LISTING PROSPECTUS Deutsche Bank Capital Funding Trust V (a wholly owned subsidiary of Deutsche Bank Aktiengesellschaft) 3,000,000 Noncumulative Trust Preferred Securities (Liquidation Preference Amount € 100 per Trust Preferred Security) The Noncumulative Trust Preferred Securities, Liquidation Preference Amount € 100 per security, (the “Trust Preferred Securities”) offered hereby (the “Offering”) represent preferred undivided beneficial ownership interests in the assets of Deutsche Bank Capital Funding Trust V, a statutory trust created under the laws of the State of Delaware (the “Trust”). The assets of the Trust consist solely of Class B Preferred Securities of Deutsche Bank Capital Funding LLC V, a Delaware limited liability company (the “Company”). Deutsche Bank Aktiengesellschaft, Frankfurt am Main, (the “Bank”) will own one common security of the Trust. Capital Payments (as defined herein) will accrue at a fixed rate of 6.15% per annum on the respective liquidation preference amounts of € 100 per Trust Preferred Security (the “Liquidation Preference Amount”) and € 100 per Class B Preferred Security, and will be payable quarterly in arrears on March 2, June 2, September 2 and December 2 of each year, commencing March 2, 2004 (each such date, a “Payment Date”). Capital Payments payable on each Payment Date will accrue from and including the immediately preceding Payment Date (or December 2, 2003 with respect to Capital Payments payable on March 2, 2004), up to but excluding the relevant Payment Date (each such period, a “Payment Period”), and will be calculated on the basis of a 360-day year of twelve 30-day months. The Class B Preferred Securities are not offered hereby. The Trust Preferred Securities will be initially evidenced by a temporary Global Certificate, in fully registered form, registered in the name of, and deposited on or about the closing date with, Clearstream Banking AG, Frankfurt am Main, (“Clearstream AG”) for credit to the accountholders of Clearstream AG, including Euroclear Bank S.A./N.V., Brussels, as operator of the Euroclear System (“Euroclear”) and Clearstream Banking, société anonyme, Luxembourg (“Clearstream, Luxembourg”). Such temporary Global Certificate will be exchangeable for a permanent Global Certificate, in fully registered form, not earlier than 40 days after the closing date upon certification of non-U.S. beneficial ownership. The Trust Preferred Securities are expected, on issue, to be assigned ratings of “A” by Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc. (“S&P”), “A2” by Moody’s Investors Service, Inc. (“Moody’s”) and “A+” by Fitch Ratings Ltd. (“Fitch”). The ratings for the Trust Preferred Securities are derived from the ratings of the Bank. A rating is not a recommendation to buy, hold or sell securities, and may be subject to revision, suspension or withdrawal at any time by the rating agency. Application has been made to admit the Trust Preferred Securities to trading and official quotation on the Frankfurt Stock Exchange. Application also has been made to admit the Trust Preferred Securities to trading and official quotation on the Official Segment of Euronext Amsterdam N.V.’s Stock Market (“Euronext Amsterdam”). This Listing Prospectus constitutes a prospectus for the purposes of the listing and issuing rules of the Frankfurt Stock Exchange. This document is also an offering circular for the offering and sale of the Trust Preferred Securities (“Offering Circular”), and when attached to a prospectus supplement constitutes a prospectus for the purposes of the listing and issuing rules of Euronext Amsterdam. See “Investment Considerations” beginning on page 44 for a discussion of certain factors that should be considered by prospective investors. Offering Price: 100% of Liquidation Preference Amount. THE TRUST PREFERRED SECURITIES ARE NOT AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY JURISDICTION AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT IN A TRANSACTION THAT IS EXEMPT FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR THE SECURITIES LAWS OF ANY JURISDICTION. The Trust Preferred Securities are offered by the Managers named below, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the Trust Preferred Securities will be ready for delivery in book-entry form only through the facilities of Clearstream AG on or about December 2, 2003 against payment therefor in immediately available funds. Beneficial interests in the Trust Preferred Securities will be shown on, and transfers thereof will be effected only through, records maintained by Clearstream AG. Deutsche Bank BCP Investimento, SA Credit Suisse First Boston HSBC Landesbank Baden-Wuerttemberg Natexis Banques Populaires Tokyo-Mitsubishi International plc UBS Investment Bank The date of this Listing Prospectus is December 2, 2003.
Transcript
LISTING PROSPECTUS
Deutsche Bank Capital Funding Trust V (a wholly owned subsidiary of Deutsche Bank Aktiengesellschaft)
3,000,000 Noncumulative Trust Preferred Securities (Liquidation Preference Amount € 100 per Trust Preferred Security) The Noncumulative Trust Preferred Securities, Liquidation Preference Amount € 100 per security, (the “Trust Preferred Securities”) offered hereby (the “Offering”) represent preferred undivided beneficial ownership interests in the assets of Deutsche Bank Capital Funding Trust V, a statutory trust created under the laws of the State of Delaware (the “Trust”). The assets of the Trust consist solely of Class B Preferred Securities of Deutsche Bank Capital Funding LLC V, a Delaware limited liability company (the “Company”). Deutsche Bank Aktiengesellschaft, Frankfurt am Main, (the “Bank”) will own one common security of the Trust.
Capital Payments (as defined herein) will accrue at a fixed rate of 6.15% per annum on the respective liquidation preference amounts of € 100 per Trust Preferred Security (the “Liquidation Preference Amount”) and € 100 per Class B Preferred Security, and will be payable quarterly in arrears on March 2, June 2, September 2 and December 2 of each year, commencing March 2, 2004 (each such date, a “Payment Date”). Capital Payments payable on each Payment Date will accrue from and including the immediately preceding Payment Date (or December 2, 2003 with respect to Capital Payments payable on March 2, 2004), up to but excluding the relevant Payment Date (each such period, a “Payment Period”), and will be calculated on the basis of a 360-day year of twelve 30-day months. The Class B Preferred Securities are not offered hereby.
The Trust Preferred Securities will be initially evidenced by a temporary Global Certificate, in fully registered form, registered in the name of, and deposited on or about the closing date with, Clearstream Banking AG, Frankfurt am Main, (“Clearstream AG”) for credit to the accountholders of Clearstream AG, including Euroclear Bank S.A./N.V., Brussels, as operator of the Euroclear System (“Euroclear”) and Clearstream Banking, société anonyme, Luxembourg (“Clearstream, Luxembourg”). Such temporary Global Certificate will be exchangeable for a permanent Global Certificate, in fully registered form, not earlier than 40 days after the closing date upon certification of non-U.S. beneficial ownership.
The Trust Preferred Securities are expected, on issue, to be assigned ratings of “A” by Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc. (“S&P”), “A2” by Moody’s Investors Service, Inc. (“Moody’s”) and “A+” by Fitch Ratings Ltd. (“Fitch”). The ratings for the Trust Preferred Securities are derived from the ratings of the Bank. A rating is not a recommendation to buy, hold or sell securities, and may be subject to revision, suspension or withdrawal at any time by the rating agency.
Application has been made to admit the Trust Preferred Securities to trading and official quotation on the Frankfurt Stock Exchange. Application also has been made to admit the Trust Preferred Securities to trading and official quotation on the Official Segment of Euronext Amsterdam N.V.’s Stock Market (“Euronext Amsterdam”). This Listing Prospectus constitutes a prospectus for the purposes of the listing and issuing rules of the Frankfurt Stock Exchange. This document is also an offering circular for the offering and sale of the Trust Preferred Securities (“Offering Circular”), and when attached to a prospectus supplement constitutes a prospectus for the purposes of the listing and issuing rules of Euronext Amsterdam. See “Investment Considerations” beginning on page 44 for a discussion of certain factors that should be considered by prospective investors.
Offering Price: 100% of Liquidation Preference Amount. THE TRUST PREFERRED SECURITIES ARE NOT AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY JURISDICTION AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD EXCEPT IN A TRANSACTION THAT IS EXEMPT FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR THE SECURITIES LAWS OF ANY JURISDICTION.
The Trust Preferred Securities are offered by the Managers named below, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that the Trust Preferred Securities will be ready for delivery in book-entry form only through the facilities of Clearstream AG on or about December 2, 2003 against payment therefor in immediately available funds. Beneficial interests in the Trust Preferred Securities will be shown on, and transfers thereof will be effected only through, records maintained by Clearstream AG.
Deutsche Bank
BCP Investimento, SA Credit Suisse First Boston HSBC
Landesbank Baden-Wuerttemberg Natexis Banques Populaires Tokyo-Mitsubishi International plc UBS Investment Bank
The date of this Listing Prospectus is December 2, 2003.
NO PERSON IS AUTHORIZED TO PROVIDE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS OFFERING CIRCULAR, AND ANY INFORMATION OR REPRESENTATION NOT CONTAINED IN THIS OFFERING CIRCULAR MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE BANK, THE TRUST OR THE COMPANY OR BY THE MANAGERS. THE DELIVERY OF THIS OFFERING CIRCULAR AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS DOCUMENT IS ONLY BEING DISTRIBUTED TO AND IS ONLY DIRECTED AT (I) PERSONS WHO ARE OUTSIDE THE UNITED KINDGOM OR (II) TO INVESTMENT PROFESSIONALS FALLING WITHIN ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2001 (THE “ORDER”) OR (III) HIGH NET WORTH ENTITIES, AND OTHER PERSONS TO WHOM IT MAY LAWFULLY BE COMMUNICATED, FALLING WITHIN ARTICLE 49(2) OF THE ORDER (ALL SUCH PERSONS TOGETHER BEING REFERRED TO AS “RELEVANT PERSONS”). THE TRUST PREFERRED SECURITIES ARE ONLY AVAILABLE TO, AND ANY INVITATION, OFFER OR AGREEMENT TO SUBSCRIBE, PURCHASE OR OTHERWISE ACQUIRE SUCH TRUST PREFERRED SECURITIES WILL BE ENGAGED IN ONLY WITH, RELEVANT PERSONS. ANY PERSON WHO IS NOT A RELEVANT PERSON SHOULD NOT ACT OR RELY UPON THIS DOCUMENT OR ANY OF ITS CONTENTS.
IN CONNECTION WITH THE OFFERING, DEUTSCHE BANK AG LONDON (THE “LEAD MANAGER”) OR ANY PERSON ACTING FOR IT MAY OVER-ALLOT OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICES OF THE TRUST PREFERRED SECURITIES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL FOR A LIMITED TIME AFTER THE ISSUE DATE. HOWEVER, THERE MAY BE NO OBLIGATION ON THE LEAD MANAGER OR ANY OF ITS AGENTS TO DO THIS. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME, AND MUST BE BROUGHT TO AN END AFTER A LIMITED PERIOD. SUCH TRANSACTIONS MAY BE EFFECTED ON THE FRANKFURT STOCK EXCHANGE, EURONEXT AMSTERDAM OR OTHERWISE. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE “GENERAL INFORMATION—SUBSCRIPTION AND SALE”.
AFFILIATES OF THE COMPANY MAY MAKE A SECONDARY MARKET IN THE TRUST PREFERRED SECURITIES. IF AFFILIATES OF THE COMPANY MAKE A SECONDARY MARKET IN THE TRUST PREFERRED SECURITIES, SUCH MARKET-MAKING MAY GIVE RISE TO LIMITATIONS FOR TRUST PREFERRED SECURITIES PREVIOUSLY SOLD IN OFFSHORE TRANSACTIONS IN RELIANCE ON REGULATION S UNDER THE SECURITIES ACT WITH RESPECT TO RESALES IN THE UNITED STATES OR TO U.S. PERSONS.
NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY IN THE UNITED STATES HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED WHETHER THIS OFFERING CIRCULAR IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
OTHER THAN IN THE NETHERLANDS, NO ACTION HAS BEEN TAKEN TO PERMIT A PUBLIC OFFERING OF THE TRUST PREFERRED SECURITIES IN ANY JURISDICTION WHERE ACTION WOULD BE REQUIRED FOR SUCH PURPOSE. THE DISTRIBUTION OF THIS OFFERING CIRCULAR AND THE OFFERING OF THE TRUST PREFERRED SECURITIES IN CERTAIN JURISDICTIONS MAY BE RESTRICTED BY LAW. EACH PURCHASER OF THE TRUST PREFERRED SECURITIES MUST COMPLY WITH ALL APPLICABLE LAWS AND REGULATIONS IN FORCE IN ANY JURISDICTION IN WHICH IT PURCHASES, OFFERS OR SELLS THE TRUST PREFERRED SECURITIES OR POSSESSES OR DISTRIBUTES THIS OFFERING CIRCULAR AND MUST OBTAIN ANY CONSENT, APPROVAL OR PERMISSION REQUIRED BY IT FOR THE PURCHASE, OFFER OR SALE BY IT OF THE TRUST PREFERRED SECURITIES UNDER THE LAWS AND REGULATIONS IN FORCE IN ANY JURISDICTION TO WHICH IT IS SUBJECT OR IN WHICH IT MAKES SUCH PURCHASES, OFFERS OR SALES, AND NONE OF THE TRUST, THE COMPANY, THE BANK OR THE MANAGERS SHALL HAVE ANY RESPONSIBILITY THEREFOR.
SO LONG AS THE TRUST PREFERRED SECURITIES HAVE NOT BEEN LISTED ON EURONEXT AMSTERDAM, OR IT IS UNLIKELY THAT THE TRUST PREFERRED SECURITIES WILL SOON BE ADMITTED TO LISTING, THE TRUST PREFERRED SECURITIES MAY ONLY BE OFFERED, SOLD, OR DELIVERED IN OR FROM THE NETHERLANDS AS PART OF THEIR INITIAL DISTRIBUTION OR AS PART OF ANY RE-OFFERING, AND THIS OFFERING CIRCULAR AND ANY OTHER DOCUMENT
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IN RESPECT OF THE OFFERING MAY ONLY BE DISTRIBUTED OR CIRCULATED IN THE NETHERLANDS, TO INDIVIDUALS OR LEGAL ENTITIES THAT INCLUDE, BUT ARE NOT LIMITED TO, BANKS, BROKERS, DEALERS, INSTITUTIONAL INVESTORS AND UNDERTAKINGS WITH A TREASURY DEPARTMENT, WHO OR WHICH TRADE OR INVEST IN SECURITIES IN THE CONDUCT OF BUSINESS OR PROFESSION.
THE BANK, THE COMPANY AND THE TRUST ASSUME RESPONSIBILITY FOR THE CONTENTS OF THIS OFFERING CIRCULAR. THE BANK, THE COMPANY AND THE TRUST, HAVING MADE REASONABLE INQUIRIES, CONFIRM THAT (I) THE OFFERING CIRCULAR CONTAINS ALL INFORMATION WITH RESPECT TO THE BANK, ITS AFFILIATES, ITS SUBSIDIARIES, THE TRUST PREFERRED SECURITIES, CLASS B PREFERRED SECURITIES AND THE OBLIGATIONS (AS DEFINED HEREIN) THAT IS MATERIAL IN THE CONTEXT OF THE LISTING, ISSUE AND OFFERING OF THE TRUST PREFERRED SECURITIES; (II) THE INFORMATION CONTAINED IN THIS OFFERING CIRCULAR IS TRUE AND ACCURATE IN ALL MATERIAL RESPECTS AND IS NOT MISLEADING; (III) THE OPINIONS AND INTENTIONS EXPRESSED IN THIS OFFERING CIRCULAR ARE HONESTLY HELD; AND (IV) THERE ARE NO OTHER FACTS THE OMISSION OF WHICH MAKES THIS OFFERING CIRCULAR AS A WHOLE OR ANY OF THE INFORMATION OR THE EXPRESSION OF ANY OF THE OPINIONS OR INTENTIONS MISLEADING IN ANY RESPECT.
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TABLE OF CONTENTS
GLOSSARY .......................................................................................................................................................... 1 INTRODUCTORY SUMMARY OF THE TRANSACTION........................................................................... 8 GENERAL INFORMATION............................................................................................................................ 10 SELLING RESTRICTIONS ............................................................................................................................. 12 TAXATION......................................................................................................................................................... 14 FORWARD-LOOKING STATEMENTS ........................................................................................................ 17 PRESENTATION OF FINANCIAL INFORMATION .................................................................................. 17 OFFERING CIRCULAR SUMMARY ............................................................................................................ 19 THE OFFERING................................................................................................................................................ 28 INVESTMENT CONSIDERATIONS .............................................................................................................. 39 CAPITALIZATION OF THE COMPANY AND THE TRUST .................................................................... 42 DEUTSCHE BANK CAPITAL FUNDING TRUST V ................................................................................... 43 DEUTSCHE BANK CAPITAL FUNDING LLC V ........................................................................................ 45 USE OF PROCEEDS ......................................................................................................................................... 48 DISTRIBUTABLE PROFITS OF THE BANK............................................................................................... 49 DESCRIPTION OF THE TRUST SECURITIES ........................................................................................... 50 DESCRIPTION OF THE COMPANY SECURITIES.................................................................................... 62 DESCRIPTION OF THE SUPPORT UNDERTAKING................................................................................ 71 DESCRIPTION OF THE SERVICES AGREEMENT................................................................................... 72 DESCRIPTION OF THE TERMS OF THE INITIAL OBLIGATION........................................................ 73 LEGAL MATTERS ........................................................................................................................................... 76 CAPITALIZATION OF DEUTSCHE BANK GROUP.................................................................................. 77 THE BANK ......................................................................................................................................................... 78 APPENDIX A: SUPPORT UNDERTAKING................................................................................................A-1 FINANCIAL STATEMENTS AND OTHER INFORMATION ON DEUTSCHE BANK GROUP: Excerpts from Annual Report for the year ended December 31, 2002 (Consolidated Financial Statements) according to §292a of the German Commercial Code (Handelsgesetzbuch) ............................................... F-2 Interim Report for the nine months ended September 30, 2003............................................................... F-145
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GLOSSARY
“1940 Act” means the U.S. Investment Company Act of 1940, as amended.
“Additional Amounts” means such additional amounts payable by the Company or Trust pursuant to the terms of the Class B Preferred Securities and the Trust Preferred Securities as additional Capital Payments as may be necessary in order that the net amounts received by the holders of the Class B Preferred Securities and the Trust Preferred Securities, after deduction or withholding for or on account of any Withholding Taxes, on payments on and any amount payable in liquidation or on repayment upon redemption thereof, will equal the amounts that otherwise would have been received had no such deduction or withholding been required.
“Additional Interest Amounts” means any additional interest amounts payable by the Bank or other obligor pursuant to the terms of the Initial Obligation as a result of deduction or withholding upon payment of interest on the Initial Obligation or repayment upon redemption thereof.
“Administrative Action” means any judicial decision, official administrative pronouncement, published or private ruling, regulatory procedure, notice or announcement (including any notice or announcement of intent to adopt certain procedures or regulations) by any legislative body, court, governmental authority or regulatory body.
“BaFin” means the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienst-leistungsaufsicht).
“Bank” means Deutsche Bank Aktiengesellschaft, Frankfurt am Main.
“billion” means one thousand million.
“Board of Directors” means the Board of Directors of the Company.
“Business Day” means a day on which TARGET (the Trans-European Automated Real Time Gross Settlement Express Transfer System) is operating credit or transfer instructions in respect of payments in Euro.
“By-laws” means the by-laws of the Company.
“Capital Payments” means the periodic distributions on the Trust Securities and the Class B Preferred Securities.
“CI” means the Corporate Investments Group Division of the Bank.
“CIB” means the Corporate and Investment Bank Group Division of the Bank.
“Class A Preferred Security” means the noncumulative Class A Preferred Security representing an ownership interest in the Company.
“Class B Preferred Securities” means the noncumulative Class B Preferred Securities evidencing preferred ownership interests in the Company.
“Clearstream, Luxembourg” means Clearstream Banking, société anonyme, Luxembourg.
“Clearstream AG” means Clearstream Banking AG, Frankfurt am Main, Germany.
“Closing Date” means December 2, 2003.
“Code” means the Internal Revenue Code of 1986, as amended.
“Company” means Deutsche Bank Capital Funding LLC V, a Delaware limited liability company.
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“Company Common Security” means the voting common security representing an ownership interest in the Company.
“Company Preferred Securities” means the Class B Preferred Securities and the Class A Preferred Security.
“Company Special Redemption Event” means (i) a Regulatory Event, (ii) a Tax Event with respect to the Company or (iii) an Investment Company Act Event with respect to the Company.
“Company Successor Securities” means other securities substituted for the Class B Preferred Securities having substantially the same terms as the Class B Preferred Securities.
“Consolidated Financial Statements” means the audited consolidated financial statements (including the notes thereto) included herein of Deutsche Bank Group as of and for the years ended December 31, 2001 and December 31, 2002.
“DBSI” means Deutsche Bank Securities Inc.
“Delaware Trustee” means Deutsche Bank Trust Company Delaware, in its capacity as Delaware trustee of the Trust.
“Deutsche Bank Group” means the Bank and its consolidated subsidiaries.
“Distributable Profits” of the Bank for any fiscal year is the balance sheet profit (Bilanzgewinn) as of the end of such fiscal year, as shown in the audited unconsolidated balance sheet of the Bank as of the end of such fiscal year. Such balance sheet profit includes the annual surplus or loss (Jahresüberschuß/-fehlbetrag), plus any profit carried forward from previous years, minus any loss carried forward from previous years, plus transfers from capital reserves and earnings reserves, minus allocations to earnings reserves, all as determined in accordance with the provisions of the German Stock Corporation Act (Aktiengesetz) and accounting principles generally accepted in the Federal Republic of Germany as described in the German Commercial Code (Handelsgesetzbuch) and other applicable German law then in effect.
“Distribution Compliance Period” means the period until the 40th day after the later of the Closing Date and the completion of the distribution of the Trust Preferred Securities.
“Enforcement Event” under the Trust Agreement with respect to the Trust Securities means the occurrence, at any time, of either (i) non-payment of Capital Payments (plus any Additional Amounts thereon, if any) on the Trust Preferred Securities or the Class B Preferred Securities at the Stated Rate in full, for four consecutive Payment Periods, or (ii) a default by the Bank in respect of any of its obligations under the Support Undertaking; provided, that, pursuant to the Trust Agreement, the holder of the Trust Common Security will be deemed to have waived any Enforcement Event with respect to the Trust Common Security until all Trust Enforcement Events with respect to the Trust Preferred Securities have been cured, waived or otherwise eliminated.
“Euro” and “€” means the lawful currency of the member states of the European Union (including Germany) that have adopted the single currency in accordance with the Treaty establishing the European Community, as amended by the Maastricht Treaty.
“Euroclear” means Euroclear Bank S.A./N.V., Brussels, as operator of the Euroclear system.
“Euronext Amsterdam” means the Official Segment of Euronext Amsterdam N.V.’s Stock Market.
“Fitch” means Fitch Ratings Ltd.
“FSMA” means the United Kingdom’s Financial Services and Markets Act 2000.
“Germany” means the Federal Republic of Germany.
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“German Disbursing Agent” means a German bank or a German financial services institution, each as defined in the German Banking Act (Kreditwesengesetz) (including a German branch of a foreign bank or a foreign financial services institution, but excluding a foreign branch of a German bank or German financial services institution) with which a German Holder maintains a custodial account in which the Trust Preferred Securities are kept.
“German Holder” means a holder of Trust Preferred Securities that is a resident of Germany or for which income in respect of the Trust Preferred Securities is regarded as income from German sources, e. g., because such Trust Preferred Securities form part of the business property of a permanent establishment or fixed base maintained in Germany.
“Global Certificates” means the Temporary Global Certificate and the Permanent Global Certificate.
“Global Security” means one or more global certificates representing the Class B Preferred Securities if they are distributed to holders of the Trust Preferred Securities.
“HGB” means the German Commercial Code (Handelsgesetzbuch).
“Independent Enforcement Director” means the independent member of the Board of Directors appointed by the holders of the Class B Preferred Securities if the Company fails to pay Capital Payments (plus any Additional Amounts thereon, if any) for specified periods or if a holder of the Class B Preferred Securities has notified the Company that the Bank has failed to perform any obligation under the Support Undertaking and such failure continues for a specified period.
“Initial Obligation” means subordinated obligations of the Bank acquired by the Company using the proceeds from the issuance of the Class B Preferred Securities, the Class A Preferred Security and the Company Common Security.
“Initial Obligation Redemption Date” means December 2, 2009, the first day on which the Initial Obligation is redeemable at the option of the Bank other than upon the occurrence of a Company Special Redemption Event or in the event of replacement with Substitute Obligations.
“Initial Redemption Date” means December 2, 2009, the first day on which the Class B Preferred Securities will be redeemable other than on the occurrence of a Company Special Redemption Event.
“Interest Payment Date” means March 2, June 2, September 2 and December 2 of each year, commencing March 2, 2004.
“Interest Period” means the period from and including the immediately preceding Interest Payment Date (or December 2, 2003 with respect to interest payable on March 2, 2004) to but excluding the relevant Interest Payment Date.
“Interim Consolidated Financial Statements” means the unaudited consolidated financial statements (including the notes thereto) included herein of Deutsche Bank Group as of and for the nine-month periods ended September 30, 2002 and September 30, 2003.
“Investment Company” means an investment company within the meaning of the 1940 Act.
“Investment Company Act Event” means the request and receipt by the Bank of an opinion of a nationally recognized U.S. law firm experienced in such matters to the effect that there is more than an insubstantial risk that the Company or the Trust is or will be considered an Investment Company as a result of any judicial decision, pronouncement or interpretation (irrespective of the manner made known), the adoption or amendment of any law, rule or regulation, or any notice or announcement (including any notice or announcement of intent to adopt such law, rule or regulation) by any U.S. legislative body, court, governmental agency, or regulatory authority, in each case after the date of the issuance of the Company Securities and the Trust Securities.
“IRS” means the Internal Revenue Service.
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“Issue Date” means December 2, 2003, the issue date of the Trust Preferred Securities.
“Junior Securities” means (i) common stock of the Bank, (ii) each class of preference shares of the Bank ranking junior to Parity Securities of the Bank, if any, and any other instrument of the Bank ranking pari passu therewith or junior thereto and (iii) preference shares or any other instrument of any subsidiary of the Bank subject to any guarantee or support agreement of the Bank ranking junior to the obligations of the Bank under the Support Undertaking.
“KWG” means the German Banking Act (Kreditwesengesetz).
“Lead Manager” means Deutsche Bank AG London.
“Liquidation Preference Amount” means the liquidation preference amount of € 100 per Trust Preferred Security.
“LLC Act” means the Delaware Limited Liability Company Act, as amended.
“LLC Agreement” means the limited liability company agreement of the Company, as amended and restated in its entirety prior to the issuance of Trust Preferred Securities.
“Maastricht Treaty” means the Treaty on European Union which amended the Treaty establishing the European Community.
“Managers” means the financial institutions named as Managers on the cover page hereof.
“Maturity Date” means December 2, 2033, the maturity date of the Initial Obligation.
“Moody’s” means Moody’s Investors Service, Inc.
“Netherlands Paying Agent” means Deutsche Bank AG, Amsterdam Branch.
“Non-U.S. Holder” means a holder of Trust Preferred Securities that is not a U.S. Person.
“Non-U.S. Persons” means persons who acquire Trust Preferred Securities in compliance with Regulation S.
“Obligation Redemption Date” means any Interest Payment Date on or after the Initial Obligation Redemption Date.
“Obligations” means the Initial Obligation and the Substitute Obligations.
“Offering” means the offering by Deutsche Bank Capital Funding Trust V of the Trust Preferred Securities.
“Offering Price” means the initial offering price of € 100 per Trust Preferred Security.
“Operating Profits” of the Company for any Payment Period means the excess of the amounts payable (whether or not paid) on the Obligations or, after the Maturity Date, on the Permitted Investments that the Company may then hold in accordance with the LLC Agreement during such Payment Period over any operating expenses of the Company not paid or reimbursed by the Bank or one of its branches or affiliates during such Payment Period.
“Order” means the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.
“Parity Securities” means each class of the most senior ranking preference shares of the Bank, if any, and Parity Subsidiary Securities.
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“Parity Subsidiary Securities” means the most senior ranking preference shares or any other instrument of any subsidiary of the Bank subject to any guarantee or support agreement of the Bank ranking pari passu with the obligations of the Bank under the Support Undertaking.
“Payment Date” means March 2, June 2, September 2 and December 2 of each year, commencing March 2, 2004.
“Payment Period” means the period from and including the immediately preceding Payment Date (or December 2, 2003, with respect to Capital Payments payable on March 2, 2004) to but excluding the relevant Payment Date.
“PCAM” means the Private Clients and Asset Management Group Division of the Bank.
“Permanent Global Certificate” means a permanent Global Certificate, in fully registered form, for which the Temporary Certificate will be exchangeable, not earlier than 40 days after the closing date upon certification of non-U.S. beneficial ownership.
“Permitted Investments” means investments by the Company in debt obligations of the Bank or one or more majority-owned subsidiaries of the Bank, unconditionally guaranteed by the Bank (which may act through a branch) on a subordinated basis at least equal to the ranking of the Initial Obligation or, in the event such an investment is not available, in U.S. Treasury securities; provided, in each case, that such investment does not result in a Company Special Redemption Event.
“Preferred Securities” means the Class A Preferred Security and the Class B Preferred Securities.
“Principal Amount” means, in connection with the Initial Obligation, € 300,000,000.
“Principal Paying Agent” means Deutsche Bank Aktiengesellschaft, Frankfurt am Main, and its successors, in its capacity as Principal Paying Agent with respect to the Trust Preferred Securities.
“Property Account” means a segregated non-interest bearing trust account maintained exclusively by the Property Trustee.
“Property Trustee” means The Bank of New York, in its capacity as trustee of the Trust.
“Qualified Subsidiary” means a subsidiary that is consolidated with the Bank for German bank regulatory purposes of which more than fifty percent (50%) of the outstanding voting stock or other equity interest entitled ordinarily to vote in the election of the directors or other governing body (however designated) and of which more than fifty percent (50%) or the outstanding capital stock or other equity interest is, at the time, beneficially owned or controlled directly or indirectly by the Bank, which subsidiary meets the definition of “a company controlled by its parent company” as defined in Rule 3a-5 under the 1940 Act.
“Redemption Date” means the date of redemption of the Class B Preferred Securities.
“Redemption Notice” means notice of any redemption of the Class B Preferred Securities.
“Redemption Price” means a redemption price per Class B Preferred Security equal to the liquidation preference amount thereof, plus any accrued and unpaid Capital Payments for the then current Payment Period to but excluding the Redemption Date.
“Regular Trustees” means three of the Trustees who are employees or officers of, or who are affiliated with, the Bank.
“Regulation S” means Regulation S under the Securities Act.
“Regulatory Event” means that the Bank is notified by a relevant regulatory authority that, as a result of the occurrence of any amendment to, or change (including any change that has been adopted but has not yet become effective) in, the applicable banking laws of Germany (or any rules, regulations or interpretations thereunder,
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including rulings of the relevant banking authorities) or the guidelines of the Committee on Banking Supervision at the Bank for International Settlements, in each case effective after the date of the issuance of the Company Securities and the Trust Securities, the Bank is not, or will not be, allowed to treat the Class B Preferred Securities as core capital or Tier 1 regulatory capital for capital adequacy purposes on a consolidated basis.
“Relevant Jurisdiction” means the United States or Germany or, during any period during which Substitute Obligations are outstanding, the jurisdiction of residence of any obligor on outstanding Substitute Obligations (or any jurisdiction from which payments are made).
“Relevant Persons” means (i) persons who are outside the United Kingdom, (ii) investment professionals falling within Article 19(5) of the Order and (iii) high net worth entities, and other persons to whom this document may lawfully be communicated, falling within Article 49(2) of the Order.
“S&P” means Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the U.S. Securities Act of 1933, as amended.
“Services Agreement” means the services agreement among the Trust, the Company and the Bank or a majority-owned affiliate of the Bank.
“Sponsor” means the Bank, in relation to the Trust Agreement.
“Stated Rate” means 6.15% per annum, calculated on the basis of a 360-day year of twelve 30-day months.
“Substitute Obligations” means any obligation issued in substitution for the Initial Obligation.
“Successor Securities” means other securities having substantially the same terms as the Trust Securities.
“Support Undertaking” means a support agreement between the Bank and the Company.
“Tax Event” means (A) the receipt by the Bank of an opinion of a nationally recognized law firm or other tax adviser in a Relevant Jurisdiction, experienced in such matters, to the effect that, as a result of (i) any amendment to, or clarification of, or change (including any announced prospective change) in, the laws or treaties (or any regulations promulgated thereunder) of a Relevant Jurisdiction or any political subdivision or taxing authority thereof or therein affecting taxation, (ii) any Administrative Action, or (iii) any amendment to, clarification of, or change in the official position or the interpretation of such Administrative Action or any interpretation or pronouncement that provides for a position with respect to such Administrative Action that differs from the theretofore generally accepted position, in each case, by any legislative body, court, governmental authority or regulatory body, irrespective of the manner in which such amendment, clarification or change is made known, which amendment, clarification or change is effective, or which pronouncement or decision is announced, after the date of issuance of the Company Securities and the Trust Securities, there is more than an insubstantial risk that (a) the Trust or the Company is or will be subject to more than a de minimis amount of taxes, duties or other governmental charges, or (b) the Trust, the Company or an obligor on the Obligations would be obligated to pay Additional Amounts or Additional Interest Amounts, or (B) a final determination has been made by the German tax authorities to the effect that the Bank, as obligor on the Obligations, may not, in the determination of its taxable income for the purposes of determining German corporate income tax in any year, deduct in full interest payments on the Obligations (except to the extent such interest payments are determined to be connected with income of a branch that is not subject to taxation in Germany). However, none of the foregoing will constitute a Tax Event if it may be avoided by the Bank, the Trust or the Company taking reasonable measures under the circumstances.
“Temporary Global Certificate” means a temporary Global Certificate which will be exchangeable for the Permanent Global Certificate not earlier than 40 days after the Closing Date upon certification of non-U.S. beneficial ownership.
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“Trust” means Deutsche Bank Capital Funding Trust V, a statutory trust created under the laws of the State of Delaware.
“Trust Act” means the Delaware Statutory Trust Act, as amended.
“Trust Agreement” means the trust agreement among the Trustees and the Bank, as the Sponsor and holder of the Trust Common Security, as amended and restated in its entirety prior to the issuance of the Trust Preferred Securities.
“Trust Common Security” means the common security of the Trust.
“Trust Preferred Securities” means the 3,000,000 Noncumulative Trust Preferred Securities, Liquidation Preference Amount € 100 per security offered in the Offering.
“Trust Preferred Securityholder” means a person that acquires Trust Preferred Securities on their original issue at their original Offering Price.
“Trust Securities” means the Trust Common Security together with the Trust Preferred Securities.
“Trust Special Redemption Event” means (i) a Tax Event solely with respect to the Trust, but not with respect to the Company, or (ii) an Investment Company Act Event solely with respect to the Trust, but not with respect to the Company.
