. As a result of this decision, Mr. Newman's cash
compensation for 1998 was his annual base salary of $900,000. Consistent with
the other Named Executive Officers (other than Mr. Shattuck) for the year 1998,
no stock options were granted, and no shares were awarded under the Partnership
Equity Plan. Mr. Newman's $900,000 compensation for 1998 compares with $12.7
million awarded to him as cash, stock and stock options for 1997.
Other compensation Mr. Newman received in 1998 includes earnings and
appreciation on deferred compensation previously awarded, such as Partnership
Equity Plan Shares and payments pursuant to POP I & POP II, as well as
retirement plan benefits and perquisites (transportation).
Conclusion
The Committee believes that it has the responsibility to ensure that the pay
practices of the Corporation are internally effective in support of the
Corporation's goals and objectives and are competitive in the marketplace to
attract, retain and motivate the talent in the best interests of the
Corporation. Through the program described above, a very significant portion of
Executive Officer compensation is linked directly to individual and corporate
performance.
Compensation Committee Interlocks and Insider Participation
The Human Resources Committee currently consists of the following persons: N.J.
Nicholas Jr., Chairman, Lee A. Ault III, Phillip A. Griffiths, Donald L. Staheli
and Patricia C. Stewart, all of whom are non-officer directors and none of whom
is an employee or former or current officer of the Corporation or its
subsidiaries.
Some of the directors who are members of the HR Committee and their
associates, including affiliates and related interests, from time to time may be
customers of the Corporation and/or subsidiaries of the Corporation, and some of
these directors and their associates, including affiliates and related
interests, from time to time may be 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.
The Human Resources Committee
N.J. Nicholas, Chairman
Lee A. Ault III
Phillip A. Griffiths
Donald L. Staheli
Patricia C. Stewart
Bankers Trust Corporation and its Subsidiaries 103
<PAGE>
I. Summary Compensation Table ($000 omitted)
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------------------
Bonus
------------------------------------
Total Other Annual
Named Executive Officers Year Salary Cash(a) + Stock(b) = Bonus Compensation(c)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Frank N. Newman 1998 $ 900.0 $ -- $ -- $ -- $ 148.4
Chairman, Chief Executive 1997 900.0 5,760.7 4,204.6 9,965.3 72.1
Officer & President 1996 825.0 3,507.1 4,592.4 8,099.5 --
Duncan P. Hennes 1998 275.0 1,300.0 5,200.0 6,500.0 --
Executive Vice President
& Treasurer
Yves C. de Balmann 1998 350.0 1,012.0 4,048.0 5,060.0 923.2
Vice Chairman 1997 350.0 4,030.7 3,821.0 7,851.7 --
1996 287.5 2,507.1 4,319.3 6,826.4 --
Mayo A. Shattuck III 1998 350.0 1,012.0 4,048.0 5,060.0 --
Vice Chairman 1997 66.7 5,510.7 1,000.0 6,510.7 --
Mary Cirillo 1998 350.0 580.0 2,320.0 2,900.0 44.6
Executive Vice President 1997 175.0 1,350.0 1,577.3 2,927.3 --
<CAPTION>
Long Term
Compensation
----------------------------------------
Awards Payouts
--------------------------- ----------
Shares
Restricted Underlying LTIP All Other
Named Executive Officers Stock Awards(d) Options(e) Payouts(f) Compensation(g)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Frank N. Newman -- -- $2,989.6 $ 691.6
Chairman, Chief Executive -- 80,000 1,031.3 617.6
Officer & President -- 80,000 -- 1,341.7
Duncan P. Hennes -- -- 1,494.8 347.3
Executive Vice President
& Treasurer
Yves C. de Balmann -- -- 2,391.7 1,077.5
Vice Chairman -- 60,000 825.0 907.8
-- 60,000 -- 292.4
Mayo A. Shattuck III -- 60,000 -- 79.7
Vice Chairman -- 80,000 6,572.7 9.0
Mary Cirillo -- -- -- 102.1
Executive Vice President 901.3 50,000 -- 719.1
</TABLE>
(a) Includes annual bonus and profit driven benefit payable in cash from the
Corporation's qualified defined contribution plan. At the request of Mr.
Newman, the Committee agreed not to consider a bonus amount for him in
1998, but instead, to re-allocate any amount that might have been
considered for him in the overall bonus pool for Bankers Trust employees.
(b) Includes the value of book-entry shares awarded by formula based on
corporate earnings under the Partnership Equity Plan ("PEP"). Under the
Plan, shares vest at the end of the performance year and are deferred for
five additional years. While deferred, shares are credited with the
greater of the equivalent of the quarterly net income or dividend per
share of the Common Stock. The dividend equivalent portion is paid
currently in cash and the balance is deferred into additional shares.
Dividend equivalents on book-entry shares are paid at the same rates as
are paid on the Common Stock and are not included in the above totals. The
value of all PEP Awards for 1998 was zero. Also includes the value of
book-entry shares awarded under the Equity Participation Plan ("EPP") as
part of the annual bonus. Under this Plan, shares are deferred and vest in
equal installments for three years. While deferred, shares earn the
greater of the Common Stock's quarterly net income per share or dividend.
Share earnings are paid in cash quarterly. For 1998, the value of the EPP
Awards for each of the Named Executive Officers is as follows: Newman--$0;
Hennes--$5,200,000; de Balmann--$4,048,000; Shattuck--$4,048,000; and
Cirillo--$2,320,000.
(c) Other Annual Compensation reflects amounts as follows: Newman--$83,131 and
$65,264, respectively, for ground and air transportation; de
Balmann--$23,725 for ground transportation and $899,511 for expatriate
assignment related payments; and Cirillo--$44,600 for ground
transportation.
(d) As part of her employment agreement, Ms. Cirillo was granted 10,000 shares
of restricted stock in 1997. All of these shares were still outstanding at
the end of 1998, with a total value of $854,375 at the 12/31/98 closing
price of $85.4375. None of the other above Named Executive Officers held
any shares of restricted stock at the end of 1998.
(e) As part of his employment agreement, Mr. Shattuck was granted 60,000 stock
options.
(f) Includes LTIP Payouts for the second installment under POP I and the first
installment under POP II, respectively as follows: Newman--$1,031,250,
$1,958,333; Hennes--$515,625, $979,167; and de Balmann--$825,000,
$1,566,667.
(g) Includes earnings per share less cash dividends ("net E.P.S. credits")
earned on pre-1998 PEP Awards, net E.P.S. credits earned on the pre-1998
EPP portion of annual bonuses, accrued interest as of December 31, 1998,
on POP I, non-elective company contributions to defined contribution plans
and life insurance premiums paid under a plan that is available generally
to all employees. For 1998, net E.P.S. credits earned on pre-1998 PEP
Awards, net E.P.S. credits earned on the pre-1998 EPP portion of annual
bonuses, accrued interest on POP I LTIP awards, non-elective company
contributions to defined contribution plans, and life insurance premiums,
respectively, for each of the above Named Executive Officers are as
follows: Newman--$143,192, $63,526, $291,250, $189,600, $4,070;
Hennes--$63,253, $73,342, $145,625, $64,600, $506; de Balmann--$266,377,
$90,442, $233,000, $79,600, $1,827; Shattuck--$0, $4,075, $0, $75,000,
$644; and Cirillo--$16,086, $4,558, $0, $79,600, $1,827. Net E.P.S.
credits on the EPP portion of 1998 annual bonuses begin in 1999. The
amounts shown for Mr. de Balmann include reimbursements for relocation
expenses of $406,237.
II. Options/SAR Grants Table(a)
<TABLE>
<CAPTION>
Options/SAR Grants in Last Fiscal Year
- ------------------------------------------------------------------------------------------------------------------------------------
Number of % of Total Options
Securities Underlying Granted to Employees Exercise Expiration Grant Date
Named Executive Officers Options Granted(b) in Fiscal Year Price Date Present Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
F.N. Newman 0 0.00%
D.P. Hennes 0 0.00%
Y.C. de Balmann 0 0.00%
M.A. Shattuck III 60,000 6.05% $65.175 9/15/08 $828,000
M. Cirillo 0 0.00%
</TABLE>
(a) No SARS were granted during 1998.
(b) No stock options were granted during 1998 to Messrs. Newman, Hennes, de
Balmann and Ms. Cirillo. Reflects 60,000 stock options granted to Mr.
Shattuck as part of his employment agreement.
(c) The hypothetical grant date present values are calculated under a modified
Black-Scholes Model, which is a mathematical formula used to value options
traded on the stock exchange. The assumptions used in hypothesizing the
above options' grant date present values include the stock's expected
volatil ity of 36.88%, the risk free rate of return of 4.76%, the
projected dividend yield of 6.14%, the projected time to exercise (seven
years) and a 5% adjustment for non-transferability or risk of forfeiture
during vesting period with respect to the grant made on 9/15/98.
104 Bankers Trust Corporation and its Subsidiaries
<PAGE>
III. Option Exercises and Year End Value Table
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Shares Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at Fiscal Year End at Fiscal Year End(b)
Shares Value ---------------------------- ------------------------------
Named Executive Officers Acquired Realized(a) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
F.N. Newman 50,000 $2,810,940 210,000 -- $1,538,750 $ --
D.P. Hennes -- $ -- 70,000 -- $ 270,000 $ --
Y.C. de Balmann -- $ -- 215,000 -- $2,202,500 $ --
M.A. Shattuck III -- $ -- 26,667 113,333 $ -- $1,215,750
M. Cirillo -- $ -- 50,000 -- $ -- $ --
</TABLE>
(a) Market value of underlying common shares at exercise minus option's strike
price.
(b) Market value of underlying securities at year end minus option's strike
price. The value of unexercised in-the-money stock options at 12/31/98
shown above are presented pursuant to SEC rules. Upon the closing of the
merger with Deutsche Bank, all outstanding stock options, including
unexercisable options, will be cashed-out based on the excess, if any, of
the $93 merger price over the option's strike price.
Employment Agreements
In connection with the Corporation's contemplated acquisition of Alex. Brown
Incorporated ("Alex. Brown"), the Corporation entered into employment agreements
with certain Alex. Brown employees (the "Alex. Brown Executives"), including
Mayo A. Shattuck III (on April 29, 1997). The term of the employment agreement
runs from September 1, 1997 through December 31, 1999 (the "Employment Period").
In the event that an Alex. Brown Executive's employment is terminated during the
Employment Period by the Corporation, other than for "Cause" (including on
account of his or her death or disability), or if the Alex. Brown Executive
terminates his or her employment for "Good Reason," the Corporation will make a
lump sum payment to the Alex. Brown Executive in cash within 30 days of the date
of termination in an amount equal to the aggregate of the Alex. Brown
Executive's accrued but unpaid salary, pro rata bonus and accrued deferred
compensation. In addition, the Alex. Brown Executive will receive an amount
equal to the product of (1) the number of years (including fractions thereof)
remaining from the date of termination until December 31, 1999 and (2) the sum
of (x) the Alex. Brown Executive's annual base salary and (y) the Alex. Brown
Executive's guaranteed minimum bonus, which product will be discounted to its
present value at the applicable federal rate. In addition, the Alex. Brown
Executive's Stock Options and restricted stock will become immediately vested.
The employment agreement provides for a gross-up payment to be made to the
Alex. Brown Executive, if necessary, to eliminate the effects of the imposition
of the excise tax under Section 4999 of the U.S. Internal Revenue Code on the
payments made thereunder.
In the event that the Alex. Brown Executive's employment is terminated by
the Corporation for Cause or by the Alex. Brown Executive without Good Reason
during the Employment Period, the Employment Agreement will be terminated
without further obligation to the Alex. Brown Executive, other than to pay any
accrued and unpaid salary, accrued deferred compensation and any other benefits
provided under the Corporation's employee plans.
Under the terms of his employment agreement, Mr. Shattuck was elected as a
Vice Chairman of the Corporation and received in 1997 a prorated base salary of
$350,000, a grant of 80,000 options to purchase the Common Stock and a cash
bonus for the year on a basis consistent with Alex. Brown's past practices. In
addition, Mr. Shattuck will receive minimum annual base salary of $350,000 and
will be awarded in respect of calendar years 1998 and 1999 an annual bonus of no
less than $3.5 million, payable in the same ratio of cash and equity as other of
the Corporation's peer executives. Mr. Shattuck will also receive in 1998 and
1999 additional grants of 60,000 options to purchase the Common Stock, which
will vest and become exercisable on the first anniversary of the date of grant,
and a grant of 75,000 PEP units. The exercise price of all of the options
granted under the employment agreement will be equal to the average closing
price of the Common Stock for the five trading days prior to the date of grant.
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 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 POP I 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
Bankers Trust Corporation and its Subsidiaries 105
<PAGE>
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.
Comparison of Five-Year Cumulative Total Return to Shareholders
The comparison of five-year cumulative total return to shareholders is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year End Compound
------------------------------------------------------------------ Annual
1993 1994 1995 1996 1997 1998 Return Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bankers Trust Corporation $100.0 $ 74.1 $ 94.9 $129.5 $175.7 $139.4 6.9%
Peer Group* 100.0 92.9 154.2 229.6 344.3 374.5 30.2%
S&P 500 Index 100.0 101.3 139.4 171.4 228.6 294.0 24.1%
</TABLE>
o Total return to shareholders is stock price appreciation of a hypothetical
$100 investment on December 31, 1993, with all dividends reinvested.
o Bankers Trust and Peer Group returns calculated based on dividend
reinvestment on payment dates.
* Peer group includes The Bear Stearns Companies Inc., Bank of New York Co.
Inc., Chase Manhattan Corporation, Citigroup Inc., Lehman Brothers
Holdings, Inc., Mellon Bank Corporation, Merrill Lynch & Co., Inc., J.P.
Morgan & Co., Inc., Morgan Stanley Dean Witter & Co., Paine Webber Group,
Inc., and State Street Corporation. Total shareholder return reflects
Morgan Stanley Group returns through 5/30/97 and the combined entity
thereafter; individual returns for Chemical Bank and Chase Manhattan
Corporation (old) through 3/29/96 and the combined entity thereafter;
individual returns for Citicorp and Travelers Group, Inc. through 10/8/98
and the combined entity thereafter.
106 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Pension Plan
The following table shows the estimated annual pension benefits payable at
normal retirement age to a covered participant who has attained the earnings and
years of service classifications indicated under the Corporation's tax-qualified
defined benefit pension plan ("Pension Plan") based upon "Covered Compensation"
and "Credited Service," as such terms are defined below. Benefits shown below
are computed as a single life annuity and are not subject to reduction for
Social Security or other offset amounts.
Years of Credited Service
- --------------------------------------------------------------------------------
Average Final Salary 15 20 25 30 35 or more
- --------------------------------------------------------------------------------
$100,000 $21,000 $28,000 $35,000 $42,000 $49,000
$125,000 $26,250 $35,000 $43,750 $52,500 $61,250
$160,000 $33,000 $44,800 $56,000 $67,200 $78,400
$192,000 and above $40,320 $53,760 $67,200 $80,640 $94,080
A participant's Covered Compensation is his or her average final salary.
"Average Final Salary" under the Pension Plan is the average annual base salary,
as reported in the Summary Compensation Table, during the 60 consecutive
calendar months in the last 120 calendar months of a participant's Credited
Service yielding the highest average annual salary (subject to certain
limitations on salary under the Internal Revenue Code with respect to
tax-qualified plans). Covered Compensation does not include any other
compensation included in the Summary Compensation Table. Credited Service under
the Pension Plan is the number of years and months worked for the Corporation
and certain of its subsidiaries after attaining age 21 and completing one year
of service and is limited to 35 years.
As of December 31, 1998, the years of Credited Service for Mr. Newman, Mr.
de Balmann, Ms. Cirillo, Mr. Hennes and Mr. Shattuck under the Pension Plan (in
completed years) was 2, 9, 0, 10 and 0, respectively. Messrs. de Balmann and
Hennes are fully vested; Mr. Newman and Ms. Cirillo have been employed by the
Corporation for less than five years and are not vested; since the Pension Plan
has yet to be amended to include any former Alex. Brown employees, Mr. Shattuck
is not a participant in the Pension Plan. Alex. Brown did not maintain a defined
benefit retirement plan. Covered Compensation for each of Messrs. Newman, de
Balmann and Hennes for 1998 was $160,000, and their annual accrued benefit for
December 31, 1998 and payable at age 65 was $4,914, $24,338 and $22,459,
respectively.
Effective January 1, 1999, the 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 5%, 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%); (ii) change the vesting schedule to 25%
vested after three (3) years, 50% after four (4) years and 100% 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. Opening cash balances at January 1, 1999, for
Messrs. Newman, de Balmann and Hennes were $56,090, $219,104 and $75,772
respectively.
Bankers Trust Corporation and its Subsidiaries 107
<PAGE>
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, 1998
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:
<TABLE>
<CAPTION>
Name Of Each
Exchange On
Title of Each Class Which Registered
- -------------------------------------------------------------------------------- -----------------------
<S> <C>
Common Stock, $1 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
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 73/4%
Cumulative Preferred Stock, Series S ($2,500 Liquidation Preference) New York Stock Exchange
</TABLE>
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. | |
State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 1, 1999: Common Stock, $1 par
value, $8,107,431,242.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of March 1, 1999: Common Stock, $1 par value,
97,566,226 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
108 Bankers Trust Corporation and its Subsidiaries
<PAGE>
Form 10-K Cross-Reference Index
Part I
Item No. Pages
1. Business
Description of Business 91
Supplemental Financial Data
International Operations 19, 69
Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates and
Interest Differential 86-88
Investment Portfolio 50
Loan Portfolio 36-40, 48-49, 51-52
Summary of Credit Loss Experience 31-35, 48-49, 53
Deposits 90
Return on Equity and Assets 12
Short-Term Borrowings 54
2. Properties 93
3. Legal Proceedings 93
4. Submission of Matters to a Vote of Security Holders *
Part II
5. Market for Registrant's Common Equity and
Related Stockholder Matters 61, 85
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
7a. Quantitative and Qualitative Disclosures
About Market Risk 23-29
8. Financial Statements and Supplementary Data
Bankers Trust Corporation and Subsidiaries
(Consolidated) 42-46
Notes to Financial Statements 47-81
Reports of Independent Auditors 83-84
Selected Quarterly Financial Data 85
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure *
Part III
10. Directors and Executive Officers of the Registrant
Directors 95
Executive Officers 96
Section 16(a) Beneficial Ownership
Reporting Compliance 98
11. Executive Compensation 101-107
12. Security Ownership of Certain Beneficial Owners
and Management 97-98
13. Certain Relationships and Related Transactions 98
Part IV
Item No. Pages
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) Preferred Share Purchase Rights ***
(ii) 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 93 **
(iii) (A) Management Contracts and
Compensation Plans **
12. Statements Re Computation of Ratios **
21. Subsidiaries of the Registrant **
23. Consents of Experts **
24. Power of Attorney **
27. Financial Data Schedule
(b) Reports on Form 8-K-The Corporation filed two reports
on Form 8-K during the quarter ended December 31, 1998.
-- The report dated October 22, 1998 and filed on
October 23, 1998, filed the Corporation's Press
Release, which announced earnings for the quarter
ended September 30, 1998.
-- The report dated November 30, 1998 and filed on
December 3, 1998, filed the Corporation's
announcement that the Corporation and Deutsche Bank
A.G. entered into a definitive agreement to merge
whereby Bankers Trust will be merged into a
wholly-owned subsidiary of Deutsche Bank with
Bankers Trust as the surviving corporation.
- --------------------------------------------------------------------------------
* 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,
One Bankers Trust Plaza, 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
and preferred share purchase rights issued by the Parent Company 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. Portions of the 1998 Annual Report to the Corporation's
stockholders are not required by the Form 10-K report and are not "filed" as
part of the Form 10-K. Only those sections of the Annual Report referenced in
the above index are incorporated in the Form 10-K.
Bankers Trust Corporation and its Subsidiaries 109
<PAGE>
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 19, 1999.
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 19, 1999.
FRANK N. NEWMAN* Chairman of the Board,
- ------------------------------- Chief Executive Officer,
(Frank N. Newman) President and Director
(Principal Executive Officer)
RICHARD H. DANIEL* Vice Chairman and
- ------------------------------- Chief Financial Officer
(Richard H. Daniel) (Principal Financial
Officer)
DAVID C. FISHER* Controller and
- ------------------------------- Principal Accounting Officer
(David C. Fisher)
LEE A. AULT III* Director
- ------------------------------
(Lee A. Ault III)
NEIL R. AUSTRIAN* Director
- ------------------------------
(Neil R. Austrian)
GEORGE B. BEITZEL* Director
- ------------------------------
(George B. Beitzel)
PHILLIP A. GRIFFITHS* Director
- ------------------------------
(Phillip A. Griffiths)
WILLIAM R. HOWELL* Director
- ------------------------------
(William R. Howell)
VERNON E. JORDAN, JR.* Director
- ------------------------------
(Vernon E. Jordan, Jr.)