“Trustees” means the five trustees of the Trust, pursuant to the Trust Agreement.
“U.S. GAAP” means accounting principles generally accepted in the United States.
“U.S. Holder” means a Trust Preferred Securityholder that is a citizen or resident of the United States, a U.S. domestic corporation, or otherwise subject to U.S. federal income taxation on a net income basis in respect of its investment in Trust Preferred Securities.
“U.S. Person” has the meaning given to it in Regulation S, unless otherwise specified.
“Withholding Taxes” means any present or future taxes, duties or governmental charges of any nature whatsoever imposed, levied or collected by or on behalf of the United States or Germany or, during any period in which any Substitute Obligations are outstanding, any Relevant Jurisdiction, or by or on behalf of any political subdivision or authority therein or thereof having the power to tax.
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INTRODUCTORY SUMMARY OF THE TRANSACTION
The Trust exists for the sole purposes of issuing the common security of the Trust (the “Trust Common Security”) and the Trust Preferred Securities (together, the “Trust Securities”), investing the gross proceeds thereof in noncumulative Class B Preferred Securities (the “Class B Preferred Securities”) of Deutsche Bank Capital Funding LLC V, a Delaware limited liability company (the “Company”), which evidence preferred ownership interests in the Company, and engaging in activities necessary or incidental thereto. In addition to the Class B Preferred Securities, the Company will also issue one voting common security (the “Company Common Security”) and one noncumulative Class A preferred security (the “Class A Preferred Security”), each representing ownership interests in the Company. The Bank will initially own the Company Common Security and the Class A Preferred Security. Amounts available to the Trust for distribution to the holders of the Trust Preferred Securities will be limited to distributions received by the Trust from the Company with respect to the Class B Preferred Securities. Periodic distributions on the Trust Securities and the Class B Preferred Securities are referred to herein as “Capital Payments”. For a summary of the terms of the Trust Preferred Securities and the Class B Preferred Securities, see “The Offering” herein.
Capital Payments will accrue at a fixed rate of 6.15% per annum (the “Stated Rate”) on the respective liquidation preference amounts of € 100 per Trust Preferred Security (the “Liquidation Preference Amount”) and € 100 per Class B Preferred Security, and will be payable quarterly in arrears on March 2, June 2, September 2 and December 2 of each year, commencing March 2, 2004 (each such date, a “Payment Date”). Capital Payments payable on each Payment Date will accrue from and including the immediately preceding Payment Date (or December 2, 2003 with respect to Capital Payments payable on March 2, 2004), up to but excluding the relevant Payment Date (each such period, a “Payment Period”), and will be calculated on the basis of a 360-day year of twelve 30-day months.
Each Capital Payment on the Trust Preferred Securities will be payable to the holders of record of the Trust Preferred Securities as they appear on the books and records of the Trust at the close of business on the corresponding record date. The record dates for the Trust Preferred Securities will be (i) so long as the Trust Preferred Securities remain in book-entry form, at the end of the Business Day (as defined herein) immediately preceding the date on which the relevant Capital Payment will be paid, and (ii) in all other cases, 15 Business Days prior to the relevant Payment Date.
Capital Payments on the Trust Preferred Securities are expected to be paid out of Capital Payments received by the Trust from the Company with respect to the Class B Preferred Securities. Capital Payments on the Class B Preferred Securities are expected to be paid out of interest payments received by the Company on the Obligations (as defined herein) or Permitted Investments (as defined herein) held by the Company from time to time. If the Company does not declare (and is not deemed to have declared) a Capital Payment in respect of any Payment Period, the holders of the Class B Preferred Securities will have no right to receive a Capital Payment in respect of such Payment Period, and the Company will have no obligation to pay a Capital Payment in respect of such Payment Period, whether or not Capital Payments are declared (or deemed to have been declared) and paid in respect of any future Payment Period. In such a case, no Capital Payments will be made on the Trust Preferred Securities in respect of such Payment Period.
The Company will use substantially all of the proceeds from the issuance of the Class B Preferred Securities to acquire subordinated obligations of the Bank (the “Initial Obligation”). The income received by the Company from the Initial Obligation, and any obligations issued in substitution therefor (the “Substitute Obligations”, and, together with the Initial Obligation, the “Obligations”), will be available for distribution, as appropriate, to the holders of the Class B Preferred Securities and the Class A Preferred Security (together with the Class B Preferred Securities, the “Preferred Securities”) and the holder of the Company Common Security.
The Bank and the Company will enter into a support agreement (the “Support Undertaking”) for the benefit of the holders of the Class B Preferred Securities prior to the issuance of the Class B Preferred Securities. Pursuant to the Support Undertaking, the Bank will undertake that (i) the Company will at all times be in a position to meet its obligations if and when such obligations are due and payable, including Capital Payments declared (or deemed declared) on the Class B Preferred Securities and payments due upon redemption of the Class B Preferred Securities (plus, in each case, Additional Amounts (as defined herein) thereon, if any), and (ii) in liquidation, the Company will have sufficient funds to pay the liquidation preference amounts of the Class B Preferred Securities, plus accrued and unpaid Capital Payments for the then current Payment Period to but
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excluding the date of liquidation and Additional Amounts, if any. The Support Undertaking is not a guarantee of any kind that the Company will at any time have sufficient assets to declare a Capital Payment or other distribution. The Bank’s obligations under the Support Undertaking are subordinated to all of its senior and subordinated debt obligations of the Bank.
Upon redemption of the Class B Preferred Securities, the Trust must redeem the Trust Preferred Securities. The Class B Preferred Securities will be redeemable at the option of the Company, in whole but not in part, on December 2, 2009 (the “Initial Redemption Date”), and on each Payment Date thereafter. The Company will also have the right to redeem the Class B Preferred Securities at any time prior to the Initial Redemption Date, in whole but not in part, upon the occurrence of a Company Special Redemption Event (as defined herein). Any redemption will be at a redemption price (the “Redemption Price”) per Class B Preferred Security equal to the liquidation preference amount thereof, plus any accrued and unpaid Capital Payments for the then current Payment Period to but excluding the date of redemption (a “Redemption Date”) and Additional Amounts, if any. See “Description of the Company Securities—Class B Preferred Securities—Redemption of the Class B Preferred Securities”. The Class B Preferred Securities and the Trust Preferred Securities will not have any scheduled maturity date and will not be redeemable at any time at the option of the holders thereof.
Upon the occurrence of a Trust Special Redemption Event (as defined herein) or in the event of any voluntary or involuntary dissolution, liquidation, winding up or termination of the Trust, holders of the Trust Securities, including the Trust Preferred Securities, will be entitled to receive a corresponding number of the Class B Preferred Securities. See “Description of the Trust Securities—Redemption”.
The Class B Preferred Securities are not offered hereby. However, because the sole assets of the Trust are the Class B Preferred Securities and the holders of the Trust Preferred Securities may receive the Class B Preferred Securities in certain circumstances, prospective purchasers of the Trust Preferred Securities are also making an investment decision with respect to the Class B Preferred Securities and should carefully review all of the information contained in this Offering Circular regarding the Class B Preferred Securities. See “Description of the Company Securities—Class B Preferred Securities” and “Investment Considerations—Special Redemption Risk”.
The Bank or a majority-owned affiliate of the Bank will enter into a services agreement (the “Services Agreement”) with the Company and the Trust. The Bank, as the holder of the Company Common Security, will elect the Board of Directors of the Company (the “Board of Directors”), which initially will consist of three directors.
Each holder of Class B Preferred Securities will be a third-party beneficiary of the Support Undertaking.
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GENERAL INFORMATION
Subject of this Offering Circular
Subject of this Offering Circular (the “Offering Circular”) are the Noncumulative Trust Preferred Securities, Liquidation Preference Amount € 100 per security, which represent the undivided beneficial ownership interests in the assets of Deutsche Bank Capital Funding Trust V, a statutory trust created under the laws of the State of Delaware, United States of America.
Use of Proceeds
All the proceeds from the sale of the Trust Securities (aggregating € 300,000,100, including the Trust Common Security) will be invested by the Trust in the Class B Preferred Securities. The Company will use substantially all of the funds from the sale of the Class B Preferred Securities to make an investment in the Initial Obligation. The Bank intends to use the proceeds from the sale of the Initial Obligation for general corporate purposes, and the Bank expects to treat the Class B Preferred Securities as consolidated Tier 1 regulatory capital. The Bank will pay certain commissions to the Managers (one of which – the Lead Manager – is an affiliate of the Bank) and reimburse the Managers for certain expenses in connection with the Offering. Accordingly, the net proceeds to the Bank net of commission to the Managers can be deemed to be € 294,000,000.
Responsibility for the Contents of this Offering Circular
The Bank, the Company and the Trust assume responsibility for the contents of this Offering Circular in accordance with § 44 et seq. of the German Stock Exchange Act (Börsengesetz) and declare that to the best of their knowledge all information herein contained is accurate and that there are no other facts the omission of which would, in the context of the offering of the Trust Preferred Securities, make any statement in this Offering Circular misleading in any material respect.
Clearing Systems and Settlement
The Trust Preferred Securities were accepted for clearance through Clearstream AG under the following clearance codes:
ISIN: DE000A0AA0X5 Common Code: 018127768 German Security Code (Wertpapier-Kenn-Nummer): A0AA0X Availability of Documents
As long as any of the Trust Preferred Securities are outstanding, copies of the following documents may be inspected during usual business hours at the office of the paying agent in the Netherlands at Deutsche Bank AG, Amsterdam Branch, Herengracht 450-454, NL-1017 CA Amsterdam, the Netherlands, or at the office of the Bank at Grosse Gallusstrasse 10-14, D-60272 Frankfurt am Main: •the Articles of Association (Satzung) of the Bank •the Amended and Restated Limited Liability Company Agreement and Certificate of Formation of the Company •the Amended and Restated Trust Agreement and Certificate of Trust of the Trust •the Purchase Agreement related to the Trust Preferred Securities •the Support Undertaking
Copies of the audited annual financial statements and interim financial statements of the Bank will be available in the English language free of charge at (1) the specified office of the paying agent in Frankfurt so long as the Trust Preferred Securities are listed on the Frankfurt Stock Exchange, (2) the specified office of the paying agent in the Netherlands as long as the Trust Preferred Securities are listed on Euronext Amsterdam and (3) the office of the Bank.
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The Bank files reports and other information with the U.S. Securities and Exchange Commission (the “SEC”). Copies of these documents may be requested, upon payment of a duplicating fee, by writing to the SEC. These documents may also be read and copied at the SEC’s public reference room in Washington, D.C.:
Please call the SEC at 1-800-SEC-0330 for further information on its public reference rooms, including those in New York and Chicago. Some of the Bank’s SEC filings are also available on the SEC’s website at http://www.sec.gov.
Subscription and Sale Subject to the terms and conditions set forth in the Purchase Agreement among the Bank, the Company, the Trust and the Managers, each Manager named below has agreed to purchase, and the Trust has agreed to sell to such Manager, the number of Trust Preferred Securities set forth opposite the name of such Manager:
in € Deutsche Bank AG London.............................................................................. 279,000,000 BCP Investimento – Banco Comercial Portugues de Investimento, SA........... 3,000 Credit Suisse First Boston (Europe) Limited.................................................... 3,000 HSBC Bank plc ................................................................................................ 3,000 Landesbank Baden-Wuerttemberg ................................................................... 3,000 Natexis Banques Populaires.............................................................................. 3,000 Tokyo-Mitsubishi International plc .................................................................. 3,000 UBS Limited..................................................................................................... 3,000 Total.................................................................................................................. 300,000,000
Under the terms and conditions of the Purchase Agreement, the Managers will be committed to take and pay for all shares of the Trust Preferred Securities offered hereby, if any are taken.
The purchase price for the Trust Preferred Securities will be the initial offering price of 100% of the Liquidation Preference Amount per Trust Preferred Security (the “Offering Price”). The Bank, as the holder of the Company Common Security, will pay the Managers a combined commission of € 2 per Trust Preferred Security. The Managers propose to offer shares of the Trust Preferred Securities at the Offering Price. After the Trust Preferred Securities are released for sale, the Offering Price and other selling terms may from time to time be varied by the Managers.
In view of the fact that the proceeds from the sale of the Trust Preferred Securities will be used to purchase the Initial Obligation, the Purchase Agreement provides that the Bank will reimburse the Managers for certain expenses of the Offering.
Each of the Managers and their affiliates have provided from time to time, and expect to provide in the future, investment services to the Bank and its affiliates, for which the Managers or their affiliates have received or will receive customary fees and commissions.
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SELLING RESTRICTIONS
Each of the Managers has represented and agreed that it has not offered, sold, or delivered and will not offer, sell or deliver any of the Trust Preferred Securities directly or indirectly, or distribute this Offering Circular or any other offering material relating to the Trust Preferred Securities, in or from any jurisdiction except under circumstances that would result in compliance with the applicable laws and regulations thereof and that will not impose any obligations on the Bank, the Company or the Trust.
United States
Each of the Managers has represented and agreed that, except as permitted by the Purchase Agreement, it will not offer or sell the Trust Preferred Securities within the United States or to, or for the account or benefit of, U.S. persons (i) as part of its distribution at any time or (ii) otherwise until 40 days after the Closing Date, and it will have sent to each dealer to which it sells Trust Preferred Securities during the 40-day restricted period a confirmation or other notice setting forth the restrictions on offers and sales of the Trust Preferred Securities within the United States or to, or for the account or benefit of, U.S. persons. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act.
In addition, until 40 days after the commencement of the offering, an offer or sale of the Trust Preferred Securities within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act.
The Trust Preferred Securities may not be purchased by or transferred to any employee benefit plan subject to Title I of the U.S. Employee Retirement Income Security Act of 1974, as amended, any plan or arrangement subject to Section 4975 of the U.S. Internal Revenue Code of 1986, as amended, or any entity whose underlying assets include the assets of any such employee benefit plans, plans or arrangements.
United Kingdom
Each of the Managers has represented and agreed in the Purchase Agreement that:
(i) it has not offered or sold, and, prior to the expiry of six months from the Issue Date of the Trust Preferred Securities will not offer or sell, any Trust Preferred Securities to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments, whether as principal or agent, for purposes of their business or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995,
(ii) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (“FSMA”) received by it in connection with the issue or sale of any Trust Preferred Securities in circumstances in which section 21(1) of the FSMA does not apply to the Company or the Trust, and
(iii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Trust Preferred Securities in, from or otherwise involving the United Kingdom.
Germany
Each Manager has confirmed that it is aware that no German sales prospectus (Verkaufsprospekt) has been or will be published in respect of the Offering; and each Manager has represented and agreed that so long as the Trust Preferred Securities have not been listed on the Frankfurt Stock Exchange it will comply with the German Securities Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz) or any other laws applicable in Germany governing the issue, offering and sale of the Trust Preferred Securities. In particular each Manager has undertaken not to engage in a public offering (Öffentliches Anbieten) in Germany with respect to any Trust Preferred Securities otherwise than in accordance with the Securities Sales Prospectus Act and any other act replacing or supplementing it and all other applicable laws and regulations.
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The Netherlands
So long as the Trust Preferred Securities have not been listed on Euronext Amsterdam, or it is unlikely that the Trust Preferred Securities will soon be admitted to listing, the Trust Preferred Securities may only be offered, sold, or delivered in or from the Netherlands as part of their initial distribution or as part of any re-offering, and this Offering Circular and any other document in respect of the offering may only be distributed or circulated in the Netherlands, to individuals or legal entities that include, but are not limited to, banks, brokers, dealers, institutional investors and undertakings with a treasury department, who or which trade or invest in securities in the conduct of business or profession.
Hong Kong
Each Manager has agreed that it and each of its affiliates have not (i) offered or sold, and will not offer or sell, the Trust Preferred Securities by means of any document, to persons in Hong Kong other than persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong or (ii) issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, any invitation, document or advertisement relating to Trust Preferred Securities in Hong Kong (unless permitted to do so under the securities laws of Hong Kong) other than with respect to Trust Preferred Securities intended to be disposed of outside Hong Kong or only to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent.
Singapore
The Offering Circular has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each of the Managers has agreed that the Offering Circular and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Trust Preferred Securities, may not be circulated or distributed, nor may the Trust Preferred Securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor or other person specified in Section 274 of the Securities and Futures Act 2001 of Singapore (the “SFA”) (ii) to a sophisticated investor, and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
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TAXATION
The following is a summary of the principal United States federal income tax considerations to Non-U.S. Holders (as defined below) of the purchase, ownership and disposition of the Trust Preferred Securities and Class B Preferred Securities. This summary addresses only the tax consequences to a person that, for United States federal tax purposes, is an individual who is not a citizen or resident of the United States, a foreign corporation, or any other person not subject to United States federal income tax on a net income tax basis in respect of an investment in the Trust Preferred Securities or Class B Preferred Securities (a “Non-U.S. Holder”) and that acquires Trust Preferred Securities pursuant to the Offering at the initial offering price. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations, Internal Revenue Service rulings and pronouncements and judicial decisions as of the date hereof, all of which are subject to change (possibly with retroactive effect). PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRUST PREFERRED SECURITES AND CLASS B PREFERRED SECURITIES, AS WELL AS THE EFFECT ON ANY STATE, LOCAL OR FOREIGN TAX LAWS. United States Federal Income Taxation
Assuming compliance with the terms of the Trust Agreement, the Trust will be treated as a grantor trust and will not be taxable as a corporation for United States federal income tax purposes. As a result, the Trust will not be subject to tax and each beneficial owner of Trust Preferred Securities will be considered the beneficial owner of a corresponding amount of Class B Preferred Securities held by the Trust. An exchange of Trust Preferred Securities for a corresponding amount of Class B Preferred Securities represented by the Trust Preferred Securities, or of Class B Preferred Securities for a corresponding amount of Trust Preferred Securities equal to the liquidation amount of such Trust Preferred Securities, will not be a taxable event.
In purchasing the Trust Preferred Securities, each holder of Trust Preferred Securities agrees with the Bank, the Company, and the Trustee that the Bank, the Company, the Trustee and the holders of Trust Preferred Securities will treat holders of Trust Preferred Securities for all purposes as holders of an undivided interest in Trust assets, including the Class B Preferred Securities, and not as holders of a direct interest in the Bank or in any other person, and the following discussion is based on the assumption that such treatment will apply for United States federal income tax purposes. Assuming full compliance with the Company Agreement and Investment Policies, the Company will not be classified as an association or “publicly traded partnership” taxable as a corporation and will not itself be subject to United States federal income tax, but will be treated as a partnership for United States federal income tax purposes. Accordingly, the Company will not be subject to tax and each holder will be required to take into account its allocable share of items of income, gain, loss and deduction of the Company in computing its United States federal income tax liability (but only to the extent described in the following paragraph), regardless of whether distributions are made to the holder.
The Company intends to operate so that it will not be engaged in a trade or business within the United
States for United States federal income tax purposes and to invest in securities the income from which will be exempt from United States federal withholding tax. Accordingly, a Non-U.S. Holder will not be subject to United States federal income tax, or withholding tax, on any income in respect of Trust Preferred Securities or Class B Preferred Securities, unless such income or gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States. A Non-U.S. Holder will not be subject to United States federal income or withholding tax on gain realized on the sale or exchange of the Trust Preferred Securities or Class B Preferred Securities, unless (i) such gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States or (ii) the Non-U.S. Holder is an individual who was present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met as well. Information Returns and Certification
In general, a Non-U.S. Holder who holds Trust Preferred Securities through a non-U.S. bank or other non-U.S. financial institution that is a participant in Clearstream, AG, Euroclear or Clearstream, Luxembourg
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that makes all payments on the Trust Preferred Securities through an office outside the United States will not be required to provide certification of non-U.S. status for withholding or backup withholding purposes. In other contexts, however, including where a Non-U.S. Holder withdraws from the Trust and directly holds the Class B Preferred Securities, a Non-U.S. Holder in order to eliminate U.S. information reporting requirements and backup withholding tax will be required to comply with applicable certification procedures to establish the holder’s non-U.S. status (by providing an IRS Form W-8BEN).
Prior to March 31 each year, the Company will furnish each beneficial owner of Class B Preferred Securities that are not represented by Trust Preferred Securities (or, if such Class B Preferred Securities are held by a nominee or custodian that does not comply with the requirements described in the next paragraph, such nominee or custodian) with a copy of the relevant Schedule K-1 to the Company’s annual tax return on Internal Revenue Service (“IRS”) Form 1065, setting forth such beneficial owner’s allocable share of the Company’s income for the prior calendar years. Copies of each Schedule K-1 will be provided to the IRS. The Company will not furnish beneficial owners of Trust Preferred Securities with Schedules K-1. The Trust will, however, report to the IRS the amount of income allocated each year to each beneficial owner of Trust Preferred Securities, in accordance with applicable law.
Any person who holds Class B Preferred Securities as a nominee for another person is required to disclose to the Company (a) the name, address and taxpayer identification number of the nominee and each person for whom it holds Class B Preferred Securities; (b) whether each person for whom it holds Class B Preferred Securities is (i) a person who is not a United States person (as defined in U.S. Treasury regulations), (ii) a foreign government, an international organization or any wholly owned agency or instrumentality of either of the foregoing, or (iii) a tax-exempt entity; (c) the amount and description of Class B Preferred Securities held, acquired or transferred each year for each person for whom it holds Class B Preferred Securities and (d) unless the Company has given the nominee a written authorization to omit such information, certain other information regarding Class B Preferred Securities that it holds as nominee, including the methods of acquisition and costs thereof and net proceeds from transfers. Brokers and financial institutions that hold Class B Preferred Securities may be required to furnish additional information about themselves and any Class B Preferred Securities they may hold for their own accounts. Penalties may be imposed for failure to comply with these requirements. These requirements do not apply to nominee holders of Trust Preferred Securities.
German Taxation
The following is a discussion of certain German tax considerations that may be relevant to a holder of Trust Preferred Securities that is a resident of Germany or for which income in respect of the Trust Preferred Securities is regarded as income from German sources, e. g., because such Trust Preferred Securities form part of the business property of a permanent establishment or fixed base maintained in Germany (a “German Holder”). The information contained in this summary is not to be construed as tax advice. It is based on an interpretation of the German tax laws as of the date hereof and is subject to change. Any such change may be applied retroactively and may adversely affect the tax consequences described herein. This summary does not purport to deal with all aspects of taxation that may be relevant to investors in the light of their individual circumstances. Prospective investors are advised to consult their own tax advisors with respect to the tax consequences of purchasing, holding, redeeming or disposing of Trust Preferred Securities.
Income Taxation
Capital Payments received by or, in specific cases, owed to a German Holder with respect to the Trust Preferred Securities will be subject to German personal or corporate income tax (plus a “solidarity surcharge” thereon, which is currently levied at 5.5%), and, in the case of a German Holder who is an individual, may be subject to church tax. Upon the sale or redemption of the Trust Preferred Securities, a German Holder will also be required to include in its taxable income the difference between the amount realized on such sale or redemption and the cost of acquisition (or adjusted tax base) of the Trust Preferred Securities. Income derived from the Trust Preferred Securities will also be subject to German municipal trade tax on income (Gewerbeertragsteuer) if the Trust Preferred Securities form part of the property of a German business establishment for trade tax purposes or are held by a German corporate investor. A German Holder who is an individual and does not hold the Trust Preferred Securities as a business asset will be entitled to a standard deduction (Werbungskosten-Pauschbetrag) of € 51 in computing his or her investment income (including income derived from the Trust Preferred Securities) if no higher expenses are evidenced as well as an exemption
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(Sparer-Freibetrag) of € 1,550 with respect to such investment income. These amounts are doubled for couples filing a joint tax return.
German Withholding Tax
If the Trust Preferred Securities are kept in a custodial account maintained by a German Holder with a German bank or a German financial services institution, each as defined in the German Banking Act (Kreditwesengesetz) (including a German branch of a foreign bank or a foreign financial services institution, but excluding a foreign branch of a German bank or German financial services institution) (a “German Disbursing Agent”), the German Disbursing Agent will generally be required to withhold tax (Zinsabschlagsteuer) at a rate of 30% (plus solidarity surcharge thereon at a rate of 5.5%, resulting in an aggregate withholding rate of 31.65%) of the gross amount paid as income with respect to the Trust Preferred Securities. Upon the sale or redemption of the Trust Preferred Securities, a German Disbursing Agent will generally be required to withhold tax at an aggregate rate of 31.65% on:
(i) the excess of the sale or redemption proceeds of the Trust Preferred Securities over the holder’s acquisition cost, if the Trust Preferred Securities have been acquired through or purchased from and have since been held in custody with such German Disbursing Agent, or
(ii) an amount equal to 30% of the sale or redemption proceeds of the Trust Preferred Securities, if the Trust Preferred Securities have not been so held with such German Disbursing Agent.
Tax withheld by the German Disbursing Agent will be credited against the German Holder’s final liability for personal or corporate income tax or refunded if in excess of such final tax liability.
Gift and Inheritance Taxation
The gratuitous transfer of the Trust Preferred Securities by a holder as a gift or by reason of death is subject to German gift or inheritance tax, based on the market value of the Trust Preferred Securities at the time of the transfer, if the holder of the Trust Preferred Securities or the recipient is a resident, or deemed to be a resident, of Germany under German gift and inheritance tax law at the time of the transfer. If neither the holder of the Trust Preferred Securities nor the recipient is a resident, or deemed to be a resident, of Germany at the time of the transfer, no German gift or inheritance tax is levied unless the Trust Preferred Securities form part of the property of a permanent establishment or a fixed base maintained by the holder of the Trust Preferred Securities in Germany.
Other German Taxes
There are no German transfer, stamp or other similar taxes which would apply to the sale or transfer of the Trust Preferred Securities. Net-worth tax (Vermögensteuer) ceased to be levied by Germany on January 1, 1997 and trade tax on capital (Gewerbekapitalsteuer) ceased to be levied by Germany on January 1, 1998.
European Union Savings Directive
On June 3, 2003, the Council of the European Union adopted a directive on the taxation of savings income. Pursuant to the directive, a member state of the European Union will be required to provide to the tax authorities of other member states information regarding payments of interest (or other similar income) paid by a person within its jurisdiction to individual residents of such other member states, except that Belgium, Luxembourg and Austria will instead operate a withholding system for a transitional period in relation to such payments. Subject to certain conditions, the provisions of the directive will be effective as of January 1, 2005.
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FORWARD-LOOKING STATEMENTS
This Offering Circular contains certain forward-looking statements with respect to Deutsche Bank Group’s financial condition and results of operations. In this document, forward-looking statements include, among others, statements relating to:
• implementation of strategic initiatives;
• the development of aspects of results of operations;
• expectations of the impact of risks that affect Deutsche Bank’s business, including the risks of loss on credit exposures and risks relating to changes in interest and currency exchange rates and in asset prices; and
• other statements relating to future business development and economic performance.
In addition, Deutsche Bank Group may from time to time make forward-looking statements in its periodic reports to the SEC on Form 6-K, annual and interim reports, invitations to annual shareholders’ meetings and other information sent to shareholders, offering circulars and prospectuses, press releases and other written materials. Deutsche Bank Group’s Board of Managing Directors, Supervisory Board, officers and employees may also make oral forward-looking statements to third parties, including financial analysts.
Forward-looking statements are statements that are not historical facts, including statements about Deutsche Bank Group’s beliefs and expectations. When used in this Offering Circular, words such as “believe”, “anticipate”, “expect”, “intend”, “seek”, “estimate”, “project”, “should”, “potential”, “reasonably possible”, “plan” and similar expressions identify forward-looking statements.
By their very nature, forward-looking statements involve risks and uncertainties, both general and specific. Deutsche Bank Group bases these statements on its current plans, estimates, projections and expectations. Potential investors should therefor not place too much reliance on them. Forward-looking statements speak only as of the date they were made, and Deutsche Bank Group undertakes no obligation to update any of them in light of new information or future events, unless required by law.
A number of important factors could cause Deutsche Bank Group’s actual results to differ materially from those described in any forward-looking statement. These factors include, among others, the following:
• changes in general economic and business conditions;
• changes and volatility in currency exchange rates, interest rates and asset prices;
• changes in governmental policy and regulation, and political and social conditions;
• changes in Deutsche Bank Group’s competitive environment;
• the success of Deutsche Bank Group’s acquisitions, divestitures, mergers and strategic alliances;
• the success of any realignments of the Deutsche Bank Group’s Divisions and risks that Deutsche Bank Group may not fully realize the benefits anticipated from these realignments and from any cost containment plans that Deutsche Bank Group has initiated;
• the effectiveness and success of the new management structure Deutsche Bank Group adopted on January 31, 2002, to achieve and maintain the integration of its strategic and operational management; and
• other factors, including those referred to elsewhere in this document and others that are not referred to in this document.
PRESENTATION OF FINANCIAL INFORMATION
In this Offering Circular, references to “€” and “Euro” are to the lawful currency of the member states of the European Union (including Germany) that have adopted the single currency in accordance with the Treaty establishing the European Community, as amended by the Treaty on European Union (the “Maastricht Treaty”).
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Unless otherwise indicated, any reference in this Offering Circular to “Consolidated Financial Statements” is to the audited consolidated financial statements (including the notes thereto) included herein of Deutsche Bank Group as of and for the years ended December 31, 2001 and December 31, 2002, and any reference to the “Interim Consolidated Financial Statements” is to the unaudited consolidated financial statements (including the notes thereto) included herein of Deutsche Bank Group as of and for the nine-month periods ended September 30, 2002 and September 30, 2003.
The Consolidated Financial Statements of Deutsche Bank Group were prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The amount of “Distributable Profits” of the Bank for any fiscal year, which determines the extent to which the Company is authorized to make Capital Payments on the Class B Preferred Securities, is calculated on the basis of the Bank’s audited unconsolidated financial statements prepared in accordance with accounting provisions generally accepted in the Federal Republic of Germany as described in the German Commercial Code (Handelsgesetzbuch) and other applicable German law then in effect. See “Description of the Company Securities—Class B Preferred Securities—Capital Payments”.
In this Offering Circular, all references to “billions” are references to one thousand millions. Due to rounding, the numbers presented throughout this Offering Circular may not add up precisely, and percentages may not precisely reflect absolute figures.
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OFFERING CIRCULAR SUMMARY
The following summary is qualified in its entirety by the detailed information and financial data presented elsewhere in this Offering Circular, including the Consolidated Financial Statements and the Interim Consolidated Financial Statements.
The Trust
The Trust is a statutory trust formed under the Delaware Statutory Trust Act, as amended (the “Trust Act”), pursuant to a trust agreement executed by the Bank, as sponsor, The Bank of New York, as trustee (the “Property Trustee”), and Deutsche Bank Trust Company Delaware, as Delaware trustee (the “Delaware Trustee”), and the filing of a certificate of trust with the Secretary of State of the State of Delaware on October 22, 2003. Such trust agreement will be amended and restated in its entirety (as so amended and restated, the “Trust Agreement”) prior to the issuance of the Trust Preferred Securities. The Bank will own the Trust Common Security representing a capital contribution in respect thereof equal to € 100. The Trust Common Security will rank pari passu, and payments thereon will be made pro rata, with the Trust Preferred Securities, except that upon liquidation of the Trust and in certain circumstances described under “Description of the Trust Securities—Subordination of the Trust Common Security,” the rights of the holder of the Trust Common Security to Capital Payments and other payments in respect of the Class B Preferred Securities will be subordinated to the rights of the holders of the Trust Preferred Securities.
The Property Trustee will hold title to the Class B Preferred Securities for the benefit of the holders of the Trust Securities, and the Property Trustee will have the power to exercise all rights, powers and privileges with respect to the Class B Preferred Securities under the LLC Agreement (as defined herein). In addition, the Property Trustee will maintain exclusive control of a segregated non-interest bearing trust account (the “Property Account”) to hold all payments made in respect of the Class B Preferred Securities for the benefit of the holders of the Trust Securities.
The Trust will use all the proceeds derived from the issuance of the Trust Securities to purchase the Class B Preferred Securities from the Company, and, accordingly, the assets of the Trust will consist solely of the Class B Preferred Securities. The Trust exists exclusively for the purposes of:
• issuing the Trust Securities representing undivided beneficial ownership interests in the assets of the Trust;
• investing the gross proceeds from the issuance of the Trust Securities in the Class B Preferred Securities; and
• engaging in those other activities necessary or incidental thereto.
The Trust may also, from time to time and without the consent of the holders of the Trust Preferred Securities, issue additional Trust Preferred Securities having the same terms and conditions as the Trust Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Trust Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Trust Preferred Securities in consideration for the receipt of Class B Preferred Securities equal to the aggregate liquidation preference amount of such additional Trust Preferred Securities.
The Company
The Company is a limited liability company formed under the Delaware Limited Liability Company Act, as amended (the “LLC Act”), on October 21, 2003, pursuant to a limited liability company agreement of the Company and the filing of a certificate of formation of the Company with the Secretary of State of the State of Delaware. Such limited liability company agreement of the Company will be amended and restated in its entirety (as so amended and restated, the “LLC Agreement”) prior to the issuance of the Trust Preferred
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Securities. Pursuant to the LLC Agreement, the Company will issue two classes of preferred securities representing limited liability company interests in the Company, the Class A Preferred Security and the Class B Preferred Securities, and one class of a common security representing limited liability company interests in the Company, the Company Common Security. The Bank will hold the Company Common Security and the Class A Preferred Security. The Company will be treated as a partnership for United States federal income tax purposes.
The sole purposes of the Company are:
• to issue the Class A Preferred Security, the Class B Preferred Securities and the Company Common Security;
• to invest substantially all of the proceeds thereof in the Initial Obligation;
• upon any redemption of the Initial Obligation prior to the Maturity Date (as defined herein), which does not involve a redemption of the Class B Preferred Securities, to reinvest the proceeds in Substitute Obligations issued by the Bank or a majority-owned subsidiary that is consolidated with the Bank for German bank regulatory purposes in replacement for the Initial Obligation, so long as any such reinvestment does not result in a Company Special Redemption Event (as defined herein);
• in the event of any default on the Obligations, to enforce its rights for payment of any overdue amounts;
• after the Maturity Date, if the Class B Preferred Securities have not been redeemed, to invest in Permitted Investments (as defined herein);
• to enter into and, in certain circumstances, to enforce the Support Undertaking for the sole benefit of the holders of the Class B Preferred Securities; and
• to engage in those other activities necessary or incidental thereto.
The Company may also, from time to time and without the consent of the holders of the Class B Preferred Securities, issue additional Class B Preferred Securities having the same terms and conditions as the Class B Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Class B Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Class B Preferred Securities in consideration for Obligations of a principal amount equal to the aggregate liquidation preference amount of such additional Class B Preferred Securities.
The Bank
The Bank is one of the largest groups of financial and banking institutions in Germany, Europe and the world, as measured by total assets of € 864 billion on September 30, 2003. The Bank offers a wide variety of investment, financial and related products and services to consumer and corporate clients worldwide through the Corporate and Investment Bank Group Division, Private Clients and Asset Management Group Division and the Corporate Investments Group Division.
The Bank’s goal is to take on a leading position in all of its core business lines by offering clients high-quality products and customized financial solutions at competitive conditions.
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Summary Consolidated Financial and Other Data of the Deutsche Bank Group
Income Statement Data
Year ended December 31, 2002 2001 2000 (€ in millions, except per share data) Net interest revenues ............................................... € 7,186 € 8,620 € 7,028 Provision for loan losses.......................................... 2,091 1,024 478 Net interest revenues after provision for loan
losses.................................................................... 5,095 7,596 6,550 Commissions and fee revenues................................ 10,834 10,727 11,693 Trading revenues, net .............................................. 4,024 6,031 7,625 Other non-interest revenues..................................... 4,503 4,163 8,133 Total net revenues.................................................... 24,456 28,517 34,001 Compensation and benefits...................................... 11,358 13,360 13,526 Goodwill amortization/impairment.......................... 62 871 771 Restructuring activities ............................................ 583 294 125 Other non-interest expenses..................................... 8,904 12,189 12,710 Total non-interest expenses ..................................... 20,907 26,714 27,132 Income before income tax expense (benefit) and
cumulative effect of accounting changes ............. 3,549 1,803 6,869 Income tax expense ................................................. 372 434 2,643 Income tax expense (benefit) from the change in
effective tax rate and the reversing effect ............ 2,817(1) 995(1) (9,287)(2)
Income before cumulative effect of accounting changes, net of tax................................................ 360(1) 374(1) 13,513(2)
Cumulative effect of accounting changes, net of tax(2)...................................................................... 37 (207) —
Net income(2)............................................................ € 397(1) € 167(1) € 13,513(2)
Basic earnings per share(3) Income before cumulative effect of accounting
changes, net of tax................................................ 0.58(1) 0.60(1) € 22.00(2)
Cumulative effect of accounting changes, net of tax(2)...................................................................... 0.06 (0.33) —
Net income(2)............................................................ € 0.64(1) € 0.27(1) € 22.00(2)
Diluted earnings per share(4) Income before cumulative effect of accounting
changes, net of tax................................................ € 0.57(1) € 0.60(1) € 21.72(2)
Cumulative effect of accounting changes, net of tax(2)...................................................................... 0.06 (0.33) —
Net income(2)............................................................ € 0.63(1) € 0.27(1) € 21.72(2)
Dividends paid per share(5) ...................................... € 1.30 € 1.30 € 1.15 ____________________ (1) These figures reflect the income tax expense (benefit) from changes in effective tax rates pursuant to German tax law and the reversing
effect. These changes and their effects are described in notes 20 and 26 to the Consolidated Financial Statements included herein. (2) In 2002 and 2001, these figures reflect the cumulative effect of changes in accounting principle. These changes and their effects on
Deutsche Bank Group’s Consolidated Statement of Income are described in note 2 to the Consolidated Financial Statements included herein.
(3) Basic earnings per share for each period is calculated by dividing net income by the weighted average number of common shares outstanding.
(4) Diluted earnings per share for each period is calculated by dividing Deutsche Bank Group’s net income by the weighted average number of common shares and potential dilutive common shares outstanding.
(5) Dividends declared and paid in the year.
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The following table shows Deutsche Bank Group’s income before cumulative effect of accounting
changes, Deutsche Bank Group’s net income and basic net income per share, in each case excluding the effects of the tax rate changes and the cumulative effect of accounting changes:
2002 Per Share
(basic) 2001 Per Share
(basic) 2000 Per Share
(basic)
(€ in millions, except per share amounts)
Income before cumulative effect of accounting changes, net of tax ..... € 360 € 0.58 € 374 € 0.60 € 13,513 € 22.00
Cumulative effect of accounting changes, net of tax........................ 37 0.06 (207) (0.33) — —
Net income...................................... € 397 € 0.64 € 167 € 0.27 € 13,513 € 22.00 Income tax expense (benefit) from
the change in effective tax rate and the reversing effect ................ 2,817 4.58 995 1.61 (9,287) (15.12)
Net income without the effect of tax rate changes ............................ € 3,214 € 5.22 € 1,162 € 1.88 € 4,226 € 6.88
Net income before accounting changes and the effect of tax rate changes......................................... € 3,177 € 5.16 € 1,369 € 2.21 € 4,226 € 6.88
Balance Sheet Data
As of December 31, 2002 2001 2000 (€ in millions) Total assets .............................................................. 758,355 918,222 928,994 Loans, net ................................................................ 167,303 259,838 274,660 Deposits ................................................................... 327,625 374,089 350,552 Long-term debt ........................................................ 104,055 166,908 154,484 Common shares ....................................................... 1,592 1,591 1,578 Total shareholders’ equity ....................................... 29,991 40,193 43,683 Tier 1 risk-based capital (BIS*)(1)............................ 22,742 24,803 23,504 Total risk-based capital (BIS*)(1) ............................. 29,862 37,058 39,343 ____________________ * Bank for International Settlements. (1) BIS figures for 2002, 2001 and 2000 were derived and reported in accordance with U.S. GAAP. The figures for 2000 were originally
reported in accordance with International Accounting Standards. These 2000 figures are restated and reported in accordance with U.S. GAAP for comparison purposes, and are unaudited.
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Recent Developments and Outlook for the Bank
The Bank reported income before income tax expense of € 1.1 billion for the second quarter of 2003, compared to € 2.2 billion for the second quarter of 2002 and € 234 million for the first quarter of 2003. The figure for the second quarter of 2002 included significant gains on sales of industrial holdings.
Net income for the second quarter of 2003 was € 572 million compared with € 204 million in the second quarter of 2002. Income tax expense (before tax reversal effects) was € 503 million in the second quarter of 2003 (second quarter of 2002: € 150 million) and includes one-off effects following changes in German tax law in May 2003.
Net revenues increased from € 5.0 billion in the first quarter of 2003 to € 5.9 billion in the second quarter of 2003. They declined 27% compared to the second quarter of 2002, reflecting the effects of the sale of non-core businesses and shifts in exchange rates.
Total provision for credit losses decreased for the third consecutive quarter, falling to € 333 million (€ 340 million of provision for loan losses net of € 7 million reduction in provision for off-balance sheet positions) from € 350 million (€ 380 million of provision for loan losses net of € 30 million reduction in provision for off-balance sheet positions) in the first quarter of 2003, and down from a peak in autumn 2002. The Bank reduced problem loans by € 0.9 billion in 2003 to € 8.4 billion.
Noninterest expenses for the second quarter of 2003 was € 4.5 billion, compared to € 4.4 billion in the first quarter of 2003. This increase resulted from higher severance and performance related compensation expenses – non-compensation expenses declined 7% from the first quarter of 2003. Noninterest expenses were down 16% compared to the second quarter of 2002.
The Group Division Corporate and Investment Bank (“CIB”) continued to demonstrate its strong global competitive position. CIB recorded income before income taxes of € 878 million in the second quarter of 2003. This compares to € 1.4 billion for the first quarter of 2003 which included a gain of € 508 million from the disposal of a substantial part of the Bank’s Global Securities Services business. The division’s income before income taxes in the second quarter of 2002 was € 249 million.
Revenues from sales and trading products were € 2.7 billion in the second quarter of 2003, up 30% versus the second quarter of 2002, reflecting the stability and sustainability of the sales and trading platform. An improved market environment helped boost sales and trading revenues from equities and related derivative products to € 903 million, up by 52% compared to the first quarter of 2003, and by 61% compared to the second quarter of 2002. Sales and trading revenues from debt and related products were € 1.8 billion for the second quarter of 2003, matching the first quarter of 2003 figure and up by 18% versus the second quarter of 2002. This solid performance once again illustrates the stability of the Bank’s revenues as a result of its heavy emphasis on customer flow business.
The Bank’s Group Division Private Clients and Asset Management (“PCAM”) reported revenues of € 2.0 billion in the second quarter of 2003. Income before income taxes in the second quarter of 2003 rose by 4% compared to the first quarter of 2003 despite severance costs following the reorganization of the Private & Business Clients Corporate Division (“PBC”).
PBC reported income before income taxes of € 163 million in the second quarter of 2003, an increase of € 36 million compared to the first quarter of 2003. Compared to the second quarter of 2002 (excluding gains of € 507 million from the sale of the insurance business) income before income taxes improved by € 68 million mainly due to reductions in non-interest expenses following reorganization measures and cost-saving initiatives.
The Asset and Wealth Management Corporate Division recorded income before income taxes of € 123 million for the second quarter of 2003, up € 22 million versus the second quarter of 2002 and down € 24 million versus the first quarter of 2003 (which included a gain from the sale of the Bank’s Passive Asset Management business).
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For a discussion of the Bank’s operating results for the nine months ended September 30, 2003, see the Interim Consolidated Financial Statements included herein.
On September 19, 2003, the Düsseldorf District Court admitted charges of the Düsseldorf Public Prosecutor against Dr. Ackermann and other former members of the Supervisory Board, members of the Board of Managing Directors and one manager of Mannesmann AG and ordered a trial. The charges allege a breach of trust in connection with payments to former members of the Board of Managing Directors and other managers of Mannesmann AG following the takeover of Mannesmann by Vodafone in spring 2000. The Supervisory Board and the Board of Managing Directors of Deutsche Bank have declared that they support Dr. Ackermann’s defense and that they view the case against him as unjustified. The Düsseldorf District Court has set the beginning of the trial for January 21, 2004.
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Summary Interim Consolidated Financial and Other Data of the Deutsche Bank Group
Income Statement
Nine months ended September 30, 2003 September 30, 2002 (€ in millions) Net interest revenues ............................................................ 4,590 5,770 Provision for loan losses....................................................... 894 1,611Net interest revenues after provision for loan losses ............ 3,696 4,159Commissions and fees from fiduciary activities ................... 2,403 2,962Commissions, broker’s fees, markups on securities
underwriting and other securities activities....................... 2,672 3,244Fees for other customer services........................................... 1,904 1,954Insurance premiums.............................................................. 83 712Trading revenues, net ........................................................... 4,253 3,277Net gains (losses) on securities available for sale................. (125) 2,986Net loss from equity method investments............................. (569) (660)Other revenues...................................................................... 849 903Total non-interest revenues................................................... 11,470 15,378Compensation and benefits................................................... 7,967 8,765Net occupancy expense of premises ..................................... 948 966Furniture and equipment....................................................... 134 165IT costs ................................................................................. 1,395 1,707Agency and other professional service fees.......................... 491 547Communication and data services ........................................ 480 600Policyholder benefits and claims .......................................... 102 729Other expenses...................................................................... 1,484 2,141Goodwill impairment............................................................ 114 -Restructuring activities ......................................................... (29) 605Total non-interest expenses .................................................. 13,086 16,225Income before income tax expense and cumulative
effect of accounting changes............................................. 2,080 3,312Income tax expense .............................................................. 1,178 144Income tax expense from the reversing effect of the
change in effective tax rate ............................................... 124 2,703Income before cumulative effect of accounting
changes, net of tax............................................................. 778 465Cumulative effect of accounting changes, net of tax ............ 151 37Net income............................................................................ 929 502
Balance sheet
As of September 30, 2003 June 30, 2003 March 31, 2003 (€ in millions) Total assets ............................................. 864,328 851,267 802,253 Loans, net ............................................... 162,114 161,017 167,524 Liabilities ............................................... 836,901 821,355 772,810 Total shareholders’ equity ...................... 27,427 29,912 29,443 Tier I risk-based capital (BIS) ................ 21,560 23,205 22,936 Total risk-based capital (BIS)................. 29,893 31,733 31,369
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Earnings per share
Nine months ended September 30, 2003 September 30, 2002 (€) Basic: Income before cumulative effect of accounting
changes, net of tax............................................................. 1.36 0.75 Cumulative effect of accounting changes, net of tax ............ 0.27 0.06 Reported net income............................................................. 1.63 0.81 Diluted: Income before cumulative effect of accounting
changes, net of tax............................................................. 1.30 0.74 Cumulative effect of accounting changes, net of tax ............ 0.25 0.06 Reported net income............................................................. 1.55 0.80 Denominator for basic earnings per share –
weighted-average shares outstanding................................ 570,041,314 622,566,397 Denominator for diluted earnings per share –
adjusted weighted-average shares after assumed conversions ....................................................................... 598,105,067 627,113,183
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The Formation of the Trust and the Company
Prior to or simultaneously with the completion of the Offering, the Company, the Trust and the Bank will engage in the following transactions: (i) the Company will issue to the Bank the Company Common Security; (ii) the Company will issue to the Bank the Class A Preferred Security; (iii) the Trust will issue to the Bank the Trust Common Security; (iv) the Trust will issue the Trust Preferred Securities to Deutsche Bank AG London, which will sell the Trust Preferred Securities to investors; (v) the Company will issue to the Trust the Class B Preferred Securities and (vi) the Company will invest the proceeds from the issuance of the Class B Securities in the Initial Obligation.
The Bank or a majority-owned affiliate of the Bank will enter into the Services Agreement. The Bank, as the holder of the Company Common Security, will elect the Board of Directors, which initially will consist of three directors.
Each holder of Company Class B Preferred Securities and the Trust Preferred Securities will be a third-party beneficiary of the Support Undertaking.
The following diagram summarizes the relationship among the Company, the Trust, the Bank and investors in the Trust Preferred Securities following completion of the Offering.
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THE OFFERING
This section contains a summary of the Company, the Trust, the terms of the Trust Preferred Securities and the Class B Preferred Securities, as well as information relating to this Offering. For a more complete description of the terms of the Trust Preferred Securities, the Class B Preferred Securities, the Initial Obligation and the Support Undertaking, see “Description of the Trust Securities,” “Description of the Company Securities,” “Description of the Terms of the Initial Obligation” and “Description of the Support Undertaking”, as well as “Distributable Profits of the Bank”. Capitalized terms used and not otherwise defined below have the meaning given such terms under such headings.
The Trust Deutsche Bank Capital Funding Trust V is a Delaware statutory trust formed for the purpose of issuing the Trust Securities and investing the proceeds therefrom in the Class B Preferred Securities, the Capital Payments and redemption payments (if any) on which will be passed through to holders of the Trust Securities.
The Company Deutsche Bank Capital Funding LLC V, a Delaware limited liability company, is a wholly owned subsidiary of the Bank which will be consolidated with the Bank for German bank regulatory purposes. The Company will hold the Obligations.
Securities Offered The Trust will offer 3,000,000 Trust Preferred Securities with a Liquidation Preference Amount of € 100 per Trust Preferred Security. The terms of the Trust Preferred Securities will be substantially identical to the terms of the Class B Preferred Securities.
Use of Proceeds All the proceeds from the sale of the Trust Securities (aggregating € 300,000,100, including the Trust Common Security) will be invested by the Trust in the Class B Preferred Securities.
The Company will use substantially all of the proceeds from the sale of the Class B Preferred Securities to invest in the Initial Obligation.
The Bank intends to use the proceeds from the sale of the Initial Obligation for general corporate purposes, and the Bank expects to treat the Class B Preferred Securities as consolidated Tier I regulatory capital. The Bank will pay certain commissions to the Managers (one of which – the Lead Manager – is an affiliate of the Bank) and reimburse the Managers for certain expenses in connection with the Offering. Accordingly, the net proceeds to the Bank net of commissions to the Managers can be deemed to be € 294,000,000.
Bank’s Support Undertaking
The Bank will execute a Support Undertaking under which it will agree that (i) the Company will at all times be in a position to meet its obligations if and when such obligations are due and payable, including Capital Payments declared (or deemed declared) on the Class B Preferred Securities and payments due upon redemption of the Class B Preferred Securities plus, in each case, Additional Amounts thereon, if any, and (ii) in liquidation, the Company will have sufficient funds to pay the liquidation preference amounts of the Class B Preferred Securities, plus accrued and unpaid Capital Payments for the then current Payment Period to but excluding the date of liquidation plus Additional Amounts, if any. The Support Undertaking is not a guarantee of any kind that the Company will at any time have sufficient assets to declare a Capital Payment or other distribution.
The Bank’s obligations under the Support Undertaking will be subordinated to all senior and subordinated debt obligations of the Bank (including profit participation rights (Genussscheine)), will rank pari passu with the Parity Securities (as defined herein), if any, and will rank senior to any other preference shares of the Bank. The holders of the Class B Preferred Securities will be third-party beneficiaries of the Support Undertaking. If a holder of the Class B Preferred Securities has notified the
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Company that the Bank has failed to perform any obligation under the Support Undertaking, and such failure continues for 60 days or more after such notice is given, the holders of the Class B Preferred Securities will have the right to elect the Independent Enforcement Director (as defined and described herein) who will be required to enforce the rights of the Company under the Support Undertaking without prejudice to the rights of the holders of the Class B Preferred Securities thereunder.
The Bank will also undertake not to give any guarantee or similar undertaking with respect to, or enter into any other agreement relating to the support of, any other preference shares or similar securities of any other affiliated entity that would rank senior in any regard to the Support Undertaking unless the Support Undertaking is amended so that it ranks at least pari passu with and contains substantially equivalent rights of priority as to payment as any such other guarantee or other support agreement.
TERMS OF THE TRUST PREFERRED SECURITIES, THE CLASS A PREFERRED SECURITY AND THE CLASS B PREFERRED SECURITIES
Maturity The Trust Preferred Securities and the Class B Preferred Securities will not have a maturity date or be subject to any mandatory redemption provisions.
Capital Payments Capital Payments will accrue at a rate of 6.15% per annum on the respective liquidation preference amounts of € 100 per Trust Preferred Security and € 100 per Class B Preferred Security, and will be payable quarterly in arrears on March 2, June 2, September 2 and December 2 of each year, commencing March 2, 2004. Capital Payments payable on each Payment Date will accrue from and including the immediately preceding Payment Date (or December 2, 2003 with respect to Capital Payments payable on March 2, 2004), up to but excluding the relevant Payment Date, and will be calculated on the basis of a 360-day year of twelve 30-day months. Capital Payments will be noncumulative.
Each Capital Payment on the Trust Preferred Securities will be payable to the holders of record of the Trust Preferred Securities as they appear on the books and records of the Trust at the close of business on the corresponding record date. The record dates for the Trust Preferred Securities will be (i) so long as the Trust Preferred Securities remain in book-entry form, at the end of the Business Day immediately preceding the date on which the relevant Capital Payment will be paid, and (ii) in all other cases, 15 Business Days prior to the relevant Payment Date.
If any Payment Date or Redemption Date falls on a day that is not a Business Day, payment of all amounts otherwise payable on such date will be made on the next succeeding Business Day, without adjustment, interest or further payment as a result of such delay in payment.
“Business Day” means a day on which TARGET (the Trans-European Automated Real Time Gross Settlement Express Transfer System) is operating credit or transfer instructions in respect of payments in Euro.
Capital Payments on the Class B Preferred Securities will be paid out of the Company’s Operating Profits (as defined herein) or from payments received by the Company under the Support Undertaking. If the Company does not declare (and is not deemed to have declared) a Capital Payment in respect of any Payment Period, the holders of the Class B Preferred Securities will have no right to receive a Capital Payment on the Class B Preferred Securities in respect of such Payment
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Period, and the Company will have no obligation to pay a Capital Payment on the Class B Preferred Securities in respect of such Payment Period, whether or not Capital Payments on the Class B Preferred Securities are declared (or deemed to have been declared) and paid on the Class B Preferred Securities in respect of any future Payment Period.
Capital Payments on the Class B Preferred Securities are authorized to be declared and paid on any Payment Date to the extent that:
• the Company has an amount of Operating Profits for the Payment Period ending on the day immediately preceding such Payment Date at least equal to the amount of such Capital Payments; and
• the Bank has an amount of Distributable Profits (as defined herein) for the
preceding fiscal year for which audited financial statements are available at least equal to the aggregate amount of such Capital Payments on the Class B Preferred Securities and capital payments or dividends or other distributions or payments on Parity Securities, if any, pro rata on the basis of Distributable Profits for such preceding fiscal year.
Notwithstanding the foregoing, if the Bank or any of its subsidiaries declares or
pays any dividends or makes any other payment or other distribution on any Parity Securities in any fiscal year, the Company will be deemed to have declared Capital Payments on the Class B Preferred Securities on the first Payment Date falling contemporaneously with or immediately after the date on which such dividend was declared or other payment or distribution was made. If the dividend or other payment or distribution on Parity Securities was in the full stated amount payable on such Parity Securities in the then current fiscal year through the Payment Date, Capital Payments will be deemed declared at the Stated Rate in full for the then current fiscal year through such Payment Date. If the dividend or other payment or distribution on Parity Securities was only a partial payment of the amount so owing, the amount of the Capital Payment deemed declared on the Class B Preferred Securities will be adjusted proportionally.
Further, notwithstanding the foregoing, if the Bank or any of its subsidiaries declares or pays any dividend or makes any other payment or distribution on its Junior Securities (other than payments on Junior Securities issued by wholly owned subsidiaries of the Bank, when such Junior Securities are held exclusively by the Bank or by any of its other wholly owned subsidiaries), the Company will be deemed to have declared Capital Payments on the Class B Preferred Securities at the Stated Rate in full (i) for payment on the first four Payment Dates falling contemporaneously with and/or immediately following the date on which such dividend was declared or other payment made, if such Junior Securities pay dividends annually, (ii) for payment on the first two Payment Dates falling contemporaneously with and/or immediately following the date on which such dividend was declared or other payment made, if such Junior Securities pay dividends semi-annually, or (iii) for payment on the first Payment Date falling contemporaneously with or immediately following the date on which such dividend was declared or other payment made, if such Junior Securities pay dividends quarterly.
If the Bank or any of its subsidiaries redeems, repurchases or otherwise acquires any Parity Securities or Junior Securities (other than Parity Securities or Junior Securities issued by wholly-owned subsidiaries of the Bank, when such Parity Securities or Junior Securities are held exclusively by the Bank or any of the Bank’s wholly-owned subsidiaries) for any consideration except by conversion into or exchange for common stock of the Bank and subject to certain exceptions set forth in “Description of the Company Securities—Class B Preferred Securities—
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Capital Payments”, the Company will be deemed to have declared Capital Payments on the Class B Preferred Securities at the Stated Rate in full for payment on the first four Payment Dates falling contemporaneously with and/or immediately following the date on which such redemption, repurchase or other acquisition occurred.
Despite sufficient Operating Profits of the Company and sufficient Distributable Profits of the Bank, the Company will not be permitted to make Capital Payments on the Class B Preferred Securities on any Payment Date (or a date set for redemption or liquidation) if on such date there is in effect an order of the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (the “BaFin”) (or any other relevant regulatory authority) prohibiting the Bank from making any distributions of profits. The Company will have no obligation to make up, at any time, any Capital Payments not paid in full by the Company as a result of insufficient Operating Profits of the Company, insufficient Distributable Profits of the Bank or an order of the BaFin.
“Operating Profits” of the Company for any Payment Period is the excess of the amounts payable (whether or not paid) on the Obligations or, after the Maturity Date, on the Permitted Investments that the Company may then hold in accordance with the LLC Agreement during such Payment Period over any operating expenses of the Company not paid or reimbursed by the Bank or one of its branches or affiliates during such Payment Period.
“Distributable Profits” of the Bank for any fiscal year is the balance sheet profit (Bilanzgewinn) as of the end of such fiscal year, as shown in the audited unconsolidated balance sheet of the Bank as of the end of such fiscal year. Such balance sheet profit includes the annual surplus or loss (Jahresüberschuß/-fehlbetrag), plus any profit carried forward from previous years, minus any loss carried forward from previous years, plus transfers from capital reserves and earnings reserves, minus allocations to earnings reserves, all as determined in accordance with the provisions of the German Stock Corporation Act (Aktiengesetz) and accounting principles generally accepted in the Federal Republic of Germany as described in the German Commercial Code (Handelsgesetzbuch) and other applicable German law then in effect.
In determining the availability of sufficient Distributable Profits of the Bank for any fiscal year to permit Capital Payments to be declared with respect to the Class B Preferred Securities during the succeeding fiscal year of the Bank, any Capital Payments already paid during the succeeding fiscal year of the Bank on the Class B Preferred Securities and any capital payments or dividends already paid during the succeeding fiscal year of the Bank on Parity Securities, if any, on the basis of Distributable Profits for such fiscal year, will be deducted from such Distributable Profits.
“Parity Securities” means each class of the most senior ranking preference shares of the Bank, if any, and Parity Subsidiary Securities.
“Parity Subsidiary Securities” means the most senior ranking preference shares or any other instrument of any subsidiary of the Bank subject to any guarantee or support agreement of the Bank ranking pari passu with the obligations of the Bank under the Support Undertaking.
“Junior Securities” means (i) common stock of the Bank, (ii) each class of preference shares of the Bank ranking junior to Parity Securities of the Bank, if any, and any other instrument of the Bank ranking pari passu therewith or junior thereto and (iii) preference shares or any other instrument of any subsidiary of the Bank subject to any guarantee or support agreement of the Bank ranking junior to
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the obligations of the Bank under the Support Undertaking.
Principal Paying Agent Deutsche Bank Aktiengesellschaft, Frankfurt am Main.
Netherlands Paying Agent
Deutsche Bank Aktiengesellschaft, Amsterdam Branch.
Payments of Additional Amounts
All payments on the Class B Preferred Securities and the Trust Preferred Securities, as the case may be, and any amount payable in liquidation or upon redemption thereof, will be made without deduction or withholding for or on account of any present or future taxes, duties or governmental charges of any nature whatsoever imposed, levied or collected by or on behalf of the United States or Germany or, during any period in which any Substitute Obligations are outstanding, the jurisdiction of residence of any obligor on such Substitute Obligations (or any jurisdiction from which payments are made) (each, a “Relevant Jurisdiction”) or by or on behalf of any political subdivision or authority therein or thereof having the power to tax (collectively, “Withholding Taxes”), unless such deduction or withholding is required by law. In such event, the Company or the Trust, as the case may be, will pay, as additional Capital Payments, such additional amounts (“Additional Amounts”) as may be necessary in order that the net amounts received by the holders of the Class B Preferred Securities and the Trust Preferred Securities, after such deduction or withholding, will equal the amounts that otherwise would have been received had no such deduction or withholding been required. However, no such Additional Amounts will be payable in respect of the Class B Preferred Securities and the Trust Preferred Securities:
• if and to the extent that the Company is unable to pay such Additional Amounts because such payment would exceed the Distributable Profits of the Bank for the preceding fiscal year (after subtracting from such Distributable Profits the amount of Capital Payments on the Class B Preferred Securities and dividends or other distributions or payments on Parity Securities, if any, already paid on the basis of such Distributable Profits on or prior to the date on which such Additional Amounts will be payable);
• with respect to any Withholding Taxes that are payable by reason of a holder
or beneficial owner of the Class B Preferred Securities (other than the Trust) or Trust Preferred Securities having some connection with any Relevant Jurisdiction other than by reason only of the mere holding of the Class B Preferred Securities or the Trust Preferred Securities; or
• with respect to any Withholding Taxes which are deducted or withheld
pursuant to (i) any European Union Directive or Regulation concerning the taxation of interest income, or (ii) any international treaty or understanding relating to such taxation and to which the United States, the European Union or Germany is a party, or (iii) any provision of law implementing, or complying with, or introduced to conform with, such Directive, Regulation, treaty or understanding; or
• where such deduction or withholding can be avoided if the holder or
beneficial owner of the Class B Preferred Securities (other than the Trust) or the Trust Preferred Securities makes a declaration of non-residence or other similar claim for exemption to the relevant tax authority or complies with any reasonable certification, documentation, information or other reporting requirement imposed by the relevant tax authority; provided, such claim for exemption would not be materially more onerous than comparable U.S. tax reporting requirements (such as Internal Revenue Service (“IRS”) Forms 1001, W-8 and W-9).
Class A Preferred The Class A Preferred Security is expected to receive capital payments only to the
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Security extent that (i) Capital Payments are not permitted to be paid on the Class B Preferred Securities in full on any Payment Date due to insufficient Distributable Profits of the Bank or an order of the BaFin (or any other relevant regulatory authority) prohibiting the Bank from making any distributions of profits (as described above), and (ii) the Company has sufficient Operating Profits.
Ranking In the event of any voluntary or involuntary liquidation, dissolution, winding up or termination of the Company, the Class B Preferred Securities will rank junior to the Class A Preferred Security, and the Class B Preferred Securities will rank senior to the Company Common Security; provided that any payments made by the Bank pursuant to the Support Undertaking will be payable by the Company solely to the holders of the Class B Preferred Securities.
Distributions at Liquidation
In the event of any voluntary or involuntary liquidation, dissolution, winding up or termination of the Trust, the holders of the Trust Securities will be entitled to receive the Class B Preferred Securities. The holders of the Trust Preferred Securities will have a preference over the holder of the Trust Common Security with respect to distributions upon liquidation of the Trust.
Upon liquidation of the Company, the holder of the Class A Preferred Security will be entitled to receive the Obligations or Permitted Investments (including accrued and unpaid interest thereon) as its liquidation distribution. Each holder of the Class B Preferred Securities will be entitled to receive the liquidation preference amount of such Class B Preferred Securities, plus accrued and unpaid Capital Payments in respect of the current Payment Period to but excluding the date of liquidation and Additional Amounts, if any. The Company expects that the liquidation distribution to the holders of the Class B Preferred Securities will be paid out of funds received from the Bank under the Support Undertaking. Under the terms of the LLC Agreement and to the fullest extent permitted by law, the Company will not be dissolved until all obligations under the Support Undertaking have been paid in full pursuant to its terms.
Redemption Upon redemption of the Class B Preferred Securities, the Trust must redeem the Trust Securities. The Class B Preferred Securities are redeemable at the option of the Company, in whole but not in part, on December 2, 2009 (the “Initial Redemption Date”) and on each Payment Date thereafter at a redemption price per Class B Preferred Security equal to the liquidation preference amount thereof, plus any accrued and unpaid Capital Payments for the then current Payment Period to but excluding the Redemption Date (the “Redemption Price”), plus Additional Amounts, if any. The Company may exercise its right to redeem the Class B Preferred Securities only if it has:
• given at least 30 days’ prior notice (or such longer period as may be required by the relevant regulatory authorities) to the holders of the Class B Preferred Securities (and the Trust Securities) of its intention to redeem the Class B Preferred Securities on the Redemption Date; and
• obtained any required regulatory approvals.
The Company will also have the right, prior to the Initial Redemption Date, to redeem the Class B Preferred Securities at any time, in whole but not in part, upon the occurrence of a Company Special Redemption Event at the Redemption Price plus Additional Amounts, if any. See “Description of the Company Securities—Class B Preferred Securities—Redemption of the Class B Preferred Securities”.
Upon the occurrence of a Trust Special Redemption Event or in the event of any
voluntary or involuntary dissolution, liquidation, winding up or termination of the Trust, holders of the Trust Securities, will be entitled to receive a pro rata amount
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of the Class B Preferred Securities. See “Description of the Trust Securities—Redemption”. The Class B Preferred Securities and the Trust Preferred Securities will not have any scheduled maturity date and will not be redeemable at any time at the option of the holders thereof.
See “Description of the Trust Securities—Redemption” for definitions of
“Company Special Redemption Event” and “Trust Special Redemption Event”.
No redemption of the Class B Preferred Securities for any reason may take place unless on the Redemption Date:
• the Company has sufficient funds (by reason of payments on the Obligations,
Permitted Investments or pursuant to the Support Undertaking) to pay the Redemption Price (plus Additional Amounts, if any);
• the Bank has an amount of Distributable Profits for the preceding fiscal year
for which audited financial statements are available at least equal to the Capital Payments on the Class B Preferred Securities accrued and unpaid as of the Redemption Date plus Additional Amounts, if any; and
• no order of the BaFin (or any other relevant regulatory authority) is in effect
prohibiting the Bank from making any distributions (including to the holders of Parity Securities, if any).
Voting Rights Holders of the Trust Preferred Securities will not have any voting rights, except
that the holders of a majority of the outstanding Trust Preferred Securities (excluding Trust Preferred Securities held by the Bank or any of its respective affiliates) will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or direct the exercise of any trust or power conferred upon the Property Trustee under the Trust Agreement, including the right to direct the Property Trustee, as holder of the Class B Preferred Securities, on how to vote the Class B Preferred Securities in respect of the matters on which holders of the Class B Preferred Securities are entitled to vote.
So long as any Class B Preferred Securities are outstanding, the Company will not,
without the affirmative vote of at least 662/3% in aggregate liquidation preference amount of the Class B Preferred Securities, voting separately as a class (excluding any Class B Preferred Securities held by the Bank or any of its affiliates), (i) amend, alter, repeal or change any provision of the LLC Agreement (including the terms of the Class B Preferred Securities) if such amendment, alteration, repeal or change would materially adversely affect the rights, preferences, powers or privileges of the Class B Preferred Securities, (ii) agree to modify or amend any provision of, or waive any default in the payment of any amount under the Obligations in any manner that would materially affect the interests of the holders of the Class B Preferred Securities, or (iii) effect any merger, consolidation, or business combination involving the Company, or any sale of all or substantially all of the assets of the Company, provided, that any such merger, consolidation, or business combination involving the Company, or any sale of all or substantially all of the assets of the Company, also must comply with the provisions of the LLC Agreement. For a description of these provisions set forth in the LLC Agreement, see “Description of the Company Securities—Mergers, Consolidations and Sales.”
The Company will not, without the unanimous consent of all the holders of the
Class B Preferred Securities (excluding any Class B Preferred Securities held by the Bank or any of its affiliates), issue any additional securities of the Company ranking prior to or pari passu with the Class B Preferred Securities as to periodic distribution rights or rights on liquidation or dissolution of the Company, or incur
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any indebtedness for money borrowed; provided, however, that in any event the Company may, from time to time and without the consent of the holders of the Class B Preferred Securities, issue additional Class B Preferred Securities having the same terms and conditions as the Class B Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Class B Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Class B Preferred Securities in consideration for Obligations of a principal amount equal to the aggregate liquidation preference amount of such additional Class B Preferred Securities.
Enforcement Rights If (i) the Company fails to pay Capital Payments (plus any Additional Amounts
thereon, if any) on the Class B Preferred Securities at the Stated Rate in full for four consecutive Payment Periods, or (ii) a holder of the Class B Preferred Securities has notified the Company that the Bank has failed to perform any obligation under the Support Undertaking and such failure continues for 60 days after such notice is given, then the holders of the Class B Preferred Securities will have the right to appoint one independent member of the Board of Directors (the “Independent Enforcement Director”). Any Independent Enforcement Director so appointed will vacate office if, in such Independent Enforcement Director’s sole determination: (i) Capital Payments (plus Additional Amounts, if any) on the Class B Preferred Securities have been made on the Class B Preferred Securities at the Stated Rate in full by the Company for at least four consecutive Payment Periods, and (ii) the Bank is in compliance with its obligations under the Support Undertaking provided, however, that the Company may, from time to time and without the consent of the holders of the Class B Preferred Securities, issue additional Class B Preferred Securities having the same terms and conditions as the Class B Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Class B Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Class B Preferred Securities in consideration for Obligations of a principal amount equal to the aggregate liquidation preference amount of such additional Class B Preferred Securities.