HAMISH MAXWELL* Director
- ------------------------------
(Hamish Maxwell)
N. J. NICHOLAS JR.* Director
- ------------------------------
(N. J. Nicholas Jr.)
RUSSELL E. PALMER* Director
- ------------------------------
(Russell E. Palmer)
DONALD L. STAHELI* Director
- ------------------------------
(Donald L. Staheli)
PATRICIA CARRY STEWART* Director
- ------------------------------
(Patricia Carry Stewart)
G. RICHARD THOMAN* Director
- ------------------------------
(G. Richard Thoman)
GEORGE J. VOJTA* Vice Chairman
- ------------------------------ of the Board
(George J. Vojta) and Director
PAUL A. VOLCKER* Director
- ------------------------------
(Paul A. Volcker)
*By /s/ JAMES T. BYRNE, JR.
---------------------------------------
(James T. Byrne, Jr., Attorney-in-Fact)
110 Bankers Trust Corporation and its Subsidiaries
<PAGE>
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, 1998
BANKERS TRUST CORPORATION
Bankers Trust Corporation and its Subsidiaries 119
<PAGE>
BANKERS TRUST CORPORATION
EXHIBIT INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
3. Articles of Incorporation and By-laws, as amended
Restated Certificate of Incorporation of the Registrant filed
with the State of New York on June 9, 1988 (1)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on August 30, 1989 (1)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on June 14, 1990 (1)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on March 20, 1992 (1)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on October 27, 1992 (1)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on January 21, 1993 (1)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on June 1, 1993 (1)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on August 18, 1993 (2)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on March 25, 1994 (3)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on August 22, 1994 (4)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on June 29, 1995 (5)
By-laws as in effect November 18, 1997 (24)
Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant filed with the State of
New York on April 23, 1998 (26)
4. Instruments Defining the Rights of Security Holders, Including Indentures
(i)a Rights Agreement, as amended, dated November 26, 1997
describing the terms of the Preferred Share Purchase
Rights (18)
(i)b Amendment No. 1 to Amended and Restated Rights Agreement,
dated as of November 30, 1998 between Bankers Trust
Corporation and Harris Trust and Savings Bank, N.A. (28)
(ii) Long-Term Debt Indentures 109
10. Material Contracts
(i) (A) Agreement and Plan of Merger, dated November 30, 1998,
by and among Deutsche Bank A.G., Circle Acquisition
Corporation and Bankers Trust Corporation (28)
(i) (B) Stock Option Agreement dated November 30, 1998 between
Bankers Trust Corporation and Deutsche Bank, A.G. (28)
(ii) (C) Contract of sale for the office building located at
280 Park Avenue, New York (25)
(D) Leases for Principal Premises Described on Page 93
Lease Agreement relating to the seven stories of a
37-story building located at 14-16 Wall Street (7)
Lease Agreement relating to the eight-story building
located in Jersey City, New Jersey (8)
Lease Agreement relating to the eight-story building
located in London, England (9)
Lease Agreement relating to the three-story building in
Nashville, Tennessee (10)
Synopsis of the Agreement for Sub-Lease and the Sub-Lease
relating to the 42-story building located in Sydney,
Australia (11)
Lease abstract relating to Four World Trade Center, New
York 132
120 Bankers Trust Corporation and its Subsidiaries
<PAGE>
(iii)(A) Management Contracts and Compensation Plans
(1) Employment Contract for Richard H. Daniel (12)
(2) Partnership for One-hundred Plan--Plan Document, as
amended (20)
(3) Employment Agreement for David Marshall (13)
(4) Consulting Agreement with Paul Volcker (13)
(5) BT Investments (Australia) Limited Group Notional
Equity Participation Plan, as amended (13)
(6) Employment Contract for Frank N. Newman (19)
(7) Severance agreement with B.J. Kingdon (21)
(8) Employment agreement with Mary Cirillo (22)
(9) Employment agreement with Mayo A. Shattuck III (23)
(10) Employment agreement with Gene Ludwig (27)
(11) Employment agreements in connection with the
Agreement and Plan of Merger between Bankers Trust
and Deutsche Bank
(a) Frank N. Newman 133
(b) Richard H. Daniel 134
(c) Mary Cirillo 135
(d) Mayo A. Shattuck III 136
(e) Yves C. de Balmann 137
(12) 1994 Stock Option and Stock Award Plan (14)
(13) 1991 Stock Option and Stock Award Plan (15)
(14) 1985 Stock Option and Stock Award Plan (16)
January, 1989 amendments thereto (11)
(15) Additional Capital Accumulation Plan (17)
(16) The Supplemental Executive Retirement Plan (9)
(17) Deferred Compensation Plan for Directors (6)
(18) January, 1989 amendments to the Deferred
Compensation Plan for Directors and The Supplemental
Executive Retirement Plan (14)
(19) Partnership for One-Hundred Plan II (22)
(20) Bankers Trust New York Corporation 138
Change in Control Severance Plan I
(21) Split Dollar Insurance Agreement (23)
(22) Alex. Brown Incorporated 1996 Equity Incentive Plan (23)
(23) Stock Option Agreement, dated as of November 30,
1998 between Bankers Trust Corporation and Deutsche
Bank A.G. (28)
12. Statements Re Computation of Ratios
Computation of Consolidated Ratios of Earnings to Fixed Charges 123
Computation of Consolidated Ratios of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements 124
21. Subsidiaries of the Registrant 125
23. Consents of Experts 126-127
24. Power of Attorney 128
27. Financial Data Schedule 130
(NOTE: FOOTNOTE REFERENCES FOR THIS INDEX APPEAR ON THE NEXT PAGE.)
Bankers Trust Corporation and its Subsidiaries 121
<PAGE>
BANKERS TRUST CORPORATION
EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
FOOTNOTE REFERENCES
(1) This document is incorporated by reference from Bankers Trust
Corporation's Form 8-K dated September 24, 1993, file number 1-5920.
(2) This document is incorporated by reference from Bankers Trust
Corporation's Form 8-K dated August 6, 1993, file number 1-5920.
(3) This document is incorporated by reference from Bankers Trust
Corporation's Form 8-K dated March 21, 1994, file number 1-5920.
(4) This document is incorporated by reference from Bankers Trust
Corporation's Form 8-K dated August 12, 1994, file number 1-5920.
(5) This document is incorporated by reference from Bankers Trust
Corporation's Form 8-K dated June 29, 1995, file number 1-5920.
(6) This document is incorporated by reference from Bankers Trust
Corporation's Form 8-K dated November 10, 1995, file number 1-5920.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) This document is incorporated by reference from Bankers Trust
Corporation's Form 10-Q dated May 15, 1996, file number 1-5920.
(13) This document is incorporated by reference from Bankers Trust
Corporation's Form 10-Q dated November 14, 1996, file number 1-5920.
(14) 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.
(15) 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.
(16) This document is incorporated by reference from Bankers Trust
Corporation's Proxy Statement dated as of March 21, 1988, file number
1-5920.
(17) 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.
(18) This document is incorporated by reference from Bankers Trust
Corporation's Form 8-K dated November 26, 1997, file number 1-5920.
(19) 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.
(20) This document is incorporated by reference from Bankers Trust
Corporation's Form 10-K for the year ended December 31, 1996, file number
1-5920.
(21) This document is incorporated by reference from Bankers Trust
Corporation's Form 10-Q dated May 15, 1997, file number 1-5920.
(22) This document is incorporated by reference from Bankers Trust
Corporation's Form 10-Q dated August 14, 1997, file number 1-5920.
(23) This document is incorporated by reference from Bankers Trust
Corporation's Form 10-Q dated November 14, 1997, file number 1-5920.
(24) This document is incorporated by reference from Bankers Trust
Corporation's Form 8-K dated December 2, 1997, file number 1-5920.
(25) This document is incorporated by reference from Bankers Trust
Corporation's Form 10-K for the year ended December 31, 1997, file number
1-5920.
(26) This document is incorporated by reference from Bankers Trust
Corporation's Form 8-K dated April 23, 1998, file number 1-5920.
(27) This document is incorporated by reference from Bankers Trust
Corporation's Form 10-Q dated August 14, 1998, file number 1-5920.
(28) This document is incorporated by reference from Bankers Trust
Corporation's Form 8-K dated November 30, 1998, file number 1-5920.
122 Bankers Trust Corporation and its Subsidiaries
EXHIBIT 12(a)
BANKERS TRUST CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
(dollars in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
1. Income (loss) before income taxes $ 987 $ 469 $ 1,131 $ 1,239 $ (77)
2. Add: Fixed charges excluding capitalized interest (Line 10) 3,911 5,138 5,483 5,959 6,954
3. Less: Equity in undistributed income of unconsolidated
subsidiaries and affiliates 45 28 30 (117) 15
- ------------------------------------------------------------------------------------------------------------------------------------
4. Earnings including interest on deposits 4,853 5,579 6,584 7,315 6,862
5. Less: Interest on deposits 965 1,360 1,355 2,076 2,195
- ------------------------------------------------------------------------------------------------------------------------------------
6. Earnings excluding interest on deposits $ 3,888 $ 4,219 $ 5,229 $ 5,239 $ 4,667
====================================================================================================================================
Fixed Charges:
7. Interest expense $ 3,880 $ 5,105 $ 5,451 $ 5,926 $ 6,919
8. Estimated interest component of net rental expense 31 33 32 33 35
9. Amortization of debt issuance expense -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
10. Total fixed charges including interest on deposits and
excluding capitalized interest 3,911 5,138 5,483 5,959 6,954
11. Add: Capitalized interest -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
12. Total fixed charges 3,911 5,138 5,483 5,959 6,954
13. Less: Interest on deposits (Line 5) 965 1,360 1,355 2,076 2,195
- ------------------------------------------------------------------------------------------------------------------------------------
14. Fixed charges excluding interest on deposits $ 2,946 $ 3,778 $ 4,128 $ 3,883 $ 4,759
====================================================================================================================================
Consolidated Ratios of Earnings to Fixed Charges:
Including interest on deposits (Line 4/Line 12) 1.24 1.09 1.20 1.23 .99
====================================================================================================================================
Excluding interest on deposits (Line 6/Line 14) 1.32 1.12 1.27 1.35 .98
====================================================================================================================================
</TABLE>
For the year ended December 31, 1998, earnings, as defined, did not cover fixed
charges, including and excluding interest on deposits by $92 million, as a
result of a net loss recorded during the period.
Bankers Trust Corporation and its Subsidiaries 123
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)
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
1. Income (loss) before income taxes $ 987 $ 469 $1,131 $1,239 $ (77)
2. Add: Fixed charges excluding capitalized interest (Line 13) 3,911 5,138 5,483 5,959 6,954
3. Less: Equity in undistributed income of unconsolidated
subsidiaries and affiliates 45 28 30 (117) 15
- ------------------------------------------------------------------------------------------------------------------------------------
4. Earnings including interest on deposits 4,853 5,579 6,584 7,315 6,862
5. Less: Interest on deposits 965 1,360 1,355 2,076 2,195
- ------------------------------------------------------------------------------------------------------------------------------------
6. Earnings excluding interest on deposits $3,888 $4,219 $5,229 $5,239 $4,667
====================================================================================================================================
Preferred Stock Dividend Requirements:
7. Preferred stock dividend requirements $ 28 $ 51 $ 51 $ 49 $ 32
8. Ratio of income (loss) from continuing operations before income taxes
to income (loss) from continuing operations after income taxes 144% 151% 148% 143% 105%
- ------------------------------------------------------------------------------------------------------------------------------------
9. Preferred stock dividend requirements on a pretax basis $ 40 $ 77 $ 75 $ 70 $ 34
====================================================================================================================================
Fixed Charges:
10. Interest Expense $3,880 $5,105 $5,451 $5,926 $6,919
11. Estimated interest component of net rental expense 31 33 32 33 35
12. Amortization of debt issuance expense -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
13. Total fixed charges including interest on deposits and
excluding capitalized interest 3,911 5,138 5,483 5,959 6,954
14. Add: Capitalized interest -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
15. Total fixed charges 3,911 5,138 5,483 5,959 6,954
16. Add: Preferred stock dividend requirements--pretax (Line 9) 40 77 75 70 34
- ------------------------------------------------------------------------------------------------------------------------------------
17. Total combined fixed charges and preferred
stock dividend requirements on a pretax basis 3,951 5,215 5,558 6,029 6,988
18. Less: Interest on deposits (Line 5) 965 1,360 1,355 2,076 2,195
- ------------------------------------------------------------------------------------------------------------------------------------
19. Combined fixed charges and preferred stock dividend requirements
on a pretax basis excluding interest on deposits $2,986 $3,855 $4,203 $3,953 $4,793
====================================================================================================================================
Consolidated Ratios of Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements:
Including interest on deposits (Line 4/Line 17) 1.23 1.07 1.18 1.21 .98
====================================================================================================================================
Excluding interest on deposits (Line 6/Line 19) 1.30 1.09 1.24 1.32 .97
====================================================================================================================================
</TABLE>
For the year ended December 31, 1998, earnings, as defined, did not cover fixed
charges and preferred stock dividend requirements, including and excluding
interest on deposits, by $126 million, as a result of a net loss recorded during
the period.
124 Bankers Trust Corporation and its Subsidiaries
EXHIBIT 21
BANKERS TRUST CORPORATION
SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 1998
Subsidiary(1) State of Incorporation
------------- ----------------------
Bankers Trust Company New York
BT Alex. Brown Incorporated Delaware
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.
Bankers Trust Corporation and its Subsidiaries 125
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-13278, 33-27498, 33-45699, 33-58340, 33-50395, 33-51615,
33-65301, 333-08549, 333-15089, 333-15089-01 through -04, 333-32909, Form S-4
Nos. 333-22733, 333-22733-01, 333-31061 and Form S-8 Nos. 2-67517, 2-97972,
33-20693, 33-21564, 33-41014, 33-52329, 33-54971, 333-12181, 333-19963,
333-31061, 333-34371, 333-43959 and 333-57427) of our report dated January 21,
1999, (except for Note 28, as to which the date is March 12, 1999), with respect
to the consolidated balance sheet of Bankers Trust Corporation and Subsidiaries
at December 31, 1998 and December 31, 1997, and the related consolidated
statements of income, changes in stockholders' equity, comprehensive income and
cash flows for each of the years in the two-year period ended December 31, 1998,
which report appears in the December 31, 1998 Annual Report on Form 10-K of
Bankers Trust Corporation. Such report also makes reference to our audit of the
combination of Bankers Trust Corporation and Alex. Brown Incorporated as
reflected in the combined restated statements of income, changes in
stockholders' equity, comprehensive income and cash flows for the year ended
December 31, 1996.
/S/ KPMG LLP
------------
KPMG LLP
New York, New York
March 19, 1999
126 Bankers Trust Corporation and its Subsidiaries
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-3 (Nos. 33-13278, 33-27498, 33-45699, 33-58340, 33-50395, 33-51615,
33-65301, 333-08549, 333-15089, 333-15089-01 through -04 and 333-32909), Form
S-4 (Nos. 333-22733, 333-22733-01 and 333-31061) and Form S-8 (Nos. 2-67517,
2-97972, 33-20693, 33-21564, 33-41014, 33-52329, 33-54971, 333-12181, 333-19963,
333-34371, 333-31061, 333-43959 and 333-57427) and in the related Prospectuses
of Bankers Trust Corporation (formerly Bankers Trust New York Corporation) of
our report dated January 23, 1997, (except for Note 28, as to which the date is
March 6, 1997), with respect to the consolidated statements of income,
comprehensive income, changes in stockholders' equity, and cash flows of Bankers
Trust Corporation (formerly Bankers Trust New York Corporation) and Subsidiaries
for the year ended December 31, 1996, prior to their restatement for the 1997
pooling-of-interests with Alex. Brown Incorporated, included in this Annual
Report (Form 10-K) for the year ended December 31, 1998 filed with the
Securities and Exchange Commission.
/S/ ERNST & YOUNG LLP
-----------------------
Ernst & Young LLP
New York, New York
March 19, 1999
Bankers Trust Corporation and its Subsidiaries 127
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 Frank N.
Newman, George J. Vojta, Richard H. Daniel, Melvin A. Yellin and James T. Byrne,
Jr., 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 1998 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.
February 16, 1999 Bankers Trust Corporation
By /s/ FRANK N. NEWMAN
---------------------
Frank N. Newman
Chairman of the Board
/s/ FRANK N. NEWMAN
-----------------------------------------------
Frank N. Newman
Chairman of the Board, Chief Executive Officer,
President and Director
(Principal Executive Officer)
/s/ RICHARD H. DANIEL
-----------------------------------------------
Richard H. Daniel
Vice Chairman and
Chief Financial Officer
(Principal Financial Officer)
/s/ DAVID C. FISHER
-----------------------------------------------
David C. Fisher
Controller and
Principal Accounting Officer
128 Bankers Trust Corporation and its Subsidiaries
<PAGE>
February 16, 1999
/s/ LEE A. AULT III
-----------------------------------------------
Lee A. Ault III Director
/s/ NEIL R. AUSTRIAN
-----------------------------------------------
Neil R. Austrian Director
/s/ GEORGE B. BEITZEL
-----------------------------------------------
George B. Beitzel Director
/s/ PHILLIP A. GRIFFITHS
-----------------------------------------------
Phillip A. Griffiths Director
/s/ WILLIAM R. HOWELL
-----------------------------------------------
William R. Howell Director
/s/ VERNON E. JORDAN, JR.
-----------------------------------------------
Vernon E. Jordan, Jr. Director
/s/ HAMISH MAXWELL
-----------------------------------------------
Hamish Maxwell Director
/s/ N.J. NICHOLAS JR.
-----------------------------------------------
N.J. Nicholas Jr. Director
/s/ RUSSELL E. PALMER
-----------------------------------------------
Russell E. Palmer Director
/s/ DONALD L. STAHELI
-----------------------------------------------
Donald L. Staheli Director
/s/ PATRICIA C. STEWART
-----------------------------------------------
Patricia C. Stewart Director
/s/ G. RICHARD THOMAN
-----------------------------------------------
G. Richard Thoman Director
/s/ GEORGE J. VOJTA
-----------------------------------------------
George J. Vojta Vice Chairman
of the Board
and Director
/s/ PAUL A. VOLCKER
-----------------------------------------------
Paul A. Volcker Director
Bankers Trust Corporation and its Subsidiaries 129
Exhibit 10(ii)d
LEASE ABSTRACT
FOUR WORLD TRADE CENTER
NOVEMBER 17, 1997
Index of Topics
Page
1. Tenant: ............................................................ 1
2. Landlord: .......................................................... 1
3. Building: .......................................................... 1
4. Date of Lease: ..................................................... 1
5. Description of the Premises: ....................................... 1
6. Commencement Date: ................................................. 2
7. Term: .............................................................. 5
8. Use: ............................................................... 5
9. Basic Rental: ...................................................... 5
10. Additional Basic Rental: ........................................... 9
11. Vendors: ........................................................... 9
12. Maintenance and Repair: ............................................ 9
13. Access: ............................................................ 10
14. Special Construction: .............................................. 11
15. Construction Generally: ............................................ 12
16. Removal and Restoration: ........................................... 15
17. Finishing Allowance: ............................................... 16
18. Sales Tax Exemption: ............................................... 19
19. Signs: ............................................................. 19
20. Entry: ............................................................. 20
21. Desk Space: ........................................................ 21
22. Notices: ........................................................... 21
23. Payments: .......................................................... 21
24. Insurance: ......................................................... 21
25. Late Charges: ...................................................... 22
26. Rent Abatement: .................................................... 22
27. HVAC: .............................................................. 22
28. Elevators: ......................................................... 23
29. Loading Dock: ...................................................... 23
30. Security System: ................................................... 23
31. Water: ............................................................. 24
32. Electricity: ....................................................... 25
33. Condenser Water: ................................................... 26
34. Chilled Water: ..................................................... 26
35. Premises Cleaning: ................................................. 27
36. Communications: .................................................... 27
37. Electric Generators: ............................................... 27
38. Roof Antenna: ...................................................... 27
39. Renewal: ........................................................... 27
40. Additional Space - Third Floor: .................................... 28
41. Building Right of First Refusal: ................................... 29
42. Self Help: ......................................................... 32
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Lease Abstract
1. Tenant: Bankers Trust Company
2. Landlord: The Port Authority of New York and New Jersey
3. Building: 4 World Trade Center
4. Date of Lease: August 27, 1997
5. Description of
the Premises: Total: 276,912 rentable square feet.
Area A - entire fourth floor - 90,830 rentable
square feet.
Area A-1 - p/o sixth floor - 68,462 rentable
square feet.
Area A-2 - remainder of sixth floor - 21,868
rentable square feet.
Area A-3 - p/o fifth floor - 55,515 rentable
square feet.
Area A-3-1 - p/o fifth floor - temporary elevator
shaft space.
Area A-4 - remainder of fifth floor - 35,467
rentable square feet.
Area A-5 - p/o third floor - elevator shaft space
- 229 rentable square feet.
Area A-6 - p/o plaza floor - private entrance area
- 667 rentable square feet.
Area A-7 - roof area - for fuel storage tank for
electrical generators - 254 rentable square feet.
Area A-8 - ninth floor - existing electrical
generator - 484 rentable square feet.
Area A-9 - roof - penthouse areas - for additional
electrical generator and chiller units - 2,350
rentable square feet.
<PAGE>
Area A-10 - exclusive loading dock slip.
Area A-11 - p/o seventh floor - elevator shaft
space - 786 rentable square feet.
Area A-12 - p/o mezzanine level - elevator pit
space.
6. Commencement Date: Area A - seventy-five (75) days after August 27,
1997, which is November 10, 1997 (note - if
Tenant's Demolition Work in Area A is prevented by
certain failures of the Port Authority to make
repairs, provide ingress and egress or supply
certain services, or by reason of a strike, in
effect on or before October 27, 1997, not caused
by Lessee, Lessee may be entitled to a rent credit
for each day prior to October 27, 1997 for which
performance of the Demolition Work is so
prevented; see page 14 of Lease).
Area A-1 - November 15, 1997.
Area A-2 - June 15, 1998.
Area A-3 - March 15, 1999.
Area A-4 - August 1, 1999.
Area A-5 - The earlier of the date Lessee
commences construction in the third floor elevator
shaft (provided that Lessee shall notify the Port
Authority of intent to commence such work not less
than fifteen (15) Business Days prior to
commencement of such work), or the date that the
Port Authority shall tender possession of the
elevator shaft on the fifth floor (in the event
that a surrender is obtained from Standard
Chartered Bank) or March 15, 1999, which is the
Commencement Date for Area A-3 on the fifth floor
(i.e., the intention is that the Commencement Date
for the third floor elevator shaft space is no
sooner than the Commencement Date for the fifth
floor elevator shaft space).
Area A-6 - January 1, 1998.
Area A-7 - October 1, 1997.
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Area A-8 - October 1, 1997.
Area A-9 - October 1, 1997.
Area A-10 - November 10, 1997.
Area A-1l - January 1, 1998.
The above Commencement Dates in the case of Areas
A-1, A-2, A-3 or A-4 are subject to postponement
if the entire Area is not in Delivery Condition
and for any or all of the Areas is subject to
postponement if not available or ready for
occupancy or use by reason of fire or other
casualty, causes beyond the control of the Port
Authority or holdover by an occupant, except as
set forth below as to the Occupied Space, or for
any other reason as specifically provided in pages
5-10 of the Lease, with various cancellation
rights by the Lessee as to the Area affected.
Additionally, if the postponement is not due to
causes beyond the control of the Port Authority,
Lessee may be entitled to a credit against rents
for the area affected as provided on page 7 of the
Lease.
The work to put in the space in Delivery Condition
required to be substantially completed by the Port
Authority prior to the Commencement Date of each
of Areas A-1, A-2, A-3 and A-4 is set forth on
pages 208 through 210 of the Lease (if the Lessee
wishes that the Port Authority remove air-cooling
ducts, it must specify same to Port Authority in a
plan not less than ninety (90) days prior to the
Port Authority's commencement of the demolition
work). The Port Authority shall give Lessee not
less than five (5) Business Days prior notice of
the completion (subject to minor "punch list"
items) of the work so as to permit the Lessee to
inspect such Area at least two (2) Business Days
prior to the Commencement Date for that Area.
Acceptance by the Lessee of such Area and
commencement of its construction and installation
work is a deemed acknowledgement of completion.
-3-
<PAGE>
Notwithstanding the foregoing, as provided on page
15 of the Lease, if on November 15, 1997 space
shown as the Merrill Lynch area or the Telecom
Closet on the 6th floor is not available and in
Delivery Condition because it continues to be
occupied by an occupant, and the balance of Area
A-1 is in Delivery Condition, the Area A-1
Commencement Date shall nevertheless occur. When
rent commences on Area A-1 the Lessee shall be
entitled to a certain credit reflecting rent
payable as to any such Occupied Space until the
Occupied Space is delivered in Delivery Condition.
The Port Authority is to keep Lessee fully
informed of its reasonable efforts to cause the
occupants to vacate the Occupied Space. The
Merrill Lynch space is subject to a lease expiring
September 30, 1997 and the Telecom Closet is
subject to a month to month lease to New York
Blood Bank which the Port Authority is required to
terminate effective no later than September 30,
1997. The Port Authority must give Lessee not less
than ten (10) Business Days prior notice of the
effective date of tender of the Occupied Space in
Delivery Condition.
The Commencement Date of Area A-3-1 (which is
temporary elevator shaft space on the 5th floor
until March 15, 1999 when Area A-3 is to be
available) is, as provided on page 16 of the
Lease, conditional upon the Port Authority
obtaining a Surrender Agreement from Standard
Chartered and the agreement of Standard Chartered
to permit Lessee to enter its premises to
construct the elevator in the surrendered space.
The Port Authority must give Lessee not less than
twenty (20) days notice of the effective date of
the Surrender and Consent Agreement of Standard
Chartered Bank. Lessee has agreed not to
unreasonably interfere with Standard Chartered
while performing the elevator work, which may
include overtime work. The term of the temporary
letting of Area A-3-1 expires on the Area A-3
Commencement Date.
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<PAGE>
7. Term: The term expires on the twentieth (20th)
anniversary of the Area A Commencement Date or
November 10, 2017.
Any party can request an agreement setting forth
the actual Commencement Dates.
8. Use: Clerical, administrative and executive offices for
the Lessee's international and domestic banking,
investment, securities, trust, insurance and other
financial services business and all other uses
ancillary or incidental thereto, and for such
other types of business previously engaged in by
office tenants at the World Trade Center (the Port
Authority to advise Lessee as to such previous
uses). In the event that title to the building is
transferred to a private landlord, then the Lessee
may use the premises, in addition, for any other
lawful purpose, subject to the limitations set
forth on pages 19 and 20 of the Lease.
9. Basic Rental: (a) Area A:
(1) Area A Rent Commencement date through the
day preceding the First Increase Date,
$2,225,340.00 per annum, in monthly
installments of $185,445.00; and
(2) First Increase Date through the day
preceding the Second Increase Date,
$2,316,165.00 per annum, in monthly
installments of $193,013.75; and
(3) Second Increase Date throughout the balance
of the term, $2,497,824.00 per annum, in
monthly installments of $208,152.00.
(b) Area A-1:
(1) Area A-1 Rent Commencement Date through the
day preceding the First Increase Date,
$1,677,321.00 per annum, in monthly
installments of $139,776.75; and
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<PAGE>
(2) First Increase Date through the day
preceding the Second Increase Date,
$1,745,781.00 per annum, in monthly
installments of $145,481.75.
(3) Second Increase Date throughout the balance
of the term, $1,882,710.00 per annum, in
monthly installments of $156,892.50.
(c) Area A-2:
(1) Area A-2 Rent Commencement Date through the
day preceding the First Increase Date,
$535,770.00 per annum, in monthly
installments of $44,647.50; and
(2) First Increase Date through the day
preceding the Second Increase Date,
$557,634.00 per annum, in monthly
installments of $46,469.50; and
(3) Second Increase Date throughout the balance
of the term, $601,371.00 per annum, in
monthly installments of $50,114.25; and
(d) Area A-3:
(1) Area A-3 Rent Commencement Date through the
day preceding the First Increase Date,
$1,360,119.00 per annum, in monthly
installments of $113,343.25; and
(2) First Increase Date through the day
preceding the Second Increase Date,
$1,415,634.00 per annum, in monthly
installments of $117,969.50; and
(3) Second Increase Date throughout the balance
of the term, $1,526,664.00 per annum, in
monthly installments of $127,222.00.
(e) Area A-4:
(1) Area A-4 Rent Commencement Date through the
day preceding the First Increase Date,
$868,944.00 per annum, in monthly
installments of $72,412.00; and
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<PAGE>
(2) First Increase Date through the day
preceding the Second Increase Date,
$904,416.00 per annum, in monthly
installments of $75,368.00; and
(3) Second Increase Date throughout the balance
of the term, $975,348.00 per annum, in
monthly installments of $81,279.00.
(f) Area A-5:
(1) Area A-5 Rent Commencement Date through the
day preceding the First Increase Date,
$5,616.00 per annum, in monthly installments
$468.00; and
(2) First Increase Date through the day
preceding the Second Increase Date,
$5,844.00 per annum, in monthly installments
$487.00; and
(3) Second Increase Date throughout the balance
of the term, $6,300.00 per annum, in monthly
installments of $525.00.
(g) Area A-6:
(1) Area A-6 Rent Commencement Date through the
day preceding the First Increase Date,
$23,340.00 per annum, in monthly
installments of $1,945.00; and
(2) First Increase Date through the day
preceding the Second Increase Date,
$24,684.00 per annum, in monthly
installments of $2,057.00; and
(3) Second Increase Date throughout the balance
of the term, $26,016.00 per annum, in
monthly installments of $2,168.00.
(h) Area A-11;
(1) Area A-11 Rent Commencement Date through the
day preceding the First Increase Date,
$19,260.00 per annum, in monthly
installments of $1,605.00; and
-7-
<PAGE>
(2) First Increase Date through the day
preceding the Second Increase Date,
$20,040.00 per annum, in monthly
installments of $1,670.00; and
(3) Second Increase Date throughout the balance
of the term, $20,832.00 per annum, in
monthly installments of $1,736.00.
The "Rent Commencement Date" for each of Area A,
Area A-1, Area A-2, Area A-3, Area A-4, Area A-5,
Area A-6 and Area A-11 shall mean the 455th day
following the Commencement Date for that Area, the
"First Increase Date" shall be the 180th day
following the 7th anniversary of the Area A
Commencement Date (i.e., May 9, 2005) and the
"Second Increase Date" shall be the 5th
anniversary of the First Increase Date (i.e., May
9, 2010).
Accordingly the Area A Rent Commencement Date is
February 8, 1999.
If the Rent Commencement Date, First Increase Date
or Second Increase Date for any Area shall be
other than the first day of a calendar month, the
installment of basic rental payable for the month
shall be prorated.
No rent is payable for Area A-7, Area-8 or Area
A-9, or for the space shown on Exhibit A-12 (see
page 51 of the Lease).
The rent for Area A-3-1 (temporary elevator shaft)
is $5,268 per annum in monthly installments of
$439 commencing on the Commencement Date for Area
A-3-1 until the Area A-3 Commencement Date.
Lessee may elect to accept Areas A-1, A-2, A-3 or
A-4 in other than Delivery Condition, by notice to
the Port Authority within five (5) Business Days
after such acceptance, in which event the Port
Authority will give a credit for the Area; see
page 14 of the Lease.
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<PAGE>
10. Additional Basic
Rental: From and after July 1, 1998 for each rentable
square foot then in the premises (other than in
Areas A-7, A-8, A-9 and A-12) Lessee shall pay the
difference between the taxes for the tax year
beginning on each July 1 over the taxes for the
tax year beginning July 1, 1997.
From and after July 1, 1998 Lessee shall pay at an
annual rate equal to $O.0065 for each $0.01, or
major fraction thereof, that the wage rate exceeds
the wage rate in effect on January 1, 1998
multiplied by the rentable square feet then in the
premises (other than in Areas A-7, A-8, A-9 and
A-12).
The additional rent shall be payable in monthly
installments equal to one-twelfth (1/12th) of the
annual rate after notice thereof given by the Port
Authority.
11. Vendors: Lessee may (as provided on page 33 of the Lease)
obtain through independent vendors, food,
beverage, water and vending machine, and floor
waxing and other maintenance services and rubbish
or garbage removal services, if vendor will not
cause a labor disturbance, and the contract for
such services must permit cancellation by Lessee
on short term notice in the event that vender does
cause labor disturbances.
12. Maintenance
and Repair: In addition to the usual maintenance and repair
obligations, as provided on page 37 of the Lease,
Lessee must do all preventive maintenance and make
all necessary repairs, replacements and painting
to the plumbing, fixtures and furniture located in
the bathrooms on the 3rd floor, on the 6th floor
when the full floor is part of the premises and
the 5th floor which are not accessible by public
corridors, but the Port Authority shall make all
repairs, replacements and rebuilding to all
plumbing providing utilities to any such
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<PAGE>
bathroom within the walls or beneath the floor of
such bathroom.
13. Access: The Port Authority may close the Church Street
lobby if it constructs a functionally equivalent
lobby in the building providing access to the
World Trade Center Plaza; see page 50 of the
Lease.
The Port Authority will not materially adversely
interfere with access from the Liberty Street
Bridge between the building and Two World Trade
Center and the private elevator lobby on the plaza
(Area A-6). The Lessee shall not materially
adversely interfere with free access of others
between its private elevator lobby and the Liberty
Street Bridge.
The access to Area A-11, the elevator shaft area
on the 7th floor, is presently through a public
corridor, but in the event the public corridor is
leased by the Port Authority, it must reserve a
right of entry through the leased space to permit
Lessee such access to the machinery and equipment
installed in Area A-11, as specified on page 51 of
the Lease.
Lessee is granted a license to use the volume of
space described in Area A-12 on the mezzanine
level commencing January 1, 1998 for construction
of an elevator pit, with access thereto in
accordance with a separate letter exchanged by the
Port Authority with Express, Inc. (the tenant of
that space), but with access to such space only
until April 1, 1998, when the elevator pit
construction must be completed. The hours of such
construction must be arranged directly with the
tenant; see page 51 of the Lease.
The Port Authority had previously arranged access
to space of two tenants on the 5th and 6th floors
to allow Lessee to construct a telecommunications
closet in their space, in accordance
-10-
<PAGE>
with letters signed by Standard Chartered Bank and
Commodities Exchange Center.
The Port Authority and Lessee executed a side
letter in which Lessee agreed to do this work on
an overtime basis, reimburse the tenant for any
security costs and indemnify the Port Authority
for certain liabilities.
14. Special
Construction: Lessee may install a private elevator in the areas
marked on the Lease exhibits for that purpose, but
the cost of constructing walls separating and
demising such elevator areas from other spaces on
the plaza, 3rd floor and temporary elevator shaft
on the 5th floor shall be reimbursed by the Port
Authority to the Lessee in the same manner as the
Finishing Allowance; see page 59 of the Lease.
Lessee shall at its own cost demise the Area A-9
premises from the remaining portion of the roof
penthouse area and install a ventilation grille
over such portion of Area A-9; see page 60 of the
Lease.
Lessee may rebuild the bridge connecting 130
Liberty Street (without Port Authority approval)
but subject to legal requirements (which may
require NYC Department of Transportation and other
approvals) and with approval by the Port Authority
construct a private entrance in Area A-6 for
access from the Plaza and to which the private
elevator shall connect; see page 59 of the Lease.
Lessee is required to perform certain demolition
work in Area A specified on page 77 of the Lease
(Area A Demolition Work) and certain work to
increase the HVAC capacity including construction
of a new mechanical room on the 3rd floor and the
installation of additional electric capacity in
the electrical closets in Area A, Area A-1, and
Area A-2, specified on page 79 of the Lease (HVAC
Work). Lessee's bids for this
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<PAGE>
work must be separate from its remaining
construction work.
Lessee shall also renovate the existing bathrooms
on the 4th floor, 5th floor and 6th floor
commencing as of the respective delivery to the
Lessee by the Port Authority of premises on that
floor (Bathroom Work). Lessee is use reasonable
efforts to insure that bathrooms on each floor are
available both for men and women for other tenants
on that floor. Fixtures and colors are to be
specified by the Port Authority and the
configuration of the bathrooms is to be similar to
the existing. The 6th floor contains one less
ladies' room, and Lessee must either double the
size of the existing ladies' room or construct an
additional ladies' room; see page 81 of the Lease.
15. Construction
Generally: Any alterations, improvements or replacements
generally require the Port Authority's prior
consent, not to be arbitrarily or capriciously
withheld in accordance with the provisions on page
53 of the Lease. Generally, it is required that a
form construction application be submitted to the
Port Authority in order to obtain the consent
together with the plans and specifications
covering the proposed work, which may be submitted
on an Area by Area basis.
The Port Authority is not to charge any fees
except as set forth on page 58 of the Lease.
The Port Authority must approve contractors and
subcontractors, within five (5) Business Days
after receiving request, such disapproval to be
based upon limited reasons set forth on page 61 of
the Lease. Failure to respond in five (5) Business
Days shall be deemed approval. Additionally, the
Port Authority approves certain contractors listed
on Schedule C for Lessee's initial construction,
which list may
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<PAGE>
thereafter be supplemented as provided on page 61
of the Lease.
As specified on page 62 of the Lease, the Port
Authority must approve or disapprove of the
construction application within 22 Business Days
unless the Lessee gives the Port Authority not
less than 12 Business Days advance notice of
submission, in which event the response shall be
within 12 Business Days after submission (if
submitted on the date originally specified).
Revisions to the plans must be approved or
disapproved by the Port Authority within 16
Business Days, but if 12 advance Business Days
notice is given, the Port Authority must respond
within 12 Business Days after submission (if
submitted on the date originally specified).
Lessee may elect professional certification, in
which event the Port Authority must respond within
10 Business Days after receipt. Whether or not the
Port Authority responds in the 10 Business Day
period, Lessee may commence construction in
accordance with its plans (other than structural
modifications or connections to building systems)
if it has met with the physical facilities
director of the Port Authority. The Port
Authority's review must be on the basis of
compliance with legal requirements and the Port
Authority's Construction Review Manual.
In order to occupy the premises upon completion of
Lessee's construction in each Area, Lessee must
obtain a permit from the Port Authority, by
delivering a final certificate signed by the
Lessee and Lessee's architect; see pages 64 and 70
of the Lease; upon receipt of the certificates the
Port Authority shall within 5 Business Days
inspect the work and either not certify it or
deliver a temporary permit in accordance with the
criteria set forth on page 65 of the Lease.
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Failure by the Port Authority to comply with the
time periods as to response to plans and
specifications and, inspection and issuance of
permits may result in a rent credit to the Lessee
based upon the formula set forth on pages 66 and
67 of the Lease.
Lessee is required to use its best efforts to
cause its contractors, architects or engineers to
indemnify the Port Authority as provided on page
68 of the Lease and obtain insurance as provided
on page 69 of the Lease; in the case of
contractors, such contractor's obligations applies
whether or not caused by the contractor, except
that as to a particular construction application
these obligations with respect of contractors with
respect to third persons' acts can be covered by
an indemnity and insurance of the Lessee and its
general contractor or construction manager;
therefore, Lessee should require such broad
indemnity and insurance of its general contractor
or construction manager.
If Lessee shall designate one or more individuals
to the Port Authority, the Port Authority's
inspectors shall report to such individuals when
reviewing or inspecting the work.
The Port Authority must within 15 Business Days
after receipt of the certificate inspect and
deliver a final permit to occupy the Area, and
upon receipt of the final permit for the last Area
for which Lessee is performing its initial
construction, Lessee shall deliver to the Port
Authority as built drawings; see page 73 of the
Lease.
Notwithstanding the foregoing, as set forth on
page 74 of the Lease, the Lessee shall not be
required to obtain the Port Authority's consent to
perform decorating work, such as painting and wall
papering, relocate existing electrical outlets
(without slab drilling) or install or replace
communications cabling in the premises
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not connected to building systems provided that
within 15 Business Days after completion Lessee
provides a description of the work to the Port
Authority with a certificate as set forth on page
75 of the Lease.
Additionally, Lessee may perform non-structural
interior work of a type that no building permit
would be required if the building were under
private ownership, without filing a construction
application, but by requesting the Port
Authority's prior approval, which shall be given
within 10 Business Days after receipt of the plans
and specifications or a written description of the
work and a Certificate of Lessee as described on
page 76 of the Lease.