Form and Denomination The Trust Preferred Securities will be initially evidenced by a temporary Global Certificate in registered form in the name of, and deposited on or about the closing date with, Clearstream AG, and its successors, for credit to the accountholders of Clearstream AG, including Euroclear and Clearstream, Luxembourg. Such temporary Global Certificate (a “Temporary Global Certificate”) will be exchangeable for a permanent Global Certificate (a “Permanent Global Certificate” and together with the Temporary Global Certificate, the “Global Certificates”) not earlier than 40 days after the closing date upon certification of non-U.S. beneficial ownership. The Trust Preferred Securities will be issued in denominations of € 100 Liquidation Preference Amount (or greater integral multiples thereof).
Listing Application has been made to list the Trust Preferred Securities on the Frankfurt
Stock Exchange and on Euronext Amsterdam.
Clearing and Settlement It is expected that the Trust Preferred Securities will be ready for delivery in book-entry form only through the facilities of Clearstream AG on or about December 2, 2003 (the “Closing Date”) against payment therefor in immediately available funds. Beneficial interests in the Trust Preferred Securities will be shown on, and transfers thereof will be effected only through, records maintained by Clearstream AG.
Notices For so long as the Trust Preferred Securities are listed on the Frankfurt Stock Exchange, all notices concerning the Trust Preferred Securities will be published in the German Federal Gazette (Bundesanzeiger) and in at least one daily newspaper having general circulation in Germany and admitted to carry stock exchange
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announcements (expected to be the Börsen-Zeitung). For so long as the Trust Preferred Securities are listed on Euronext Amsterdam and the rules of such exchange so require, notices to holders of the Trust Preferred Securities shall be deemed to have been given upon publication in a daily newspaper of general circulation in the Netherlands (which is expected to be the Het Financieele Dagblad), notice thereof given to Euronext Amsterdam, and publication in the Officiële Prijscourant.
Governing Law The LLC Agreement, including the terms of the Class A Preferred Security and the Class B Preferred Securities, and the Trust Agreement, including the terms of the Trust Securities, will be governed by Delaware law. The Support Undertaking will be governed by German law.
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TERMS OF THE INITIAL OBLIGATION
Maturity December 2, 2033 (the “Maturity Date”).
Principal Amount € 300,000,000 (equal to the proceeds from the offer and sale of the Trust Preferred Securities and the resulting issuance of the Class B Preferred Securities) (the “Principal Amount”) of an issue of subordinated obligations of the Bank, subdivided into individual notes, each with a nominal amount of € 100.
Interest Payments Interest will accrue at a fixed rate of 6.15% per annum on each individual note comprising a portion of the Principal Amount, and will be payable quarterly in arrears on March 2, June 2, September 2 and December 2 of each year, commencing March 2, 2004 (each such date, an “Interest Payment Date”). Interest Payments payable on each Interest Payment Date will accrue from and including the immediately preceding Interest Payment Date (or December 2, 2003 with respect to Interest Payments payable on March 2, 2004), up to but excluding the relevant Interest Payment Date (each such period, an “Interest Period”), and will be calculated on the basis of a 360-day year of twelve 30-day months.
If any Interest Payment Date or Obligation Redemption Date falls on a day that is not a Business Day, payment of all amounts otherwise payable on such date will be made on the next succeeding Business Day, without adjustment, interest or further payment as a result of such delay in payment.
Ranking With respect to payment of interest and principal and any other amounts upon liquidation of the Bank, the Initial Obligation (i) will be subordinated to all debt obligations of the Bank that are not subordinated, (ii) will rank pari passu with other subordinated debt obligations or other instruments, and (iii) will be senior to all junior subordinated debt obligations and to preference shares of the Bank, if any, and the common shares of the Bank.
Redemption The Initial Obligation will not be redeemable prior to December 2, 2009 (the “Initial Obligation Redemption Date”), except upon the occurrence of (1) a Regulatory Event, (2) a Tax Event or (3) an Investment Company Act Event with respect to the Company or in the event of replacement with Substitute Obligations (as defined herein). Subject to having obtained any required regulatory approvals, the Bank may cause the redemption of the Initial Obligation in whole but not in part prior to the Initial Redemption Date, upon: (i) the occurrence of any of the events numbered (1), (2) or (3) above and the election of the Company to redeem the Class B Preferred Securities and (ii) at least 30 days’ prior notice, at a redemption price equal to the Principal Amount plus accrued and unpaid interest for the then current Interest Period to but excluding the date of redemption and Additional Interest Amounts (as defined below), if any. The Bank may, at its option, redeem the Initial Obligation, in whole or in part, on the Initial Obligation Redemption Date or on any Interest Payment Date thereafter, upon at least 30 days’ prior notice, subject to having obtained any required regulatory approvals, at a redemption price equal to the Principal Amount to be redeemed, plus accrued and unpaid interest thereon for the then current Interest Period to but excluding the date of redemption, and Additional Interest Amounts, if any. Exercise of the Bank’s redemption right is conditional upon replacement of the Principal Amount of the Obligation to be redeemed by paying in other, at least equivalent own funds (haftendes Eigenkapital) within the meaning of the German Banking Act (Kreditwesengesetz) (the “KWG”), or prior approval of the BaFin or any successor authority of such redemption.
Except as set forth under “Substitution” below, the Initial Obligation may not be redeemed for any reason unless the Company has the right to, and has given notice that it will, redeem the Class B Preferred Securities.
Substitution At any time, the Bank will have the right to (i) substitute another obligor on the Initial
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Obligation, in whole or in part, which obligor will be a branch of the Bank or a Qualified Subsidiary (as defined herein), or (ii) replace the Obligations, in whole or in part, with Substitute Obligations; provided, in each case, that (a) such substitution or replacement does not result in a Company Special Redemption Event and (b) the Bank (which may act through a branch) guarantees on a subordinated basis, at least equal to the ranking of the Initial Obligation, the obligations of any such majority-owned subsidiary.
The LLC Agreement provides that after the Maturity Date, if the Class B Preferred Securities have not been redeemed, the Company will invest in debt obligations of the Bank or one or more majority-owned subsidiaries of the Bank, unconditionally guaranteed by the Bank (which may act through a branch) on a subordinated basis at least equal to the ranking of the Initial Obligation or, in the event such an investment is not available, in U.S. Treasury securities (together, “Permitted Investments”); provided, in each case, that such investment does not result in a Company Special Redemption Event.
Governing Law The Initial Obligation will be governed by German law.
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INVESTMENT CONSIDERATIONS
An investment in the Trust Preferred Securities involves certain risks. An investor should carefully consider the following discussion, in conjunction with the other information contained in this Offering Circular, before deciding whether an investment in the Trust Preferred Securities is suitable.
Risks Associated with the Financial Condition of the Bank and Its Affiliates
If the financial condition of the Bank or its affiliates were to deteriorate, then it could result in: (i) the Bank having insufficient Distributable Profits for the Company to declare and pay Capital Payments on the Class B Preferred Securities at the Stated Rate in full, or (ii) the Company receiving reduced payments from the Bank under the Initial Obligation or under the Support Undertaking. This could reduce the amounts received by the Trust in respect of the Class B Preferred Securities, which, in turn, would reduce the amounts available to the Trust for periodic distributions to holders of the Trust Preferred Securities. In addition, if a voluntary or involuntary liquidation, dissolution or winding up of the Bank were to occur, holders of the Trust Preferred Securities may lose all or part of their investment.
The Company Is Not Required to Make Capital Payments
The declaration of Capital Payments by the Company on the Class B Preferred Securities (and, accordingly, the payment of Capital Payments on the Trust Preferred Securities by the Trust) is limited by the terms of the LLC Agreement. Although it is the policy of the Company to distribute the full amount of Operating Profits for each Payment Period as Capital Payments to the holders of the Class B Preferred Securities, the Board of Directors has discretion in declaring and making Capital Payments (except with respect to deemed declarations which are mandatory). In addition, even if the Bank has sufficient Distributable Profits, the Company will not be permitted to make Capital Payments on the Class B Preferred Securities on any Payment Date if on such date there is in effect an order of the BaFin or any other relevant regulatory authority prohibiting the Bank from making any distributions of profits. To the extent the Company is not permitted to make Capital Payments on the Class B Preferred Securities on any Payment Date, this will reduce the amounts available to the Trust to make Capital Payments on the Trust Preferred Securities. See “Description of the Company Securities—Class B Preferred Securities—Capital Payments” and “Description of the Trust Securities.”
Capital Payments Are Noncumulative
The Capital Payments are discretionary and noncumulative. The LLC Agreement provides that it is the policy of the Company to distribute all of its Operating Profits; however, even if the Distributable Profits test has been met by the Bank, holders of the Trust Preferred Securities will have no right to receive any Capital Payments in respect of such Payment Period unless the Board of Directors declares (or is deemed to have declared) Capital Payments on the Class B Preferred Securities for such Payment Period. See “Description of the Company Securities—Class B Preferred Securities—Capital Payments.”
No Voting Rights; Relationships with the Bank and Its Affiliates; Certain Conflicts of Interest
The Bank will control the Company through its power to elect a majority of the Board of Directors as holder of the Company Common Security. Generally, the Trust, to the extent that it is the holder of the Class B Preferred Securities, will have no right to vote to elect members of the Board of Directors. The only exception is that holders will have the right to elect one independent member to the Board of Directors, the Independent Enforcement Director, if: (i) the Company fails to make Capital Payments (and Additional Amounts thereon) on the Class B Preferred Securities at the Stated Rate in full for four consecutive Payment Periods, or (ii) a holder of the Class B Preferred Securities has notified the Company that the Bank has failed to perform any obligation under the Support Undertaking and such failure continues for 60 days after such notice is given.
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The Company expects that the initial (and all future) directors and officers of the Company and Regular Trustees of the Trust will be officers or employees of the Bank or their affiliates. Under the Services Agreement, the Bank also will provide certain accounting, legal, tax and other support services to the Company and the Trust. In addition, the Bank or affiliates of the Bank will act as Delaware Trustee, Principal Paying Agent, Netherlands Paying Agent, Listing Agent and Registrar. Consequently, conflicts of interest may arise for those officers or employees of the Bank and its affiliates in the discharge of their duties as officers or employees of the Company or Regular Trustees of the Trust or any buyers of such affiliates as such agents.
Special Redemption Risk
Redemption upon Occurrence of a Company Special Redemption Event. The Class B Preferred Securities (and, consequently, the Trust Preferred Securities) will be redeemable at any time at the option of the Company, in whole but not in part, upon the occurrence of a Company Special Redemption Event. A Company Special Redemption Event will arise if, as a result of certain changes in law, there are changes in the tax status of the Company; Additional Amounts relating to withholding taxes become applicable to payments on the Class B Preferred Securities, the Trust Securities or the Obligations; the Bank, as obligor of the Obligations, may not deduct in full interest payments on the Obligations for German corporate income tax purposes; the Bank is not permitted to treat the Class B Preferred Securities as Tier I regulatory capital on a consolidated basis; or the Company will be considered an “investment company” within the meaning of the U.S. Investment Company Act of 1940, as amended (the “1940 Act”). See “Description of the Trust Securities—Redemption”.
Liquidation of the Trust upon Occurrence of a Trust Special Redemption Event. If there has occurred a Tax Event or an Investment Company Act Event (in each case, as defined herein) each solely with respect to the Trust, then the Trust will be dissolved and liquidated. Upon such dissolution and liquidation of the Trust, each holder of the Trust Securities would receive as its liquidation distribution a pro rata amount of the Class B Preferred Securities. Upon such distribution, holders of the Class B Preferred Securities and their nominees will become subject to Form K-1 and nominee reporting requirements under the Code. There can be no assurance as to the market price for the Class B Preferred Securities that would be distributed in exchange for Trust Preferred Securities if a dissolution and liquidation of the Trust were to occur or that such a market for the Class B Preferred Securities would ever develop. Accordingly, the Class B Preferred Securities which an investor may subsequently receive on dissolution and liquidation of the Trust may trade at a discount to the price of the Trust Preferred Securities for which they were exchanged.
The Support Undertaking Is Not A Guarantee that Capital Payments Will Be Made
The Bank and the Company have entered into the Support Undertaking for the benefit of the Company and the holders of the Class B Preferred Securities. However, the Support Undertaking does not represent a guarantee from the Bank that the Company will be authorized to declare and make a Capital Payment for any Payment Period. Furthermore, the obligations of the Bank under the Support Undertaking rank junior to all indebtedness of the Bank with the effect that, if the Bank (and therefor the Company) were liquidated, holders of the Trust Preferred Securities would have the right to receive any payments on the Liquidation Preference Amount, plus any accrued and unpaid Capital Payments for the then current Payment Period to but excluding the date of liquidation and Additional Amounts, if any, pursuant to the Support Undertaking pari passu with amounts payable to the holders of the most senior preference shares of the Bank. See “Description of the Support Undertaking.”
No Prior Public Market; Resale Restrictions
The Trust Preferred Securities are a new issue of securities. Prior to the Offering, there has been no public market for the Trust Preferred Securities. Application has been made to admit the Trust Preferred Securities to trading and official quotation on the Frankfurt Stock Exchange and on Euronext Amsterdam. Listing of the Trust Preferred Securities on the Frankfurt Stock Exchange and on Euronext Amsterdam is expected to occur shortly after closing. The Trust Preferred Securities may trade at a discount to the price that the investor paid to purchase the Trust Preferred Securities offered by this Offering Circular. There can be no assurance that an active secondary market for the Trust Preferred Securities will develop. The liquidity and the market prices for
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the Trust Preferred Securities can be expected to vary with changes in market and economic conditions, the financial condition and prospects of the Bank and Deutsche Bank Group and other factors that generally influence the secondary market prices of securities. Such fluctuations may significantly affect liquidity and market prices for the Trust Preferred Securities.
Regulatory Restrictions on the Company’s Operations
Because the Company is a subsidiary of the Bank, German bank regulatory authorities could make determinations in the future with respect to the Bank that could adversely affect the Company’s ability to make Capital Payments in respect of the Class B Preferred Securities. In addition, United States federal or state regulatory authorities, as well as German and European Union regulatory authorities and regulatory authorities in other countries, have regulatory authority over the Bank and/or the Bank’s subsidiaries. Under certain circumstances, any of such regulatory authorities could make determinations or take decisions in the future with respect to the Bank and/or any of the Bank’s subsidiaries or a portion of their respective operations or assets that could adversely affect the ability of any of them to, among other things, make distributions to their respective securityholders, engage in transactions with affiliates, purchase or transfer assets, pay their respective obligations or make any redemption or liquidation payments to their securityholders.
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CAPITALIZATION OF THE COMPANY AND THE TRUST
Capitalization of the Company
The following table sets forth the capitalization of the Company as of November 26, 2003 and as adjusted to reflect the consummation of the sale of 3,000,000 Trust Preferred Securities and the use of the net proceeds therefrom as described under “General Information—Use of Proceeds”. As of November 26, 2003 Actual As Adjusted (€) Debt
Total long-term debt 0 0 Securityholders’ Equity
Class B Preferred Securities (liquidation preference of € 100 per security); none issued and outstanding, actual; and € 300,000,100 Class B Preferred Securities authorized, € 300,000,100 Class B Preferred Securities issued and outstanding, as adjusted ................... 0 300,000,100
Class A Preferred Securities; none issued and outstanding, actual; and 1 Class A Preferred Security authorized, 1 Class A Preferred Security issued and outstanding, as adjusted ................................................... 0 100
Company Common Security, none issued and outstanding, actual; and 1 Company Common Security authorized, 1 Company Common Security issued and outstanding, as adjusted ..................................... 0 100
Total securityholders’ interests........................................................................... 0 300,000,300 Total capitalization(1) ........................................................................................ 0 300,000,300 ___________ (1) Except as disclosed in the above table, there has been no material change in the capitalization of the Company
since its formation on October 21, 2003.
Capitalization of the Trust
The following table sets forth the capitalization of the Trust as of November 26, 2003 and as adjusted to reflect the consummation of the sale of 3,000,000 Trust Preferred Securities and the use of the net proceeds therefrom as described under “General Information—Use of Proceeds.”
As of November 26, 2003 Actual As Adjusted
(€) Debt
Total long-term debt ..................................................................................... 0 0 Securityholders’ Interests
Trust Preferred Securities (liquidation preference of € 100 per security); none issued and outstanding, actual; and € 300,000,000 securities authorized, € 300,000,000 securities issued and outstanding, as adjusted.............................................................................................. 0 300,000,000
Trust Common Security; none issued and outstanding, actual; and 1 Trust Common Security authorized, 1 Trust Common Security issued and outstanding, as adjusted ..................................................................... 0 100
Total securityholders’ interests........................................................................... 0 300,000,100 Total capitalization(1) ........................................................................................ 0 300,000,100 ________________ (1) Except as disclosed in the above table, there has been no material change in the capitalization of the Trust since its
creation.
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DEUTSCHE BANK CAPITAL FUNDING TRUST V
The Trust is a statutory trust (Delaware Secretary of State file number 3718273) formed under the Trust Act pursuant to the trust agreement executed by the Bank, as sponsor and as holder of the Trust Common Security, the Property Trustee and the Delaware Trustee, and the filing of a certificate of trust with the Secretary of State of the State of Delaware on October 22, 2003. Such trust agreement dated October 22, 2003, will be amended and restated in its entirety prior to the issuance of the Trust Preferred Securities to reflect the terms of the Trust Preferred Securities (as amended and restated on the Closing Date, the “Trust Agreement”). The Trust Common Security will rank pari passu, and payments thereon will be made pro rata, with the Trust Preferred Securities, except that in liquidation and in certain circumstances described under “Description of the Trust Securities—Subordination of the Trust Common Security,” the rights of the holder of the Trust Common Security to periodic distributions and to payments upon liquidation, redemption and otherwise will be subordinated to the rights of the holders of the Trust Preferred Securities. For a complete description of the share capital of the Trust, see “Description of the Trust Securities”.
The Trust will use all the proceeds derived from the issuance of the Trust Securities to purchase the Class B Preferred Securities from the Company, and, accordingly, the assets of the Trust will consist solely of the Class B Preferred Securities. The Trust exists for the sole purposes of:
• issuing the Trust Securities representing undivided beneficial ownership interests in the assets of the Trust;
• investing the proceeds from the issuance of the Trust Securities in the Class B Preferred Securities; and
• engaging in those other activities necessary or incidental thereto.
The Trust may also, from time to time and without the consent of the holders of the Trust Preferred Securities, issue additional Trust Preferred Securities having the same terms and conditions as the Trust Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Trust Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Trust Preferred Securities in consideration for the receipt of Class B Preferred Securities equal to the aggregate liquidation preference amount of such additional Trust Preferred Securities.
Pursuant to the Trust Agreement, there will initially be five trustees (the “Trustees”) of the Trust. Three of the Trustees will be individuals who are employees or officers of, or who are affiliated with, the Bank (the “Regular Trustees”). The fourth Trustee, the Property Trustee, will be a financial institution that is unaffiliated with the Bank. The fifth Trustee will be the “Delaware Trustee”. Initially, The Bank of New York will act as Property Trustee, and Deutsche Bank Trust Company Delaware, a Delaware corporation, will act as Delaware Trustee, until, in each case, removed or replaced by the holder of the Trust Common Security.
The Property Trustee will hold title to the Class B Preferred Securities for the benefit of the holders or beneficial holders of the Trust Securities, and the Property Trustee will have the power to exercise all rights, powers and privileges with respect to the Class B Preferred Securities under the LLC Agreement. In addition, the Property Trustee will maintain exclusive control of the Property Account to hold all payments made in respect of the Class B Preferred Securities for the benefit of the holders of the Trust Securities. Funds in the Property Account will remain uninvested until disbursed pursuant to the terms of the Trust Agreement. The Bank, as the holder of the Trust Common Security, will have the right to appoint, remove or replace any of the Trustees and to increase or decrease the number of Trustees, provided that at least one Trustee will be the Delaware Trustee, at least one Trustee will be the Property Trustee and at least one Trustee will be a Regular Trustee.
For so long as the Trust Preferred Securities remain outstanding, the Bank will covenant (i) that the Trust Common Security will be held by the Bank or by any one or more subsidiaries of the Bank, (ii) to cause the Trust to remain a statutory trust and not to voluntarily dissolve, wind up, liquidate or be terminated, except as permitted by the Trust Agreement and (iii) to use its commercially reasonable efforts to ensure that the Trust will not be classified as other than a grantor trust for United States federal income tax purposes.
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The rights of the holders of the Trust Preferred Securities, including economic rights, rights to information and voting rights, are as set forth in the Trust Agreement and the Trust Act. See “Description of the Trust Securities”.
Under the services agreement dated the Closing Date among the Trust, the Company and the Bank (the “Services Agreement”), the Bank will be obligated, among other things, to provide legal, accounting, tax and other general support services to the Trust and the Company, to maintain compliance with all applicable U.S. and German local, state and federal laws, and to provide administrative, recordkeeping and secretarial services for the Company and the Trust. The fees and expenses of the Company (to the extent not paid by the Company) and the fees and expenses of the Trust, including, in each case, any taxes, duties, assessments or governmental charges of whatsoever nature (other than Withholding Taxes) imposed by Germany, the United States or any other taxing authority upon the Company or the Trust, and all other obligations of the Company and the Trust (other than with respect to the Trust Securities or the Company Securities) will be paid by the Bank pursuant to the Services Agreement. See “Description of the Services Agreement”.
The initial Regular Trustees will be John Cipriani, Richard W. Ferguson and Joseph Rice. The address of all Regular Trustees is the principal executive office of the Trust. The location of the principal executive office of the Trust is c/o Deutsche Bank Capital Funding LLC V, 60 Wall Street, New York, New York 10005, and its telephone number is (212) 250-2428.
The location of the offices of the Property Trustee is 101 Barclay Street, Floor 21 West, New York, New York 10286. The location of the offices of the Delaware Trustee is 1011 Centre Road, Suite 200, Wilmington, Delaware 19805.
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DEUTSCHE BANK CAPITAL FUNDING LLC V
The Company is a limited liability company (Delaware Secretary of State file number 3717919) that was formed under the LLC Act on October 21, 2003 and pursuant to an initial limited liability company agreement, dated as of October 22, 2003 (as subsequently amended and restated on the Closing Date, the “LLC Agreement”) and the filing of a certificate of formation of the Company with the Secretary of State of the State of Delaware. Pursuant to the LLC Agreement, the Company will issue two classes of preferred securities representing limited liability company interests in the Company, the Class A Preferred Security and the Class B Preferred Securities, and one class of common security representing limited liability company interests in the Company, the Company Common Security. The Property Trustee will initially hold 100% of the issued and outstanding Class B Preferred Securities. The Bank will initially hold the issued and outstanding Company Common Security and the Class A Preferred Security. For a complete description of the Share Capital of the Company, see “Description of the Company Securities”.
The sole purposes of the Company are:
• to issue the Class A Preferred Security, the Class B Preferred Securities and the Company Common Security;
• to invest substantially all of the proceeds thereof in the Initial Obligation;
• upon any redemption of the Initial Obligation prior to the Maturity Date, which does not involve a redemption of the Class B Preferred Securities, to reinvest the proceeds in Substitute Obligations issued by the Bank or a majority-owned subsidiary that is consolidated with the Bank for German bank regulatory purposes in replacement for the Initial Obligation, so long as any such reinvestment does not result in a Company Special Redemption Event;
• in the event of any default on the Obligations, to enforce its rights for payment of any overdue amounts;
• after the Maturity Date, if the Class B Preferred Securities have not been redeemed, to invest in Permitted Investments;
• to enter into and, in certain circumstances, to enforce the Support Undertaking for the sole benefit of the holders of the Class B Preferred Securities; and
• to engage in those other activities necessary or advisable for the carrying out of the foregoing purposes.
The Company may also, from time to time and without the consent of the holders of the Class B Preferred Securities, issue additional Class B Preferred Securities having the same terms and conditions as the Class B Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Class B Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Class B Preferred Securities in consideration for Obligations of a principal amount equal to the aggregate liquidation preference amount of such additional Class B Preferred Securities.
For so long as the Class B Preferred Securities remain outstanding, the LLC Agreement provides that: (i) the Company will remain a limited liability company and, to the fullest extent permitted by law, will not voluntarily or involuntarily liquidate, dissolve, wind up or be terminated, except as permitted by the LLC Agreement; (ii) the Bank and the Company will use their commercially reasonable efforts to ensure that the Company will not be an association or a publicly traded partnership taxable as a corporation for United States federal income tax purposes; (iii) the Bank undertakes that the Bank or one or more other Qualified Subsidiaries (as defined herein) of the Bank will maintain sole ownership of the Company Common Security and the Class A Preferred Security, and the Bank or a Qualified Subsidiary may transfer the Company Common Security or the Class A Preferred Security only to the Bank or other Qualified Subsidiaries, provided that prior to such transfer it has received an opinion of a nationally recognized law firm experienced in such matters to the effect that: (A) the Company will continue to be treated as a partnership, and not as an association or publicly traded partnership taxable as a corporation, for United States federal income tax purposes, (B) such transfer will not cause the
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Company to be required to register under the 1940 Act, and (C) such transfer will not adversely affect the limited liability of the holders of the Class B Preferred Securities.
“Qualified Subsidiary” means a subsidiary that is consolidated with the Bank for German bank regulatory purposes of which more than fifty percent (50%) of the outstanding voting stock or other equity interest entitled ordinarily to vote in the election of the directors or other governing body (however designated) and of which more than fifty percent (50%) or the outstanding capital stock or other equity interest is, at the time, beneficially owned or controlled directly or indirectly by the Bank, which subsidiary meets the definition of “a company controlled by its parent company” as defined in Rule 3a-5 under the 1940 Act.
The rights of the holders of the Class B Preferred Securities, including economic rights, rights to information and voting rights, are set forth in the LLC Agreement and the LLC Act. See “Description of the Company Securities—Class B Preferred Securities”.
The Company’s business and affairs will be conducted by its Board of Directors, which initially will consist of three members, elected by the Bank as initial holder of the Company Common Security. However, in the event that:
• the Company fails to pay Capital Payments (including Additional Amounts thereon) on the Class B Preferred Securities at the Stated Rate in full for four consecutive Payment Periods; or
• a holder of the Class B Preferred Securities has notified the Company that the Bank has failed to perform any obligation under the Support Undertaking and such failure continues for 60 days after such notice is given,
then the holders of the Class B Preferred Securities will have the right to appoint the Independent Enforcement Director. The Independent Enforcement Director’s term will end if, in such Independent Enforcement Director’s sole determination Capital Payments (plus Additional Amounts, if any) have been made on the Class B Preferred Securities at the Stated Rate in full for at least four consecutive Payment Periods and the Bank is in compliance with its obligations under the Support Undertaking.
So long as any Class B Preferred Securities are outstanding, the Company will not, without the affirmative vote of at least 662/3% in aggregate liquidation preference amount of the Class B Preferred Securities, voting separately as a class (excluding any Class B Preferred Securities held by the Bank or any of its affiliates), (i) amend, alter, repeal or change any provision of the LLC Agreement (including the terms of the Class B Preferred Securities) if such amendment, alteration, repeal or change would materially adversely affect the rights, preferences, powers or privileges of the Class B Preferred Securities, (ii) agree to modify or amend any provision of, or waive any default in the payment of any amount under the Obligations in any manner that would materially affect the interests of the holders of the Class B Preferred Securities or (iii) effect any merger, consolidation, or business combination involving the Company, or any sale of all or substantially all of the assets of the Company, provided, that any such merger, consolidation, or business combination involving the Company, or any sale of all or substantially all of the assets of the Company, also must comply with the requirements set forth under “Description of the Company Securities—Mergers, Consolidations and Sales”.
The Company will not, without the unanimous consent of all the holders of the Class B Preferred Securities (excluding any Class B Preferred Securities held by the Bank or any of its affiliates), issue any additional equity securities of the Company ranking prior to or pari passu with the Class B Preferred Securities as to periodic distribution rights or rights on liquidation or dissolution of the Company provided, however, that the Company may, from time to time and without the consent of the holders of the Class B Preferred Securities, issue additional Class B Preferred Securities having the same terms and conditions as the Class B Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Class B Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Class B Preferred Securities in consideration for Obligations of a principal amount equal to the aggregate liquidation preference amount of such additional Class B Preferred Securities.
After the Maturity Date, if the Class B Preferred Securities have not been redeemed, the Company will invest in Permitted Investments. The Company will select for purchase Permitted Investments in the following order of priority and within each category on terms that are the best available in relation to providing funds for
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the payment of Capital Payments, any Additional Amounts and the Redemption Price of the Class B Preferred Securities:
• first, debt obligations of the Bank or one or more majority-owned subsidiaries of the Bank, unconditionally guaranteed by the Bank (which may act through any of its subsidiaries) on a subordinated basis that ranks at least pari passu with the Initial Obligation; or
• second, in the event such an investment is not available, in United States Treasury securities.
The Company will also enter into the Services Agreement with the Trust and the Bank or a majority owned affiliate of the Bank, under which the Bank or a majority owned affiliate of the Bank will be obligated, among other things, to provide legal, accounting, tax and other general support services to the Company and the Trust, to maintain compliance with all applicable U.S. and German local, state and federal laws, and to provide administrative, recordkeeping and secretarial services for the Company and the Trust. The fees and expenses of the Trust and the Company, including any taxes, duties, assessments or governmental charges of whatever nature (other than Withholding Taxes) imposed by Germany, the United States or any other taxing authority upon the Company or the Trust, and all other obligations of the Company and the Trust (other than with respect to the Trust Securities or the Company Securities) will be paid by the Bank pursuant to the Services Agreement. See “Description of the Services Agreement”.
The holders of the Class B Preferred Securities are third-party beneficiaries of the Support Undertaking between the Bank and the Company. See “Description of the Support Undertaking.”
The initial directors of the Company will be John Cipriani, Richard W. Ferguson, Jean O’Callaghan and Joseph Rice. The initial officers of the Company will be Richard W. Ferguson as President, John Cipriani as Vice President and Treasurer, Jean O’Callaghan, Joseph Rice and Helmut Mannhardt as Vice President, Sonja K. Olsen as Secretary, and Sandra L. West and James O. Wilhelm as Assistant Secretary. The address of all directors and officers of the company is the principal executive office of the Company. The location of the principal executive offices of the Company is Deutsche Bank Capital Funding LLC V, 60 Wall Street, New York, New York 10005, and its telephone number is (212) 250-2428.
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USE OF PROCEEDS
All the proceeds from the sale of the Trust Securities (aggregating € 300,000,100, including the Trust Common Security) will be invested by the Trust in the Class B Preferred Securities. The Company will use substantially all of the funds from the sale of the Class B Preferred Securities to make an investment in the Initial Obligation. The Bank intends to use the proceeds from the sale of the Initial Obligation for general corporate purposes, and the Bank expects to treat the Class B Preferred Securities as consolidated Tier 1 regulatory capital. The Bank will pay certain commissions to the Managers (one of which – the Lead Manager – is an affiliate of the Bank) and reimburse the Managers for certain expenses in connection with the Offering. Accordingly, the net proceeds to the Bank net of commission to the Managers can be deemed to be €294,000,000.
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DISTRIBUTABLE PROFITS OF THE BANK
The Company’s authority to declare Capital Payments on the Class B Preferred Securities for any Payment Period depends, among other things, on the Distributable Profits of the Bank for the preceding fiscal year. For the definition of Distributable Profits, see “The Offering—Terms of the Trust Preferred Securities, the Class A Preferred Security and the Class B Preferred Securities—Capital Payments”. Distributable Profits are determined on the basis of the Bank’s audited unconsolidated financial statements prepared in accordance with accounting principles generally accepted in the Federal Republic of Germany as described in the German Commercial Code (Handelsgesetzbuch) and other applicable German law then in effect. The German Commercial Code differs in certain respects from U.S. GAAP, in accordance with which the Bank prepares its consolidated financial statements.
Distributable Profits in respect of any fiscal year includes, in addition to annual profit, transfers made by the Bank, in its discretion, of amounts carried on its balance sheet as Other Revenue Reserves. In addition, in determining Distributable Profits for any fiscal year, the amounts shown below as Capital Reserves and Statutory Revenue Reserves Available to Offset an Annual Loss may be transferred in the Bank’s discretion to offset any losses, which may be incurred by the Bank.
The following table sets forth, as of the end of the years indicated, certain items derived from the Bank’s audited unconsolidated balance sheet that relate to the foregoing discussion:
2002 2001 2000 (€ in millions)
Annual profits after allocations to other revenue reserves 808 808 801 Other revenue reserves .................................................... 6,518 7,745 7,590 7,326 8,553 8,391 Capital reserves and statutory revenue reserves
available to offset an annual loss ................................. 10,973 10,959 10,639 18,299 19,512 19,030 The Bank paid total dividends on its ordinary shares of € 808 million, € 800 million and € 801 million in respect of 2002, 2001 and 2000, respectively.
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DESCRIPTION OF THE TRUST SECURITIES
The Trust Securities will be issued pursuant to the terms of the Trust Agreement. The following summary sets forth the material terms and provisions of the Trust Securities. This summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, the terms and provisions of the Trust Agreement and the Trust Act.
General
The Trust Preferred Securities will be issued in fully registered form without coupons. The Trust Preferred Securities will not be issued in bearer form. See “—Form, Book-Entry Procedures and Transfer”.
The Trust Agreement authorizes the Regular Trustees of the Trust to issue the Trust Preferred Securities, which represent undivided beneficial ownership interests in the assets of the Trust. Title to the Class B Preferred Securities will be held by the Property Trustee for the benefit of the holders and beneficial owners of the Trust Preferred Securities. The Trust Agreement does not permit the Trust to acquire any assets other than the Class B Preferred Securities, issue any securities other than the Trust Preferred Securities or incur any indebtedness provided that, as the Company may, from time to time and without the consent of the Trust as the holder of the Class B Preferred Securities, issue additional Class B Preferred Securities having substantially the same terms as the Class B Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Class B Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Class B Preferred Securities, the Trust, accordingly, may, from time to time and without the consent of the holders of the Trust Preferred Securities, issue additional Trust Preferred Securities having the same terms and conditions as the Trust Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Trust Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Trust Preferred Securities in consideration for the receipt of additional Class B Preferred Securities equal to the aggregate liquidation preference amount of such additional Trust Preferred Securities.
Capital Payments
Capital Payments will accrue at a rate of 6.15% per annum on the respective liquidation preference amount of € 100 per Trust Preferred Security, and will be payable quarterly in arrears on March 2, June 2, September 2 and December 2 of each year, commencing March 2, 2004. Capital Payments payable on each Payment Date will accrue from and including the immediately preceding Payment Date (or December 2, 2003 with respect to Capital Payments payable on March 2, 2004), up to but excluding the relevant Payment Date, and will be calculated on the basis of a 360-day year of twelve 30-day months. Capital Payments will be noncumulative.