16. Removal and
Restoration: As specified on pages 54 and 55 of the Lease,
Lessee shall prior to the Expiration Date remove
kitchens, stairwells, vaults, elevator and
elevator equipment, electrical generators,
structural steel enforcement or other items
installed by Lessee not typically installed or
usable in an average business office. If Lessee
shall state at the time of its construction
application which items are not typical of a
business office, then the Port Authority at the
time of approval of the construction may state
that it will require the removal of one or more of
such items, or if the Port Authority shall have
failed to respond with respect to any such items,
then such items need not be removed.
There is no obligation of restoration except for
vertical penetrations (other than small diameter
core boarings) and other structural work which
adversely affects the useability or value of the
premises, including elevator shafts or stairwell
openings.
Lessee shall prior to the Expiration Date also
remove computer and telecommunications equipment,
furniture and removable fixtures and other
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personal property unless within 60 days prior
thereto the Port Authority advises Lessee that it
need not remove such items, in which case the
Lessee may nevertheless remove such items.
17. Finishing
Allowance: If Lessee elects to install a totalizing
electricity meter system, the Port Authority shall
reimburse Lessee for the Lessee's cost of
construction and installation of the system in
each Area, but not in excess of $80,000 in the
aggregate.
The Port Authority shall reimburse the Lessee for
its cost of the Area A Demolition Work in the
amount equal to the lowest responsive contractors'
bid plus extra costs for unforeseen field
conditions if, for work costing less than $10,000
Lessee shall notify the Port Authority prior to
performing the work, and for work costing $10,000
or more if Lessee has received the Port
Authority's approval which shall be deemed given
if the Port Authority has not notified the Lessee
of its approval within 3 Business Days after a
request; see page 78 of the Lease.
The Port Authority shall reimburse the Lessee for
the cost to the Lessee of performing the HVAC
Work, based on separate bids from Lessee's
contractors.
The Port Authority will reimburse the Lessee for
the cost of performing the Bathroom Work upon
completion of each bathroom, but not in excess of
$100,000 for each bathroom, except that
reimbursement with respect to completion of the
construction of the additional ladies room on the
6th floor shall not exceed $50,000 or if Lessee
elects to enlarge the existing ladies room shall
not exceed $150,000 for the enlarged ladies room.
The Port Authority shall also reimburse Lessee as
follows as set forth on pages 83 and 84 of the
Lease:
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Area A finishing allowance for construction and
installation work in Area A but not in excess of
$4,541,500.
Area A-1 finishing allowance for the cost of
construction and installation work in Area A-1 but
not in excess of $3,423,100.
Area A-2 finishing allowance for the cost of
construction and installation work in Area A-2 but
not in excess of $1,093,400.
Area A-3 finishing allowance for the cost of
construction and installation work in Area A-3 but
not in excess of $2,775,750.
Area A-4 finishing allowance for the cost of
construction and installation work in Area A-4 but
not in excess of $1,773,350.
Area A-5 finishing allowance for the cost of
construction and installation work in Area A-5 but
not in excess of $11,450.
Area A-6 finishing allowance for the cost of
construction and installation work in Area A-6 but
not in excess of $33,350.
Area A-11 finishing allowance for the cost of
construction and installation work in Area A-11
but not in excess of $39,300.
Each Allowance may be drawn monthly on or about
the 10th day of each calendar month except that
the Allowance for bathroom work is paid as each
bathroom is completed and the Allowance for the
totalizing electric meter system is paid as each
system is completed in each Area. The monthly
payments of the Allowance require a certificate of
the Lessee to be delivered to the Port Authority
as provided in pages 84 through 86 of the Lease
accompanied by evidence of payment of the previous
certificates, such as canceled checks or
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other receipts. The requisition may be for the
cost of performing the work described in the
certificate including any retainage. The amount to
be paid by the Port Authority will be ninety
percent (90%) of the requisition and shall be
payable within 20 Business Days.
The last ten percent (10%) payment of each such
Allowance requires that Lessee certify as to
completion of the work in the manner similar to
that required to obtain the temporary permit to
occupy the premises, and that the Lessee provide a
fully itemized statement of its cost, in
accordance with the provisions set forth on pages
78, 79 and 87 of the Lease. If any portion of the
cost of such work remains unreimbursed, including
the ten percent (10%) deductions, the Port
Authority shall pay the same, less the amount of
any claims made against the Port Authority by
Lessee's subcontractors in connection with the
work.
The costs which may be paid through the Allowance
are defined on page 89 of the Lease with the
limitation that engineering, architectural,
planning design and other professional fees do not
exceed twenty-five percent (25%) of the direct
costs. Costs also do not include payments made to
affiliates of Lessee in accordance with the
definition set forth on page 89 and 90 of the
Lease.
If, however, as provided on page 87 of the Lease,
Lessee does not expend the full amount of the
Allowance on the permissible costs applicable to
each respective allowance (other than for Area A
Demolition Work, HVAC Work, Bathroom Work or
totalizers), the excess shall be credited by the
Port Authority against the rental obligations for
the respective Area following the determination of
such Finishing Allowance.
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If the Port Authority fails to make a payment of
any Allowance it must pay a late charge as
provided in a formula contained on pages 88 and 89
of the Lease.
18. Sales Tax
Exemption: Tangible personal property purchased for
incorporation into the Building or in construction
of improvements to or for use in maintaining,
servicing or repairing the Building, may be exempt
from NY sales and use taxes. Contractors should
have a Form ST-120.1. This includes TI, the
Demolition, HVAC and Bathroom Work.
19. Signs: Lessee is entitled to proportionate listings on
the building standard directory on each floor but
must pay for replacement listings at the Port
Authority standard rates. Lessee is entitled to
proportionate listings in the main building
directory in the lobby but must pay for
replacement listings at the Port Authority
standard rates. See page 91 of the Lease.
As provided on page 92, of the Lease, Lessee may
place its name or corporate logo on the existing
pedestal sign outside the Church Street entrance
(or if closed, outside the functionally equivalent
lobby to be constructed by the Port Authority on
the Plaza) in accordance with a drawing shown on
Exhibit G to the Lease.
In addition Lessee may install its tenant
identification sign in such main building lobby at
the back wall of the passenger elevators, not
exceeding 12" by 30" in size.
Also, Tenant may install another sign outside the
entrance to Lessee's special elevator lobby to be
constructed in Area A-6, not exceeding 12" by 60"
in size. The specifics of the signs must be
approved by the Port Authority.
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There are restrictions upon the Port Authority
placing other tenant signage on the pedestal sign
which is larger or otherwise more prominent than
Lessee's sign. The Port Authority also shall not
permit the placement of any other tenant's signage
on the Church Street facade of the Building or the
facade of the replacement lobby.
The Port Authority shall not permit any other
office tenant signage adjacent to the entrance to
Lessee's special elevator lobby.
The Port Authority shall not permit the placement
of any tenant signage of a Direct Competitor on
the Liberty Street facade of the Building. A
Direct Competitor is an entity listed on Schedule
E to the Lease together with additional or
substitute business entities specified by Lessee
by notice to the Port Authority, but no more than
a total of 25 at any time.
Retail signage is not prohibited at a retail
tenant's entrance.
20. Entry: The Port Authority reserved a right of access to
construct a ventilation shaft through the premises
for another tenant as described on pages 98 and 99
of the Lease. Lessee is required to make the
specified portion of the premises through which
the shaft passes available for such purpose.
The Port Authority may otherwise construct in the
premises certain pipes, conduits and lines as
provided on page 90 of the Lease, as long as no
such installation reduces the usable square feet
by more than 20, but if more than 100 square feet
is taken or in the aggregate or more than one-half
of one percent (.5%) of the total on any floors is
taken, Lessee shall be entitled to a rent
abatement.
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21. Desk Space: In addition to subletting and assignment
generally, on page 112 of the Lease it is provided
that Lessee may permit desk space to be used by
persons or corporations with which it has a
contractual relationship.
22. Notices: In writing, by hand, or by nationally recognized
overnight courier, registered or certified U.S.
mail (RRR). Notices to the Port Authority go to
Executive Director, One World Trade Center, New
York, New York 10048, until changed. Notices to
Lessee go to Bruce Bloch at 130 Liberty Street,
until changed and notice only to the premises is
not effective. Notices are deemed given upon
delivery. See page 135 of the Lease.
23. Payments: Payments by Lessee shall be made to the Port
Authority of New York and New Jersey, P.O. Box
17309, Newark, New Jersey 07194, until changed by
60 days notice. See page 136 of the Lease.
24. Insurance: Lessee must carry liability insurance and property
damage insurance as provided on pages 146 and 147
of the Lease. Lessee may request the Port
Authority to approve it having a deductible in
excess of $250,000 which the Port Authority shall
not unreasonably withhold so long as larger
deductibles for similar policies are customarily
permitted by landlords of first class office
buildings in downtown Manhattan. Certificates of
compliance with the insurance requirements must be
delivered to the Port Authority.
On page 151 of the Lease there is a provision that
if the Port Authority does not obtain property
damage insurance on the building or obtains
insurance for less than the full replacement value
or with a deductible in excess of $250,000 then,
as to the uninsured or self insured portion, the
Lessee is responsible for repair to the building
and premises caused by insurable risks resulting
from the Lessee's or its employees or contractors
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acts or omissions up to the lesser of $250,000 or
such self-insured portion. This effectively means
that Lessee is not protected by the normal waiver
of subrogation provisions as to insurable property
damage, and therefore should carry its own
insurance covering this obligation under the Lease
to the extent of $250,000.
25. Late Charges: There is a formula on page 151 of the Lease for
payments of late charges for payments late for at
least 15 calendar days. The Lessee can avoid the
late charge penalty for up to 30 days by
withholding an amount disputed in good faith from
the remainder of the rent and giving notice to the
Port Authority of the amount to be withheld and
the reason for the withholding, except that this
right does not apply to basic rental and
escalation (additional basic rental) or other
charges specified in the Lease.
26. Rent Abatement: If as a result of failure of the Port Authority to
maintain or repair, provide access or supply
services Lessee's operation in the premises is
materially adversely affected, if Lessee gives
notice thereof to the Port Authority and if the
condition continues for 6 consecutive Business
Days Lessee may be entitled to certain abatements
of rental provided on page 156 of the Lease and,
after 225 days, may have the right to terminate
the Lease, in whole or in part.
27. HVAC: HVAC is required between 8:00 a.m. and 8:00 p.m.
on business days and between 9:00 a.m. and 1:00
p.m. on Saturdays, other than legal holidays, in
accordance with design criteria attached to the
Lease. Requests for services during other hours
are required to be made by 4:00 p.m. of the last
prior business day. The present charges are
required to be $27.50 per fan hour, with the
minimum activation of two fans, subject to change
but in no event to exceed rates generally charged
at the World Trade Center. Lessee may rebalance
the VAV boxes. See page 162 of the Lease.
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28. Elevators: Passenger elevator service with at least 6 cars is
required from 8:00 a.m. to 6:00 p.m. Mondays
through Fridays and with at least 4 cars between
6:00 p.m. and 8:00 p.m. Mondays through Fridays
and 9:00 a.m. through 1:00 p.m. Saturdays, and
with at least 2 cars on legal holidays and outside
of such hours. Until June 30, 1998 the passenger
cars may be reduced to no less than 3 during
normal business hours while the Port Authority is
upgrading passenger elevator service.
Freight elevator service of at least 2 cars is
required 8:00 a.m. to 6:00 p.m. Mondays through
Fridays other than legal holidays. On overtime
hours Lessee may be required to pay the charge in
effect from time to time at the Port Authority
other than in connection with removal of trash and
debris if Lessee provides its own cleaning
services. The current charge for freight elevator
and loading dock is $55.00 per hour with certain
minimums as set forth on page 165 of the Lease.
However, for the initial move into the Premises or
into any additional space leased during the term,
and for Lessee's initial construction of such
space, there will be no charge for overtime,
freight or loading dock services, and such
services may be on a reserved basis for up to one
freight elevator and one loading dock if 7 days
prior notice is given to the Port Authority.
29. Loading Dock: A loading dock shown on Exhibit A-10 to the Lease
may be used exclusively by Lessee without charge
and the Port Authority will take commercially
reasonable measures to prevent others from using
that dock; see page 166 of the Lease.
30. Security System: The Port Authority will provide a pass scanning
system in the main lobby of the building with a
security desk having two security personnel to
issue passes, one designated for visitors to
Lessee generally during 8:00 a.m. to 6:00 p.m.
Mondays through Fridays other than legal
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holidays, and at other times one such security
person to oversee the use of the scanning
equipment. At Lessee's election the Port Authority
will provide at Lessee's expense additional
security personnel to issue passes to the visitors
of the Lessee in the main lobby outside of normal
business hours (otherwise visitors must obtain
passes elsewhere in the World Trade Center); see
page 166 of the Lease.
In addition, either the Lessee or the Port
Authority may require that pass scanning equipment
be installed at the private entrance to Lessee's
premises in Area A-6, in either case at Lessee's
sole cost and expense. Lessee may request a
written estimate of the cost of such equipment,
which estimate may represent a cap on Lessee's
required reimbursement under the circumstances
provided on page 167 of the Lease. At Lessee's
request the Port Authority shall provide security
personnel to issue passes to visitors in Lessee's
private entrance to its premises during hours as
Lessee shall specify; however, the entrance cannot
be left unlocked and unattended without "positive
access control equipment" such as floor-to-ceiling
single purpose revolving door mechanism. Lessee
may instead lock the entrance to its private
elevator lobby when security personnel are not
present; see page 167 of the Lease.
Lessee may request any security personnel assigned
to Lessee in the main elevator lobby or the
private elevator lobby be reassigned for good
cause. Lessee may request video tape records if
made by the Port Authority.
31. Water: Hot and cold water is furnished for use by the
Lessee in kitchens, etc. at a charge, other than
for up to 3 pantries on each floor of the
premises, as set forth on page 169 of the Lease.
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32. Electricity: Electricity is generally provided to the extent of
6 watts per rentable square foot to be transformed
to the premises in accordance with the HVAC Work.
If the Port Authority generally upgrades
electrical capacity to exceed 6 watts per rentable
square foot it shall likewise provide the increase
to the premises, pro rata, without charge or at
the same charge generally provided to others,
unless Lessee does not wish the increased
capacity. The Port Authority shall furnish,
maintain and replace submeters at its expense
except that the Lessee may install a totalizer
meter system subject to reimbursement of Lessee's
cost but not in excess of $80,000 for all such
systems in all Areas of the premises, as set forth
on page 83 of the Lease.
Payment for electricity is set forth in the
formula on page 171 of the Lease, which is
generally based on 115% of the charges paid by the
World Trade Center to the Power Authority of the
State of New York. Lessee may request copies of
bills received by the Port Authority for such
electricity to verify the Port Authority's bill to
Lessee. Lessee's costs are to exclude electricity
used in providing base building HVAC.
Lessee may request that the Port Authority provide
additional electrical capacity to the premises
under the circumstances set forth on page 174 of
the Lease, at Lessee's cost and expense. If the
Port Authority has no additional electrical
capacity for Lessee, under the circumstances set
forth on page 175 of the Lease application may be
made to the utility company to increase the
electrical capacity to the building, at a pro rata
cost to the Lessee as set forth on pages 175 and
176 of the Lease.
Lessee may also request under the circumstances
set forth on page 176 of the Lease that it obtain
electricity directly from the utility company,
rather than through submetering.
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33. Condenser Water: Condenser water will be furnished by the Port
Authority sufficient for up to 200 tons of
capacity plus at Lessee's option, tempered fresh
air not exceeding 750 cubic feet per minute per
full floor. Charges for condenser water and fresh
air are set forth on pages 178 and 179 of the
Lease, including certain minimum charges
regardless of usage. However, if the Port
Authority elects to provide chilled water to the
building, it can cease to supply condenser water
to the extent the Lessee has not utilized the full
200 tons of capacity and require that such further
tonnage utilize chilled water; in such event, the
chilled water charges can be applied to the
condenser water minimum charge. Lessee may on a
one-time-basis reduce the 200 ton capacity
commitment for condenser water to Lessee's then
installed capacity, in which event there would be
no further minimum charge for condenser water.
Additionally, if the Lessee has not permanently
reduced the commitment, Lessee may no often than
once in any 12-month period temporarily reduce the
commitment to Lessee's then installed capacity, in
which event the minimum annual charges shall be
reduced, pro-rata, based upon the ratio of the
then installed tonnage to 200 tons. There is no
tap in charge for connecting to the condenser
water system.
34. Chilled Water: If chilled water becomes available, the Port
Authority may so limit Lessee's use of condenser
water but the Port Authority must supply chilled
water sufficient to make up the excess to 200 tons
of capacity of air-conditioning equipment; in such
event billing for condenser water may be affected
because the chilled water payments may be applied
to the condenser water minimum charge. If the Port
Authority installs the chilled water system,
Lessee is entitled to its pro rata share of the
chilled water available to the building. The
chilled water charges are set forth on page 188 of
the Lease; there are no minimums. There is no tap
in charge.
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35. Premises Cleaning: The Port Authority provides cleaning as set forth
in page 163 of the Lease, both of the premises and
of public areas. Lessee may clean the premises
with its own contractor to be approved by the Port
Authority with a rent reduction as set forth on
page 185 and in Schedule G to the Lease.
36. Communications: If a telephone or other communications provider
does not have an agreement with the Port Authority
committing the carrier to utilize closets and
shaftways within the building, the Lessee may
arrange to connect to such provider at a location
outside the World Trade Center using the
building's closets as shaftways, which could
include running communications cabling over the
bridge from 130 Liberty Street. The Port Authority
may but is not required to discuss with a provider
lease of any space in the building to supply
communication services to the building. See page
189 of the Lease.
37. Electric
Generators: The Lease gives the right the Lessee to use an
existing electrical generator in Area A-8, on an
"as is" basis. See page 180 of the Lease. In
addition, Lessee may install additional electrical
generators in Area A-9.
38. Roof Antenna: The Port Authority shall provide 10 square feet on
the roof for installation of antennas. See page
191 of the Lease.
39. Renewal: Lessee may extend the lease pursuant to 2
five-year renewal options; see pages 193-199 of
the Lease. Each option must be exercised by a date
at least 10 full calendar months prior to the then
expiration date, i.e., by December 31, 2016 in the
case of the first option and by December 31, 2021
in the case of the second option. In order to
exercise an option Lessee must not be in default
on the date of the notice or on the effective date
beyond any applicable notice and/or cure period.
Lessee may exercise its renewal option as to the
entire premises or as to a portion if
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the portion consists of at least one entire floor
and contiguous portions for the entirety of an
adjacent floor vertically contiguous thereto. The
renewal rent shall be 95% of fair market value
rental determined in an arbitration but which
shall reflect no free rent period or any finishing
work allowance, that the brokerage commission will
be in accordance with the existing agreement and
other factors described on page 195 of the Lease,
including that the base periods for additional
basic rental shall be unchanged.
40. Additional Space -
Third Floor: Lessee has a right of first refusal on space on
the 3rd floor shown on Exhibit A-5 as described on
page 199 of the Lease. Lessee must respond within
30 Business Days after notice of availability by
the Port Authority, which if the notice is given
after December 15, 1998 must include the Port
Authority's then current rental rate. The space
must be in "Delivery Condition" and with the HVAC
Work performed by the Port Authority. The Port
Authority must thereafter tender a supplemental
agreement to which the Lessee must respond within
30 days. Failure by the Lessee to meet the above
deadlines will result in loss of its rights,
except that if the Port Authority does not lease
the space within the following year, it must again
give the refusal notice to Lessee when the space
is again available.
The rental rate is the same as for the 4th, 5th
and 6th floors if Lessee exercised its option on
or before December 31, 1998 and, if exercised
thereafter is at the rate set forth in the Port
Authority's notice or if Lessee elects, fair
market rental determined by arbitration plus an
amortized amount of the Port Authority's cost of
performing the HVAC work, as set forth on page 205
of the Lease. The fair market rental value
determined in the arbitration shall reflect that
there will be no free rent period or any finishing
work
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allowance, that the brokerage commission will be
in accordance with the existing agreement, that
there is no imputed value for the HVAC Work and
other factors described on page 206 of the Lease,
including that the base periods for additional
basic rental shall be unchanged.
41. Building Right
of First Refusal: In addition the Lessee has a right of first
refusal on other space in the building provided
that it must notify the Port Authority commencing
on any anniversary of the Lease Commencement Date,
i.e., November 10 of each year (commencing
November 10, 1998) that it desires to lease
additional office space during the following year
specifying the amount. The Port Authority must
offer any available space above the plaza level in
the building to the Lessee specifying the
availability date and the Port Authority's current
rental rate.
As set forth on pages 201 and 207, space is not
deemed "available for leasing if is then leased to
a tenant in the building which wishes to relet or
extend or if it is subject to a now existing right
of another tenant to include the space in its
premises. The Port Authority is required to
provide to the Lessee a schedule of such rights on
or before September 27, 1997. Other than the
rights of the then tenants of the space, and the
disclosed other existing rights of tenants, it is
intended that Lessee's right of first offer be
superior to the rights of any outside party or of
any tenant as to any other space in the building.
This is reflected in the provision on page 201
which requires the Port Authority to notify the
Lessee after any surrenders of space by the
Commodities Exchange Center and prior to leasing
any space exceeding 10,000 rentable square feet to
any person other than the existing tenant thereof.
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As set forth on pages 201 and 202, Lessee must
exercise its right within 30 Business Days after
notice but may elect less than all of the
available space covered by the notice if the space
constitutes one at least entire floor, as set
forth on page 201 of the Lease. Thereafter the
Port Authority must provide a supplemental
agreement to which the Lessee must respond in 30
days. Failure by the Lessee to meet the above
deadlines will result in the loss of its rights
except that Lessee may again give a notice of
interest for the next anniversary of date and if
the space is again available for leasing then
Lessee shall have its refusal right with respect
thereto.
The space must be delivered in "Delivery
Condition" and if it, together with any other such
contiguous space previously leased by Lessee
exceeds 45,000 rentable square feet in area, the
Port Authority shall perform the heating,
ventilation and air-conditioning work that was a
part of the HVAC work (unless Lessee notifies the
Port Authority that it does not wish such work to
be done) and if the space exceeds 10,000 rentable
square feet the Port Authority shall perform the
electrical work that was part of the HVAC Work.
The rent for such additional space is the Port
Authority's current rent rate set forth in its
notice, or at Lessee's election, 90% of fair
market rental value plus in the event the Port
Authority performs the heating, ventilating and
air-conditioning work increased by an amortized
amount thereof set forth on page 205 of the Lease.
The fair market rental value shall reflect no free
rent period or any finishing work allowance, that
the brokerage commission will be in accordance
with the existing agreement, that there is no
imputed value for the HVAC Work and other factors
described on page 206 of the Lease, including that
the base periods for additional basic rental shall
be unchanged.
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For the purposes of the Delivery Condition of the
Areas, the items need only be substantially
completed except for "punch list" which must be
completed within 10 days after the Commencement
Date for the Area. The Port Authority shall give
Lessee not less than 5 Business Days prior notice
of the completion of the work so as to permit the
Lessee to inspect the Area at least 2 Business
Days prior to the Commencement Date for that area.
In addition, the Port Authority must perform
certain fire code work in each Area specified on
page 210 of the Lease not less than 60 days prior
to the date Lessee completes its construction and
installation work in such Area (including Area A).
Also, the Port Authority must complete the work in
the Church Street lobby on or before June 1, 1998
as set forth on Exhibit F to the Lease; see page
210 of the Lease.
As part of the Port Authority's work, there were
removed vinyl asbestos floor tiles in Area A and
asbestos containing glue was encapsulated. On page
211 of the Lease it provides that if Lessee
desires to drill access holes in the floor slab
and the removal of the encapsulated glue is
required by law, the Port Authority will, at its
option, either remove the glue and the
encapsulating material or reimburse Lessee for the
cost of removal, but will not disapprove the
drilling by reason of the encapsulated glue.
In general, the Port Authority is obligated, as
set forth on page 212 of the Lease, to remove
certain hazardous materials from the premises, the
MER Room and the shaftways and closets used by
Lessee.
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<PAGE>
42. Self Help: In the event that the Port Authority fails to
perform its maintenance obligations in the
premises (as opposed to the public areas of the
building) and the Port Authority still has not
done so within 30 days after receipt of notice
from Lessee, Lessee may give the Port Authority
notice that it intends to perform such obligation
and if the Port Authority has not done so within
10 days after receipt of the latter notice, Lessee
may do so and upon delivery of receipts or other
evidence of payment the Port Authority shall grant
Lessee a credit in the amount of Lessee's
reasonable cost.
-32-
Exhibit 10(iii)(A)(11)(a)
EMPLOYMENT AGREEMENT
AGREEMENT by and between Bankers Trust Corporation, a New York
corporation and Frank N. Newman (the "Executive"), dated as of the 30th day of
November, 1998.
1. Employment Period. Subject to the consummation of the
transactions contemplated by the Agreement and Plan of Merger among the Company,
Merger Sub and Deutsche Bank AG ("Deutsche"), dated as of November 30, 1998 (the
"Merger Agreement, the Company or its successor agrees to employ the Executive,
and the Executive hereby agrees to remain in the employ of the Company subject
to the terms and conditions of this Agreement, for the period commencing on the
closing date of the transactions contemplated by the Merger Agreement (the
"Commencement Date") and ending on December 31, 2003 (the "Employment Period").
2. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, the Executive shall serve in the position set forth on
Exhibit A hereto, with reporting relationships as set forth on Exhibit A. The
Executive's office shall be located as set forth on Exhibit A.
(ii) During the Employment Period, and excluding any periods
of vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote full attention and time during normal business hours to the
business and affairs of the Company and to use the Executive's reasonable best
efforts to perform such responsibilities in a professional manner. It shall not
be a violation of this Agreement for the executive to (A) serve on corporate,
civic or charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C) manage personal
investments, so long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement. It is expressly understood and agreed that to
the extent that any such activities have been conducted by the Executive prior
to the Commencement Date, the continued conduct of such activities (or the
conduct of activities similar in nature and scope thereto) subsequent to the
Commencement Date shall not thereafter be deemed to interfere with the
performance of the Executive's responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary") in the
amount set forth on Exhibit A. The Annual Base Salary shall be paid no less
frequently than in equal monthly installments.
(ii) Annual Bonus. For each year during the Employment Period,
in addition to Annual Base Salary, the Executive will be awarded an annual bonus
(the "Annual Bonus") which is consistent with Company practice and policy with
respect to the division in which the Executive is employed but which will not be
less than the amount set forth on Exhibit A (the "Minimum Bonus"), payable in
the ratio of cash and equity incentives set forth on Exhibit A.
(iii) Deferral Amount; Stock Options. The Executive is
entitled to certain amounts set forth on Exhibit A upon the consummation of the
Merger pursuant to the Company
<PAGE>
Stock Options Plans and pursuant to the terms of other Awards (as such terms are
defined in the Merger Agreement). The Executive may elect to defer receipt of an
amount set forth on Exhibit A on the terms set forth therein (the "Deferral
Amount"). The Executive also agrees that any amounts that would become payable
or vested upon shareholder approval of the Merger shall not be payable or vest
until consummation of the Merger. The Executive agrees to the treatment of his
stock options set forth in the Merger Agreement.
(iv) Savings and Retirement Plans. During the Employment
Period, the Executive shall be eligible to participate in all savings and
retirement plans, practices, policies and programs to the extent applicable
generally to other peer executives of the Company and its affiliated companies
and shall receive service credit for all service to the Company or its
affiliates (other than for purposes of benefit accrual under a defined benefit
plan).
(v) Welfare and Other Benefit Plans. During the Employment
Period, the Executive and/or the Executive's family, as the case may be, shall
be eligible for participation in and shall receive all benefits under welfare,
fringe, change of control protection, vacation and other similar benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies. For purposes of all such
plans, the Company shall credit the Executive with full credit for all service
credited under the corresponding existing benefit plans in which the Executive
participates for purposes of eligibility to participate and receive benefits but
not for purposes of benefit accrual. With respect to the Company's welfare
benefit plans, the Company shall cause any such plan to waive any pre-existing
condition exclusions and actively-at-work requirements thereunder with respect
to the Executive and his eligible dependents and shall ensure that any covered
expenses incurred on or before the Commencement Date shall be taken into account
for purposes of satisfying applicable deductible, coinsurance and maximum
out-of-pocket provisions after the Commencement Date to the extent that such
expenses are taken into account for the benefit of peer executives of the
Company.
(vi) Expenses. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable business
expenses incurred by the Executive, in accordance with the policies of the
Company.
(vii) Indemnity. The Executive shall be indemnified by the
Company against claims arising in connection with the Executive's status as an
employee, officer, director or agent of the Company in accordance with the
Company's indemnity policies for its senior executives, subject to applicable
law.
3. Termination of Employment. (a) Death or Disability. The
Executive's employment shall terminate automatically upon the Executive's death
during the Employment Period. If the Company determines in good faith that the
Disability of the Executive has occurred during the Employment Period (pursuant
to the definition of Disability set forth below), it may give to the Executive
written notice in accordance with Section 10(b) of this Agreement of
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<PAGE>
its intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the 30th
day after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the Executive
shall not have returned to full-time performance of the Executive's duties. For
purposes of this Agreement, "Disability" shall have the meaning set forth in the
Company's Long-Term Disability Plan.
(b) Cause. The Company may terminate the Executive's employment
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
shall mean:
(i) intentional gross misconduct by the Executive damaging in a
material way to the Company, or
(ii) a material breach of this Agreement damaging in a material way
to the Company, which shall include a material breach of Section 6 hereof,
after the Company has given the Executive notice thereof and a reasonable
opportunity to cure.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties materially and
adversely inconsistent with the Executive's position (including, without
limitation, status, offices, titles and reporting requirements),
authority, duties or responsibilities as contemplated by Exhibit A, a
failure by Deutsche to appoint the Executive as a member of the Vorstand
of Deutsche, reporting directly to the Spokesman of the Vorstand, or any
other action by the Company which results in a material diminution in such
position, authority, duties or responsibilities, excluding for this
purpose any action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(ii) any material failure by the Company to comply with any of the
provisions of Section 2(b) of this Agreement, other than a failure not
occurring in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Executive;
(iii) The Company's requiring the Executive to be based at any
office or location except as set forth on Exhibit A and except for
required travel consistent with your position;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section
10(c) of this Agreement, unless such failure does not occur in bad faith
and is remedied by the Company promptly after receipt of notice thereof
given by the Executive.
-3-
<PAGE>
Any good faith determination by the Executive of Good Reason after
the first anniversary of the Merger shall be conclusive. Notwithstanding the
foregoing, no event, action or omission shall constitute Good Reason if (x) the
Executive shall have consented in writing thereto, or (y) the Executive shall
not, within 60 days of knowledge thereof, have given the Company written notice
in accordance with Section 3(d) hereof of the Executive's termination on the
grounds that such event, action or omission constitutes Good Reason.
(d) Notice of Termination. Any termination by the Company for Cause,
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 10(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than thirty
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be ,(ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
4. Obligations of the Company upon Termination. (a) Good Reason;
Other Than for Cause. If, during the Employment Period, the Company shall
terminate the Executive's employment other than for Cause, including by reason
of the Executive's death or Disability, or the Executive shall terminate
employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the amounts
set forth in clauses A and B below:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the Minimum Bonus and (y) a fraction (the "Proration
Fraction"), the numerator of which is the number of days in the
current calendar year through the Date of Termination, and the
denominator of which is 365 and (3) any compensation previously
-4-
<PAGE>
deferred by the Executive (together with any accrued interest or
earnings thereon) to the extent not theretofore paid (the sum of the
amounts described in clauses (1), (2), and (3) shall be hereinafter
referred to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) the number of years
(including fractions thereof) remaining from the Date of Termination
until December 31, 2003 and (2) the sum of(x) the Executive's Annual
Base Salary and (y) the Minimum Bonus; and
(ii) all stock awards or stock equivalents held by the Executive
shall be immediately vested and payable; and
(iii) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is entitled to
receive under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies, excluding any
severance plan, policy or agreement except to the extent that such plan,
policy or agreement provides, in accordance with its terms, benefits with
a value in excess of the benefits payable to the Executive under this
Section 4 (such other amounts and benefits shall be hereinafter referred
to as the "Other Benefits").
(b) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause or the Executive terminates employment without
Good Reason during the Employment Period, this Agreement shall terminate without
further obligations to the Executive other than the obligation to pay to the
Executive (x) Accrued Obligations less the amount determined under Section
4(a)(i)A(2) hereof, and (y) Other Benefits, in each case to the extent
theretofore unpaid.
5. Arbitration. The Company and the Executive agree that any
disputes with respect to this Agreement shall be subject to binding arbitration
in New York City in accordance with the rules of the American Arbitration
Association. The proceedings and the results of such arbitration shall be
treated as confidential information subject to Section 6(a) hereof The Company
agrees to pay for the costs of arbitration and shall reimburse the Executive for
his reasonable attorney's fees provided that the Executive prevails on at least
one material issue in the arbitration.
6. Confidential Information/Noncompetition. (a) The Executive shall
hold in a fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or any of
its affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during the Executive's employment by the Company or
any of its affiliated companies and which shall not be or become public
knowledge (other than by acts by the Executive or representatives of the
Executive in violation of this Agreement). After termination of the Executive's
employment with the Company, the Executive shall not, without the prior written
consent of the Company or as may otherwise be required by law or legal process
(provided the Company has been given notice of and opportunity to challenge or
limit the scope of disclosure purportedly so required), communicate
-5-
<PAGE>
or divulge any such information, knowledge or data to anyone other than the
Company and those designated by it.
(b) Until December 31, 2003, or if earlier, one year after the
Executive's termination of employment, the Executive will not own, manage,
operate, control or participate in the ownership, management, operation or
control of, or be connected as an officer, employee, partner, director or
otherwise with, or have any financial interest in, any business which is in
competition with the investment banking, corporate finance, corporate advisory,
asset management or M&A business conducted by the Company or Deutsche or any of
their respective affiliates in the United States. Ownership, for personal
investment purposes only, of not to exceed 2% of the voting stock of any
publicly held corporation shall not constitute a violation hereof. This Section
6(b) shall be of no force or effect if the Executive's employment is terminated
without Cause.
7. Specific Performance. The Executive acknowledges that a violation
on his part of any of the covenants contained in Section 6 hereof would cause
immeasurable and irreparable damage to the Company. Accordingly, the Executive
agrees that the Company shall be entitled to injunctive relief in any court of
competent jurisdiction for any actual or threatened violation of any such
covenant in addition to any other remedies it may have. The Executive agrees
that in the event that any arbitrator or court of competent jurisdiction shall
finally hold that any provision of Section 6 hereof is void or constitutes an
unreasonable restriction against the Executive, the provisions of such Section 6
shall not be rendered void but shall apply to such extent as such arbitrator or
court may determine constitutes a reasonable restriction under the
circumstances.
8. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the Company
to or for the benefit of the Executive whether pursuant to this Agreement or
otherwise, and determined without regard to
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<PAGE>
any additional payments required under this Section 9 (a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, is hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by KPMG Peat
Marwick (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 9, shall be paid by the Company to the
Executive within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 9(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30 day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, ac-
-7-
<PAGE>
cepting legal representation with respect to such claim by an attorney
reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively
to contest such claim, and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to this Section 9, the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall (subject to
the Company's complying with the requirements of Section 9(c)) promptly pay to
the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section 9(c), a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the expiration
of 30 days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance shall offset,
to the extent thereof, the amount of Gross-Up Payment required to be paid.
-8-
<PAGE>
10. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws. The captions of this Agreement are
not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
927 Fifth Avenue
New York, NY 10021
If to the Company:
130 Liberty Street
New York, NY 10006
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The Company's obligation to make the payments provided for in
this Agreement and otherwise to perform obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Executive or others, other than
claims for a breach of Section 6 of this Agreement. In no event shall the
Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement, and such amounts shall not be reduced whether or
not the Executive obtains other employment.
(d) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(e) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(f) On and after the Commencement Date, this Agreement shall
supersede any other agreement between the parties with respect to the subject
matter hereof
-9-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ Frank N. Newman
----------------------------------------
FRANK N. NEWMAN
BANKERS TRUST CORPORATION
By /s/ James T. Byrne, Jr.
-------------------------------------
JAMES T. BYRNE, JR.
Acknowledged and agreed as a Guarantor
of performance:
DEUTSCHE BANK AG
By
--------------------------------------
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<PAGE>
Exhibit A
Name: Frank N. Newman
Title: Chairman and Chief Executive Officer of Bankers Trust Corporation and
Bankers Trust Company or their successors. Co-Head of the Global Corporates and
Institutions division of Deutsche (or its functional equivalent) (including the
Global Institutional Services business), reporting directly to the Spokesman of
the Vorstand. It is management's intention to recommend to the Supervisory Board
of Deutsche Bank AG that the Executive be appointed a member of the Vorstand of
Deutsche Bank AG.
Location: Manhattan, New York
Annual Base Salary: $900,000
Minimum Bonus: $10,100,000 payable at least $7,070,000 in cash and the remainder
may be based on the value of Deutsche common stock (a "Stock Award"). The cash
portion of the Minimum Bonus payable with respect to calendar year 1999 shall be
reduced by any pro rata bonus payable upon a Change of Control of the Company.
The Stock Award shall vest in three equal annual installments after the date of
grant. The Stock Award shall have a floor value, upon vesting, guaranteed by the
Company of 75% of its value on the date of grant. All Stock Awards will vest
immediately upon a termination by the Company without Cause or by the Executive
for Good Reason or upon the Executive's retirement, whether or not during the
Employment Period.
Deferral Amount: $14,000,000. The Deferral Amount shall be paid to the Executive
in three equal annual installments, commencing on the first anniversary of the
Merger, together with interest at a rate of 12.5%.
PRIVILEGED AND CONFIDENTIAL
Exhibit 10(iii)(A)(11)(b)
December 17, 1998
Dear Mr. Daniel:
In connection with the proposed merger between Bankers Trust and
Deutsche Bank (the "Merger") and subject to the consummation of the Merger,
Bankers Trust is happy to provide you with the following retention bonus and pay
guarantee package. For purposes of this Agreement, the term "Bankers Trust"
shall include its successors.
1. Title; Position. You shall serve as Vice Chairman and Chief Financial
Officer of Bankers Trust and Chief Financial Officer of Bankers Trust
Company, or their respective successors. You shall report to the Chief
Executive Officer of Bankers Trust and the Chief Executive Officer of
Bankers Trust Company. You shall be located in Manhattan, New York.
2. Retention Bonus. The amount of your retention bonus is $9 million.
One half of your retention bonus, equal to $4.5 million, is in cash.
Half of that amount will be paid to you on the second anniversary of the closing
of the Merger and the other half will be paid to you on the third anniversary of
the closing of the Merger, provided that you are employed on those dates. If
after the closing of the Merger and prior to the third anniversary of the
closing of the Merger your employment is terminated by Bankers Trust without
Cause (as such term is defined under the Bankers Trust Change in Control
Severance Plan in effect as of the date hereof (the "Severance Plan")), you die
or are disabled or you terminate your employment for Good Reason (in each case,
a "Qualifying Termination"), then you will be paid any unpaid portion of the
cash retention bonus within five business days after such termination. For
purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to you of any duties materially and adversely
inconsistent with your position (including, without
limitation, status, offices, titles and reporting
requirements), authority, duties or responsibilities as
contemplated by this Agreement or any other action by Bankers
Trust or its affiliates which results in a material diminution
in such position, authority, duties or responsibilities,
excluding for this purpose any action not taken in bad faith
and which is remedied by Bankers Trust or its affiliates
promptly after receipt of notice thereof given by you;
(ii) any material failure by Bankers Trust or its affiliates to
comply with any of the compensation provisions of this
Agreement, other than a failure not occurring in bad faith and
which is remedied by Bankers Trust or its affiliates promptly
after receipt of notice thereof given by you;
(iii) Bankers Trust's requiring you to be based at any office or
location except as set forth herein and except for required
travel consistent with your position; or
(iv) any failure by Bankers Trust to cause any successor to assume
this Agreement, unless such failure does not occur in bad
faith and is remedied by the Company promptly after receipt of
notice thereof given by you.
Notwithstanding the foregoing, no event action or omission shall
constitute Good Reason if (x) you shall have consented in writing thereto or (y)
you shall not, within 60 days of knowledge thereof, have given Bankers Trust
written notice of your termination on the grounds that such event, action or
omission constitutes Good Reason.
<PAGE>
The other half of your retention bonus, initially equal to $4.5
million, may be based on the value of the Deutsche Bank common stock at the
closing of the merger and will be paid to you either in shares of Deutsche Bank
common stock or in cash. The value of the bonus at the time it is paid or
distributed to you will fluctuate with the value of the stock, provided that the
value of the payments made to you, at the time they are paid, will not be less
than 50% of the initial value of the Deutsche Bank stock on a U.S. dollar basis
on the closing of the Merger. One half of this portion of the bonus will be paid
or distributed to you on the second anniversary of the closing of the Merger and
the remaining shares will be paid or distributed to you on the third anniversary
of the closing of the Merger, provided that you are employed on those dates. If
you have a Qualifying Termination after the closing of the Merger and prior to
the third anniversary of the closing of the Merger, then you will be paid the
value of the remaining bonus in cash within five business days after such
termination, subject to the 50% floor.