If any Payment Date or Redemption Date falls on a day that is not a Business Day, payment of all amounts otherwise payable on such date will be made on the next succeeding Business Day, without adjustment, interest or further payment as a result thereof.
Capital Payments on the Trust Preferred Securities are expected to be paid out of Capital Payments received by the Trust from the Company with respect to the Class B Preferred Securities. Capital Payments on the Class B Preferred Securities are expected to be paid by the Company out of its Operating Profits or from payments received by the Company under the Support Undertaking. See “Description of the Company Securities—Class B Preferred Securities—Capital Payments”. If the Company does not declare (and is not deemed to have declared) a Capital Payment on the Class B Preferred Securities in respect of any Payment Period, the holders of the Class B Preferred Securities will have no right to receive a Capital Payment on the Class B Preferred Securities in respect of such Payment Period, and the Company will have no obligation to pay a Capital Payment on the Class B Preferred Securities in respect of such Payment Period, whether or not Capital Payments are declared (or deemed to have been declared) and paid on the Class B Preferred Securities in respect of any future Payment Period. In such a case, no Capital Payments will be made on the Trust Preferred Securities in respect of such Payment Period.
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Each Capital Payment on the Trust Preferred Securities will be payable to the holders of record of the Trust Preferred Securities as they appear on the books and records of the Trust at the close of business on the corresponding record date. The record dates for the Trust Preferred Securities will be (i) so long as the Trust Preferred Securities remain in book-entry form, at the end of the Business Day immediately preceding the date on which the relevant Capital Payment will be paid, and (ii) in all other cases, 15 Business Days prior to the relevant Payment Date.
Such Capital Payments will be paid through or by the order of the Property Trustee who will hold amounts received in respect of the Class B Preferred Securities in the Property Account for the benefit of the holders of the Trust Preferred Securities, subject to any applicable laws and regulations and the provisions of the Trust Agreement. Each payment will be made as described in “—Form, Book-Entry Procedures and Transfer”.
The right of the holders of the Trust Preferred Securities to receive Capital Payments is noncumulative. Accordingly, if the Trust does not have funds available for payment of a Capital Payment in respect of any Payment Period, the holders will have no right to receive a Capital Payment in respect of such Payment Period, and the Trust will have no obligation to pay a Capital Payment in respect of such Payment Period, whether or not Capital Payments are paid in respect of any future Payment Period.
Except as described under “—Subordination of the Trust Common Security” below, all Capital Payments and other payments to holders of the Trust Securities will be distributed among holders of record pro rata, based on the proportion that the aggregate Liquidation Preference Amount of the Trust Preferred Securities held by each holder bears to the aggregate Liquidation Preference Amount of all Trust Preferred Securities.
Payments of Additional Amounts
All payments on the Trust Preferred Securities by the Trust, and any amount payable in liquidation or upon redemption thereof, will be made without withholding or deduction for or on account of Withholding Taxes unless such deduction or withholding is required by law. In such event, the Trust will pay, as additional Capital Payments, such Additional Amounts as may be necessary in order that the net amounts received by the holders of the Trust Preferred Securities will equal the amounts that otherwise would have been received had no such deduction or withholding been required. However, no such Additional Amounts will be payable in respect of the Trust Preferred Securities:
• if and to the extent that the Company is unable to pay corresponding amounts in respect of the Class B Preferred Securities because such payment would exceed the Distributable Profits of the Bank for the preceding fiscal year (after subtracting from such Distributable Profits the amount of the Capital Payments on the Class B Preferred Securities and dividends or other distributions or payments on Parity Securities, if any, already paid on the basis of such Distributable Profits on or prior to the date on which such Additional Amounts will be payable);
• with respect to any Withholding Taxes that are payable by reason of a holder or beneficial owner of the Trust Preferred Securities having some connection with any Relevant Jurisdiction other than by reason only of the mere holding of the Trust Preferred Securities; or
• with respect to any Withholding Taxes which are deducted or withheld pursuant to (i) any European Union Directive or Regulation concerning the taxation of interest income, or (ii) any international treaty or understanding relating to such taxation and to which the United States, the European Union or Germany is a party, or (iii) any provision of law implementing, or complying with, or introduced to conform with, such Directive, Regulation, treaty or understanding; or
• where such deduction or withholding can be avoided if the holder or beneficial owner of the Trust Preferred Securities makes a declaration of non-residence or other similar claim for exemption to the relevant tax authority or complies with any reasonable certification, documentation, information or other reporting requirement imposed by the relevant tax authority; provided, however, that the exclusion set forth in this clause shall not apply in respect of any certification, information, documentation or other reporting requirement if such requirement would be materially more onerous, in form, in procedure or in the substance of information disclosed, to the holder or beneficial owner of
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Trust Preferred Securities than comparable information or other reporting requirements imposed under U.S. tax law, regulation and administrative practice (such as IRS Forms 1001, W-8 and W-9).
Enforcement Events
The occurrence, at any time, of either of the following (each of which is defined as an “Enforcement Event”):
• non-payment of Capital Payments (plus any Additional Amounts thereon, if any) on the Trust Preferred Securities or the Class B Preferred Securities at the Stated Rate in full, for four consecutive Payment Periods; or
• a default by the Bank in respect of any of its obligations under the Support Undertaking;
will constitute an Enforcement Event under the Trust Agreement with respect to the Trust Securities; provided, that, pursuant to the Trust Agreement, the holder of the Trust Common Security will be deemed to have waived any Enforcement Event with respect to the Trust Common Security until all Enforcement Events with respect to the Trust Preferred Securities have been cured, waived or otherwise eliminated. Until such Enforcement Events with respect to the Trust Preferred Securities have been so cured, waived or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the holders of the Trust Preferred Securities and only the holders of the Trust Preferred Securities will have the right to direct the Property Trustee with respect to certain matters under the Trust Agreement. In the case of non-payment of Capital Payments (plus any Additional Amounts thereon, if any) on the Class B Preferred Securities referred to in clause (i) above or the continuation of a failure by the Bank to perform any obligation under the Support Undertaking for a period of 60 days after notice thereof has been given to the Company by the Property Trustee or any holder of the Class B Preferred Securities, holders of the Trust Preferred Securities will have the right to appoint the Independent Enforcement Director. See “Description of the Company Securities—Class B Preferred Securities—Voting and Enforcement Rights”.
Upon the occurrence of an Enforcement Event, the Property Trustee will have the right to enforce the rights of the holders of the Class B Preferred Securities, including:
• claims to receive Capital Payments (only if and to the extent declared or deemed to have been declared) on the Class B Preferred Securities;
• appointment of the Independent Enforcement Director (to the extent that such Enforcement Event results from non-payment of Capital Payments on the Class B Preferred Securities for four consecutive Payment Periods or the continuation of a failure by the Bank to perform any obligation under the Support Undertaking for a period of 60 days after notice thereof has been given to the Company by the Property Trustee or any holder of the Class B Preferred Securities); and
• assertion of the rights under the Support Undertaking as it relates thereto.
If the Property Trustee fails to enforce its rights under the Class B Preferred Securities after a holder of the Trust Preferred Securities has made a written request, such holder of record of the Trust Preferred Securities may directly institute a legal proceeding against the Company to enforce the Property Trustee’s rights under the Class B Preferred Securities without first instituting any legal proceeding against the Property Trustee, the Trust or any other person or entity.
Redemption
Upon redemption of the Class B Preferred Securities, the Trust must apply the redemption price received in connection therewith to redeem the Trust Preferred Securities. The Class B Preferred Securities are redeemable at the option of the Company, in whole but not in part, on any Payment Date falling on or after the Initial
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Redemption Date at the Redemption Price plus Additional Amounts, if any. The Company may exercise its right to redeem the Class B Preferred Securities only if it has:
• given at least 30 days’ prior notice (or such longer period as required by the relevant regulatory authorities) to the holders of the Class B Preferred Securities of its intention to redeem the Class B Preferred Securities on the Redemption Date; and
• obtained any required regulatory approvals.
The Trust Agreement will provide that the Property Trustee will promptly give notice to the holders of the Trust Preferred Securities of the Company’s intention to redeem the Class B Preferred Securities on the Redemption Date. Any such notice will be in accordance with the procedures described below under “—Notices.”
The Company will also have a right, at any time prior to the Initial Redemption Date upon at least 30 days’ prior notice, to redeem the Class B Preferred Securities in whole but not in part, upon the occurrence of a Company Special Redemption Event at the Redemption Price plus Additional Amounts, if any.
In the event the Trust Preferred Securities are in definitive form, any payment due upon redemption thereof will be in accordance with the procedures described under “—Form, Book-Entry Procedures and Transfer.”
A “Company Special Redemption Event” means (i) a Regulatory Event, (ii) a Tax Event with respect to the Company or (iii) an Investment Company Act Event with respect to the Company.
The Class B Preferred Securities and the Trust Preferred Securities will not have any scheduled maturity date and will not be redeemable at any time at the option of the holders thereof. Upon any redemption of the Class B Preferred Securities, the proceeds of such redemption will simultaneously be applied to redeem the Trust Preferred Securities. Any Class B Preferred Securities or Trust Preferred Securities that are redeemed will be canceled, and not reissued, following their redemption.
Upon the occurrence of a Trust Special Redemption Event or in the event of any voluntary or involuntary liquidation, dissolution, winding up or termination of the Trust, holders of the Trust Securities, will be entitled to receive a pro rata amount of the Class B Preferred Securities in accordance with the terms of the Trust Agreement.
If, at any time, a Trust Special Redemption Event occurs and is continuing, the Regular Trustees will, within 90 days following the occurrence of such Trust Special Redemption Event, dissolve the Trust upon at least 30 but not more than 60 days’ notice to the holders of the Trust Preferred Securities in accordance with the procedures described below under “—Notices” and upon at least 30 but not more than 60 days’ notice to, and consultation with Euroclear, Clearstream, Luxembourg and the Property Trustee. After satisfaction of the claims of creditors of the Trust, if any, Class B Preferred Securities would be distributed on a pro rata basis to the holders of the Trust Preferred Securities and the holder of the Trust Common Security in liquidation of such holders’ interest in the Trust, provided, however, that, if, at such time, the Trust has the opportunity to eliminate, within 90 days of its occurrence, the Trust Special Redemption Event by taking some ministerial action, such as filing a form or making an election, or some other similar reasonable measures, which in the sole judgment of the Bank will cause no adverse effect on the Company, the Trust, the Bank or the holders of the Trust Preferred Securities and will involve no material costs, then the Trust will pursue any such measure in lieu of dissolution.
A “Trust Special Redemption Event” means (i) a Tax Event solely with respect to the Trust, but not with respect to the Company, or (ii) an Investment Company Act Event solely with respect to the Trust, but not with respect to the Company.
A “Tax Event” means (A) the receipt by the Bank of an opinion of a nationally recognized law firm or other tax adviser in a Relevant Jurisdiction, experienced in such matters, to the effect that, as a result of (i) any amendment to, or clarification of, or change (including any announced prospective change) in, the laws or treaties (or any regulations promulgated thereunder) of a Relevant Jurisdiction or any political subdivision or taxing authority thereof or therein affecting taxation, (ii) any judicial decision, official administrative pronouncement, published or private ruling, regulatory procedure, notice or announcement (including any notice
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or announcement of intent to adopt such procedures or regulations) by any legislative body, court, governmental authority or regulatory body (an “Administrative Action”) or (iii) any amendment to, clarification of, or change in the official position or the interpretation of such Administrative Action or any interpretation or pronouncement that provides for a position with respect to such Administrative Action that differs from the theretofore generally accepted position, in each case, by any legislative body, court, governmental authority or regulatory body, irrespective of the manner in which such amendment, clarification or change is made known, which amendment, clarification or change is effective, or which pronouncement or decision is announced, after the date of issuance of the Company Securities and the Trust Securities, there is more than an insubstantial risk that (a) the Trust or the Company is or will be subject to more than a de minimis amount of taxes, duties or other governmental charges, or (b) the Trust, the Company or obligor on the Obligations would be obligated to pay Additional Amounts or Additional Interest Amounts, or (B) a final determination has been made by the German tax authorities to the effect that the Bank, as obligor on the Obligations, may not, in the determination of its taxable income for the purposes of determining German corporate income tax in any year, deduct in full interest payments on the Obligations (except to the extent such interest payments are determined to be connected with income of a branch that is not subject to taxation in Germany). However, none of the foregoing will constitute a Tax Event if it may be avoided by the Bank, the Trust or the Company taking reasonable measures under the circumstances.
“Regulatory Event” means that the Bank is notified by a relevant regulatory authority that, as a result of the occurrence of any amendment to, or change (including any change that has been adopted but has not yet become effective) in, the applicable banking laws of Germany (or any rules, regulations or interpretations thereunder, including rulings of the relevant banking authorities) or the guidelines of the Committee on Banking Supervision at the Bank for International Settlements, in each case after the date of the issuance of the Company Securities and the Trust Securities, the Bank is not, or will not be, allowed to treat the Class B Preferred Securities as core capital or Tier I regulatory capital for capital adequacy purposes on a consolidated basis.
An “Investment Company Act Event” means that the Bank has requested and received an opinion of a nationally recognized U.S. law firm experienced in such matters to the effect that there is more than an insubstantial risk that the Company or the Trust is or will be considered an “investment company” within the meaning of the 1940 Act as a result of any judicial decision, pronouncement or interpretation (irrespective of the manner made known), the adoption or amendment of any law, rule or regulation, or any notice or announcement (including any notice or announcement of intent to adopt such law, rule or regulation) by any U.S. legislative body, court, governmental agency, or regulatory authority, in each case after the date of the issuance of the Company Securities and the Trust Securities.
On the date fixed for any distribution of the Class B Preferred Securities, upon dissolution of the Trust, (i) the Trust Preferred Securities will no longer be deemed to be outstanding and (ii) certificates representing Trust Preferred Securities will be deemed to represent the Class B Preferred Securities having a liquidation preference amount equal to the Liquidation Preference Amount of the Trust Preferred Securities and the liquidation preference amount of the Trust Common Security until such certificates are presented to the Company or its agent for transfer or reissuance.
If the Class B Preferred Securities are distributed to the holders of the Trust Preferred Securities, the Bank will use its commercially reasonable efforts to cause the Class B Preferred Securities (i) to be eligible for clearing and settlement through Clearstream AG or a successor clearing agent and (ii) to be listed on the Frankfurt Stock Exchange and the Amsterdam Stock Exchange or other securities exchange or other organization on which the Trust Preferred Securities are then listed.
Redemption Procedures
On the date specified for redemption of any Trust Preferred Securities in a notice of redemption issued by the Trust in respect of any Trust Securities (which notice will be irrevocable and given at least 30 calendar days prior to the Redemption Date), if the Company has paid to the Property Trustee a sufficient amount of cash in connection with the related redemption of the Class B Preferred Securities, then, by 10:00 a.m., Central European time, on the date specified for redemption, the Trust will irrevocably deposit with the Principal Paying Agent funds sufficient to pay the amount payable on redemption of the Trust Preferred Securities called for redemption. If notice of redemption will have been given and funds are deposited as required, then upon the date
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of such deposit, all rights of holders of such Trust Securities so called for redemption will cease, except the right of the holders of such Trust Preferred Securities to receive the redemption price, but without interest on such redemption price. If any Redemption Date falls on a day that is not a Business Day, payment of all amounts otherwise payable on such date will be made on the next succeeding Business Day, without adjustment, interest or further payment as a result of such delay in payment.
Purchases of the Trust Preferred Securities
Subject to the foregoing redemption provisions and procedures and applicable law (including, without limitation, U.S. federal securities laws), the Bank or its subsidiaries may at any time and from time to time purchase outstanding Trust Preferred Securities by tender, in the secondary market or by private agreement. Such Trust Preferred Securities remain outstanding and may be resold. If the Bank or any of its affiliates offer or sell, or make a secondary market in, the Trust Preferred Securities, such actions may give rise to limitations with respect to resales in the United States or to U.S. persons of trust preferred securities previously sold in offshore transactions in reliance on Regulation S.
Subordination of the Trust Common Security
Payment of Capital Payments and other distributions on, and amounts on redemption of, the Trust Securities will generally be made pro rata based on the liquidation preference amount of the Trust Securities. However, upon the liquidation of the Trust and during the continuance of a default under the Obligations or a failure by the Bank to perform any obligation under the Support Undertaking, holders of the Trust Preferred Securities will have a preference over the holder of the Trust Common Security with respect to payments of Capital Payments and other distributions and amounts upon redemption or liquidation of the Trust. The Trust Preferred Securities constitute direct, unsecured and unsubordinated securities of the Trust and rank pari passu without any preference among themselves.
In the case of any Enforcement Event, the holder of the Trust Common Security will be deemed to have waived any such Enforcement Event until all such Enforcement Events with respect to the Trust Preferred Securities have been cured, waived or otherwise eliminated. Until all Enforcement Events with respect to the Trust Preferred Securities have been so cured, waived or otherwise eliminated, the Property Trustee will act solely on behalf of the holders of the Trust Preferred Securities and not on behalf of the holder of the Trust Common Security, and only the holders of the Trust Preferred Securities will have the right to direct the Property Trustee to act on their behalf.
Liquidation Distribution upon Dissolution
Pursuant to the Trust Agreement, the Trust will dissolve:
• upon the bankruptcy, insolvency or dissolution of the Bank;
• upon the filing of a certificate of dissolution with respect to the Company or the filing of a certificate of cancellation with respect to the Trust after having obtained the consent of at least a majority of the outstanding Trust Securities, voting together as a single class, to file such certificate of cancellation;
• when all of the Trust Securities shall have been called for redemption and (i) the amounts necessary for redemption thereof shall have been paid to the holders of the Trust Securities or (ii) all of the Class B Preferred Securities shall have been distributed to the holders of the Trust Securities in exchange for all of the Trust Securities;
• upon the distribution of all of the Class B Preferred Securities upon the occurrence of a Trust Special Redemption Event;
• upon the entry of a decree of a judicial dissolution of the Company or the Trust; or
• upon the redemption of all of the Trust Securities.
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In the event of any voluntary or involuntary liquidation, dissolution, winding up or termination of the Trust, the holders of the Trust Securities will be entitled to receive the Class B Preferred Securities. The holders of the Trust Preferred Securities will have a preference over the holder of the Trust Common Security with respect to distributions upon liquidation of the Trust.
Voting Rights
Except as expressly required by applicable law, or except as provided for in the LLC Agreement, the holders of the Trust Preferred Securities will not be entitled to vote on the affairs of the Trust or the Company. So long as the Trust holds any Class B Preferred Securities, the holders of the Trust Preferred Securities will have the right to direct the Property Trustee to enforce the voting rights attributable to such Class B Preferred Securities. These voting rights may be waived by the holders of the Trust Preferred Securities by written notice to the Property Trustee and in accordance with applicable laws.
Subject to the requirement of the Property Trustee obtaining a tax opinion as set forth in the last sentence of this paragraph, the holders of a majority of the outstanding Trust Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, and to direct the exercise of any trust or power conferred upon the Property Trustee under the Trust Agreement, including the right to direct the Property Trustee, as holder of the Class B Preferred Securities, to (i) exercise the remedies available to it under the LLC Agreement as a holder of the Class B Preferred Securities, and (ii) consent to any amendment, modification or termination of the LLC Agreement or the Class B Preferred Securities where such consent will be required; provided, however, that, where a consent or action under the LLC Agreement would require the consent or act of the holders of more than a majority of the Class B Preferred Securities affected thereby, only the holders of the percentage of the aggregate number of the Trust Securities outstanding which is at least equal to the percentage of the Class B Preferred Securities required to so consent or act under the LLC Agreement, may direct the Property Trustee to give such consent or take such action on behalf of the Trust. See “Description of the Company Securities—Class B Preferred Securities—Voting and Enforcement Rights.” Except with respect to directing the time, method and place of conducting a proceeding for a remedy as described above, the Property Trustee will be under no obligation to take any of the actions described in clause (i) or (ii) above unless the Property Trustee has obtained an opinion of independent tax counsel to the effect that as a result of such action, the Trust will not fail to be classified as a grantor trust for U.S. federal income tax purposes and that after such action each holder of the Trust Securities will continue to be treated as owning an undivided beneficial ownership interest in the Class B Preferred Securities.
Any required approval or direction of holders of the Trust Preferred Securities may be given at a separate meeting of holders of the Trust Preferred Securities convened for such purpose, at a meeting of all of the holders of the Trust Securities or pursuant to a written consent. The Regular Trustees will cause a notice of any meeting at which holders of the Trust Preferred Securities are entitled to vote, or of any matter upon which action by written consent of such holders is to be taken, to be made in the manner described below under “—Notices”. Each such notice will include a statement setting forth the following information: (i) the date of such meeting or the date by which such action is to be taken; (ii) a description of any resolution proposed for adoption at such meeting on which such holders are entitled to vote or of such matter upon which written consent is sought; and (iii) instructions for the delivery of proxies or consents. No vote or consent of the holders of the Trust Preferred Securities will be required for the Trust to redeem and cancel Trust Preferred Securities or distribute Class B Preferred Securities in accordance with the Trust Agreement.
Notwithstanding that holders of the Trust Preferred Securities are entitled to vote or consent under any of the circumstances described above, any of the Trust Preferred Securities that are beneficially owned at such time by the Bank or any entity directly or indirectly controlled by, or under direct or indirect common control with, the Bank, will not be entitled to vote or consent and will, for purposes of such vote or consent, be treated as if such Trust Preferred Securities were not outstanding, except for the Trust Preferred Securities purchased or acquired by the Bank or its affiliates in connection with transactions effected by or for the account of customers of the Bank or any of its affiliates or in connection with trading or market-making activities in connection with such Trust Preferred Securities in the ordinary course of business; provided, however, that persons (other than affiliates of the Bank) to whom the Bank or any of its affiliates have pledged Trust Preferred Securities may vote or consent with respect to such pledged Trust Preferred Securities pursuant to the terms of such pledge.
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The procedures by which holders of the Trust Preferred Securities represented by the Global Certificates may exercise their voting rights are described below. See “—Form, Book-Entry Procedures and Transfer”.
Holders of the Trust Preferred Securities will have no rights to appoint or remove the Regular Trustees, who may be appointed, removed or replaced solely by the Bank, as the holder of the Trust Common Security.
Merger, Consolidation or Amalgamation of the Trust
The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any corporation or other entity, except as described below. The Trust may, with the consent of a majority of the Regular Trustees and without the consent of the holders of the Trust Securities, the Property Trustee or the Delaware Trustee, consolidate, amalgamate, merge with or into, or be replaced by a trust organized as such under the laws of any State of the United States; provided, that:
• if the Trust is not the survivor, such successor entity either (x) expressly assumes all of the obligations of the Trust to the holders of the Trust Securities or (y) substitutes for the Trust Securities other securities having substantially the same terms as the Trust Securities (the “Successor Securities”), so long as the Successor Securities rank the same as the Trust Securities rank with respect to Capital Payments, distributions and rights upon liquidation, redemption or otherwise;
• the Company expressly acknowledges a trustee of such successor entity possessing the same powers and duties as the Property Trustee as the holder of the Class B Preferred Securities;
• if applicable, the Successor Trust Securities are listed, or any Successor Trust Securities will be listed upon notification of issuance, on any securities exchange or any other organization on which the Trust Preferred Securities are then listed or quoted;
• such merger, consolidation, amalgamation or replacement does not cause the Trust Preferred Securities (including the Successor Securities) to be downgraded by any nationally recognized rating organization;
• such merger, consolidation, amalgamation or replacement does not adversely affect the rights, preferences and privileges of the holders of the Trust Preferred Securities (including any Successor Securities) in any material respect;
• such successor entity has purposes substantially identical to that of the Trust;
• the obligations of the Bank pursuant to the Support Undertaking will continue in full force and effect; and
• prior to such merger, consolidation, amalgamation or replacement, the Bank has received an opinion of a nationally recognized law firm experienced in such matters to the effect that:
- such merger, consolidation, amalgamation or replacement will not adversely affect the rights, preferences and privileges of the holders of the Trust Preferred Securities (including the Successor Securities) in any material respect,
- following such merger, consolidation, amalgamation or replacement, neither the Trust nor such successor entity will be required to register under the 1940 Act,
- following such merger, consolidation, amalgamation or replacement, the Trust (or such successor trust) will be classified as a grantor trust for U.S. federal income tax purposes and
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- following such merger, consolidation, amalgamation or replacement, the Company will not be classified as an association or a publicly traded partnership taxable as a corporation for United States federal income tax purposes.
Notwithstanding the foregoing, the Trust will not, except with the consent of holders of 100% of the outstanding Trust Preferred Securities (excluding Trust Preferred Securities held by the Bank and its affiliates), consolidate, amalgamate, merge with or into, or be replaced by any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it, if such consolidation, amalgamation, merger or replacement would cause the Trust or the successor entity not to be classified as a grantor trust for United States federal income tax purposes.
Modification of the Trust Agreement
The Trust Agreement may only be modified and amended if approved by a majority of the Regular Trustees (and in certain circumstances the Property Trustee and the Delaware Trustee), provided, that, if any proposed amendment provides for, or the Regular Trustees otherwise propose to effect, (i) any action that would materially adversely affect the powers, preferences or special rights of the Trust Securities, whether by way of amendment to the Trust Agreement or otherwise, or (ii) the dissolution, winding up or termination of the Trust other than pursuant to the terms of the Trust Agreement, then the holders of the Trust Securities voting together as a single class will be entitled to vote on such amendment or proposal and such amendment or proposal will not be effective except with the approval of at least a majority of the outstanding Trust Securities affected thereby; provided further that, if any amendment or proposal referred to in clause (i) above would adversely affect only the Trust Preferred Securities or the Trust Common Security, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal will not be effective except with the approval of a majority of such class of the Trust Securities outstanding.
The Trust Agreement may be amended without the consent of the holders of the Trust Securities to (i) cure any ambiguity, (ii) correct or supplement any provision in the Trust Agreement that may be defective or inconsistent with any other provision of the Trust Agreement, (iii) add to the covenants, restrictions or obligations of the Bank, (iv) conform to any change in the 1940 Act or the rules or regulations thereunder, (v) modify, eliminate and add to any provision of the Trust Agreement to such extent as may be necessary or desirable; provided, that, no such amendment will have a material adverse effect on the rights, preferences or privileges of the holders of the Trust Securities, or (vi) accomplish the issuance, from time to time and without the consent of the holders of the Trust Preferred Securities, of additional Trust Preferred Securities having the same terms and conditions as the Trust Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Trust Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Trust Preferred Securities in consideration for the receipt of Class B Preferred Securities equal to the aggregate liquidation preference amount of such additional Trust Preferred Securities.
Notwithstanding the foregoing, no amendment or modification may be made to the Trust Agreement if such amendment or modification would (i) cause the Trust to fail to be classified as a grantor trust for United States federal income tax purposes, (ii) cause the Company to be classified as an association or publicly traded partnership taxable as a corporation for such purposes, (iii) reduce or otherwise adversely affect the powers of the Property Trustee or (iv) cause the Trust or the Company to be required to register under the 1940 Act.
Form, Book-Entry Procedures and Transfer
The Trust Preferred Securities will be issued in fully registered form, without coupons, in denominations of € 100 Liquidation Preference Amount (or integral multiples of € 100 in excess thereof).
The Trust Preferred Securities will be initially evidenced by a Temporary Global Certificate, in fully registered form, interests in which will be exchangeable for interests in the Permanent Global Certificate, in fully registered form, upon the 40th day after the later of the closing date and the completion of the distribution of the Trust Preferred Securities (the “Distribution Compliance Period”). The Global Certificates will be deposited upon issuance with, and registered in the name of, Clearstream AG for credit to accountholders of
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Clearstream AG, including Clearstream, Luxembourg and Euroclear. Definitive certificates representing individual Trust Preferred Securities and coupons shall not be issued. Copies of the Temporary Global Certificate and the Permanent Global Certificate are available free of charge at the specified offices of the Paying Agents. Beneficial interests in the Global Certificates may not be exchanged for Trust Preferred Securities in certificated form.
On or after the expiration of the Distribution Compliance Period, a certificate must be provided by or on behalf of each holder of a beneficial interest in a Temporary Global Certificate to the Paying Agent, certifying that the beneficial owner of the interest in such Temporary Global Certificate is not a U.S. Person. Unless such certificate is provided, (i) the holder of such beneficial interest will not receive any payments of Capital Payments, redemption price or any other payment with respect to such holder’s beneficial interest in the Temporary Global Certificate, (ii) such beneficial interest may not be exchanged for a beneficial interest in a Permanent Global Certificate, and (iii) settlement of trades with respect to such beneficial interest will be suspended. In the event that any holder of a beneficial interest in such Temporary Global Certificate fails to provide such certification, exchanges of interests in the Temporary Global Certificate for interests in the Permanent Global Certificate and settlements of trades of all beneficial interests in such Temporary Global Certificate may be temporarily suspended.
Beneficial interests in the Trust Preferred Securities will be shown only on, and transfers thereof will be effected only through, book-entry records maintained by Clearstream AG and, except in the limited circumstances described below, Trust Preferred Securities in certificated form will not be issued. Holders of beneficial interests in the Global Certificates must rely upon the procedures of Clearstream AG, Euroclear and Clearstream, Luxembourg and (if applicable) their respective participants to exercise any rights of a holder under the Global Certificates. Transfers and payments in respect of the Trust Preferred Securities may be effected through the Principal Paying Agent subject to the terms of the Trust Preferred Securities and the operating procedures of Clearstream AG. In the case of transfers between Clearsteam participants, between Euroclear participants and between Clearstream participants on the one hand and Euroclear participants on the other hand shall be effected in accordance with procedures established for these purposes by Clearstream and Euroclear, respectively. None of the Bank, the Company and the Trust will have any responsibility or liability for any aspect of the records relating to the payments made on account of beneficial interests in the Global Certificates or for maintaining, supervising or reviewing any records relating to such beneficial interests.
A Permanent Global Certificate will cease to represent the Trust Preferred Securities, and Trust Preferred Securities in definitive registered form will be exchangeable therefor only if (i) Clearstream AG notifies the Company that it is unwilling or unable to continue as depositary for such Permanent Global Certificate and no successor depositary shall have been appointed or (ii) the Company determines in its sole discretion that such Permanent Global Certificate shall be so exchangeable. Such definitive Trust Preferred Securities will be in denominations of € 100 and will be registered in such names as Clearstream AG shall direct and payments with respect thereto will be made at the offices described below. In addition, in all cases where the Trust Preferred Securities are issued in definitive form, the record dates for Capital Payments thereon will be 15 Business Days prior to the relevant Payment Date. Except as set forth in this paragraph, no definitive securities will be issued.
The Trust Preferred Securities may not be purchased by or transferred to any employee benefit plan subject to Title I of the U.S. Employee Retirement Income Security Act of 1974, as amended, any plan or arrangement subject to Section 4975 of the U.S. Internal Revenue Code of 1986, as amended, or any entity whose underlying assets include the assets of any such employee benefit plans, plans or arrangements.
Payments
Payments in respect of the Trust Preferred Securities will be made to or as directed by Clearstream AG as the registered holder of the Global Certificate representing the Trust Preferred Securities. Payments made to Clearstream AG shall be made by wire transfer, and Clearstream AG, Euroclear or Clearstream, Luxembourg, as applicable, will credit the relevant accounts of their participants on the applicable dates.
All payments on the Trust Preferred Securities by the Trust, and any amount payable in liquidation or upon redemption thereof, will be made without withholding or deduction for or on account of Withholding Taxes unless such deduction or withholding is required by law. In such event, the Trust will pay, as additional Capital
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Payments, such Additional Amounts as may be necessary in order that the net amounts received by the holders of the Trust Preferred Securities will equal the amounts that otherwise would have been received had no such deduction or withholding been required. However, no such Additional Amounts will be payable in respect of the Trust Preferred Securities under certain circumstances described in “—Payment of Additional Amounts”.
Any claims to Capital Payments or amounts payable upon redemption will become void unless presented for payment within a period of four years, with respect to Capital Payments, or 10 years with respect to amounts payable upon redemption, from the Payment Date or Redemption Date, as applicable.
Registrar, Transfer Agent, and Paying Agents
Deutsche Bank Aktiengesellschaft, Frankfurt am Main, will act as Registrar, Transfer Agent and Principal Paying Agent for the Trust Preferred Securities. Registration of transfers of the Trust Preferred Securities will be effected without charge by or on behalf of the Trust, but upon payment (with the giving of such indemnity as the Trust or the Bank may require) in respect of any tax or other government charges which may be imposed in relation to it.
For so long as the Trust Preferred Securities are listed on Euronext Amsterdam and the rules of Euronext Amsterdam so require, the Trust will maintain a Netherlands Paying Agent. The initial Netherlands Paying Agent will be Deutsche Bank Aktiengesellschaft, Amsterdam Branch.
The Trust will not be required to register or cause to be registered the transfer of the Trust Preferred Securities after such Trust Preferred Securities have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, prior to the occurrence of any Enforcement Event and after the curing or waiver of all Enforcement Events that may have occurred, undertakes to perform only such duties as are specifically set forth in the Trust Agreement and, after such default, will exercise the same degree of care as a prudent person would exercise in the conduct of his or her own affairs. Subject to such provisions, the Property Trustee is under no obligation to exercise any of the powers vested in it by the Trust Agreement at the request of any holder of the Trust Preferred Securities, unless offered reasonable indemnity by such holder against the costs, expenses and liabilities which might be incurred thereby. The holders of the Trust Preferred Securities will not be required to offer such indemnity in the event such holders, by exercising their rights, direct the Property Trustee to take any action following an Enforcement Event.
Notices
All notices or communications to a holder of the Trust Preferred Securities will be delivered, telecopied or mailed by first-class, registered or certified mail to such holder’s address as shown on the books and records of the Trust.
Notices to the holders of the Trust Preferred Securities will be given by delivery of the relevant notice to Clearstream AG and any other relevant securities clearing system for communication by each of them to entitled participants.
For so long as the Trust Preferred Securities are listed on the Frankfurt Stock Exchange, all notices concerning the Trust Preferred Securities will be published in the German Federal Gazette (Bundesanzeiger) and in at least one daily newspaper having general circulation in Germany and admitted to carry stock exchange announcements (expected to be the Börsen-Zeitung). Such notices will be deemed to have been given on the date of publication as aforesaid or, if published on different dates, on the date of the first such publication.
For so long as the Trust Preferred Securities are listed on Euronext Amsterdam and the rules of such exchange so require, notices to holders of the Trust Preferred Securities shall be deemed to have been given upon publication in a daily newspaper of general circulation in the Netherlands (which is expected to be the Het
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Financieele Dagblad), notice thereof given to Euronext Amsterdam, and publication in the Officiële Prijscourant.
Governing Law
The Trust Agreement and the Trust Securities will be governed by, and construed in accordance with, the laws of the State of Delaware.