3. Pay Guarantee. In addition, your annual base salary for each of 1999, 2000
and 2001 will not be less than $350,000 and your annual bonus will not be less
than $4,150,000 ("Annual Bonus"). At least 70% of your Annual Bonus will be paid
to you as current cash compensation. The remainder may be paid to you as a
performance incentive in or based on the value of Deutsche Bank common stock.
The initial value of that stock will be equal to the remaining amount of the
Annual Bonus (the "Initial Value"). This portion of the Annual Bonus for each
year will be paid and vested as follows: (i) 1999 - in three equal parts on each
of the first, second and third anniversaries of the Merger, (ii) 2000 - in two
equal parts on each of the second and third anniversaries of the Merger, and
(iii) 2001 - in full on the third anniversary of the Merger. The amount of the
bonus will fluctuate, based on the value of the stock, provided that the value
at the time that the bonus is paid to you will not be less than 75% of its
Initial Value on a U.S. dollar basis. Any 1999 pro rata bonus paid to you for
the period prior to the Merger will count towards this guarantee.
If you have a Qualifying Termination after the closing of the Merger
and prior to December 31, 2001, then you will be paid in cash within five
business days of the termination any unpaid compensation for the remainder of
the guarantee period at the guaranteed level (whether or not originally payable
in cash or stock) as if you had continued your employment through the end of
such period. Any deferred bonus for a year prior to the year of termination will
also vest and be paid, based on the value of Deutsche Bank stock, as described
and subject to the 75% floor set forth above, whether such Qualifying
Termination occurs before or after December 31, 2001.
4. Benefits. You shall be provided with the service credit you currently enjoy
for all purposes (other than benefit accrual) in all benefits plans in which you
participate and shall be provided with employee benefits (retirement, welfare,
etc.) no less favorable than those provided to your peer executives at Bankers
Trust.
5. Other Agreements. The foregoing benefits replace your benefits under the
Bankers Trust Change of Control Severance Plan and any other severance benefit
to which you may be entitled and this Agreement supersedes all prior agreements
between you and Bankers Trust or its affiliates; provided, however, that for a
period of one year from the date of the closing of the Merger, you shall be
entitled, if you so elect in lieu of the benefits hereunder, to terminate your
employment with Bankers Trust and Bankers Trust Company (any such termination
being deemed to be a termination for Good Reason within the meaning of such
plans and agreements) and to receive full severance benefits under such
previously existing plans and agreements in lieu of any retention and severance
benefits otherwise payable hereunder. In addition, if you have a Qualifying
Termination while you would have been protected by the Severance Plan, then
Bankers Trust guarantees that the total amount paid to you as retention bonuses
and as the payout of your pay guarantee (as described in the second paragraph of
Section 3 above) will at least equal the benefit to which you would have been
entitled under the Severance Plan or any other severance benefit to which you
are currently entitled. You will be paid the excise tax gross-up payment
described in Section 4 of the Severance Plan, to the extent you become subject
to that tax. Also, you agree that your outstanding options to acquire shares of
Bankers Trust Common Stock will be treated as provided for in the Merger
Agreement.
-2-
<PAGE>
6. Vesting of Existing Benefits. You agree that any amounts that would become
payable or vested upon shareholder approval of the Merger pursuant to the
Bankers Trust stock option plans and other programs in which you participate
shall not be payable or vest until consummation of the Merger.
7. Miscellaneous. Bankers Trust's obligation to make the payments provided for
in this Agreement and otherwise to perform obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which Bankers Trust or its affiliates may have against you or others.
In no event shall you be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to you under any of the
provisions of this Agreement and such amounts shall not be reduced whether or
not you obtain other employment.
If there is a dispute between you and Bankers Trust about these
commitments, then Bankers Trust will pay your reasonable legal fees if you
prevail in a substantial way in the dispute.
I am very excited about the opportunities ahead.
Sincerely,
/s/ Frank N. Newman
----------------------------------------
Bankers Trust Corporation
Name: Frank N. Newman
Title: Chairman and Chief Executive
Officer
Agreed and accepted
/s/ Richard H. Daniel
- -------------------------------
Richard H. Daniel
-3-
PRIVILEGED AND CONFIDENTIAL
Exhibit 10(iii)(A)(11)(c)
Dear Ms. Cirillo:
In connection with the proposed merger between Bankers Trust and
Deutsche Bank (the "Merger") and subject to the consummation of the Merger,
Bankers Trust is happy to provide you with the following retention bonus and pay
guarantee package. For purposes of this Agreement, the term "Bankers Trust"
shall include its successors.
1. Title; Position. You shall serve as global head of Global Institutional
Services for Deutsche Bank, reporting to the Co-Heads of Deutsche Bank's
Global Corporates and Institutions Division, with a title appropriate to a
direct report to such Co-Heads. You shall be located in Manhattan, New
York.
2. Retention Bonus. The amount of your retention bonus is $8 million.
One half of your retention bonus, equal to $4 million, is in cash.
Half of that amount will be paid to you on the second anniversary of the closing
of the Merger and the other half will be paid to you on the third anniversary of
the closing of the Merger, provided that you are employed on those dates. If
after the closing of the Merger and prior to the third anniversary of the
closing of the Merger your employment is terminated by Bankers Trust without
Cause (as such term is defined under the Bankers Trust Change in Control
Severance Plan in effect as of the date hereof (the "Severance Plan")), you die
or are disabled or you terminate your employment for Good Reason (in each case,
a "Qualifying Termination"), then you will be paid any unpaid portion of the
cash retention bonus within five business days after such termination. For
purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to you of any duties materially and adversely
inconsistent with your position (including, without
limitation, status, offices, titles and reporting
requirements), authority, duties or responsibilities as
contemplated by this Agreement, or any other action by Bankers
Trust or its affiliates which results in a material diminution
in such position, authority, duties or responsibilities,
excluding for this purpose any action not taken in bad faith
and which is remedied by Bankers Trust or its affiliates
promptly after receipt of notice thereof given by you;
(ii) any material failure by Bankers Trust or its affiliates to
comply with any of the compensation provisions of this
Agreement, other than a failure not occurring in bad faith and
which is remedied by Bankers Trust or its affiliates promptly
after receipt of notice thereof given by you;
(iii) Bankers Trust's requiring you to be based at any office or
location except as set forth herein and except for required
travel consistent with your position; or
(iv) any failure by Bankers Trust to cause any successor to assume
this Agreement, unless such failure does not occur in bad
faith and is remedied by the Company promptly after receipt of
notice thereof given by you.
Notwithstanding the foregoing, no event, action or omission shall
constitute Good Reason if (x) you shall have consented in writing thereto or (y)
you shall not, within 60 days of knowledge thereof, have given Bankers Trust
written notice of your termination on the grounds that such event, action or
omission constitutes Good Reason.
The other half of your retention bonus, initially equal to $4
million, may be based on the
<PAGE>
value of the Deutsche Bank common stock at the closing of the Merger and will be
paid to you either in shares of Deutsche Bank common stock or in cash. The value
of the bonus at the time it is paid or distributed to you will fluctuate with
the value of the stock, provided that the value of the payments made to you, at
the time they are paid, will not be less than 50% of the initial value of the
Deutsche Bank stock on a U.S. dollar basis on the closing of the Merger. One
half of this portion of the bonus will be paid or distributed to you on the
second anniversary of the closing of the Merger and the remaining shares will be
paid or distributed to you on the third anniversary of the closing of the
Merger, provided that you are employed on those dates. If you have a Qualifying
Termination after the closing of the Merger and prior to the third anniversary
of the closing of the Merger, then you will be paid the value of the remaining
bonus in cash within five business days after such termination, subject to the
50% floor.
3. Pay Guarantee. In addition, your annual base salary for each of 1999, 2000
and 2001 will not be less than $350,000 and your annual bonus will not be less
than $3,650,000 ("Annual Bonus"). At least 70% of your Annual Bonus will be paid
to you as current cash compensation. The remainder may be paid to you as a
performance incentive in or based on the value of Deutsche Bank common stock.
The initial value of that stock will be equal to the remaining amount of the
Annual Bonus (the "Initial Value"). This portion of the Annual Bonus for each
year will be paid and vested as follows: (i) 1999 - in three equal parts on each
of the first, second and third anniversaries of the Merger, (ii) 2000 - in two
equal parts on each of the second and third anniversaries of the Merger, and
(iii) 2001 - in full on the third anniversary of the Merger. The amount of the
bonus will fluctuate, based on the value of the stock, provided that the value
at the time that the bonus is paid to you will not be less than 75% of its
Initial Value on a U.S. dollar basis. Any 1999 pro rata bonus paid to you for
the period prior to the Merger will count towards this guarantee.
If you have a Qualifying Termination after the closing of the Merger
and prior to December 31, 2001, then you will be paid in cash within five
business days of the termination any unpaid compensation for the remainder of
the guarantee period at the guaranteed level (whether or not originally payable
in cash or stock) as if you had continued your employment through the end of
such period. Any deferred bonus for a year prior to the year of termination will
also vest and be paid, based on the value of Deutsche Bank stock, as described
and subject to the 75% floor set forth above, whether such Qualifying
Termination occurs before or after December 31, 2001.
4. Benefits. You shall be provided with the service credit you currently enjoy
for all purposes (other than benefit accrual) in all benefits plans in which you
participate and shall be provided with employee benefits (retirement, welfare,
etc.) no less favorable than those provided to your peer executives at Bankers
Trust.
5. Other Agreements. The foregoing benefits replace your benefits under the
Bankers Trust Change of Control Severance Plan and any other severance benefit
to which you may be entitled and this Agreement supersedes all prior agreements
between you and Bankers Trust or its affiliates. However, if you have a
Qualifying Termination while you would have been protected by the Severance
Plan, then Bankers Trust guarantees that the total amount paid to you as
retention bonuses and as the payout of your pay guarantee (as described in the
second paragraph of Section 3 above) will at least equal the benefit to which
you would have been entitled under the Severance Plan or any other severance
benefit to which you are currently entitled. You will be paid the excise tax
gross-up payment described in Section 4 of the Severance Plan, to the extent you
become subject to that tax. Also, you agree that your outstanding options to
acquire shares of Bankers Trust Common Stock will be treated as provided for in
the Merger Agreement.
6. Deferral. You are also entitled to certain amounts upon shareholder approval
of the Merger or consummation of the Merger, pursuant to the Bankers Trust stock
option plans and other programs. In consideration of the foregoing, you agree
that the payment to you of two-thirds of the cash value of those amounts will be
deferred. One third of the deferred payment will be paid on each of the first,
second and third anniversaries of the consummation of the Merger. During the
deferral period, the amounts will accrue interest at a rate equal to 12-1/2
percent compounded semi-annually. You also agree that any
-2-
<PAGE>
amounts that would become payable or vested upon shareholder approval of the
Merger shall not be payable or vest until consummation of the Merger.
7. Miscellaneous. Bankers Trust's obligation to make the payments provided for
in this Agreement and otherwise to perform obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which Bankers Trust or its affiliates may have against you or others.
In no event shall you be obligated to seek other employment or take any other
action by way of mitigation or the amounts payable to you under any of the
provisions of this Agreement, and such amounts shall not be reduced whether or
not you obtain other employment.
If there is a dispute between you and Bankers Trust about these
commitments, then Bankers Trust will pay your reasonable legal fees if you
prevail in a substantial way in the dispute.
I am very excited about the opportunities ahead.
Sincerely,
/s/ Mark S. Bieler
----------------------------------------
Bankers Trust Corporation
Name: Mark Bieler
Title: Executive Vice President
Agreed and accepted: Agreed and acknowledged as
a Guarantor of performance:
/s/ Mary Cirillo
- --------------------------------- -----------------------------------------
Mary Cirillo Deutsche Bank AG
Name:
Title:
-3-
PRIVILEGED AND CONFIDENTIAL
Exhibit 10(iii)A(11)(d)
Dear Mr. Shattuck:
In connection with the proposed merger between Bankers Trust and
Deutsche Bank (the "Merger") and subject to the consummation of the Merger,
Bankers Trust is happy to provide you with the following retention bonus and pay
guarantee package. For purposes of this Agreement, the term "Bankers Trust"
shall include its successors.
1. Title; Position. You shall serve as Co-Head of the Global Investment
Banking division of the Global Corporates and Institutions division of
Deutsche Bank ("GCI"), reporting to the Co-Heads of GCI. You shall have
responsibility, among other matters, for (i) client coverage (industry
groups, country and regional coverage, financial sponsors); (ii) equity
capital markets; (iii) private equity investment; (iv) mergers and
acquisitions; (v) leveraged lending/high yield sales and trading (joint
responsibility with applicable GCI executive); (vi) structured and
project finance; (vii) research (jointly with applicable GCI executive);
(viii) retail brokerage in the U.S.; and (ix) certain aspects of
corporate lending (to be determined). You shall also serve as a Vice
Chairman of the Bankers Trust U.S. bank holding company and as
Co-Chairman and Co-Chief Executive Officer of the Bankers Trust Section
20 subsidiary (to the extent such corporate entities exist). You shall be
located in Baltimore, Maryland.
2. Retention Bonus. The amount of your retention bonus is $15 million.
One half of your retention bonus, equal to $7.5 million, is in
cash. Half of that amount will be paid to you on the second anniversary of the
closing of the Merger and the other half will be paid to you on the third
anniversary of the closing of the Merger, provided that you are employed on
those dates. If after the closing of the Merger and prior to the third
anniversary of the closing of the Merger your employment is terminated by
Bankers Trust without Cause (as such term is defined under the Bankers Trust
Change in Control Severance Plan in effect as of the date hereof (the "Severance
Plan")), you die or are disabled or you terminate your employment for Good
Reason (in each case, a "Qualifying Termination"), then you will be paid any
unpaid portion of the cash retention bonus within five business days after such
termination. For purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to you of any duties materially and adversely
inconsistent with your position (including, without
limitation, status, offices, titles and reporting
requirements), authority, duties or responsibilities as
contemplated by this Agreement, or any other action by Bankers
Trust or its affiliates which results in a material diminution
in such position, authority, duties or responsibilities,
excluding for this purpose any action not taken in bad faith
and which is remedied by Bankers Trust or its affiliates
promptly after receipt of notice thereof given by you;
(ii) any material failure by Bankers Trust or its affiliates to
comply with any of the compensation provisions of this
Agreement, other than a failure not occurring in bad faith and
which is remedied by Bankers Trust or its affiliates promptly
after receipt of notice thereof given by you;
(iii) Bankers Trust's requiring you to be based at any office or
location except as set forth herein and except for required
travel consistent with your position; or
(iv) any failure by Bankers Trust to cause any successor to assume
this Agreement, unless such failure does not occur in bad
faith and is remedied by the Company
<PAGE>
promptly after receipt of notice thereof given by you.
Notwithstanding the foregoing, no event, action or omission shall
constitute Good Reason if (x) you shall have consented in writing thereto or (y)
you shall not, within 60 days of knowledge thereof have given Bankers Trust
written notice of your termination on the grounds that such event, action or
omission constitutes Good Reason.
The other half of your retention bonus, initially equal to $7.5
million, may be based on the value of the Deutsche Bank common stock at the
closing of the Merger and will be paid to you either in shares of Deutsche Bank
common stock or in cash. The value of the bonus at the time it is paid or
distributed to you will fluctuate with the value of the stock, provided that the
value of the payments made to you, at the time they are paid, will not be less
than 50% of the initial value of the Deutsche Bank stock on a U.S. dollar basis
on the closing of the Merger. One half of this portion of the bonus will be paid
or distributed to you on the second anniversary of the closing of the Merger and
the remaining shares will be paid or distributed to you on the third anniversary
of the closing of the Merger, provided that you are employed on those dates. If
you have a Qualifying Termination after the closing of the Merger and prior to
the third anniversary of the closing of the Merger, then you will be paid the
value of the remaining bonus in cash within five business days after such
termination, subject to the 50% floor.
3. Pay Guarantee. In addition, your annual base salary for each of 1999, 2000
and 2001 will not be less than $350,000 and your annual bonus will not be less
than $7,150,000 ("Annual Bonus"). At least 70% of your Annual Bonus will be paid
to you as current cash compensation. The remainder may be paid to you as a
performance incentive in or based on the value of Deutsche Bank common stock.
The initial value of that stock will be equal to the remaining amount of the
Annual Bonus (the "Initial Value"). This portion of the Annual Bonus for each
year will be paid and vested as follows: (i) 1999 - in three equal parts on each
of the first, second and third anniversaries of the Merger, (ii) 2000 - in two
equal parts on each of the second and third anniversaries of the Merger, and
(iii) 2001 - in full on the third anniversary of the Merger. The amount of the
bonus will fluctuate, based on the value of the stock, provided that the value
at the time that the bonus is paid to you will not be less than 75% of its
Initial Value on a U.S. dollar basis. Any 1999 pro rata bonus paid to you for
the period prior to the Merger will count towards this guarantee.
If you have a Qualifying Termination after the closing of the Merger
and prior to December 31, 2001, then you will be paid in cash within five
business days of the termination any unpaid compensation for the remainder of
the guarantee period at the guaranteed level (whether or not originally payable
in cash or stock) as if you had continued your employment through the end of
such period. Any deferred bonus for a year prior to the year of termination will
also vest and be paid, based on the value of Deutsche Bank stock, as described
and subject to the 75% floor set forth above, whether such Qualifying
Termination occurs before or after December 31, 2001.
4. Benefits. You shall be provided with the service credit you currently enjoy
for all purposes (other than benefit accrual) in all benefits plans in which you
participate and shall be provided with employee benefits (retirement, welfare,
etc.) no less favorable than those provided to your peer executives at Bankers
Trust.
5. Other Agreements. The foregoing benefits replace your benefits under the
Bankers Trust Change of Control Severance Plan and any other severance benefit
to which you may be entitled and this Agreement supersedes all prior agreements
between you and Bankers Trust or its affiliates. However, if you have a
Qualifying Termination `while you would have been protected by the Severance
Plan, then Bankers Trust guarantees that the total amount paid to you as
retention bonuses and as the payout of your pay guarantee (as described in the
second paragraph of Section 3 above) will at least equal the benefit to which
you would have been entitled under the Severance Plan or any other severance
benefit to which you are currently entitled. You will be paid the excise tax
gross-up payment described in Section 4 of the Severance Plan, to the extent you
become subject to that tax. Also, you agree that your outstanding options to
acquire shares of Bankers Trust Common Stock will be treated as provided for in
the Merger Agreement.
-2-
<PAGE>
6 Deferral. You are entitled to certain amounts upon shareholder approval of the
Merger or consummation of the Merger, pursuant to the Bankers Trust stock option
plans and other programs. In consideration of the foregoing, you agree that the
payment to you of two-thirds of the cash value of those amounts will be
deferred. One third of the deferred payment will be paid on each of the first,
second and third anniversaries of the consummation of the Merger. During the
deferral period, the amounts will accrue interest at a rate equal to 12-1/2
percent compounded semi-annually. You also agree that any amounts that would
become payable or vested upon shareholder approval of the merger shall not be
payable or vest until consummation of the Merger.
7. Miscellaneous. Bankers Trust's obligations to make the payments provided for
in this Agreement and otherwise to perform obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which Bankers Trust or its affiliates may have against you or others.
In no event shall you be obligated to seek other employment or take any other
action by way of mitigation or the amounts payable to you under any of the
provisions of this Agreement, and such amounts shall not be reduced whether or
not you obtain other employment.
If there is a dispute between you and Bankers Trust about these
commitments, then Bankers Trust will pay your reasonable legal fees if you
prevail in a substantial way in the dispute.
I am very excited about the opportunities ahead.
Sincerely,
/s/ Mark Bieler
--------------------------------------
Bankers Trust Corporation
Name: Mark Bieler
Title: Executive Vice President
Agreed and accepted: Agreed and acknowledged as
a Guarantor of performance:
/s/ Mayo A. Shattuck, III
- ---------------------------------- --------------------------------------
Mayo A. Shattuck, III Deutsche Bank AG
Name:
Title:
-3-
Exhibit 10(iii)(A)(11)(e)
PRIVILEGED AND CONFIDENTIAL
Dear Mr. de Balmann:
In connection with the proposed merger between Bankers Trust and
Deutsche Bank (the "Merger") and subject to the consummation of the Merger,
Bankers Trust is happy to provide you with the following retention bonus and pay
guarantee package. For purposes of this Agreement, the term "Bankers Trust"
shall include its successors.
1. Title; Position. You shall serve as Co-Head of the Global Investment
Banking division of the Global Corporates and Institutions division of
Deutsche Bank ("GCI"), reporting to the Co-Heads of GCI. You shall have
responsibility, among other matters, for (i) client coverage (industry
groups, country and regional coverage, financial sponsors); (ii) equity
capital markets; (iii) private equity investment; (iv) mergers and
acquisitions; (v) leveraged lending/high yield sales and trading (joint
responsibility with applicable GCI executive); (vi) structured and project
finance; (vii) research (jointly with applicable GCI executive); (viii)
retail brokerage in the U.S.; and (ix) certain aspects of corporate
lending (to be determined). You shall also serve as a Vice Chairman of the
Bankers Trust U.S. bank holding company and as Co-Chairman and Co-Chief
Executive Officer of the Bankers Trust Section 20 subsidiary (to the
extent such corporate entities exist). You shall be located in Manhattan,
New York.
2. Retention Bonus. The amount of your retention bonus is $15 million.
One half of your retention bonus, equal to $7.5 million, is in cash.
Half of that amount will be paid to you on the second anniversary of the closing
of the Merger and the other half will be paid to you on the third anniversary of
the closing of the Merger, provided that you are employed on those dates. If
after the closing of the Merger and prior to the third anniversary of the
closing of the Merger your employment is terminated by Bankers Trust without
Cause (as such term is defined under the Bankers Trust Change in Control
Severance Plan in effect as of the date hereof (the "Severance Plan")), you die
or are disabled or you terminate your employment for Good Reason (in each case,
a "Qualifying Termination"), then you will be paid any unpaid portion of the
cash retention bonus within five business days after such termination. For
purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to you of any duties materially and adversely
inconsistent with your position (including, without
limitation, status, offices, titles and reporting
requirements), authority, duties or responsibilities as
contemplated by this Agreement, or any other action by Bankers
Trust or its affiliates which results in a material diminution
in such position, authority, duties or responsibilities,
excluding for this purpose any action not taken in bad faith
and which is remedied by Bankers Trust or its affiliates
promptly after receipt of notice thereof given by you;
(ii) any material failure by Bankers Trust or its affiliates to
comply with any of the compensation provisions of this
Agreement, other than a failure not occurring in bad faith and
which is remedied by Bankers Trust or its affiliates promptly
after receipt of notice thereof given by you;
(iii) Bankers Trust's requiring you to be based at any office or
location except as set forth herein and except for required
travel consistent with your position; or
(iv) any failure by Bankers Trust to cause any successor to assume
this Agreement, unless such failure does not occur in bad
faith and is remedied by the Company promptly after receipt of
notice thereof given by you.
Notwithstanding the foregoing, no event, action or omission shall
constitute Good
<PAGE>
Reason if (x) you shall have consented in writing thereto or (y) you shall not,
within 60 days of knowledge thereof, have given Bankers Trust written notice of
your termination on the grounds that such event, action or omission constitutes
Good Reason.
The other half of your retention bonus, initially equal to $7.5
million, may be based on the value of the Deutsche Bank common stock at the
closing of the Merger and will be paid to you either in shares of Deutsche Bank
common stock or in cash. The value of the bonus at the time it is paid or
distributed to you will fluctuate with the value of the stock, provided that the
value of the payments made to you, at the time they are paid, will not be less
than 50% of the initial value of the Deutsche Bank stock on a U.S. dollar basis
on the closing of the Merger. One half of this portion of the bonus will be paid
or distributed to you on the second anniversary of the closing of the Merger and
the remaining shares will be paid or distributed to you on the third anniversary
of the closing of the Merger, provided that you are employed on those dates. If
you have a Qualifying Termination after the closing of the Merger and prior to
the third anniversary of the closing of the Merger, then you will be paid the
value of the remaining bonus in cash within five business days after such
termination, subject to the 50% floor.
3. Pay Guarantee. In addition, your annual base salary for each of 1999, 2000
and 2001 will not be less than $350,000 and your annual bonus will not be less
than $7,150,000 ("Annual Bonus"). At least 70% of your Annual Bonus will be paid
to you as current cash compensation. The remainder may be paid to you as a
performance incentive in or based on the value of Deutsche Bank common stock.
The initial value of that stock will be equal to the remaining amount of the
Annual Bonus (the "Initial Value"). This portion of the Annual Bonus for each
year will be paid and vested as follows: (i) 1999 - in three equal parts on each
of the first, second and third anniversaries of the Merger, (ii) 2000 - in two
equal parts on each of the second and third anniversaries of the Merger, and
(iii) 2001 - in full on the third anniversary of the Merger. The amount of the
bonus will fluctuate, based on the value of the stock, provided that the value
at the time that the bonus is paid to you will not be less than 75% of its
Initial Value on a U.S. dollar basis. Any 1999 pro rata bonus paid to you for
the period prior to the Merger will count towards this guarantee.
If you have a Qualifying Termination after the closing of the Merger
and prior to December 31, 2001, then you will be paid in cash within five
business days of the termination any unpaid compensation for the remainder of
the guarantee period at the guaranteed level (whether or not originally payable
in cash or stock) as if you had continued your employment through the end of
such period. Any deferred bonus for a year prior to the year of termination will
also vest and be paid, based on the value of Deutsche Bank stock, as described
and subject to the 75% floor set forth above, whether such Qualifying
Termination occurs before or after December 31, 2001.
4. Benefits. You shall be provided with the service credit you currently enjoy
for all purposes (other than benefit accrual) in all benefits plans in which you
participate and shall be provided with employee benefits (retirement, welfare,
etc.) no less favorable than those provided to your peer executives at Bankers
Trust. You will also continue to be indemnified with respect to your state tax
filing position on the same basis as immediately prior to the Merger.
5. Other Agreements. The foregoing benefits replace your benefits under the
Bankers Trust Change of Control Severance Plan and any other severance benefit
to which you may be entitled and this Agreement supersedes all prior agreements
between you and Bankers Trust or its affiliates. However, if you have a
Qualifying Termination while you would have been protected by the Severance
Plan, then Bankers Trust guarantees that the total amount paid to you as
retention bonuses and as the payout of your pay guarantee (as described in the
second paragraph of Section 3 above) will at least equal the benefit to which
you would have been entitled under the Severance Plan or any other severance
benefit to which you are currently entitled. You will be paid the excise tax
gross-up payment described in Section 4 of the Severance Plan, to the extent you
become subject to that tax. Also, you agree that your outstanding options to
acquire shares of Bankers Trust Common Stock will be treated as provided for in
the Merger Agreement.
6. Deferral. You are also entitled to certain amounts upon shareholder approval
of the Merger or
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consummation of the Merger, pursuant to the Bankers Trust stock option plans and
other programs. In consideration of the foregoing, you agree that the payment to
you of two-thirds of the cash value of those amounts will be deferred. One third
of the deferred payment will be paid on each of the first, second and third
anniversaries of the consummation of the Merger. During the deferral period, the
amounts will accrue interest at a rate equal to 12-1/2 percent compounded
semi-annually. You also agree that any amounts that would become payable or
vested upon shareholder approval of the Merger shall not be payable or vest
until consummation of the Merger.
7. Miscellaneous. Bankers Trust's obligation to make the payments provided for
in this Agreement and otherwise to perform obligations hereunder shall not be
affected by any set-off counterclaim, recoupment, defense or other claim, right
or action which Bankers Trust or its affiliates may have against you or others.
In no event shall you be obligated to seek other employment or take any other
action by way of mitigation or the amounts payable to you under any of the
provisions of this Agreement, and such amounts shall not be reduced whether or
not you obtain other employment.
If there is a dispute between you and Bankers Trust about these
commitments, then Bankers Trust will pay your reasonable legal fees if you
prevail in a substantial way in the dispute.
I am very excited about the opportunities ahead.
Sincerely,
/s/ Mark Bieler
----------------------------------------
Bankers Trust Corporation
Name: Mark Bieler
Title: Executive Vice President
Agreed and accepted: Agreed and acknowledged as
a Guarantor of performance:
/s/ Yves C. de Balmann
- -------------------------------- ----------------------------------------
Yves C. de Balmann Deutsche Bank AG
Name:
Title:
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Exhibit 10(iii)(A)(20)
BANKERS TRUST NEW YORK CORPORATION
CHANGE IN CONTROL SEVERANCE PLAN I
The Board of Directors of Bankers Trust New York Corporation (the
"Corporation") has determined that it is in the best interests of the
Corporation and its stockholders to secure the continued services, dedication
and objectivity of the senior management employees of the Corporation and its
Subsidiaries (as defined below) in the event of any threat or occurrence of a
Change in Control (as defined in Section 1(e)) of the Corporation, without
concern as to whether such employees might be hindered or distracted by personal
uncertainties and risks created by any such actual or threatened Change in
Control. To encourage the full attention and dedication to the Corporation and
its Subsidiaries by such employees, the Board of Directors and the Human
Resources Committee of the Corporation has authorized the Corporation to adopt
the Bankers Trust New York Corporation Change in Control Severance Plan I (the
"Plan").
1. Definitions. As used in this Plan, the following terms shall have
the respective meanings set forth below:
(a) "Base Salary" means a Participant's highest annual rate of
salary or wages (excluding all bonus, overtime and incentive compensation)
during the twelve-month period immediately preceding such Participant's
Date of Termination.
(b) "Board" means the Board of Directors of the Corporation.
(c) "Bonus Amount" means the greater of (i) the annual incentive
bonus (cash and the fair market value of stock awarded as part of the
annual incentive bonus) earned by the Participant and awarded by the
<PAGE>
Corporation and/or its Subsidiaries with respect to the performance year
immediately preceding the Change in Control or (ii) the average annual
incentive bonus (cash and the fair market value of stock awarded as part
of the annual incentive bonus) earned by the Participant and awarded by
the Corporation and/or its Subsidiaries with respect to the three (3)
performance years immediately preceding the Change in Control (provided,
that if a Participant has less than three (3) full years of employment
with the Corporation or its Subsidiaries prior to the year in which the
Change in Control occurs, this clause (ii) shall equal the product of
(A)(1) the aggregate annual incentive bonuses (cash and the fair market
value of stock awarded as part of the annual incentive bonus) earned by
the Participant and awarded by the Corporation and/or its Subsidiaries
with respect to such period of employment, divided by (2) the number of
full months of the Participant's employment during such period, multiplied
by (B) twelve (12)).
(d) "Cause" means (1) a material breach by a Participant of the
duties and responsibilities of the Participant (other than as a result of
incapacity due to physical or mental illness) which is demonstrably
willful and deliberate on the Participant's part and which is not remedied
in a reasonable period of time after receipt of written notice from the
Corporation specifying such breach, (2) willful misconduct by a
Participant which is materially and demonstrably injurious to the business
or reputation of the Corporation or its Subsidiaries, or (3) a
Participant's conviction of, or plea of guilty or nolo contendere to, a
felony. The Corporation must notify the Participant that it believes
"Cause" has occurred within ninety (90) days of its knowledge of the event
or condition
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constituting Cause or such event shall not constitute Cause hereunder.
(e) "Change in Control" means the occurrence of one of the following
events:
(i) the acquisition, other than from the Corporation, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as in effect on the Effective Date) of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act as in effect
on the Effective Date) of 20% or more of the combined voting power of the
then outstanding voting securities of the Corporation entitled to vote
generally in the election of directors (the "Corporation Voting
Securities"); provided, however, that any acquisition (A) by the
Corporation or its Subsidiaries, (B) by any employee benefit plan (or
related trust) sponsored or maintained by the Corporation or any of its
Subsidiaries, (C) by any underwriter temporarily holding securities
pursuant to an offering of such securities, or (D) pursuant to a
Non-Qualifying Transaction under Subsection (iii), shall not constitute a
Change in Control; or
(ii) individuals who, as of April 15, 1997, constitute the Board
(the "Incumbent Directors") cease for any reason to constitute at least a
majority of the Board provided that any individual becoming a director
subsequent to the Effective Date whose election, or nomination for
election by the Corporation's stockholders, was approved by a vote of at
least a majority of the Incumbent Directors then on the Board (either by a
specific
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<PAGE>
vote or by approval of the proxy statement of the Corporation in which
such person is named as a director, without written objection to such
nomination) shall be an Incumbent Director; provided, however, that no
individual initially elected or nominated as a director of the Corporation
as a result of an actual or threatened election contest with respect to
directors or as a result of any other actual or threatened solicitation of
proxies or consents by or on behalf of any person other than the Board
shall be an Incumbent Director; or
(iii) the consummation of a reorganization, merger, consolidation,
statutory share exchange or similar form of corporate transaction
involving the Corporation or any of its subsidiaries that requires the
approval of the Corporation's stockholders for such transaction or the
issuance of securities in such a transaction (a "Business Combination"),
unless immediately following such Business Combination: (A) more than 60%
of the total voting power of (x) the corporation resulting from such
Business Combination (the "Surviving Corporation"), or (y) if applicable,
the ultimate parent corporation that directly or indirectly has beneficial
ownership of 100% of the voting securities eligible to elect directors of
the Surviving Corporation (the "Parent Corporation"), is represented by
Corporation Voting Securities that were outstanding immediately prior to
such Business Combination (or, if applicable, is represented by shares
into which such Corporation Voting Securities were converted pursuant to
such Business Combination), (B) no person (other than any employee benefit
plan (or
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<PAGE>
related trust) sponsored or maintained by the Surviving Corporation or the
Parent Corporation) is or becomes the beneficial owner, directly or
indirectly, of 20% or more of the total voting power of the outstanding
voting securities eligible to elect directors of the Parent Corporation
(or, if there is no Parent Corporation, the Surviving Corporation) and (C)
at least a majority of the members of the board of directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving
Corporation) following the consummation of the Business Combination were
Incumbent Directors at the time of the Board's approval of the execution
of the initial agreement providing for such Business Combination (any
Business Combination which satisfies all of the criteria specified in (A),
(B) and (C) above shall be deemed to be a "Non-Qualifying Transaction");
or
(iv) the sale or other disposition of all or substantially all of
the assets of the Corporation or a liquidation of the Corporation.
Anything herein to the contrary notwithstanding, with respect to any
Participant, a Change in Control shall not be deemed to have occurred if
such Change in Control results from or arises out of a purchase or other
acquisition of the Corporation, directly or indirectly, by a corporation
or other entity in which such Participant has or obtains a direct or
indirect equity interest immediately prior to, or in connection with, such
Change in Control; provided, however that the limitation contained in this
sentence shall not apply in respect of any direct or indirect equity
interest in a corporation or other entity (a) which equity interest is
less than 1% of such entity's equity
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interests, or (b) which is received by such Participant without the
Participant's concurrence or consent, as a result of or in connection with
a purchase or other acquisition of the Corporation by such corporation or
other entity.
Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur solely because any person acquires beneficial ownership of
20% or more of the Corporation Voting Securities as a result of the
acquisition of the Corporation Voting Securities by the Corporation which,
by reducing the number of shares of Corporation Voting Securities
outstanding, increases the percentage of shares beneficially owned by such
person; provided, that if a Change in Control would occur as a result of
such an acquisition by the Corporation (if not for the operation of this
sentence), and after the Corporation's acquisition such person becomes the
beneficial owner of additional shares of Corporation Voting Securities
that increases the percentage of Corporation Voting Securities
beneficially owned by such person, then a Change in Control shall occur.
(f) "Committee" means the Human Resources Committee of the Board.
(g) "Corporation" means Bankers Trust New York Corporation, a New
York corporation, and any successor thereto.
(h) "Date of Termination" means the date on which a Participant's
employment with the Participant's Employer
terminates.
(i) "Effective Date" means the date set forth in Section 14(b) of
this Plan as the effective date of this Plan.
(j) "Employee" means any regular, full-time salaried employee of an
Employer.
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(k) "Employer" means the Corporation or any Subsidiary which is
covered by this Plan pursuant to Section 7 and remains a Subsidiary.
(l) "Executive Officer" means any Participant who is (i) an
"executive officer" of the Corporation as defined in Rule 3b-7 under the
Exchange Act (or any successor provision thereto), or (ii) so designated
for purposes of this Plan by the Corporation's Chief Executive Officer or
the Board.
(m) "Good Reason" means, without a Participant's express written
consent, the occurrence of any of the following events during the
Termination Period:
(1) in the case of any Executive Officer (but not any other
Participant), the assignment to such Executive Officer of any duties or
responsibilities (including reporting responsibilities) inconsistent in
any material and adverse respect with such Executive Officer's duties and
responsibilities with the Executive Officer's Employer immediately prior
to such Change in Control (including any material and adverse diminution
of such duties or responsibilities); provided, however, that Good Reason
shall not be deemed to occur upon a change in duties or responsibilities
that is solely and directly a result of the Corporation no longer being a
publicly traded entity, and does not involve any other event set forth in
this paragraph (1);
(2) a reduction by the Employer in the Participant's rate of annual
base salary as in effect immediately prior to such Change in Control or as
the same may be increased from time to time thereafter;
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(3) any requirement by the Employer that the Participant (i) be
based anywhere more than fifty (50) miles from the location where the
Participant's employment is located at the time of the Change in Control
or (ii) travel on Employer business to an extent substantially greater
than the travel obligations of the Participant immediately prior to such
Change in Control;
(4) the failure of the Employer or the Corporation to (i) continue
in effect any employee benefit plan or compensation plan in which the
Participant is participating immediately prior to such Change in Control
(including the taking of any action which would adversely affect the
Participant's participation in or materially reduce the Participant's
benefits under any such plan), unless the Participant is permitted to
participate in other plans providing the Participant with substantially
comparable benefits, (ii) provide the Participant and the Participant's
dependents with welfare benefits in accordance with the plans, practices,
programs and policies in which the Participant participated immediately
prior to such Change in Control or provide substantially comparable
benefits at a substantially comparable cost to the Participant, (iii)
provide fringe benefits in accordance with the plans, practices, programs
and policies in which the Participant participated immediately prior to
such Change in Control, or provide substantially comparable fringe
benefits, or (iv) provide the Participant with paid vacation in accordance
with the plans, policies, programs and practices applicable to such
Participant immediately prior to such Change in Control (including
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<PAGE>
crediting the Participant with all service credited for such purpose prior
to the Change in Control), unless the failure to provide such paid
vacation is a result of a policy uniformly applied by the entity acquiring
the Corporation to its employees; or
(5) the failure of the Corporation to obtain the assumption
agreement from any successor as contemplated in Section 9(b).
Notwithstanding the foregoing, an isolated and inadvertent action
taken in good faith and which is remedied by the Employer (or the
Corporation) within thirty (30) days after receipt of notice thereof given
by the Participant shall not constitute Good Reason. A Participant's right
to terminate employment for Good Reason shall not be affected by the
Participant's incapacity due to mental or physical illness and a
Participant's continued employment shall not constitute consent to or a
waiver of rights with respect to any event or condition constituting Good
Reason. A Participant must, however, provide notice of termination within
ninety (90) days of such Participant's knowledge of an event or condition
constituting Good Reason or such event shall not constitute Good Reason
hereunder.
(n) "Nonqualifying Termination" means a termination of a
Participant's employment (1) by the Employer for Cause, (2) by the
Participant for any reason other than Good Reason, (3) as a result of the
Participant's death, (4) by the Employer eighty-five (85) or more calendar
days after such Participant's last day of active employment, at a time
where such Participant is on a personal leave of absence, (5) by the
Employer after the Participant's combination of short-term disability and
long-term disability benefits
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<PAGE>
exceed twelve (12) or more months, (6) as a result of the Participant's
mandatory retirement after age sixty-five (65), (7) pursuant to Section 10
hereof or (8) prior to or following the Termination Period.
(o) "Participant" means, subject to Section 2, any Senior Management
Employee.
(p) "Plan" means the Bankers Trust New York Corporation Change in
Control Severance Plan I.
(q) "Senior Management Employee" means any Employee who is (i) a
member of the Management Committee (or any successor organization) of the
Corporation (a "Management Committee Member"), (ii) a member of the
Business Council (or any successor organization) of the Corporation and
who is not a Management Committee Member (a "Business Council Member"), or
(iii) a Senior Managing Director (or its equivalent) or any other Employee
who is a participant in the Corporation's Partnership Equity Plan (or any
successor Plan), other than Participants described in (i) or (ii) above (a
"Senior Managing Director").
(r) "Separation Benefit" means the benefit payable in accordance
with Section 3(a)(2) of this Plan.