Miscellaneous
The Regular Trustees are authorized and directed to conduct the affairs of and to operate the Trust in such a way that the Trust will not be required to register under the 1940 Act and will not be characterized as other than a grantor trust for United States federal income tax purposes.
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DESCRIPTION OF THE COMPANY SECURITIES
The following summary sets forth the material terms and provisions of the limited liability company interests of the Company, including the Class B Preferred Securities. This summary is qualified in its entirety by reference to the terms and provisions of the LLC Agreement.
Upon the execution of the LLC Agreement, the Company will issue limited liability company interests consisting of the Company Common Security, the Class A Preferred Security and Class B Preferred Securities. The Company Common Security and the Class A Preferred Security will be owned directly by the Bank. All of the Class B Preferred Securities will be owned by the Trust. The Bank undertakes to maintain direct or indirect ownership of the Class A Preferred Security and the Company Common Security so long as any Class B Preferred Securities remain outstanding.
Company Common Security
Subject to the rights of the holders of the Class B Preferred Securities to appoint the Independent Enforcement Director, all voting rights are vested in the Company Common Security. The Company Common Security is entitled to one vote per security. The Company Common Security is currently, and upon consummation of the Offering will be, held by the Bank.
Capital Payments may be declared and paid on the Company Common Security only if all Capital Payments on the Class B Preferred Securities, if any, in respect of the relevant Payment Period have been declared and paid. The Company does not expect to pay dividends on the Company Common Security.
In the event of the voluntary or involuntary liquidation, dissolution, termination or winding up of the Company, after the payment of all debts and liabilities and after there have been paid or set aside for the holders of all the Company Preferred Securities the full preferential amounts to which such holders are entitled, the holder of the Company Common Security will be entitled to share equally and pro rata in any remaining assets.
Class A Preferred Security
The Class A Preferred Security will be non-voting. Capital payments on the Class A Preferred Security will be payable when, as and if declared by the Board of Directors; such a declaration will occur only to the extent the Board of Directors does not declare Capital Payments on the Class B Preferred Securities at the Stated Rate in full on any Payment Date. It is expected that the holder of the Class A Preferred Security will receive capital payments only to the extent that (i) Capital Payments are not permitted to be declared on the Class B Preferred Securities on any Payment Date at the Stated Rate in full due to insufficient Distributable Profits of the Bank for the fiscal year preceding such Payment Period or an order of the BaFin (or any other relevant regulatory authority) prohibiting the Bank from making any distribution of profits, and (ii) the Company has sufficient Operating Profits. The Company currently, subject to the above, does not intend to pay capital payments on the Class A Preferred Security. The payment of capital payments on the Class A Preferred Security is not a condition to the payment of Capital Payments on the Class B Preferred Securities.
In the event of any voluntary or involuntary liquidation, dissolution or winding up or termination of the Company, the Class B Preferred Securities will rank junior to the Class A Preferred Security, and the Class B Preferred Securities will rank senior to the Company Common Security; provided that any payments made by the Bank pursuant to the Support Undertaking will be payable by the Company solely to the holders of the Class B Preferred Securities. Accordingly, upon any liquidation, the holder of the Class A Preferred Security will be entitled to receive a liquidation distribution of the Obligations or Permitted Investments (including accrued and unpaid interest thereon). In the event of the liquidation of the Company, the Independent Enforcement Director will enforce the Support Undertaking solely for the benefit of the holders of the Class B Preferred Securities and, with respect to the Company’s rights under the Support Undertaking, the Class B Preferred Securities will rank senior to the Class A Preferred Security and payments thereunder will be distributed by the Company solely to the holders of the Class B Preferred Securities. For a description of the circumstances under which an Independent Enforcement Director may be elected, see “—Class B Preferred Securities—Voting and Enforcement Rights.”
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Class B Preferred Securities
General
When issued, the Class B Preferred Securities will be validly issued, fully paid and non-assessable. The holders of the Class B Preferred Securities will have no pre-emptive rights with respect to any other securities of the Company. The Class B Preferred Securities will not have any scheduled maturity date, will not be redeemable at any time at the option of the holders thereof, will not be convertible into any other securities of the Company and will not be subject to any sinking fund or other obligation of the Company for their repurchase or redemption. The LLC Agreement prohibits the Company, without the consent of all holders of the Class B Preferred Securities (excluding any Class B Preferred Securities held by the Bank or any of its affiliates), from issuing any debt securities or any further class or series of equity securities ranking prior to or pari passu with the Class B Preferred Securities as to periodic distribution rights or rights upon liquidation or dissolution of the Company, provided, however, that the Company may, from time to time and without the consent of the holders of the Class B Preferred Securities, issue additional Class B Preferred Securities having the same terms and conditions as the Class B Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Class B Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Class B Preferred Securities in consideration for Obligations of a principal amount equal to the aggregate liquidation preference amount of such additional Class B Preferred Securities.
Capital Payments
Capital Payments will accrue at a rate of 6.15% per annum on the respective liquidation preference amount of € 100 per Class B Preferred Security, and will be payable quarterly in arrears on March 2, June 2, September 2 and December 2 of each year, commencing March 2, 2004. Capital Payments payable on each Payment Date will accrue from and including the immediately preceding Payment Date (or December 2, 2003 with respect to Capital Payments payable on March 2, 2004), up to but excluding the relevant Payment Date, and will be calculated on the basis of a 360-day year of twelve 30-day months. Capital Payments will be noncumulative.
If any Payment Date or Redemption Date falls on a day that is not a Business Day, payment of all amounts otherwise payable on such date will be made on the next succeeding Business Day, without adjustment, interest or further payment as a result thereof.
Capital Payments on the Class B Preferred Securities will be paid out of the Company’s Operating Profits or from payments received by the Company under the Support Undertaking. If the Company does not declare (and is not deemed to have declared) a Capital Payment on the Class B Preferred Securities in respect of any Payment Period, the holders of the Class B Preferred Securities will have no right to receive a Capital Payment on the Class B Preferred Securities in respect of such Payment Period, and the Company will have no obligation to pay a Capital Payment on the Class B Preferred Securities in respect of such Payment Period, whether or not Capital Payments are declared (or deemed to have been declared) and paid on the Class B Preferred Securities in respect of any future Payment Period.
Capital Payments on the Class B Preferred Securities will only be authorized to be declared and paid on any Payment Date to the extent that:
• the Company has an amount of Operating Profits for the Payment Period ending on the day immediately preceding such Payment Date at least equal to the amount of such Capital Payments, and
• the Bank has an amount of Distributable Profits for the preceding fiscal year for which audited financial statements are available at least equal to the aggregate amount of such Capital Payments on the Class B Preferred Securities and capital payments or dividends on Parity Securities, if any, pro rata on the basis of Distributable Profits for such preceding fiscal year.
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Notwithstanding the foregoing, if the Bank or any of its subsidiaries declares or pays any dividends or makes any other payment or other distribution on any Parity Securities in any fiscal year, the Company will be deemed to have declared Capital Payments on the Class B Preferred Securities on the first Payment Date falling contemporaneously with or immediately after the date on which such dividend was declared or other payment or distribution was made. If the dividend or other payment or distribution on Parity Securities was in the full stated amount payable on such Parity Securities in the then current fiscal year through the Payment Date, Capital Payments will be deemed declared at the Stated Rate in full for the then current fiscal year through such Payment Date. If the dividend or other payment or distribution on Parity Securities was only a partial payment of the amount so owing, the amount of the Capital Payment deemed declared on the Class B Preferred Securities will be adjusted proportionally.
Further, notwithstanding the foregoing, if the Bank or any of its subsidiaries declares or pays any dividend or makes any other payment or distribution on its Junior Securities (other than payments on Junior Securities issued by wholly owned subsidiaries of the Bank, when such Junior Securities are held exclusively by the Bank or by any of its other wholly owned subsidiaries), the Company will be deemed to have declared Capital Payments on the Class B Preferred Securities at the Stated Rate in full:
i. for payment on the first four Payment Dates falling contemporaneously with and/or immediately following the date on which such dividend was declared or other payment made, if such Junior Securities pay dividends annually,
ii. for payment on the first two Payment Dates falling contemporaneously with and/or immediately following the date on which such dividend was declared or other payment made, if such Junior Securities pay dividends semi-annually, or
iii. for payment on the first Payment Date falling contemporaneously with or immediately following the date on which such dividend was declared or other payment made, if such Junior Securities pay dividends quarterly.
If the Bank or any of its Subsidiaries redeems, repurchases or otherwise acquires any Parity Securities or Junior Securities (other than Parity Securities or Junior Securities issued by wholly-owned subsidiaries of the Bank, when such Parity Securities or Junior Securities are held exclusively by the Bank or any of the Bank’s wholly-owned subsidiaries) for any consideration except by conversion into or exchange for common stock of the Bank other than:
• in connection with transactions effected by or for the account of customers of the Bank or any of its subsidiaries or in connection with the distribution, trading or market-making in respect of such securities,
• in connection with the satisfaction by the Bank or any of its subsidiaries of its obligations under any employee benefit plans or similar arrangements with or for the benefit of employees, officers, directors or consultants,
• as a result of a reclassification of the capital stock of the Bank or any of its subsidiaries or the exchange or conversion of one class or series of such capital stock for another class or series of such capital stock or
• the purchase of fractional interests in shares of the capital stock of the Bank or any of its majority-owned subsidiaries pursuant to the provisions of any security being converted into or exchanged for such capital stock),
the Company will be deemed to have declared Capital Payments on the Class B Preferred Securities at the Stated Rate in full for payment on the first four Payment Dates falling contemporaneously with and/or immediately following the date on which such redemption, repurchase or other acquisition occurred.
Despite sufficient Operating Profits of the Company and sufficient Distributable Profits of the Bank, the Company will not be permitted to make Capital Payments on the Class B Preferred Securities on any Payment
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Date (or a date set for redemption or liquidation) if on such date there is in effect an order of the BaFin (or any other relevant regulatory authority) prohibiting the Bank from making any distribution of profits.
The Company will have no obligation to make up, at any time, any Capital Payments not paid in full by the Company as a result of insufficient Operating Profits of the Company, insufficient Distributable Profits of the Bank or an order of the BaFin.
In determining the availability of sufficient Distributable Profits of the Bank related to any fiscal year to permit Capital Payments to be declared with respect to the Class B Preferred Securities, any Capital Payments already paid on the Class B Preferred Securities and any capital payments or dividends already paid during the succeeding fiscal year of the Bank on Parity Securities, if any, on the basis of such Distributable Profits for such fiscal year will be deducted from such Distributable Profits.
Each Capital Payment declared (or deemed to be declared) on the Class B Preferred Securities will be payable to the holders of record as they appear on the securities register of the Company at the close of business on the corresponding record date. The record dates for the Class B Preferred Securities will be:
• for those Class B Preferred Securities held by the Property Trustee, so long as the Trust Preferred Securities remain in book-entry form, and for Class B Preferred Securities held in book-entry form, at the end of the Business Day immediately preceding the date on which the relevant Capital Payment will be paid, and
• in all other cases, 15 Business Days prior to the relevant Payment Date.
Payment of Additional Amounts
All payments on the Class B Preferred Securities, and any amount payable in liquidation or upon redemption thereof, will be made without any deduction or withholding for or on account of Withholding Taxes, unless such deduction or withholding is required by law. The Company will pay, as additional Capital Payments, such Additional Amounts as may be necessary in order that the net amounts received by the holders of the Class B Preferred Securities and the Trust Preferred Securities, after any deduction or withholding for or on account of Withholding Taxes, will equal the amounts that otherwise would have been received in respect of the Class B Preferred Securities and the Trust Preferred Securities, respectively, in the absence of such withholding or deduction.
No such Additional Amounts, however, will be payable in respect of the Class B Preferred Securities and the Trust Preferred Securities:
• if and to the extent that the Company is unable to pay because such payment would exceed the Distributable Profits of the Bank for the preceding fiscal year (after subtracting from such Distributable Profits the amount of Capital Payments on the Class B Preferred Securities and any payments on Parity Securities, if any, already paid on the basis of such Distributable Profits on or prior to the date on which such Additional Amounts will be payable);
• with respect to any Withholding Taxes that are payable by reason of a holder or beneficial owner of the Class B Preferred Securities (other than the Trust) or Trust Preferred Securities having some connection with the Relevant Jurisdiction other than by reason only of the mere holding of the Class B Preferred Securities or the Trust Preferred Securities;
• with respect to any Withholding Taxes which are deducted or withheld pursuant to (i) any European Union Directive or Regulation concerning the taxation of interest income, or (ii) any international treaty or understanding relating to such taxation and to which the United States, the European Union or Germany is a party, or (iii) any provision of law implementing, or complying with, or introduced to conform with, such Directive, Regulation, treaty or understanding; or
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• where such deduction or withholding can be avoided if the holder or beneficial owner of the Trust Preferred Securities makes a declaration of non-residence or other similar claim for exemption to the relevant tax authority or complies with any reasonable certification, documentation, information or other reporting requirement imposed by the relevant tax authority; provided, however, that the exclusion set forth in this clause shall not apply in respect of any certification, information, documentation or other reporting requirement if such requirement would be materially more onerous, in form, in procedure or in the substance of information disclosed, to the holder or beneficial owner of Trust Preferred Securities than comparable information or other reporting requirements imposed under U.S. tax law, regulation and administrative practice (such as IRS Forms 1001, W-8 and W-9).
Voting and Enforcement Rights
The Class B Preferred Securities will have no voting rights except as expressly required by applicable law or except as indicated below. In the event the holders of the Class B Preferred Securities are entitled to vote as indicated below, each Class B Preferred Security shall be entitled to one vote on matters on which holders of the Class B Preferred Securities are entitled to vote. In the event that:
• the Company fails to pay Capital Payments (plus Additional Amounts, if any) on the Class B Preferred Securities at the Stated Rate in full for four consecutive Payment Periods; or
• a holder of the Class B Preferred Securities has notified the Company that the Bank has failed to perform any obligation under the Support Undertaking and such failure continues for 60 days after such notice is given, then the holders of the Class B Preferred Securities will have the right to appoint the Independent Enforcement Director.
The Independent Enforcement Director will be appointed by resolution passed by a majority of the holders of the Class B Preferred Securities entitled to vote thereon, as described in the LLC Agreement, present in person or by proxy at a separate general meeting of the holders of the Class B Preferred Securities convened for that purpose (which will be called at the request of any holder of a Class B Preferred Security entitled to vote thereon) or by a consent in writing adopted by a majority of the holders of the Class B Preferred Securities entitled to vote thereon. Any Independent Enforcement Director so appointed will vacate office if, in such Independent Enforcement Director’s sole determination:
• the Capital Payments (plus Additional Amounts thereon, if any) on the Class B Preferred Securities have been made on the Class B Preferred Securities at the Stated Rate in full by the Company for at least four consecutive Payment Periods and
• the Bank is in compliance with its obligations under the Support Undertaking.
Any such Independent Enforcement Director may be removed at any time, with or without cause by (and will not be removed except by) the vote of a majority of the holders of the outstanding Class B Preferred Securities entitled to vote, at a meeting of the Company’s securityholders, or of holders of the Class B Preferred Securities entitled to vote thereon, called for that purpose. If the office of Independent Enforcement Director will become vacant at any time during which the holders of the Class B Preferred Securities are entitled to appoint an Independent Enforcement Director, the holders of the Class B Preferred Securities will appoint an Independent Enforcement Director as provided above.
The Independent Enforcement Director will be an additional member of the Board of Directors referred to above and will have the sole authority, right and power to enforce and settle any claim of the Company under the Support Undertaking. However, the Independent Enforcement Director will have no right, power or authority to participate in the management of the business and affairs of the Company by the Board of Directors except for:
• actions related to the enforcement of the Support Undertaking on behalf of the holders of the Class B Preferred Securities, and
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• the distribution of amounts paid pursuant to the Support Undertaking to the holders of the Class B Preferred Securities.
No director, including the Independent Enforcement Director, will be a resident of the Federal Republic of Germany.
So long as any Class B Preferred Securities are outstanding, the Company will not, without the affirmative vote of at least 662/3% in aggregate liquidation preference amount of the Class B Preferred Securities, voting separately as a class (excluding any Class B Preferred Securities held by the Bank or any of its affiliates), (i) amend, alter, repeal or change any provision of the LLC Agreement (including the terms of the Class B Preferred Securities) if such amendment, alteration, repeal or change would materially adversely affect the rights, preferences, powers or privileges of the Class B Preferred Securities, (ii) agree to modify or amend any provision of, or waive any default in the payment of any amount under Obligations in any manner that would materially affect the interests of the holders of Class B Preferred Securities, or (iii) effect any merger, consolidation, or business combination involving the Company, or any sale of all or substantially all of the assets of the Company, provided, that any such merger, consolidation, or business combination involving the Company, or any sale of all or substantially all of the assets of the Company, also must comply with the requirements set forth under “—Mergers, Consolidations and Sales”.
The Company will not, without the unanimous consent of all the holders of the Class B Preferred Securities (excluding any Class B Preferred Securities held by the Bank or any of its affiliates), issue any additional equity securities of the Company ranking prior to or pari passu with the Class B Preferred Securities as to periodic distribution rights or rights on liquidation or dissolution of the Company provided, however, that the Company may, from time to time and without the consent of the holders of the Class B Preferred Securities, issue additional Class B Preferred Securities having the same terms and conditions as the Class B Preferred Securities (or in all respects except for the issue date, the date from which Capital Payments accrue on the Class B Preferred Securities, the issue price, and any other deviations required for compliance with applicable law) so as to form a single series with the Class B Preferred Securities in consideration for Obligations of a principal amount equal to the aggregate liquidation preference amount of such additional Class B Preferred Securities.
Notwithstanding that holders of the Class A Preferred Security or Class B Preferred Securities may become entitled to vote or consent under any of the circumstances described in the LLC Agreement or in the by-laws of the Company (the “By-laws”), any Class A Preferred Security or any of the Class B Preferred Securities that are owned by the Bank, the Company or any of their respective affiliates (other than the Trust), either directly or indirectly, will in such case not be entitled to vote or consent and will, for the purposes of such vote or consent, be treated as if they were not outstanding, except for a Class A Preferred Security or Class B Preferred Securities purchased or acquired by the Bank or its subsidiaries or affiliates in connection with transactions effected by or for the account of customers of the Bank or any of its subsidiaries or affiliates or in connection with the distribution or trading of or market-making in connection with such Class A Preferred Security or Class B Preferred Securities in the ordinary course of business. However, certain persons (other than subsidiaries or affiliates of the Bank), excluding the Trust, to whom the Bank or any of its subsidiaries or affiliates have pledged a Class A Preferred Security or Class B Preferred Securities may vote or consent with respect to such pledged Class A Preferred Security or Class B Preferred Securities pursuant to the terms of such pledge.
Redemption of the Class B Preferred Securities
The Class B Preferred Securities are redeemable at the option of the Company, in whole but not in part, on any Payment Date falling on or after the Initial Redemption Date, at the Redemption Price plus Additional Amounts, if any. The Company may exercise its right to redeem the Class B Preferred Securities only if it has (i) given at least 30 days’ prior notice (or such longer period as required by the relevant regulatory authorities) to the holders of the Class B Preferred Securities (and the Trust Preferred Securities) of its intention to redeem the Class B Preferred Securities on the Redemption Date, and (ii) obtained any required regulatory approvals.
The Company will also have a right prior to the Initial Redemption Date, to redeem the Class B Preferred Securities at any time, in whole but not in part, upon the occurrence of a Company Special Redemption Event at the Redemption Price, plus Additional Amounts, if any.
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No redemption of the Class B Preferred Securities for any reason may take place unless on the Redemption Date: (i) the Company has sufficient funds (by reason of the Obligations, Permitted Investments or the Support Undertaking) to pay the Redemption Price plus Additional Amounts, if any; (ii) the Bank has an amount of Distributable Profits at least equal to the Capital Payments on the Class B Preferred Securities accrued and unpaid as of the Redemption Date plus Additional Amounts, if any; and (iii) no order of the BaFin (or any other relevant regulatory authority) is in effect prohibiting the Bank from making any distributions (including to the holders of Parity Securities, if any).
In the event that payment of any redemption price, in respect of any Class B Preferred Securities, is improperly withheld or refused and not paid, Capital Payments on such Class B Preferred Securities will continue to accrue from the Redemption Date to the date of actual payment of such redemption price.
Any redemption of the Class B Preferred Securities, whether on a Payment Date on or after the Initial Redemption Date or upon the occurrence of a Company Special Redemption Event, will not require the vote or consent of any of the holders of the Class B Preferred Securities.
Redemption Procedures
Notice of any redemption of the Class B Preferred Securities (a “Redemption Notice”) will be given by the Board of Directors on behalf of the Company by mail to the record holder of each Class B Preferred Security to be redeemed not fewer than 30 days before the date fixed for redemption, or such other time period as may be required by the relevant regulatory authorities. For purposes of the calculation of the Redemption Date and the dates on which notices are given pursuant to the LLC Agreement, a Redemption Notice will be deemed to be given on the day such notice is first mailed, by first-class mail, postage prepaid, to holders of the Class B Preferred Securities. Each Redemption Notice will be addressed to the holders of the Class B Preferred Securities at the address of each such holder appearing in the books and records of the Company. No defect in the Redemption Notice or in the mailing thereof with respect to any holder will affect the validity of the redemption proceedings with respect to any other holder.
If the Company gives a Redemption Notice (which notice will be irrevocable) by 10:00 a.m., Frankfurt time, on the Redemption Date, the Company, if the Class B Preferred Securities are in book-entry only form, will deposit irrevocably with the Principal Paying Agent funds sufficient to pay the Redemption Price and will give the Principal Paying Agent irrevocable instructions and authority to pay the Redemption Price in respect of the Class B Preferred Securities held through Clearstream AG in global form, or if the Class B Preferred Securities are held in definitive form, will deposit with the Principal Paying Agent funds sufficient to pay the applicable redemption price and will give to the Principal Paying Agent irrevocable instructions and authority to pay such amounts to the holders of the Class B Preferred Securities, upon surrender of their certificates, by check, mailed to the address of the relevant holder of the Class B Preferred Securities appearing on the books and records of the Company on the Redemption Date.
However, for so long as the Property Trustee will hold the Class B Preferred Securities, payment will be made by wire in same day funds to the holder of the Class B Preferred Securities by 10:00 a.m., Frankfurt time, on the Redemption Date. Upon satisfaction of the foregoing conditions, then immediately prior to the close of business on the date of payment, all rights of the holders of the Class B Preferred Securities will cease, except the right of the holders to receive the applicable redemption price, but without interest on such redemption price, and from and after the date fixed for redemption, the Class B Preferred Securities will not accrue Capital Payments or bear interest.
If any Redemption Date falls on a day that is not a Business Day, payment of all amounts otherwise payable on such date will be made on next succeeding Business Day, without adjustment, interest or further payment as a result of such delay in payment.
Liquidation Distribution
Upon liquidation of the Company, the holder of the Class A Preferred Security has a claim senior to that of the holders of the Class B Preferred Securities, and the holders of the Class B Preferred Securities have a claim
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senior to that of the holder of the Company Common Security; provided that any payments made by the Bank pursuant to the Support Undertaking will be payable by the Company solely to the holders of the Class B Preferred Securities. The holder of the Class A Preferred Security will be entitled to receive the Obligations (including accrued and unpaid interest thereon) as its liquidation distribution.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, holders of the Class B Preferred Securities will, subject to the limitations described below, be entitled to receive the liquidation preference amount of such Class B Preferred Securities, plus, in each case, accrued and unpaid Capital Payments in respect of the current Payment Period and Additional Amounts, if any. The Company expects that the liquidation distribution to the holders of the Class B Preferred Securities will be paid out of funds received from the Support Undertaking. The holders of the Class B Preferred Securities will be entitled to receive their liquidation distribution before any distribution of assets is made to the holder of the Company Common Security. Under the terms of the LLC Agreement and to the fullest extent permitted by law, the Company will not be dissolved until all obligations under the Support Undertaking have been paid in full pursuant to its terms.
Mergers, Consolidations and Sales
The Company may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any corporation or other body, except as described below. The Company may, with the consent of the holders of the Class B Preferred Securities, consolidate, amalgamate, merge with or into, or be replaced by a limited partnership, limited liability company or trust organized as such under the laws of any State of the United States of America, provided, that:
• such successor entity either expressly assumes all of the obligations of the Company under the Class B Preferred Securities or substitutes for the Class B Preferred Securities other securities having substantially the same terms as the Class B Preferred Securities (the “Company Successor Securities”) so long as the Company Successor Securities are not junior to any equity securities of the successor entity, with respect to participation in the profits, distributions and assets of the successor entity, except that they may rank junior to the Class A Preferred Security or any successor Class A Preferred Security to the same extent that the Class B Preferred Securities rank junior to the Class A Preferred Security;
• the Bank expressly acknowledges such successor entity as the holder of the Obligations and holds, directly or indirectly, all of the voting securities (within the meaning of Rule 3a-5 under the 1940 Act) of such successor entity;
• such consolidation, amalgamation, merger or replacement does not cause the Trust Preferred Securities (or, in the event that the Trust is liquidated, the Class B Preferred Securities (including any Company Successor Securities)) to be downgraded by any nationally recognized rating organization;
• such consolidation, amalgamation, merger or replacement does not adversely affect the powers, preferences and other special rights of the holders of the Trust Preferred Securities or Class B Preferred Securities (including any Company Successor Securities) in any material respect;
• such successor entity has a purpose substantially identical to that of the Company;
• prior to such consolidation, amalgamation, merger or replacement, the Company has received an opinion of a nationally recognized law firm experienced in such matters to the effect that:
- such successor entity will be treated as a partnership, and will not be classified as an association or a publicly traded partnership taxable as a corporation, for United States federal income tax purposes,
- such consolidation, amalgamation, merger or replacement would not cause the Trust to be classified as other than a grantor trust for United States federal income tax purposes,
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- following such consolidation, amalgamation, merger or replacement, such successor entity will not be required to register under the 1940 Act, and
- such consolidation, amalgamation, merger or replacement will not adversely affect the limited liability of the holders of the Class B Preferred Securities;
• the Bank provides an undertaking to the successor entity under the Company Successor Securities equivalent to that provided by the Support Undertaking with respect to the Class B Preferred Securities.
Book-Entry and Settlement
If the Class B Preferred Securities are distributed to holders of the Trust Preferred Securities in connection with the involuntary or voluntary liquidation, dissolution, winding up or termination of the Trust, the Company will use reasonable efforts to arrange for the Class B Preferred Securities to be issued in the form of one or more global certificates (each a “Global Security”) registered in the name of Clearstream AG. As of the date of this Offering Circular, the description herein of Clearstream AG’s book-entry system and practices as they relate to purchases, transfers, notices and payments with respect to the Trust Preferred Securities will apply in all material respects to any Class B Preferred Securities represented by one or more Global Securities.
Registrar, Transfer Agent and Paying Agent
The Bank will act as registrar, transfer agent and paying agent for the Class B Preferred Securities. Registration of transfers of the Class B Preferred Securities will be effected without charge by or on behalf of the Company, but upon payment (with the giving of such indemnity as the Transfer Agent may require) in respect of any tax or other governmental charges that may be imposed in relation to it. The Transfer Agent will not be required to register or cause to be registered the transfer of the Class B Preferred Securities after such Class B Preferred Securities have been called for redemption.
Miscellaneous
The Board of Directors is authorized and directed to conduct the affairs of the Company in such a way that (i) the Company will not be deemed to be required to register under the 1940 Act and (ii) the Company will not be treated as an association or as a “publicly traded partnership” (within the meaning of Section 7704 of the Code) taxable as a corporation for United States federal income tax purposes. In this connection, the Board of Directors is authorized to take any action, not inconsistent with applicable law or the LLC Agreement, that the Board of Directors determines in its discretion to be necessary or desirable for such purposes, so long as such action does not adversely affect the interests of the holders of the Class B Preferred Securities.
The Class B Preferred Securities may not be purchased by or transferred to any employee benefit plan subject to Title I of the U.S. Employee Retirement Income Security Act of 1974, as amended, any plan or arrangement subject to Section 4975 of the U.S. Internal Revenue Code of 1986, as amended, or any entity whose underlying assets include the assets of any such employee benefit plans, plans or arrangements.
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DESCRIPTION OF THE SUPPORT UNDERTAKING
The following summary sets forth the material terms and provisions of the Support Undertaking. This summary is qualified in its entirety by reference to the terms and provisions of such agreement.
The Bank and the Company will enter into the Support Undertaking prior to the issuance of the Class B Preferred Securities, pursuant to which the Bank will undertake that (i) the Company will at all times be in a position to meet its obligations if and when such obligations are due and payable, including Capital Payments declared (or deemed declared) on the Class B Preferred Securities and payments due upon redemption of the Class B Preferred Securities (plus, in each case, Additional Amounts thereon, if any), and (ii) in liquidation, the Company will have sufficient funds to pay the liquidation preference amounts of the Class B Preferred Securities, plus any accrued and unpaid Capital Payments for the then current Payment Period to but excluding the date of liquidation and Additional Amounts, if any. The Bank will also undertake not to give any guarantee or similar undertaking with respect to, or enter into any other agreement relating to the support of, any other preference shares or similar securities of any other affiliated entity that would rank senior in any regard to the Support Undertaking, unless the Support Undertaking is amended so that it ranks at least pari passu with and contains substantially equivalent rights of priority as to payment as any such other guarantee or other support agreement. So long as any Class B Preferred Securities remain outstanding, the Support Undertaking may not be modified or terminated without the consent of the holders of the Class B Preferred Securities except for such modifications that are not adverse to the interests of the holders of the Class B Preferred Securities. The Support Undertaking is not a guarantee of any kind that the Company will at any time have sufficient assets to declare a Capital Payment or other distribution.
The Bank’s obligations under the Support Undertaking will be subordinated to all senior and subordinated debt obligations of the Bank (including profit participation rights (Genussscheine)), will rank pari passu with the most senior ranking preference shares of the Bank, if any, and will rank senior to any other preference shares and the common shares of the Bank.
The holders of the Class B Preferred Securities will be third-party beneficiaries of the Support Undertaking. As titleholder of the Class B Preferred Securities for the benefit of the holders of the Trust Securities, the Property Trustee will have the power to exercise all rights, powers and privileges with respect to the Class B Preferred Securities under the Support Undertaking. If a holder of the Class B Preferred Securities has notified the Company that the Bank has failed to perform any obligation under the Support Undertaking, and such failure continues for 60 days or more after such notice is given, the holders of the Class B Preferred Securities (and the Trust Preferred Securities representing Class B Preferred Securities) will have the right to appoint the Independent Enforcement Director, who will be required to enforce the rights of the Company under the Support Undertaking.
All payments under the Support Undertaking will be distributed by the Company pro rata to holders of the Class B Preferred Securities until the holders of the Class B Preferred Securities receive the full amount payable under the Support Undertaking. So long as the Trust holds Class B Preferred Securities, the Property Trustee will distribute such payments received by the Trust to the holders of the Trust Preferred Securities pro rata.
The Bank will also undertake not to give any guarantee or similar undertaking with respect to, or enter into any other agreement relating to the support of, any other preference shares or similar securities of any other affiliated entity that would rank senior in any regard to the Support Undertaking unless the Support Undertaking is amended so that it ranks at least pari passu with and contains substantially equivalent rights of priority as to payment as any such other guarantee or other support agreement.
The Support Undertaking will be governed by, and construed in accordance with, German law.
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DESCRIPTION OF THE SERVICES AGREEMENT
The following summary sets forth the material terms and provisions of the Services Agreement. This summary is qualified in its entirety by reference to the terms and provisions of such agreement.
Under the Services Agreement, the Bank or a majority-owned affiliate will be obligated, among other things, to provide legal, accounting, tax and other support services to the Trust and the Company, to maintain compliance with all applicable U.S. and German local, state and federal laws, and to provide administrative, recordkeeping and secretarial services for the Company and the Trust. The fees and expenses of the Company and the Trust, including, in each case, any taxes, duties, assessments or governmental charges of whatsoever nature (other than Withholding Taxes) imposed by Germany, the United States or any other taxing authority upon the Company or the Trust, and all other obligations of the Company and the Trust (other than with respect to the Trust Securities or the Company Securities) will be paid by the Bank or a majority-owned affiliate pursuant to the Services Agreement.
The Services Agreement does not prevent the Bank or any of its affiliates or employees from engaging in any other activities. The Services Agreement has an initial term of five years and is renewable automatically for additional five year periods unless the Company delivers a notice of nonrenewal in accordance with the terms of the Services Agreement.
The Services Agreement will be governed by, and construed in accordance with, the laws of the State of Delaware.
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DESCRIPTION OF THE TERMS OF THE INITIAL OBLIGATION
The following summary sets forth the material terms and provisions of the Initial Obligation. This summary is qualified in its entirety by reference to the terms and provisions of the Initial Obligation.
General
The Principal Amount of the Initial Obligation will be € 300,000,000 (subdivided into individual notes, each with a nominal amount of € 100) and will be equal to the sum of the aggregate liquidation preference amount of the Class B Preferred Securities plus the aggregate amounts contributed by the Bank in return for the Class A Preferred Security and the Company Common Security. All of the proceeds from the issuance of the Class B Preferred Securities, together with the funds contributed by the Bank in return for the Class A Preferred Security and the Company Common Security, will be used by the Company to purchase the Initial Obligation. The aggregate Principal Amount of the purchased Initial Obligation will be such that the aggregate interest income paid on the Initial Obligation on any Interest Payment Date will be sufficient to make the aggregate Capital Payments on the Class B Preferred Securities on a corresponding Payment Date. The purchase of the Initial Obligation will occur contemporaneously with the issuance of the Class B Preferred Securities. The Initial Obligation will not be listed on any stock exchange.
The Initial Obligation will consist of an issue of subordinated notes issued by the Bank on the Closing Date which will mature on December 2, 2033 (the “Maturity Date”). Interest will accrue at a rate of 6.15% per annum on each individual note comprising a portion of the Principal Amount, and will be payable quarterly in arrears on March 2, June 2, September 2 and December 2 of each year, commencing March 2, 2004. Interest Payments payable on each Interest Payment Date will accrue from and including the immediately preceding Interest Payment Date (or December 2, 2003 with respect to Interest Payments payable on March 2, 2004), up to but excluding the relevant Interest Payment Date, and will be calculated on the basis of a 360-day year of twelve 30-day months.
If any Interest Payment Date or Obligation Redemption Date falls on a day that is not a Business Day, payment of all amounts otherwise payable on such date will be made on the next succeeding Business Day, without adjustment, interest or further payment as a result thereof.
Payment of interest on the Initial Obligation and any repayment upon redemption thereof, will be made without withholding or deduction for or on account of any present or future taxes, duties or governmental charges of any nature whatsoever imposed, levied or collected by or on behalf of Germany or the jurisdiction of any substitute obligor or any potential subdivision thereof or any other jurisdiction from which such payment is made unless such deduction or withholding is required by law. In such event, the Bank or other obligor will pay as additional interest such additional amounts (“Additional Interest Amounts”) as may be necessary in order that the net amounts received by the Company will equal the amounts that otherwise would have been received had no such withholding or deduction been required; provided, that the obligation of the Bank or such obligor to pay such Additional Interest Amounts shall not apply to:
• any tax which is payable otherwise than by deduction or withholding;
• any tax imposed on the net income of the holder of the Initial Obligation or that is payable by reason of the holder having some connection with the jurisdiction imposing such tax that is payable by reason of a holder of the Initial Obligation having some connection with such jurisdiction other than by reason only of the mere holding of the Initial Obligation;
• with respect to any Withholding Taxes which are deducted or withheld pursuant to (i) any European Union Directive or Regulation concerning the taxation of interest income, or (ii) any international treaty or understanding relating to such taxation and to which the United States, the European Union or Germany is a party, or (iii) any provision of law implementing, or complying with, or introduced to conform with, such Directive, Regulation, treaty or understanding; or
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• any tax to the extent the same would not have been so imposed but for the presentation of any Initial Obligation for payment on a date more than 15 days after the date on which payment became due and payable or the date on which payment thereof is duly provided for, whichever occurs later.
The Initial Obligation will not be redeemable prior to December 2, 2009 except upon the occurrence of a (1) Regulatory Event, (2) a Tax Event or (3) an Investment Company Act Event with respect to the Company, or in the event of replacement with Substitute Obligations. Subject to having obtained any required regulatory approvals, the Bank may cause the redemption of the Initial Obligation in whole but not in part prior to December 2, 2009, upon: (i) the occurrence of any of the events numbered (1), (2) or (3) above and the election of the Company to redeem the Class B Preferred Securities and (ii) at least 30 days’ prior notice, at a redemption price equal to the Principal Amount plus accrued and unpaid interest and Additional Interest Amounts, if any. Exercise of the Bank’s redemption right is conditional upon replacement of the Principal Amount of the Obligation to be redeemed by paying in other, at least equivalent own funds (haftendes Eigenkapital) within the meaning of the KWG, or prior approval of the BaFin or any successor authority of such early redemption.
The Bank may, at its option, redeem the Initial Obligation, in whole or in part, on any Interest Payment Date on or after the Initial Obligation Redemption Date (each an “Obligation Redemption Date”), upon at least 30 days’ prior notice, subject to having obtained any required regulatory approvals. Such redemption will be at a redemption price equal to the Principal Amount to be redeemed plus accrued and unpaid interest thereon, and Additional Interest Amounts, if any. The Bank may not cause any redemption of the Initial Obligation prior to the Maturity Date (except upon the occurrence of a Company Special Redemption Event) unless (i) the Initial Obligation are replaced with Substitute Obligations, or (ii) the Company is permitted and has elected to redeem an equivalent liquidation preference amount of the Class B Preferred Securities as described above, in accordance with the LLC Agreement.
In the event of any default on the Obligations, the Company will enforce its rights for payment of any overdue amounts, but will not be able to accelerate the maturity of the Initial Obligation.
Subordination
The Initial Obligation will be the general unsecured debt obligation of the Bank and in the liquidation of the Bank will rank subordinate and junior to all senior indebtedness of the Bank and pari passu with other subordinated obligations of the Bank. In the event of dissolution, liquidation, bankruptcy, composition or other proceedings for the avoidance of bankruptcy of, or against, the Bank, such obligations will be subordinated to the claims of all unsubordinated creditors of the Bank so that in any event no amounts shall be payable under such obligations until the claims of all unsubordinated creditors of the Bank shall have been satisfied in full.
The Company, as the holder of the Initial Obligation, will also agree by its acceptance thereof that it waives any rights it may have to set off claims under the Initial Obligation against claims the Bank may have against it. Pursuant to §10, subparagraph (5a) of the German Banking Act, if the Bank redeems, repurchases or repays the Initial Obligation prior to a date on which such redemption or repayment is permitted under the terms thereof, notwithstanding any agreements to the contrary, any amounts so paid to a holder of the Initial Obligation must be repaid to the Bank unless a statutory exemption (replacement of the Principal Amount with at least equivalent own funds or prior approval of the BaFin) applies.
The obligations of the Bank under the Initial Obligation may not be secured by any lien, security interest or other encumbrance on any property of the Bank or any other person and, except as permitted by applicable law, the Bank shall not, directly or indirectly, acquire for its own account, finance for the account of any other person the acquisition of, or accept as security for any obligation owed to it, any of the Initial Obligation. The Bank is also prohibited from amending the terms of the Initial Obligation to limit the subordination provisions or change the Initial Obligation Redemption Date to an earlier date.
Substitution; Redemption and Reinvesting of Proceeds
At any time, the Bank will have the right to (i) substitute another obligor on the Obligations, in whole or in part, which obligor will be a branch of the Bank or a majority-owned subsidiary that is consolidated with the
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Bank for German bank regulatory purposes, or (ii) replace the Obligations, in whole or in part, with Substitute Obligations issued by the Bank or a majority-owned subsidiary that is consolidated with the Bank for German bank regulatory purposes with identical terms to those of the Initial Obligation; provided, in each case, that (a) such substitution or replacement does not result in a Company Special Redemption Event and (b) the Bank (which may act through a branch) guarantees on a subordinated basis, at least equal to the ranking of the Initial Obligation, the obligations of the new substitute obligor.
After the Maturity Date, if the Class B Preferred Securities have not been redeemed, the Company will invest in Permitted Investments. The Company will attempt to purchase Permitted Investments in the following order of priority, to the extent the same are available (and within each category on terms that are the best available in relation to providing funds for the payment of Capital Payments and the redemption of the Class B Preferred Securities):
• first, obligations of one or more majority-owned subsidiaries of the Bank, unconditionally guaranteed by the Bank (which may act through a branch) on a basis that ranks at least pari passu with the Initial Obligation; or
• second, in the event such an investment is not available, in United States Treasury securities.
Governing Law
The Initial Obligation will be governed by the laws of Germany.
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LEGAL MATTERS Certain matters of Delaware law relating to the validity of the Trust Preferred Securities and the Class B Preferred Securities will be passed upon for the Trust, the Company, the Delaware Trustee and the Bank by Richards, Layton & Finger, P.A., Wilmington, Delaware. Certain matters of the law of Germany, New York and the United States of America will be passed upon for the Trust, the Company and the Bank by the legal department of the Bank and for the Managers by Cleary, Gottlieb, Steen & Hamilton, Frankfurt am Main, Germany.
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CAPITALIZATION OF DEUTSCHE BANK GROUP
The following table sets forth the unaudited capitalization of Deutsche Bank Group as of September 30, 2003, and as adjusted to reflect the Offering. For information on the financial condition of the Deutsche Bank Group as of December 31, 2002, see the Consolidated Financial Statements included herein.
As of September 30,
2003 Actual (€ in millions) Non interest-bearing deposits Domestic offices ...................................................................................... 20,486 Foreign offices ......................................................................................... 6,964 Interest-bearing deposits Domestic offices ...................................................................................... 86,997 Foreign offices ......................................................................................... 204,792 Total deposits.............................................................................................. 319,239 Trading liabilities ......................................................................................... 161,544 Central bank funds purchased and securities sold under repurchase agreements ................................................................................. 119,774 Securities loaned .......................................................................................... 18,969
Other short-term borrowings........................................................................ 26,448 Acceptances outstanding.............................................................................. 71 Insurance policy claims and reserves........................................................... 9,402 Accrued interest payable.............................................................................. 4,456 Other liabilities ............................................................................................ 75,061 Long-term debt ............................................................................................ 99,627 Trust preferred securities(1) .......................................................................... — Obligation to purchase common shares ....................................................... 2,310 Total liabilities(1)......................................................................................... 836,901
Common shares, no par value, nominal value of Euro 2.56 ........................ 1,490 Additional paid-in capital............................................................................. 11,147 Retained earnings......................................................................................... 20,030 Common shares in treasury, at cost.............................................................. (349) Equity classified as obligation to purchase common shares ........................ (2,310) Share awards ................................................................................................ 747 Accumulated other comprehensive income Deferred tax on unrealized net gains on securities available
for sale relating to 1999 and 2000 tax rate changes in Germany ............................................................................................... (2,919)
Unrealized net gains on securities available for sale, net of applicable taxand other ............................................................................................... 846
Unrealized net gains (losses) on derivatives hedging variability of cash flows, net of tax ........................................................................ (10)
Minimum pension liability, net of tax...................................................... (8) Foreign currency translation, net of tax ................................................... (1,237) Total accumulated other comprehensive income ......................................... (3,328) Total shareholders' equity......................................................................... 27,427 Total liabilities and shareholders' equity(1) .............................................. 864,328
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(1) There has been no material change to the capitalization of the Bank since September 30, 2003 except for the issuance of € 300,000,000 Trust Preferred Securities described in this Offering Circular. See “The Bank–Share Capital” for additional information.
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THE BANK
History, Incorporation, Registered Office and Objectives
The Bank originated from the reunification of Norddeutsche Bank Aktiengesellschaft, Hamburg, Rheinisch-Westfälische Bank Aktiengesellschaft, Düsseldorf and Süddeutsche Bank Aktiengesellschaft, Munich; pursuant to the Law on the Regional Scope of Credit Institutions, these had been disincorporated in 1952 from the Bank which was founded in 1870. The merger and the name were entered in the Commercial Register of the District Court Frankfurt am Main on May 2, 1957. The Bank is a banking company with limited liability incorporated under the laws of Germany under registration number HRB 30 000. The Bank has its registered office at Taunusanlage 12, 60325 Frankfurt am Main, Germany.
The Bank is the parent company of a group consisting of banks, capital market companies, fund management companies, a property finance company, installment financing companies, research and consultancy companies and other domestic and foreign companies.
The objects of the Bank, as laid down in its Articles of Association, include the transaction of all kinds of banking business, the provision of financial and other services and the promotion of international economic relations. The Bank may realize these objectives itself or through subsidiaries and affiliated companies. To the extent permitted by law, the Bank is entitled to transact all businesses and to take all steps which appear likely to promote the objectives of the Bank, in particular: to acquire and dispose of real estate, to establish branches at home and abroad, to acquire, administer and dispose of participations in other enterprises, and to conclude enterprise agreements.
The duration of the Bank is unlimited.
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Recent Business Developments
In December 2001, the Bank signed agreements with Zurich Financial Services (“Zurich”) to acquire the greater part of Zurich's asset management businesses (Scudder, excluding its U.K. operations) and to sell to Zurich the greater part of its insurance business, most of which was held through Versicherungsholding der Deutschen Bank AG. These transactions were completed in the second quarter of 2002.
In the second quarter of 2002, the Bank acquired U.S.-based real estate investment manager RREEF. RREEF is operated as a business unit within DB Real Estate, the real estate investment management group of the Bank's Asset Management Business Division.
In the second quarter of 2002, the Bank sold its Banque Worms branches located outside of Paris. In the first quarter of 2003 it sold its remaining two Banque Worms' branches in Paris.
Following the agreement reached in 2001, in the third quarter of 2002 the Bank merged its mortgage bank subsidiary, EUROHYPO AG Europäische Hypothekenbank der Deutschen Bank, with Deutsche Hypothekenbank Frankfurt-Hamburg AG and Rheinhyp Rheinische Hypothekenbank AG, which were the respective mortgage bank subsidiaries of Dresdner Bank Aktiengesellschaft and Commerzbank Aktiengesellschaft, to form the new EUROHYPO AG. For certain purposes, other than financial reporting under U.S. GAAP, the merger had retroactive effect from January 1, 2002, even though the merger of the three entities was completed and entered into the commercial register on August 13, 2002. After the merger, the Bank's share in the combined entity was 34.6%, with Commerzbank taking a 34.4% share and Dresdner Bank taking a 28.7% share (free-float 2.3%). In connection with the merger, in December 2002, part of the Bank's London-based real estate investment banking business was contributed to EUROHYPO AG. On December 31, 2002 the Bank's share of the combined entity was 34.6%. Furthermore, in January 2003, part of the Bank's German commercial real estate financing activities and Dresdner Bank's U.S. based real estate investment banking team were transferred to the combined entity. The three transfers resulted in an increase in the Bank's share of EUROHYPO AG to 37.6%.
In the third quarter of 2002, the Bank entered into an agreement with Northern Trust Corporation to sell most of its Passive Asset Management business. The closing of the sale was completed in the first quarter of 2003.
In the fourth quarter of 2002, the Bank signed definitive agreements for the sale of substantial parts of its Global Securities Services business to State Street Corporation. The transaction closed in the first quarter of 2003.
In the fourth quarter of 2002, the Bank sold its commercial finance business of Deutsche Financial Services to GE Commercial Finance and its consumer finance business of Deutsche Financial Services to E*TRADE Bank.
In the fourth quarter of 2002, the Bank signed an agreement with IBM Business Services (“IBM BS”) pursuant to which the Bank will outsource its German Private Clients and Asset Management Information Technology/Infrastructure (“IT/I”) data centers, continental European server sites and DWS Europe computer centers to IBM BS. The contract is for a ten-year period. Under the agreement, IBM BS provides the Bank with a wide range of technology services. Pursuant to the agreement, effective February 1, 2003, the Bank transferred its PCAM IT/I business, including the respective human resources and controlling groups as well as related infrastructure functions, to IBM BS. Upon this transfer, approximately 900 staff left the company and joined their new employer IBM BS.
In February 2003, the Bank signed an agreement with Zurich Financial Services to acquire Rüd, Blass & Cie AG Bankgeschäft, a private Swiss bank. The acquisition was completed in March 2003.
In November 2002, the Bank entered into exclusive negotiations with the management team of DB Capital Partners regarding the sale of the Bank's late-stage private equity portfolio. The sale was completed in February 2003. The Bank will retain a 20% interest in the portfolio.
In February 2003, the Bank announced the simultaneous sale of two prime City of London real estate investments. The Bank has entered into agreements with The British Land Company PLC for the sale of the long leasehold (999 years) of 1 Appold Street and with KanAm grundinvest Fonds for its 55% interest in Winchester House. The Bank will remain in occupancy of these properties for a minimum of 15 years.
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In April 2003, the Bank signed a sale and purchase agreement for the acquisition of Tele Columbus Group, the leading Level 4 cable service provider in Germany, by BC Partners Ltd. The sale was completed in July 2003.
In May 2003, the Bank signed contracts to relinquish its 34.6% minority stake in Gerling-Konzern Versicherungs-Beteiligungs-AG (GKB) and to restructure simultaneously alongside with Swiss Re, Sal. Oppenheim and GKB the ownership of Gerling NCM Credit and Finance AG. The transaction closed in August 2003.
In August 2003, the Bank announced that it has entered into an agreement to sell a portfolio of private equity fund investments to Credit Suisse Strategic Partners. Closing of the transaction is expected to be completed in the fourth quarter 2003. Separately, the Bank announced the closing of a private equity fund securitization in late July 2003.
For further information on these recent transactions, see “—Group Divisions”.
Except as described above, the Bank has made no material capital expenditures or divestitures since January 1, 2000.
Since January 1, 2002, there have been no public takeover offers by third parties with respect to the Bank's shares and the Bank has made no public takeover offers in respect of other companies' shares.
Business Overview
In the overview of the business the following information are provided:
• an introduction to the Bank and its activities;
• a description of the Bank's business and management structure; and
• a discussion of the Bank's group divisions.
Introduction
The Bank is one of the largest groups of financial and banking institutions in Germany, Europe and the world, as measured by total assets of € 864 billion on September 30, 2003. The Bank offers a wide variety of investment, financial and related products and services to consumer and corporate clients worldwide through the Corporate and Investment Bank Group Division, Private Clients and Asset Management Group Division and the Corporate Investments Group Division (“CI”).
The Bank had 68,481 employees worldwide on September 30, 2003 on a full-time equivalent basis. As of December 31, 2002, the Bank operated in 76 countries out of 1,711 facilities around the world, of which 55% were in Germany.
At September 30, 2003, the Bank had the following group divisions:
• The Corporate and Investment Bank Group Division is composed of the two corporate divisions:
• Corporate Banking & Securities
• Global Transaction Banking
• The Private Clients and Asset Management Group Division, is composed of the two corporate divisions:
• Asset and Wealth Management
• Private & Business Clients
• The Corporate Investments Group Division
In addition to the three group divisions, the Bank has a Corporate Center to house those functions that support the cross-divisional management in its organization. Also, the Bank had a service function called DB Services that provided corporate services, information technology, consulting and transaction services to its entire organization. As of January 1, 2003, the service functions formerly called DB Services were moved into
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the group divisions and the Corporate Center. The goal of this realignment was to incorporate the business-related activities directly to the relevant business areas.
The activities of the group divisions and the Corporate Center are described below under “–Business and Management Structure.”
Business and Management Structure, Board of Managing Directors and Supervisory Board
The Bank's organization comprises three group divisions plus the Corporate Center.
The organizational structure combines the core businesses into two client-focused group divisions. These are:
• CIB
• PCAM
CIB has its headquarters in London, England and Frankfurt, Germany. PCAM is headquartered in Frankfurt, Germany.
CIB combines corporate banking and securities activities (including sales, trading and corporate finance services) with the transaction banking activities, while PCAM combines asset management, private wealth management and retail banking activities. Each of these two client-focused group divisions has its own infrastructure group, which includes among other things information technology services operations.
CIB serves primarily corporate and institutional clients, ranging from small- and medium-sized enterprises to multinational corporations. PCAM primarily serves retail, small corporate customers as well as affluent clients and provides asset management services to retail and institutional clients.
In addition to the two client-focused group divisions mentioned above, the Bank's principal investment activities are included in CI. Corporate Center provides overall strategic planning, liquidity and capital management, risk management and control.
On January 31, 2002, a new management structure was announced. Under the new structure, the number of members on the Bank's Board of Managing Directors was reduced from eight to five and further to four in May 2002. The Board of Managing Directors focuses on strategic management, resource allocation, risk management and control. Additionally the Board of Managing Directors has installed a Group Executive Committee, the divisional committees that assist in the management of the business and the functional committees that assist in cross-divisional management.
The Group Executive Committee is comprised of all current members of the Board of Managing Directors, along with the Global Business Heads of the two client-focused group divisions.
In accordance with German law, the Bank has both a Supervisory Board (Aufsichtsrat) and a Board of Managing Directors (Vorstand). These Boards are separate; no individual may be a member of both. The Supervisory Board appoints the members of the Board of Managing Directors and supervises the activities of this Board. The Board of Managing Directors represents the Bank and is responsible for its management.
The Board of Managing Directors (Vorstand) consists of
Dr. Josef Ackermann Spokesman of the Board of Managing Directors
Dr. Clemens Börsig
Dr. Tessen von Heydebreck
Hermann-Josef Lamberti
The Supervisory Board (Aufsichtsrat) consists of the following 20 members:
Dr. Rolf-E. Breuer
Chairman Frankfurt am Main
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Heidrun Förster* Deputy Chairperson
Deutsche Bank Privat- und Geschäftskunden AG Berlin
Dr. rer-oec. Karl-Hermann Baumann
Chairman of the Supervisory Board of Siemens Aktiengesellschaft Munich
Dr. Ulrich Cartellieri Frankfurt am Main
Klaus Funk* Deutsche Bank Privat- und Geschäftskunden AG Frankfurt am Main
Ulrich Hartmann Chairman of the Supervisory Board of E.ON AG Düsseldorf
Sabine Horn* Deutsche Bank AG Frankfurt am Main
Rolf Hunck* Deutsche Bank AG Hamburg
Sir Peter Job London
Prof. Dr. Henning Kagermann CEO and Chairman of the Board of Management of SAP AG Walldorf/Baden
Ulrich Kaufmann* Deutsche Bank AG Düsseldorf
Henriette Mark* Deutsche Bank AG Munich
Margret Mönig-Raane* Member of the Federal Executive Board and Vice President of the Unified Services Union Hamburg
Dr. Michael Otto Chairman of the Board of Management of Otto (GmbH & Co. KG) and Otto Aktiengesellschaft für Beteiligungen Hamburg
Gabriele Platscher* Deutsche Bank Privat- und Geschäftskunden AG Braunschweig
Karin Ruck* Deutsche Bank AG Bad Soden im Taunus
Tilman Todenhöfer Deputy Chairman of the Board of Management of Robert Bosch GmbH Stuttgart
Dipl.-Ing. Dr.-Ing. E.h. Jürgen Weber Chairman of the Supervisory Board of Deutsche Lufthansa AG Hamburg
Dipl.-lng. Albrecht Woeste Chairman of the Supervisory Board and the
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Shareholders' Committee of Henkel KGaA Düsseldorf
Leo Wunderlich* Deutsche Bank AG Mannheim
* elected by the staff in Germany
The members of the Board of Managing Directors accept membership on the Supervisory Boards of other corporations within the limits prescribed by law.
The business address of each member of the Board of Managing Directors of the Bank is Taunusanlage 12, 60262 Frankfurt am Main, Germany.
Capital and Balance Sheet Management
With regard to management of capital resources, the Bank has defined three main priorities in order to improve its profitability ratios (e.g., return on equity or earnings per share): first, streamlining the balance sheet through a selective reduction of risk-weighted assets, second, addressing asset quality through provisioning for problem assets, and third, returning excess capital to its shareholders through a share repurchase program.
• The Bank's aim is to release those risk-weighted assets on which the Bank believes its returns to be sub-optimal. Compared to year-end 2001 levels, the Bank has reduced risk-weighted assets by 22% at year-end 2002. This was primarily achieved through the reduction of the loan book and the de-consolidation of EUROHYPO and DFS. Furthermore, the appreciation of the Euro, particularly against the U.S. dollar, also contributed to this reduction. Asset quality was also addressed by provisioning for problem assets. The Bank will continue to pursue the reduction of low-return assets through a further decrease in lending volumes and adjustment of the way loans are priced. As a result, risk-weighted assets further declined by end of June 2003.
• The significant reduction in risk-weighted assets has further strengthened the Bank's capital ratios resulting in a BIS Tier 1 ratio of 9.5% at September 30, 2003. The change in accounting principles according to SFAS 150 affects the accounting for outstanding contracts to purchase forward Deutsche Bank common shares. This resulted in a charge to shareholders’ equity of € 2.9 billion in the third quarter of 2003. The Bank believes that it is prudent to aim at a Tier 1 target range of 8 to 9%, which might even be exceeded during difficult market conditions.
• As of December 31, 2002, a share buyback program had resulted in the repurchase of 38.1 million shares, of which 4.3 million shares were bought through forward contracts settling in the first half of 2003. This represents 61% of the total amount authorized by shareholders at the Annual General Shareholders' Meeting in May 2002. The program has been supported by the sale of industrial holdings, reductions in risk-weighted assets and low share prices. However, the Bank's overriding objective is to maintain a strong regulatory and economic capitalization.
The Bank announced the completion of its share buyback program, first announced in June 2002. From July 1, 2002 to April 15, 2003, a total of 62,146,423 shares were repurchased at an average price of € 48.32 per share.
The Board of Managing Directors of the Bank resolved to cancel 40,000,000 shares. The share capital now consists of 581,854,246 shares. The remaining shares from the buyback program were used in connection with the Bank's equity-based staff compensation program.
The Board of Managing Directors has been authorized at the General Meeting on June 10, 2003 to repurchase again up to 10% of the share capital. On September 4, 2003, the Bank announced the launch of a new share buy-back program of up to 58 million shares by 2004. The program will be funded from current earnings and by further reducing risk-weighted assets. All transactions within the scope of this buyback program will be managed in such a way that the Bank’s BIS Tier 1 capital ratio remains at the upper end of the communicated target band of 8 – 9%. As of September 30, 2003, a total of 5,901,988 shares were repurchased (or were the subject of put options) at an average price of € 55.58 per share.
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Share Capital
As of September 30, 2003, the issued share capital of the Bank Aktiengesellschaft amounted to Euro 1,489,546,869.76 consisting of 581,854,246 ordinary shares of no par value. The shares are fully paid up and in registered form. The shares are listed for trading and official quotation on all the German Stock Exchanges. They are also listed on the Stock Exchanges in Amsterdam, Brussels, London, Luxembourg, New York, Paris, Tokyo, Vienna and Zurich. As of December 31, 2002, the Bank also had authorized but unissued share capital of € 685,822, 907. As of September 30, 2003, the Bank was not aware of any single investor holding 5% or more of its shares.
For details on the capitalization and indebtedness of the Deutsche Bank Group as of September 30, 2003 and as adjusted to reflect the Offering, see “—Capitalization of Deutsche Bank Group.” There has been no material change in the capitalization of the Deutsche Bank Group since September 30, 2003. The implementation of SFAS 150, as indicated above, resulted in a charge to shareholders’ equity of € 2.9 billion and a corresponding increase in liabilities (obligation to purchase common shares) in the third quarter of 2003. Settlement of forward contracts to purchase common shares reduced this obligation to € 2.3 billion at September 30, 2003.
Group Divisions
Group division is a term used to describe the three highest-level divisions of the Bank, which are CIB, PCAM and CI. Each of CIB and PCAM are divided into several corporate divisions, each of which may have several business divisions. The CI Group Division has several business divisions and does not use the intermediate corporate division designation.
In the following discussion, the three group divisions and the Corporate Center are described as they existed on September 30, 2003.
Corporate and Investment Bank Group Division
The Corporate and Investment Bank Group Division primarily serves global corporations, financial institutions and sovereign and multinational organizations. It also serves medium-sized corporate customers throughout Europe and public sector entities throughout Europe.
At September 30, 2003, this group division included two corporate divisions, each of which has the following business divisions:
• Global Relationship Management Germany/Global Banking Division
• Loan Exposure Management Group
• Global Transaction Banking Corporate Division
• Global Securities Services
• Global Cash Management
• Global Trade Finance
The operations housed in the Corporate and Investment Bank Group Division are predominantly in the world's primary financial centers, including New York, London, Frankfurt am Main, Tokyo, Singapore and Hong Kong.
Within the business divisions Global Markets and Global Equities, in addition to providing products and services to customers, the Bank conducts an element of proprietary trading, or trading on its own account. Most of such trading activity is ancillary to customer transactions. Designated proprietary trading activity includes activities such as foreign exchange, fixed income, index arbitrage, convertible arbitrage, credit arbitrage, equity arbitrage and risk arbitrage. In index arbitrage, differences between the prices of exchange-traded derivatives (such as futures contracts on an equity index) and the underlying prices on the stock exchange of the individual stocks in the index are identified. In convertible arbitrage, volatility-related pricing differences between the
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market for convertible debt instruments and the cash and derivatives markets are identified. In credit and equity arbitrage, statistics-driven trading strategies based on short-term market movements and indicators to manage trading book so that the market value of the Bank's long positions remains roughly equal to the market value of short positions. Risk arbitrage, which is generally related to mergers and acquisitions, involves, for example, transactions such as buying a target company's shares at the same time as selling the bidding company's shares.
Within Global Corporate Finance Business Division, clients are offered not only corporate finance and equity origination products, but also a variety of credit products and financial services. In addition, a variety of financial services is provided to the public sector.
Global Relationship Management Germany/Global Banking Division (“GRMG/GBD”) is the business division that includes all relationship management functions related to multinational and medium-sized companies domiciled in Germany as well as those related to global corporate and institutional clients. In Germany, GRMG/GBD also provides varied financial services to public sector customers. These customers include German federal states (Länder) and regional and local authorities in addition to public enterprises and institutions. GRMG/GBD in Germany has the product responsibility for lending products such as loans and structured finance as well as time deposits. Special financing solutions are provided by the Bank’s subsidiaries Deutsche Immobilien Leasing GmbH and Schiffshypothekenbank zu Lübeck AG. The corporate and institutional client coverage outside of Germany was separated from the Global Corporate Finance Business Division in February 2003. GRMG/GBD outside of Germany has product responsibility for loans to corporate and institutional clients with maturities of up to 180 days.
From July 2003, the Bank has operated a new business division called Loan Exposure Management Group. This division assists in the management of new loan exposure, excluding those of medium-sized German companies, through the implementation of a hedging regime on a selective basis.
Global Transaction Banking Corporate Division, as described later, is primarily engaged in the gathering, moving, safeguarding and controlling of assets for the Bank's clients throughout the world.
Corporate and Investment Bank Group Division operates research departments which examine companies, industry sectors, geographic markets and economic trends and analyze the effects of these trends on market transactions.
Corporate Banking & Securities Corporate Division
Corporate Division Overview
Corporate Banking & Securities incorporates sales, trading and corporate finance activities. Sales and trading comprises global sales and trading businesses in the fixed income, foreign exchange, commodities, credit, derivatives and equities markets. Corporate finance combines German and international corporate finance, mergers and acquisitions, equity capital markets, corporate banking and real estate activities for large, medium-sized and institutional clients.
Products and Services
The following is a description of the products and services offered by Corporate Banking & Securities Corporate Division.
Sales and Trading (Debt and Other Products). The sales and trading (debt and other products) revenues category includes the following primary products and services:
• Interest Rate and Credit Derivatives. These include interest rate- related swaps, options and forwards, as well as credit-related derivatives. Credit-related derivatives are products offering customers the ability to hedge and/or change their credit exposure to assets or liabilities of a third party.
When entering into derivative transactions, the Bank generally also acquires positions in other securities or derivatives to manage the risk.
• Foreign Exchange. This includes market-making and trading transactions in the spot, forward and options markets. These transactions are executed in currencies of the world’s major industrialized
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countries, as well as in many other currencies. The transactions include spot, forward and option positions taken on as hedges to help manage our risk exposure.
• Fixed Income. This includes government agency trading and secondary trading. Transactions are executed for customers and also for the Bank's own account. The Bank makes markets in German and other sovereign countries' government and agency securities, whole loans and mortgage-related and other asset-backed securities. In corporate debt the Bank makes markets and trades as principal in investment grade and non-investment grade markets, executes hedge transactions through the interest rate and credit derivatives markets. This area works closely with the teams responsible for the origination (debt) activities detailed below.
• Emerging Markets. The Bank enters into various transactions for clients, predominantly centered on fixed income securities and structures. The key geographic markets in which the Bank deals are Russia, Brazil, Chile and Turkey. Past and current events have shown that these markets are volatile and that liquidity can become a significant constraint.
• Money Market and Repurchase Agreements. This area includes the activities in various short-term monetary activities of the world's key financial markets. This includes both the inter-corporate and the inter-bank markets. The products in this area include loans and deposits, repurchase and reverse repurchase agreements, commercial paper (primary and secondary) and government bills. Repurchase and reverse repurchase agreements provide financing to the customers of the Corporate Banking & Securities Corporate Division as well as on behalf of the Bank's other corporate divisions.
• Commodities. These include trading activities with clients or for the Bank's own account in precious metals, electricity, oil and natural gas energy markets and in weather derivatives.
In addition to the products described above, the Bank also enters into various forms of structured and securitization trades, most often in response to a particular client's needs. These often combine many of the above products.
Sales and Trading (Equity). The primary products and services offered in the sales and trading (equity) category are the following:
• Cash Equity. In this product area, the Bank engages in the trading and sale of equity securities in all major markets and in a number of emerging markets. This includes equity issues which the Bank structures and underwrites, as well as secondary market trading.
Cash equities is customer driven. The Bank's role is to provide two-way markets, enabling the customer to buy and sell securities from the Bank and to the Bank. The Bank may act in the role of agent for these trades, with a third party assuming the other side of the trade, or in the role of principal, where the Bank assumes the other side of the trade and hence takes the position onto its own books. As a result, the Bank may hold both long and short positions which it may hedge or close over time.
• Equity Derivatives. This product area includes the trading and sale of convertible bonds (in both primary and secondary markets) and listed futures and options on equity securities. The activity in this area is customer driven, enabling customers to buy and sell the products. The Bank acts in the role of agent or principal to the trades. Equity derivatives also includes program trading (the purchase and/or sale of large portfolios of securities on behalf of clients) as well as the structuring of client-specific derivative products. When the Bank structures client-specific derivative products, its role ranges from advising to execution and hedging on behalf of the client. This may result in the Bank taking positions onto its own books.
A number of proprietary business lines are within the equity derivatives area. In these lines, the Bank uses combinations of financial instruments in order to exploit market opportunities. An example of these business lines is index arbitrage in which the Bank attempts to exploit pricing differences between the cash (equities) market and the derivatives (equity index futures) market.
• Global Equity Prime Services. In this product area, the Bank enters into structured equity financing, stock borrowing and lending, and prime brokerage services. Structured equity financing makes use of derivative structures, such as equity swaps (in which the parties agree to exchange the return on one or more equity securities for a predetermined fixed or variable interest rate), to facilitate customer flow business, provide liquidity and manage balance sheets. The Bank undertakes stock
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borrowing and lending to provide financing of clients' and its own positions. Through prime brokerage services, the Bank provides funds through financing, stock lending, clearance and reporting services to customers.
Research. The Bank's research department in this corporate division provides comment and analysis on the bond, equity, foreign exchange and derivatives markets, as well as on the global macroeconomic environment for the Bank's corporate and institutional clients.
Loan Products. The main products and services within this revenue category are operational and strategic lending and global asset finance and leasing. The Bank participates in the syndicated loan market, either as lead or as part of a third party's syndicate. As a result of leading a syndication, the Bank typically sells down most of its position to its clients and retains a portion of the loan as part of its loan portfolio. As a result of participating in a third party's syndicate, the Bank typically acquires a small portion of the loan to hold as part of its loan portfolio.
• Operational and Strategic Lending. Operational lending relates to the working capital needs, both loans and deposits, of the operating subsidiaries of the Bank's client companies. Strategic lending involves the companies' borrowing requirements arising from mergers, acquisitions or corporate restructuring. The Bank offers short, medium and long-term loan products. The Bank fulfills its clients' short- term needs (generally up to one year) either with working capital credit lines or by cash advances on a roll-over financing basis. Roll-over financing is a method by which the Bank provides medium to long-term credit with an interest rate linked to an external rate. Short-term lending activities also include loan substitution through bills of exchange.
• Amortization, Annuity and Term Loans. For clients' medium and long-term financing needs, the Bank offers amortization and annuity loans as well as term loans. Amortization and annuity loans provide for the payment of a debt through a predetermined number of periodic payments of equal amount, each consisting of a portion of the remaining principal plus interest on the balance. Term loans are loans where the debtor does not repay the principal until the loan is due. The Bank arranges syndicated loans and enters into syndications on an assignment or participation basis. The Bank offers its floating rate products with optional interest cap and forward rate agreements. It also offers standard fixed rate products.
• Deposit Products. Deposit products include sight products, which can be withdrawn anytime without notice restrictions, and term deposits, which have restrictions on withdrawal, such as notice periods.
• Global Asset Finance and Leasing. In this area, the Bank arranges leveraged leases in Germany, the United Kingdom, the United States and Japan by offering cross-border and domestic leasing products, predominantly within the transport sector. The Bank provides or arranges financing for clients who require leasing structures to finance their capital expenditures.