(s) "Subsidiary" means any corporation which at the time qualifies
as a subsidiary under the definition of "subsidiary corporation" in
Section 424(f) of the Internal Revenue Code of 1986, as amended (the
"Code").
(t) "Termination Period" means the period of time beginning with a
Change in Control and ending two (2) years following such Change in
Control.
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2. Participation. (a) Each Employee who is a Senior Management
Employee shall automatically be entitled to be a Participant in the Plan (except
with respect to any limitations on participation provided under Section 1(m)(1)
with respect to the definition of Good Reason and under Section 4 with respect
to certain payments thereunder) as of the later of the Effective Date or the
date on which such Employee becomes a Senior Management Employee; provided,
however, that any Employee hired subsequent to a Change in Control shall not be
treated as a Participant in this Plan with respect to such Change in Control
unless such participation is specifically approved by the Committee.
(b) A Participant shall cease to be a Participant in the Plan when
he ceases to be a Senior Management Employee, unless such Participant is then
entitled to payment of a Separation Benefit as provided in the Plan or such
change in status constitutes Good Reason under the Plan. A Participant entitled
to payment of a Separation Benefit shall remain a Participant in the Plan until
the full amount of the Separation Benefit, and any other obligation under this
Plan (including payments under Section 4, if any), has been paid to the
Participant. If a Participant ceases to be a Senior Management Employee prior to
a Change in Control, such Participant shall have no further rights under this
Plan.
3. Payments Upon Termination of Employment.
(a) If during the Termination Period the employment of a Participant
shall terminate, other than by reason of a Nonqualifying Termination, then the
Corporation shall provide to such Participant the following benefits:
(1) Within thirty (30) days following the Participant's Date of
Termination, the Corporation shall pay to such Participant a lump-sum cash
amount equal to the sum of (A) the Participant's Base Salary (without
regard to any reduction
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<PAGE>
constituting Good Reason) through the Date of Termination and any bonus
awards that have been awarded, but are not yet payable, and (B) any
accrued vacation pay, in each case to the extent not theretofore paid.
(2) Within thirty (30) days following the Participant's Date of
Termination, the Corporation shall pay to such Participant a lump-sum
Separation Benefit, based upon the Participant's position (without regard
to any change in position following a Change in Control which would
constitute Good Reason hereunder) as of the Participant's Date of
Termination, equal to:
(A) for Senior Managing Directors, one and one-half (1.5)
times the sum of such Participant's Base Salary and Bonus Amount;
and
(B) for Business Council Members, two (2) times the sum of
such Participant's Base Salary and Bonus Amount; and
(C) for Management Committee Members, three (3) times the sum
of such Participant's Base Salary and Bonus Amount.
Notwithstanding the foregoing, no Participant may receive a Separation Benefit
in excess of $7.5 million.
(3) For a period commencing on the Date of Termination and
continuing for the number of years (or fractions thereof) equal to the
multiple used to determine the Separation Benefit, the Corporation shall
continue to keep in full force and effect (or otherwise provide) all
policies of medical, dental, accident, disability (other than, in the
absence of a terminal illness, long-term disability) and life insurance
with respect to the Participant and his dependents with the same level of
coverage, upon the same terms and otherwise to
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the same extent as such policies shall have been in effect immediately
prior to the Date of Termination (or, if more favorable to the
Participant, immediately prior to the Change in Control), and the
Corporation and the Participant shall share the costs of the continuation
of such insurance coverage in the same proportion as such costs were
shared immediately prior to the Date of Termination. If the Participant
cannot continue to participate in the policies of the Corporation (or the
Participant's Employer) providing such benefits, the Corporation shall
otherwise provide such benefits outside of the policies. Notwithstanding
the foregoing, if such Participant becomes reemployed with another
employer and is eligible to receive any of the welfare benefits described
in this Section 3(a)(3) from such employer, the Participant shall cease
receiving such benefit under this Plan. To the extent permitted by
applicable law, such Participant shall be entitled to be offered
continuation health coverage under Section 4980B of the Code, following
completion of the period set forth in this paragraph (3).
(b) If during the Termination Period the employment of a Participant
shall terminate by reason of a Nonqualifying Termination, then the Corporation
shall pay to the Participant within thirty (30) days following the Date of
Termination, a cash amount equal to the sum of (1) the Participant's Base Salary
(without regard to any reductions constituting Good Reason) through the Date of
Termination and any bonus awards that have been awarded, but are not yet
payable, and (2) any accrued vacation pay, in each case to the extent not
theretofore paid.
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<PAGE>
(c) The Separation Benefit and the other benefits described in this
Section 3 and in Section 4 shall be payable in addition to, and not in lieu of,
all other accrued, vested or deferred compensation, rights, options or other
benefits which may be owed to a Participant following termination or upon a
Change in Control, including but not limited to accrued vacation or sick pay,
amounts or benefits payable under any bonus or other compensation plan, stock
option plan, stock ownership plan, stock purchase plan, life insurance plan,
health plan, disability plan or similar or successor plan; provided, however,
that any Separation Benefits a Participant is entitled to hereunder shall be
reduced by the present value of the amount of any payments in the nature of
separation allowance, severance pay, or "notice" pay which the Corporation or
any Employer is required to pay such Participant pursuant to any applicable law,
severance program or employment or severance agreement. For this purpose,
unemployment compensation benefits shall not reduce Separation Benefits
hereunder.
4. Additional Payments and Limitations on Payments.
(a) Anything in this Plan (other than this Section 4) to the
contrary notwithstanding, in the event it shall be determined that any payment,
distribution or acceleration of vesting of any award or benefit by the
Corporation or its affiliated companies (a "Payment") to or for the benefit of a
Management Committee Member, a Business Council Member, or any other individual
designated by the Corporation's Chief Executive Officer or the Board (each, an
"Eligible Participant"), whether paid or payable, distributed or distributable
or accelerated or subject to acceleration pursuant to the terms of this Plan or
otherwise, but determined without regard to any additional payments required
under this Section 4(a), would be subject to the excise tax imposed by Section
4999 of the Code, or
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any interest or penalties are incurred by the Eligible Participant with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Corporation shall pay the Eligible Participant an additional payment (a
"Gross-Up Payment") in an amount such that after payment by the Eligible
Participant of all taxes (including any interest or penalties imposed with
respect to such taxes) imposed upon the Gross-Up Payment, the Eligible
Participant retains an amount of the Gross-Up Payment equal to the sum of (x)
the Excise Tax imposed upon the Payments and (y) the product of any deductions
disallowed because of the inclusion of the Gross-Up Payment in the Eligible
Participant's adjusted gross income and the highest applicable marginal rate of
federal income taxation for the calendar year in which the Gross-Up Payment is
to be made. For purposes of determining the amount of the Gross-Up Payment, the
Eligible Participant shall be deemed to (A) pay federal income taxes at the
highest marginal rate of federal income taxation for the calendar year in which
the Gross-Up Payment is to be made, (B) pay applicable state and local income
taxes at the Participant's own highest marginal rate of taxation for the
calendar year in which the Gross-Up Payment is to be made, net of the maximum
reduction in federal income taxes which could be obtained from deduction of such
state and local taxes and (C) have otherwise allowable deductions for federal
income tax purposes at least equal to those which could be disallowed because of
the inclusion of the Gross-Up Payment in the Eligible Participant's adjusted
gross income. The receipt of a Gross-Up Payment under this Section 4 shall in no
event be conditioned upon the Eligible Participant's termination of employment
or receipt of Separation Benefits under this Plan. Notwithstanding the foregoing
provisions of this Section 4(a), if it shall be determined that the Eligible
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Participant is entitled to a Gross-Up Payment, but that the Payments would not
be subject to the Excise Tax if the Separation Benefits were reduced by an
amount that is less than 10% of the portion of the Payments that would be
treated as "parachute payments" under Section 280G of the Code, then the amounts
payable to the Eligible Participant under this Plan shall be reduced (but not
below zero) to the maximum amount that could be paid to such Eligible
Participant without giving rise to the Excise Tax (the "Safe Harbor Cap"), and
no Gross-Up Payment shall be made. The reduction of the amounts payable
hereunder, if applicable, shall be made by reducing first the payments under
Section 3(a)(2), unless an alternative method of reduction is elected by the
Eligible Participant. For purposes of reducing the Payments to the Safe Harbor
Cap, only amounts payable to the Eligible Participant under this Plan (and no
other Payments) shall be reduced. If the reduction of the amounts payable
hereunder would not result in a reduction of the Payments to the Safe Harbor
Cap, no amounts payable under this Plan to such Eligible Participant shall be
reduced pursuant to this provision.
(b) The Gross-Up Payment under this Section 4 with respect to any
Payment shall be made no later than sixty (60) days following such Payment. If
the Corporation determines that no Excise Tax is payable by the Eligible
Participant, it shall furnish the Participant, upon written request, with a
written statement to such effect, and to the effect that failure to report the
Excise Tax, if any, on the Participant's applicable federal income tax return
will not result in the imposition of a negligence or similar penalty. As a
result of the uncertainty in the application of Section 4999 of the Code, it is
possible that Gross-Up Payments which will not have been made by the Corporation
should have been made ("Underpayment") or Gross-Up Payments are made by the
Corporation which should not have been made
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("Overpayment"), consistent with the calculations required to be made hereunder.
In the event that the Eligible Participant thereafter is required to make
payment of any Excise Tax or additional Excise Tax, the Corporation shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Corporation to or for the benefit of
the Eligible Participant. In the event the amount of the Gross-Up Payment
exceeds the amount necessary to reimburse the Eligible Participant for his
Excise Tax, the Corporation shall determine the amount of the Overpayment that
has been made and any such Overpayment shall be promptly paid by the Eligible
Participant to or for the benefit of the Corporation.
(c) Anything in this Plan to the contrary notwithstanding, in the
event it shall be determined that any Payment to or for the benefit of a
Participant who is not an Eligible Participant under this Section 4, whether
paid or payable, distributed or distributable or accelerated or subject to
acceleration pursuant to the terms of this Plan or otherwise would be subject to
the Excise Tax, then the Separation Benefit shall be reduced to the extent
necessary so that no portion of the Payments is subject to the Excise Tax, but
only if (1) the net amount of the Payments, as so reduced, (and after deduction
of the net amount of federal, state and local income tax on such reduced
Payments) is greater than (2) (A) the net amount of the Payments, without
reduction (but after deduction of any taxes (other than the Excise Tax) on such
Payments), less (B) the amount of Excise Tax to which the Participant would be
subject in respect of the Payments. Prior to the payment date set forth in
Section 3(a)(2), the Corporation shall provide such Participant, upon request,
with its calculation of the amounts referred to in this paragraph and such
supporting materials as are reasonably necessary for the
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Participant to evaluate the Corporation's calculations. If the Participant
objects to the Corporation's calculations, the Corporation shall pay to the
Participant such portion of the Separation Benefit (up to 100% thereof) as the
Participant determines is necessary to result in the Participant receiving the
maximum amount of Payments (net of all taxes) he could receive under this
paragraph (c).
(d) Subject to the provisions of Section 4(a), all determinations
required to be made under this Section 4, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by the
Corporation. A Participant shall cooperate, to the extent such Participant's
expenses are reimbursed by the Corporation, with any reasonable requests by the
Corporation in connection with any contests or disputes with the Internal
Revenue Service in connection with the Excise Tax.
5. Withholding Taxes. The Corporation may withhold from all payments
due to a Participant (or his beneficiary or estate) hereunder all taxes which,
by applicable federal, state, local or other law, the Corporation or any
Employer is required to withhold therefrom.
6. Reimbursement of Expenses and Settlement of Disputes. If any
contest or dispute shall arise under this Plan involving termination of a
Participant's employment with an Employer or involving the failure or refusal of
the Corporation to perform fully in accordance with the terms hereof, the
Corporation shall reimburse the Participant, on a current basis, for all
reasonable legal fees and expenses, if any, reasonably incurred by the
Participant in connection with such contest or dispute (regardless of the result
thereof), provided, that, if it is determined by a court or by arbitration that
the Participant had not entered into the contest or dispute in good faith, the
Participant shall be
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<PAGE>
obligated to return to the Corporation such reimbursed fees and expenses. All
disputes hereunder shall be settled exclusively by arbitration in New York, New
York in accordance with the rules of the American Arbitration Association then
in effect. Judgment may be entered on the arbitration award in any court having
jurisdiction. The Corporation shall bear all costs and expenses in connection
with the retention of the arbitration panel for any proceeding.
7. Participating Employers. Except for the Subsidiaries included
within Schedule A hereto, each Subsidiary shall, automatically and without any
action on the part of such Subsidiary, be deemed an Employer and the provisions
of this Plan shall be fully applicable to the Employees of such Subsidiary.
8. Termination or Amendment of Plan.
(a) Subject to paragraph (b) below, this plan shall be in effect as
of the Effective Date and shall terminate upon the fifth anniversary of the
Effective Date unless terminated at an earlier date by the Corporation.
(b) The Corporation shall have the right prior to a Change in
Control, in its sole discretion pursuant to action by the Board, to approve the
termination or amendment of this Plan; provided, however, that no such action
which would adversely affect the rights or potential rights of Participants
shall be taken by the Board from the time the Board is informed at a regular or
special meeting as to the identity of a person that may desire to enter into a
Change in Control until, in the opinion of the Board, such person or the
Corporation has abandoned or terminated any potential Change in Control; and
provided, further, that notwithstanding anything in paragraph (a) of this
Section 8 to the contrary, in no event shall this Plan be terminated or amended
following a Change in Control (including any prior designations made by the
Corporation's Chief Executive
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<PAGE>
Officer or the Board under Sections 1(l) or 4) in any manner which would
adversely affect the rights or potential rights of Participants under this Plan
with respect to such Change in Control.
9. Successors.
(a) This Plan shall not be terminated by any merger, consolidation,
share exchange or similar event involving the Corporation whereby the
Corporation is or is not the surviving or resulting entity. In the event of any
merger, consolidation, share exchange or similar event, the provisions of this
Plan shall be binding upon the surviving or resulting corporation or the person
or entity to which such assets are transferred.
(b) The Corporation agrees that concurrently with any merger,
consolidation, share exchange or sale, lease or transfer of all or substantially
all of its assets it will cause any successor or transferee unconditionally to
assume all of the obligations of the Corporation hereunder. Failure of the
Corporation to obtain such assumption prior to the effectiveness of any such
merger, consolidation, share exchange or transfer of assets shall constitute
Good Reason hereunder. For purposes of implementing the foregoing, the date on
which any such merger, consolidation, share exchange or transfer becomes
effective shall be deemed the date Good Reason occurs, and the Participant may
terminate employment for Good Reason on or following such date.
(c) This Plan shall inure to the benefit of and be enforceable by
each Participant's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If a Participant shall
die while any amounts are payable to the Participant hereunder (including any
payments which may be owed under Section 4), all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms
-20-
<PAGE>
of this Plan to such person or persons appointed in writing by the Participant
to receive such amounts or, if no person is so appointed, to the Participant's
estate.
10. Sales of Divisions or Units. Notwithstanding anything contained
herein to the contrary, in the event of a sale of a division or unit of the
Corporation following a Change in Control, any Participant affected by such sale
shall not be eligible to receive the benefits under this Plan solely as a result
of the sale, if such Participant is offered a reasonably comparable position
with reasonably comparable compensation with the acquiring company in the same
general geographic area as such Participant's then current position, and the
acquiring company agrees to provide a similar plan to this Plan ("Comparable
Employment"). The acquiring company's plan shall provide that if such
Participant's Comparable Employment with the acquiring company is terminated
(other than pursuant to a reason which would constitute a Nonqualifying
Termination hereunder) within two (2) years from the Change in Control under
this Plan, the acquiring company shall provide benefits equivalent to those
hereunder. The terms of the Participant's Comparable Employment shall be the
basis for determining Good Reason under such acquiring company's plan.
11. No Mitigation; Offset. The obligation of the Corporation to make
any payments provided for by this Plan to a Participant and otherwise to perform
its obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Corporation or any
Employer may have against the Participant or others; provided, however, that the
Corporation shall be entitled to offset against its obligations hereunder any
severance payment made or benefit provided by the Corporation or by a
Participant's Employer. In no event shall a Participant be obligated to seek
other employment or take other action by way of mitigation of the
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<PAGE>
amounts payable to the Participant under any of the provisions of this Plan and
such amounts shall not be reduced whether or not the Participant obtains other
employment, except as provided in Section 3(a)(3) of this Plan.
12. Governing Law; Validity. The interpretation, construction and
performance of this Plan, unless pre-empted by the Employee Retirement Income
Act of 1974, as amended, ("ERISA"), shall be governed by and construed and
enforced in accordance with the laws of the State of New York without regard to
the principle of conflicts of laws. The invalidity or unenforceability of any
provision of this Plan shall not affect the validity or enforceability of any
other provision of this Plan, which other provisions shall remain in full force
and effect.
13. Administration. The Plan shall be administered by the Committee.
Consistent with the requirements of ERISA and the regulations thereunder of the
Department of Labor, the Committee shall provide adequate written notice to any
Participant whose claim for Separation Benefits has been denied, setting forth
specific reasons for such denial, written in a manner calculated to be
understood by such Participant, and affording such Participant a full and fair
review of the decision denying the claim.
14. Miscellaneous.
(a) Neither the Corporation nor any Employer shall be required to
fund or otherwise segregate assets to be used for the payment of any benefits
under the Plan. The Corporation shall make such payments only out of its general
corporate funds, and therefore its obligation to make such payments shall be
subject to any claims of its other creditors having priority as to its assets.
(b) The "Effective Date" of the Plan is August 8, 1997.
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<PAGE>
(c) This Plan does not constitute a contract of employment or impose
on the Corporation or the Participant's Employer any obligation to retain the
Participant as an Employee, to change the status of the Participant's
employment, or to change the policies of the Corporation or its Subsidiaries
regarding termination of employment.
(d) The Corporation's obligations hereunder shall be subject to all
applicable laws, and Separation Benefits may be adjusted to comply with any such
laws.
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<PAGE>
Schedule A
This Plan shall not apply to any entity that:
(i) becomes a Subsidiary as a result of a foreclosure or similar
action;
(ii) becomes a Subsidiary as a result of the conversion of loans,
securities or other obligations into voting securities in connection with a
reorganization or recapitalization of such entity;
(iii) becomes a Subsidiary as a result of a private equity
investment; or
(iv) is otherwise excluded from participation in the Plan by the
Committee at the time it becomes a Subsidiary.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANKERS
TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION AT
DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,837
<INT-BEARING-DEPOSITS> 2,382
<FED-FUNDS-SOLD> 19,537
<TRADING-ASSETS> 46,170
<INVESTMENTS-HELD-FOR-SALE> 12,748
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 23,285
<ALLOWANCE> 652
<TOTAL-ASSETS> 133,115
<DEPOSITS> 37,334
<SHORT-TERM> 33,733<F1>
<LIABILITIES-OTHER> 10,676<F2>
<LONG-TERM> 19,423
0
394
<COMMON> 105
<OTHER-SE> 4,197
<TOTAL-LIABILITIES-AND-EQUITY> 133,115
<INTEREST-LOAN> 1,711
<INTEREST-INVEST> 676
<INTEREST-OTHER> 3,516<F3>
<INTEREST-TOTAL> 8,291
<INTEREST-DEPOSIT> 2,195
<INTEREST-EXPENSE> 6,919
<INTEREST-INCOME-NET> 1,372
<LOAN-LOSSES> 40
<SECURITIES-GAINS> (56)
<EXPENSE-OTHER> 5,166
<INCOME-PRETAX> (77)
<INCOME-PRE-EXTRAORDINARY> (77)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> (1.05)
<YIELD-ACTUAL> 1.16
<LOANS-NON> 392
<LOANS-PAST> 0
<LOANS-TROUBLED> 26
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 699
<CHARGE-OFFS> 107
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 652<F4>
<ALLOWANCE-DOMESTIC> 266<F4>
<ALLOWANCE-FOREIGN> 380<F4>
<ALLOWANCE-UNALLOCATED> 6<F4>
<FN>
<F1>Short-term borrowings include the following:
Securities loaned and securities sold under
repurchase agreements 17,420
Other short-term borrowings 16,313
Total 33,733
<F2>Other liabilities include the following:
Accounts payable and accrued expenses 5,210
Other liabilities 5,234
Acceptances outstanding 232
Total 10,676
<F3>Other interest income includes the
following:
Interest-bearing deposits with banks 310
Federal funds sold 211
Securities purchased under resale agreements 1,635
Securities borrowed 1,222
Customer receivables 138
Total 3,516
<F4>Amount pertains to the allowance for credit losses loans.
</FN>
</TABLE>