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Origination (Debt). In this revenue category, the Bank provides issuers with customized solutions for their financing needs by utilizing public and private debt issuances. Debt issuances can also be integrated with derivative transactions. The Bank also originates commercial mortgage loans on a global basis for inclusion in securitization transactions as a service to its clients.
Origination (Equity). In this revenue category, equity specialists help clients to raise financing for expansion, acquisitions and restructuring. Customers raise financing through the primary and secondary equity capital markets, with access to a complete range of equity products and equity-linked debt. The Bank provides both advisory and structuring services, as well as distribution, through its sales force.
Advisory. This revenue category includes primarily advice on strategic matters, including mergers and acquisitions, divestitures, spin-offs, restructuring, capital structuring and leveraged buyouts.
Other. This revenue category includes activities not included in the above categories, including the Bank's internal interest charges on un-amortized goodwill and realized gains/losses on certain business disposals.
Global Transaction Banking Corporate Division
Corporate Division Overview
Global Transaction Banking is primarily engaged in the gathering, moving, safeguarding and controlling of assets for its clients throughout the world. Global Transaction Banking provides processing, fiduciary and trust services to corporations, financial institutions and governments and their agencies. These services are domestic custody, corporate trust and agency services, clearing, balance sheet and cash management services, trade and payment services, structured export finance and international trade finance.
Global Transaction Banking generates primarily transaction services revenue.
In January 2003 the Bank sold substantial parts of its Global Securities Services business to State Street Corporation. The business units included in the sale were Global Custody, Global Funds Services (including Depotbank services), Agency Securities Lending, Global Performance Measurement and Benefit Payments businesses. In addition, Domestic Custody and Securities Clearing in the U.S. and the United Kingdom were included. Under the terms of the transaction, which closed on January 31, 2003, the Bank will receive cash payments over a one-year period, elements of which are variable depending on certain performance criteria relating to the business units being sold.
Products and Services
In this corporate division, revenues derive from transaction services. Transaction services products and services are primarily the following:
• Domestic Custody Services. In this product area, the core custodial services include settlements, safekeeping, clearing services, master custody, foreign exchange services and cash, network management and tri-party and collateral management. The primary customers for these products are financial institutions.
• Corporate Trust and Agency Services. In this product area, the Bank provides trust and payment services for bonds, commercial paper and medium-term note programs. The Bank provides services for asset-backed and mortgage-backed securities, commercial paper conduits and collateral debt obligations. The Bank services American depositary receipts, global shares and German registered shares. It also administers escrows, syndicated loans and project financings. Additionally, the Bank coordinates debt exchanges and debt restructurings. The Bank also performs custodial services related to the controlling of collateral documents and cash movements as it pertains to the buying and selling of mortgage loans before being securitized.
• U.S. Dollar and Euro Clearing Services. The Bank facilitates payments via many of the major clearing systems, including CHIPS (Clearing House Interbank Payment System), Fedwire, TARGET (the clearing system of the European Central Bank), and other clearing systems. The Bank also performs check processing, cash letter and collection items and settlement transactions out-sourced by other banks.
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• Multi-currency Clearing Services. Utilizing its branch network, the Bank provides its institutional clients with the means to settle their payments in a number of European and Asian currencies.
• Balance Sheet Management and Overnight Investments. The Bank supplements its core payment processing services with a number of liquidity management products including overnight sweep facilities, in which the Bank places customer funds in interest-bearing accounts overnight and in short-term investment instruments.
• The Trade and Payment Services area provides primarily cross-border payments, letters of credit, guarantees and short-term trade financing in support of their trade finance activities. The Bank's foreign exchange and hedging products permit clients to buy and sell currencies, as well as currency-, interest- and commodity-related hedging products. Additionally, the Bank offers a global trade management business, which enables clients to outsource trade-related activities. The Bank has also established a risk management services business in Europe to offer advice on managing risk in trade activities.
• The Structured Export Finance group structures, arranges and finances cross-border transactions. The Bank provides medium and long-term financing solutions for the export of capital goods. The Bank lends to exporters against collateral that is provided by government-owned export credit agencies. The Bank supports global exporters and producers of commodities by supplying competitive finance options for buyer's credit to help mitigate inherent risk. It works closely with these export credit agencies to help exporters reduce their country and commercial risks.
• The International Trade Finance group purchases trade finance instruments from its clients without recourse to them and provides a distribution channel for these trade finance products in the secondary market. With this financing, the Bank is helping its clients to reduce their cross-border risk. The Bank also provides liquidity for exporters and importers.
Private Clients and Asset Management Group Division
The Private Clients and Asset Management Group Division primarily serves retail as well as affluent clients and small corporate customers, and provides asset management services to retail and institutional clients.
At September 30, 2003, this group division included the following corporate divisions:
• Asset and Wealth Management
• Private & Business Clients
Asset and Wealth Management Corporate Division
Corporate Division Overview
Asset and Wealth Management is comprised of the former Asset Management Corporate Division and the Private Wealth Management business. Private Wealth Management incorporates the private banking activities not covered by the Private & Business Clients Corporate Division, and the Private Client Services business, which was transferred from the Corporate Banking & Securities Corporate Division. In May 2003, the Bank also transferred the management of its funds business from the Corporate Investments Group Division to the Asset Management Business Division.
Within the Asset Management Business Division, the Bank operates its global asset management businesses and serve a range of retail and institutional clients, including private individuals, insurance companies, pension funds, corporations, governments and charities. Within the Private Wealth Management business the Bank continues to serve Private Banking clients classified as ultra high net worth individuals. In addition, the Bank targets “corporate executives,” individuals whom the Bank views as having enhanced potential for future wealth. Corporate executives include various types of professionals, such as lawyers and consultants.
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Products and Services
Within the Asset Management Business Division, the Bank offers the following products and services:
• Retail Asset Management. Retail asset management business markets a range of investment products through mutual funds. These include equity and fixed income products that are both global, regional, country or industry-specific and are sold primarily to retail investors either directly or through financial intermediaries.
Among the Bank's most popular retail products are sector funds and funds of funds.
• Institutional Asset Management. The institutional business consists of active and passive fund management. The majority of the Bank's passive business was sold as part of the transaction with Northern Trust Corporation. Fees associated with this business represented less than 2% of the total Asset Management revenues in 2002.
• Active Fund Management. The Bank divides its active management for institutional funds into equity and fixed income products. The Bank's fund managers invest in equity and fixed income products that are global, regional, country or industry-specific.
• Passive/Quantitative Fund Management. The Bank has entered into a Preferred Provider Agreement with Northern Trust Corporation to ensure that the Bank can still continue to market to its customers a full suite of products, including those of a passive nature. The Bank will remain linked to the passive business within the German Passive Asset Management business, which was not part of the sale, and specialized passive products that the Bank has chosen strategically to continue investment management services.
• Real Estate Funds. DB Real Estate is one of the largest real estate investment managers globally (source: Pensions & Investments, the International Newspaper of Money Management), with more than 1,500 real estate professionals in 15 offices around the world. The Bank acquires and manages investments in commercial and residential properties and real estate securities on behalf of its institutional and private clients worldwide. The Bank's regional businesses have significant local market presence in North America, Australia, Asia Pacific and Europe. The Bank specializes in managing core, value-enhancing and high-yield property investments as well as investments in publicly traded real estate securities. The Bank offers several types of structures through which its clients may invest, including commingled funds, both closed and open-end, as well as investment programs that can be customized to meet an individual client's specific needs.
• Real Estate Private Equity. The Bank conducts its real estate principal investments through the Real Estate Opportunities Group. It invests in real estate and real estate-related assets, including under-performing commercial properties, development properties, real estate joint ventures and operating companies, distressed mortgage loan portfolios, commercial mortgage-backed securities, mezzanine loan investments, and passive investments in third-party real estate opportunity funds. The Bank invests globally on an opportunistic basis, acquiring assets and companies in markets that are undervalued, capital constrained, or where a pricing arbitrage exists. The Real Estate Opportunities Group seeks diversity by geography, property type and by type of investment and higher returns through the use of leverage.
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Hedge Funds. As an asset class, hedge funds have provided attractive risk-adjusted returns in most market environments and have offered portfolio diversification benefits to investors. The Bank has made a significant commitment to the absolute return asset class and is a leader in offering multi-manager and single-manager hedge funds (source: Institutional Investor). The Bank manages all of its hedge funds activities through a business group called DB Absolute Return Strategies (“ARS”). This group develops, manages and distributes funds in all major hedge fund strategies. The DB ARS hedge fund platform offers access to both the Bank's and third-party hedge fund managers. The Bank distributes its products globally to institutions and high net worth individuals. The Bank employs more than 100 professionals, with offices in New York, London, Frankfurt, Sydney, Tokyo and Summit, New Jersey.
Within the Private Wealth Management Business Division, the Bank offers the following products and services:
Loan and Deposit Products. Loan and deposit products include traditional deposit products (including current accounts, time deposits and savings accounts) as well as more specialized secured and unsecured lending. Clients are offered both standardized and more specialized finance and savings products, often in cooperation with mortgage banks.
In addition, clients are offered the option of buying securities on margin. In these transactions, the Bank funds clients' securities purchases with short-term loans, and the clients provide the Bank with collateral in the form of the purchased securities or other securities.
Advisory Services. In advisory services, relationship managers provide investment advice to clients whose securities are deposited with the Bank in accounts over which the Bank does not exercise investment discretion. This advice relates to new financial products, such as equity initial public offerings and new investment funds, as well as products in secondary markets. Services also include advice on wealth management and growth, including tax-optimized investments and estate planning. Investment advice covers stocks, bonds, mutual funds, derivatives (securities brokerage) and alternative investments. The relationship managers also advise their clients on the products of third parties.
Transaction Services. Transaction services consist of fees and commissions on bank account activities and transactions. They include account carrying charges, commissions on checks, and ATM, credit card transactions and foreign currency transaction fees. The Bank also offers its clients credit cards and direct debit cards.
Portfolio/Fund Management. In discretionary portfolio management, the Bank's relationship managers have discretion to manage their clients' investments within the clients' general guidelines. The relationship managers invest client funds in various investment products, such as stocks, bonds, mutual funds and derivatives. In connection with discretionary portfolio management services, the Bank usually charges the client a fee for each transaction as well as a recurring base fee.
Other Services. Other private banking services include the following services, which are generally provided as fee-based services in connection with advisory services and discretionary portfolio management:
• private financial planning
• trust business (in which the Bank establishes and administers trusts on behalf of its customers)
• art and lifestyle services.
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In addition, the brokers of the Private Client Services consult with clients on asset allocation strategies, risk management, investment partnerships, private placements, asset manager selection, and alternative investments. Within Private Client Services, the Corporate and Executives Group provides a host of services to companies and their executives. These services range from employee stock option programs to aiding executives with diversifying concentrated stocks. Private Client Services also provides equity trading to 'middle market' institutional investors and custody and consulting services to individuals and institutions. Furthermore, the recently acquired Rüd, Blass & Cie AG Bankgeschäft.
Private & Business Clients Corporate Division
Corporate Division Overview
The Private & Business Clients Corporate Division was established effective January 1, 2003. This corporate division combined the Bank’s Personal Banking clients, its Private Banking clients not classified as ultra high net worth individuals and its small and medium sized corporate customers formerly served by CIB under a single management and the Deutsche Bank brand. Private & Business Clients serves these customer groups in line with their needs in the Bank's key markets of Germany, Italy and Spain, as well as in Belgium, Portugal, Poland and the Netherlands.
Products and Services
Generally, similar banking products and services are offered throughout Europe, except that there are some variations from country to country to meet local market, regulatory and customer requirements. The following is a description of the products and services offered in the Private & Business Corporate Division.
Loan and Deposit Products. The most significant loan and deposit products are building financing (including mortgages) and consumer and commercial loans, as well as traditional current accounts, savings accounts and time deposits. Loan and Deposit Products include also the home loan and savings business in Germany, offered through the Bank’s subsidiary DB Bauspar AG.
Brokerage & Portfolio/Fund Management. In this area, investment advice, brokerage services, discretionary portfolio management and securities custody services are provided.
Financial & Account Services. Financial & Account Services comprise administration of current accounts in local and foreign currency as well as settlement of domestic and cross-border payments on these accounts. Furthermore they comprise the purchase and sale of payment media and the sale of insurance products, home loan and savings contracts or credit cards. In Italy, Private & Business Clients issues credit cards and processes credit card payments under the Bankamericard brand.
Corporate Investments Group Division
The Corporate Investments Group Division encompasses a broad array of alternative assets, including the Bank's private equity and venture capital investments, fund investments as well as its portfolio of industrial holdings. The Bank aims to provide financial, strategic, operational and managerial capital to enhance the values of the portfolio companies in which the group division invests.
The Bank believes that the group division enhances its portfolio management and risk management capability, enabling execution of a diversification strategy across various sectors and regions. The group division is currently in the course of reducing significantly its equity and other exposure. In this context a number of significant transactions have been entered into in the course of 2003, including the sale of much of the late-stage private equity portfolio to the former Corporate Investments management team, a securitization of fund investments and a sale of certain fund investments.
The Corporate Investments Group Division includes the following three business divisions:
• The DB Investor Business Division encompasses the Bank’s substantial holdings in industrial corporations, primarily in Germany.
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• The Private Equity Business Division is comprised of the Bank's proprietary private equity investing arm as well as certain client related businesses.
• The Other Corporate Investments Business Division holds the Bank's other investments.
DB Investor–Industrial Holdings
With respect to industrial holdings, DB Investor holds equity interests in a diverse number of manufacturing and financial services corporations. The largest two of these industrial holdings, by market value at September 30, 2003, were an 11.8% interest in DaimlerChrysler AG and a 2.5% interest in Allianz AG. Currently, over 97% of DB Investor's holdings are in German corporations. In the second quarter of 2002 the Bank sold its remaining stake in Munich Re. In the third and fourth quarter of 2002, its stakes in Buderus AG, RWE AG and Continental AG were sold. The Bank's investment in Südzucker AG was significantly reduced from 10.9% to 4.8% in the fourth quarter of 2002. In the second quarter of 2003, the Bank’s investment in Allianz AG was reduced from 3.2% to 2.5% and its investment in mg technologies AG was sold. In August 2003, the Bank sold its investment in HeidelbergCement AG.
Rather than engage in proprietary trading, which involves buying and selling securities on a day-to-day basis, DB Investor usually holds investments in listed securities for several years. The majority of the larger shareholdings in listed companies have been in the portfolio for more than 20 years.
DB Investor executes its strategy of maximizing value from the industrial holding portfolio by selling shares strategically taking into account market conditions and the prospects for profit and share price appreciation at the individual companies.
Private Equity
The Private Equity business has historically invested both on behalf of clients and on the Bank's own account in private equity directly and through funds (including secondary investments in funds), including venture capital opportunities and leveraged buy-out funds.
In February 2003, the Bank divested much of its late-stage portfolio to the former Corporate Investments management team in a € 1.5 billion transaction. Subsequent to this divestment, the Private Equity business is largely comprised of Morgan Grenfell Private Equity funds, a retained 20% interest in the late stage portfolio (retained to cover outstanding liabilities associated with this investment portfolio, principally liabilities to employees and managers), its venture capital investments, its fund investments and certain later stage investments focused on Germany and Latin America).
In July 2003, the Bank sold its investments in Tele Columbus GmbH and in Tele Columbus Ost GmbH (formerly SMATcom GmbH).
Morgan Grenfell Private Equity (MGPE) funds are set up to allow a number of external investors to invest in selected companies. MGPE actively acquires investments in companies and places them with the funds. The funds generally keep their investments for a period of years until the company is deemed fit for a public offering or a resale to an unrelated party. MGPE receives revenues as a fund-manager. The Private Equity business is also an investor in the funds.
The venture capital investment activity focuses on early-stage companies. The equity element of these investments ranges from €3 to €30 million and targets technology, telecommunications and health care enterprises in North America, Europe and Israel.
The fund business invests directly into funds and also has acted as a secondary investor. The management of its fund of funds was transferred to the Bank’s Asset and Wealth Management Corporate Division in May 2003. In August 2003, some € 400 million of funds were securitized in a transaction that reduced Private equity’s on-balance sheet exposure by € 110 million. In July 2003, a definitive agreement was signed in respect of the sale of certain fund investments that will reduce Private Equity’s on-balance sheet exposure by some € 350 million. This transaction is subject to a staggered closing process, and the transfer of all interests in the funds concerned is expected to be completed by November 30, 2003.
In certain cases the Private Equity business takes a controlling interest in companies. The revenues and expenses of these companies are consolidated.
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Other Corporate Investments
Other Corporate Investments manages certain other equity investments and credit exposures.
In February 2002, the Bank consolidated its real estate activities under DB Real Estate which was transferred to, and is included in, the Asset Management Business Division. Certain of the Bank's real estate holdings were excluded from the transfer.
The Bank sold its commercial finance business in North America to GE Commercial Finance in October 2002, and sold its consumer finance business in North America to E*TRADE Bank in December 2002.
In August 2003 the Bank divested its holding in the Gerling insurance group. Following the closing of this transaction in August 2003, the Bank increased its stake in Atradius, a global credit insurer, to 35.3%. As part of the agreement, the Bank agreed to increase this stake to 38.4% in 2003. The Bank manages this investment with Swiss Re as thee main co-investor and accounts for it under the equity method.
Other investments include:
• EUROHYPO AG, after the aforementioned merger of the Bank's mortgage banking subsidiary, the share in the combined entity was 34.6%, with Commerzbank taking a 34.4% share and Dresdner Bank taking a 28.7% share (free-float 2.3%). In connection with the merger, in December 2002, part of the Bank's London-based real estate investment banking business was contributed to EUROHYPO AG. On December 31, 2002, the Bank's share of the combined entity was 34.6%. Furthermore, in January 2003, part of the German commercial real estate financing activities and Dresdner Bank's U.S. based real estate investment banking team were transferred to the combined entity. The three transfers resulted in an increase in the Bank's share of EUROHYPO AG to 37.6% (as of August 2003). Since the merger in August 2002 this investment has been accounted for under the equity-method.
• maxblue Americas, a joint venture run by the Bank and Banco do Brazil, is a brokerage providing a variety of advisory and investment management products and services through internet-based technology, sophisticated investment centers and personal consultants.
Corporate Center
Corporate Center comprises those functions that support, at the Group level, all of the Bank's business divisions. In particular, the Corporate Center assists the Board of Managing Directors with cross-divisional coordination. The purpose of Corporate Center is not to generate revenues, but to house strategic functions in support of the Board of Managing Directors. Corporate Center includes functions such as the Group's accounting, tax, treasury, risk management, human resources, corporate development and legal functions.
Financial Year
The financial year of the Bank is the calendar year.
Auditors
The independent auditors of the Bank are KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirstschaftprüfungsgesellschaft (“KPMG”), Marie-Curie-Strasse 30, 60439 Frankfurt am Main, Germany. KPMG audited the Consolidated Financial Statements, which were prepared in accordance with U.S. GAAP. The Consolidated Financial Statements fulfill the requirements of Section 292a HGB and an unqualified auditor's report has been provided.
Litigation
Other than set out herein the Bank is not, or during the last two financial years has not been, involved (whether as defendant or otherwise) in, nor does it have knowledge of any threat of any legal, arbitration, administrative
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or other proceedings the result of which may have, in the event of an adverse determination, a significant effect on the financial condition of the Bank presented in this Offering Circular.
Due to the nature of the Bank´s business, the Bank and its subsidiaries are involved in litigation and arbitration proceedings in Germany and in a number of jurisdictions outside Germany, including the United States, arising in the ordinary course of their businesses. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal and regulatory proceedings, the Bank does not believe that the outcome of these proceedings will have a material adverse effect on its financial condition or results of its operations.
On December 20, 2002, the U.S. Securities and Exchange Commission, the National Association of Securities Dealers, the New York Stock Exchange, the New York Attorney General, and the North American Securities Administrators Association (on behalf of state securities regulators) announced an agreement in principle with ten investment banks to resolve investigations relating to research analyst independence. Deutsche Bank Securities Inc. ("DBSI"), the Bank´s U.S. SEC-registered broker-dealer subsidiary, was one of the ten investment banks. Pursuant to the agreement in principle, and subject to finalization and approval of the settlement by DBSI, the Securities and Exchange Commission and state regulatory authorities, DBSI agreed, among other things: (i) to pay € 48 million, of which € 24 million is a civil penalty and € 24 million is for restitution to investors, (ii) to adopt internal structural and operational reforms that will further augment the steps it has already taken to ensure research analyst independence and promote investor confidence, (iii) to contribute € 24 million spread over five years to provide third-party research to clients, (iv) to contribute € 5 million toward investor education, and (v) to adopt restrictions on the allocation of shares in initial public offerings to corporate executives and directors. On April 28, 2003, U.S. securities regulators announced a final settlement of the research analyst investigations with ten investment banks. Shortly before this date, DBSI located certain e-mails that were inadvertently not produced during the course of the investigation. As a result, DBSI was not part of the group of investment banks settling on that day. DBSI has cooperated fully with the regulators to ensure that all relevant e-mails are produced and is hopeful that this matter will be resolved shortly.
In May 2002, Dr. Leo Kirch personally and as an assignee initiated legal action against Dr. Breuer and the Bank alleging that a statement made by Dr. Breuer (then the Spokesman of the Bank’s Board of Managing Directors) in an interview with Bloomberg television on February 4, 2002 regarding the Kirch Group was in breach of laws and financially damaging to Kirch. On February 18, 2003, the Munich District Court No. I issued a declaratory judgement to the effect that the Bank and Dr. Breuer were jointly and severally liable for damages to Dr. Kirch, TaurusHolding GmbH & Co. KG and PrintBeteiligungs GmbH as a result of the interview statement. Dr. Kirch would have to file a new lawsuit for damages; in such proceedings he would have to prove that the statement caused any financial damages and the amount of such damages. The Bank has stated that Dr. Breuer’s statement at the time was nothing beyond what had already been publicly known. The Bank has appealed the declaratory judgment. The appeal is presently pending with the Munich Superior Court.
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APPENDIX A: SUPPORT UNDERTAKING
This Agreement (the “Agreement”), dated December 2, 2003, is entered into between Deutsche Bank Aktiengesellschaft, a German stock corporation, (the “Bank”) and Deutsche Bank Capital Funding LLC V, a Delaware limited liability company (the “Company”).
WITNESSETH:
WHEREAS, the Bank owns the Common Security of the Company;
WHEREAS, pursuant to the LLC Agreement (as defined below), the Company will issue the Class A Preferred Security to the Bank and all of the Class B Preferred Securities to the Trust;
WHEREAS, pursuant to the Trust Agreement (as defined below), the Trust will issue the Trust Preferred Securities with the same terms as, and representing corresponding amounts of, the Class B Preferred Securities;
WHEREAS, the Company intends to use the proceeds from the issuance of the Class B Preferred Securities to purchase subordinated notes of the Bank;
WHEREAS, the Company may from time to time declare capital payments on the Class B Preferred Securities pursuant to and in accordance with the LLC Agreement; and
WHEREAS, the Bank wishes to undertake for the benefit of the Company and the holders of the Class B Preferred Securities that (i) the Bank will maintain direct or indirect ownership of the Class A Preferred Security and the Common Security, (ii) the Company will at all times be in a position to meet its obligations, including its obligation to pay Capital Payments and amounts due upon redemption of the Class B Preferred Securities, including in each case, Additional Amounts thereon, if any, and (iii) in liquidation or dissolution, the Company will have sufficient funds to pay the Liquidation Preference Amounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Certain Definitions.
“Agreement” has the meaning specified in the preamble.
“Bank” has the meaning specified in the preamble.
“Capital Payments” mean any capital payments or other distributions at any time after the date hereof declared by the Board of Directors of the Company (or deemed declared in accordance with the LLC Agreement), but not yet paid, on the Class B Preferred Securities.
“Class A Preferred Security” means the class of preferred share in the Company designated as Class A.
“Class B Preferred Securities” mean the class of preferred securities in the Company designated as Class B, with a liquidation preference amount of € 100 per security.
“Common Security” means the common security, without par value, of the Company.
“Company” has the meaning specified in the preamble.
“Independent Enforcement Director” means the independent member of the board of directors of the Company appointed by the holders of the Class B Preferred Securities entitled to vote thereon upon the occurrence of certain events in accordance with, and under the terms set forth in, the LLC Agreement.
“Liquidation Preference Amounts” mean the stated liquidation preference amounts of the Class B Preferred Securities and any other amounts due and payable under the LLC Agreement upon the
A-1
voluntary or involuntary liquidation, dissolution, winding up or termination of the Company to the holders of the Class B Preferred Securities.
“LLC Agreement” means the limited liability company agreement of the Company dated as of October 22, 2003, as amended and restated as of December 2, 2003 and as the same may be further amended from time to time in accordance with its terms.
“Payment Period” has the meaning set forth in the LLC Agreement.
“Person” means any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization.
“Preferred Securities” mean the Class A Preferred Security and the Class B Preferred Securities, collectively.
“Trust” means Deutsche Bank Capital Funding Trust V, a Delaware statutory trust established pursuant to a Trust Agreement dated as of October 22, 2003, as amended and restated as of December 2, 2003 and as the same may be further amended from time to time in accordance with its terms.
“Trust Preferred Securities” means the Noncumulative Trust Preferred Securities issued by the Trust.
Section 2. Support Undertaking.
(a) The Bank undertakes to ensure that the Company will at all times be in a position to meet its obligations, including its obligations to pay Capital Payments and amounts due upon redemption of the Class B Preferred Securities, including in each case, Additional Amounts thereon, if any, and to cause the Company to pay such obligations as and when they become due and payable.
(b) The Bank undertakes to ensure that in the event of any liquidation of the Company, the Company will have sufficient funds to pay the Liquidation Preference Amounts (including accrued and unpaid Capital Payments for the then current Payment Period to the date of liquidation and Additional Amounts, if any).
(c) The obligations of the Bank under this Section 2 will be subordinated to all senior and subordinated debt obligations of the Bank, and will rank pari passu with the most senior preference shares of the Bank, if any, and will rank senior to any other preference shares and the common shares of the Bank.
(d) This Agreement shall not constitute a guarantee or undertaking of any kind that the Company will at any time have sufficient assets, or be authorized pursuant to the LLC Agreement, to declare a Capital Payment.
Section 3. Third Party Beneficiaries and Enforcement of Rights.
(a) The parties hereto agree that this Agreement is entered into for the benefit of the Company and all current and future holders of the Class B Preferred Securities and that the Company and any holder of any such Securities may severally enforce the obligations of the Bank under Section 2.
(b) The parties hereto acknowledge that, as provided in the LLC Agreement, if a holder of Class B Preferred Securities has given notice to the Company that the Bank has failed to pay any amount then due hereunder and such failure continues for sixty (60) days or more after such notice is given, the holders of the Class B Preferred Securities shall have the right to appoint the Independent Enforcement Director who will be required to enforce the rights of the Company under this Agreement.
Section 4. No Exercise of Rights. The Bank will not exercise any right of set-off, counterclaim or subrogation that it may have against the Company as long as any Class B Preferred Securities are outstanding.
A-2
Section 5. Burden of Proof. Any failure of the Company to pay Capital Payments, or the Liquidation Preference Amounts (or any part thereof), plus, in either case, Additional Amounts, if any, shall constitute prima facie evidence of a breach by the Bank of its obligations hereunder. The Bank shall have the burden of proof that the occurrence of such breach results neither from its negligent nor its intentional misconduct.
Section 6. No Senior Support to Other Subsidiaries. The Bank undertakes that it shall not give any guarantee or similar undertaking with respect to, or enter into any other agreement relating to the support or payment of any amounts in respect of any other preference shares (or instruments ranking pari passu with or junior to preference shares) of any other affiliated entity that would in any regard rank senior in right of payment to the Bank’s obligations under this Agreement, unless the parties hereto modify this Agreement such that the Bank’s obligations under this Agreement rank at least pari passu with, and contain substantially equivalent rights of priority as to payment as, such guarantee or support.
Section 7. Continued Ownership of the Class A Preferred Security and the Company Common Security. The Bank undertakes to maintain direct or indirect ownership of the Class A Preferred Security and the Company Common Security so long as any Class B Preferred Securities remain outstanding.
Section 8. No dissolution of the Company. Under the terms of the LLC Agreement and to the fullest extent permitted by law, the Bank shall not permit the Company to be dissolved until all obligations under the Support Undertaking have been paid in full pursuant to its terms.
Section 9. Modification and Termination. So long as any Class B Preferred Securities remain outstanding, this Agreement may not be modified or terminated without the consent of 100% of the holders of the Class B Preferred Securities as provided in the LLC Agreement, except for such modifications that are not adverse to the interests of the holders of the Class B Preferred Securities.
Section 10. No Assignment. So long as any Class B Preferred Securities remain outstanding, the Bank shall not assign its rights or obligations under this Agreement to any Person without the consent of the holders of such Class B Preferred Securities.
Section 11. Successors. This Agreement will be binding upon successors to the parties.
Section 12. Severability. Should any provision of this Agreement be found invalid, illegal or unenforceable for any reason, it is to be deemed replaced by the valid, legal and enforceable provision most closely approximating the intent of the parties, as expressed in such provision, and the validity, legality and enforceability of the remainder of this Agreement will in no way be affected or impaired thereby.
Section 13. Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with, the laws of the Federal Republic of Germany and the parties irrevocably submit to the non-exclusive jurisdiction of such German courts as have jurisdiction over civil matters arising in Frankfurt am Main.
A-3
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be duly executed and delivered by their respective authorized officers as of the date first written above.
DEUTSCHE BANK AKTIENGESELLSCHAFT
By: Name: Title:
By: Name: Title:
DEUTSCHE BANK CAPITAL FUNDING LLC V
By: Name: Title:
By: Name: Title:
A-4
FINANCIAL STATEMENTS AND OTHER INFORMATION ONDEUTSCHE BANK GROUP
Excerpts from Annual Report for the year ended December 31, 2002 (Consolidated Financial
Statements) according to § 292a of the German Commercial Code (Handelsgesetzbuch)
Income Statement for the years ended December 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . F-2
Statement of Comprehensive Income for the years ended December 31, 2002, 2001 and 2000 . . F-3
Net interest revenues after provision for loan losses 5,095 7,596 6,550
Commissions and fees from fiduciary activities 3,926 3,537 3,908Commissions, broker’s fees, markups on securities underwriting and other securities activities 4,319 4,557 5,170Fees for other customer services 2,589 2,633 2,615Insurance premiums [1] 744 2,717 2,837Trading revenues, net [1], [22], [30] 4,024 6,031 7,625Net gains on securities available for sale [1], [5] 3,523 1,516 3,670Net income (loss) from equity method investments [1], [6] (887) (365) 300Other revenues [1] 1,123 295 1,326
Total noninterest revenues 19,361 20,921 27,451
Compensation and benefits [1], [18], [24], [30] 11,358 13,360 13,526Net occupancy expense of premises [1] 1,291 1,334 1,090Furniture and equipment [1] 230 357 568IT costs [1] 2,188 2,343 2,215Agency and other professional service fees 761 1,080 1,151Communication and data services 792 891 762Policyholder benefits and claims [1] 759 3,002 4,003Other expenses [1] 2,883 3,182 2,921Goodwill amortization/impairment [1], [3], [12] 62 871 771Restructuring activities [25] 583 294 125
Total noninterest expenses 20,907 26,714 27,132
Income before income tax expense (benefit) and cumulative effect of accounting changes 3,549 1,803 6,869Income tax expense [1], [26] 372 434 2,643Income tax expense (benefit) from the change in effective tax rate and the reversing effect [26] 2,817 995 (9,287)
Income before cumulative effect of accounting changes, net of tax 360 374 13,513Cumulative effect of accounting changes, net of tax [2] 37 (207) –
Net income 397 167 13,513
in € [18], [27] 2002 2001 2000
Earnings per common shareBasic
Income before cumulative effect of accounting changes, net of tax 0.58 0.60 22.00Cumulative effect of accounting changes, net of tax 0.06 (0.33) –Net income 0.64 0.27 22.00
DilutedIncome before cumulative effect of accounting changes, net of tax 0.57 0.60 21.72Cumulative effect of accounting changes, net of tax 0.06 (0.33) –Net income 0.63 0.27 21.72
Cash dividends declared per common share 1.30 1.30 1.15
F-2
Statement of Comprehensive IncomeDeutsche Bank Group
Statement of Comprehensive Income
The accompanying notes are an integral part of the Consolidated Financial Statements.
in € m. 2002 2001 2000
Net income 397 167 13,513
Deferred tax on unrealized net gains on securities available for sale relating to 1999 and 2000 tax rate changes in Germany1 2,817 995 –Unrealized gains (losses) on securities available for sale
Unrealized net losses arising during the year, net of tax and other2 (5,596) (2,496) (1,185)Net reclassification adjustment for realized net gains, net of applicable tax and other3 (3,527) (1,423) (1,516)
Unrealized net gains (losses) on derivatives hedging variability of cash flows, net of tax4 2 (1) –Minimum pension liability, net of tax5 (8) – –Unrealized foreign currency translation gains (losses) arising during the year, net of tax6 (1,602) 85 432
Total other comprehensive income (loss) (7,914) (2,840) (2,269)
Comprehensive income (loss) (7,517) (2,673) 11,244
1 Amounts relate to the reversal effect of a tax benefit realized in 1999 and 2000 due to tax rate changes in 1999 and 2000.2 Amounts are net of an income tax benefit of € 69 million, € 105 million and € 820 million for the years ended December 31, 2002, 2001 and 2000, respectively, and adjustments to insurance
policyholder liabilities and deferred acquisition costs of € (230) million, € (610) million and € 5 million for the years ended December 31, 2002, 2001 and 2000, respectively.3 Amounts are net of applicable income tax expense of € 15 million, € 144 million and € 1,702 million for the years ended December 31, 2002, 2001 and 2000, respectively, and adjustments
to insurance policyholder liabilities and deferred acquisition costs of € 110 million, € (44) million and € 429 million for the years ended December 31, 2002, 2001 and 2000, respectively.4 The amount is net of an income tax expense for the year ended December 31, 2002 and an income tax benefit for the year ended December 31, 2001.5 Amount is net of an income tax benefit of € 3 million for the year ended December 31, 2002.6 Amounts are net of an income tax (benefit) expense of € 26 million, € (41) million and € (35) million for the years ended December 31, 2002, 2001 and 2000, respectively.
F-3
Balance SheetDeutsche Bank Group
Assets
Liabilities and Shareholders’ Equity
The accompanying notes are an integral part of the Consolidated Financial Statements.
Total deposits 327,625 374,089Trading liabilities [1], [4], [32] 131,212 121,329Central bank funds purchased and securities sold under repurchase agreements [1], [32] 90,709 81,375Securities loaned [1], [32] 8,790 7,620Other short-term borrowings [14], [32] 11,573 20,472Acceptances outstanding 99 553Insurance policy claims and reserves [23] 8,557 35,241Accrued interest payable 4,668 7,423Other liabilities [24], [25] 37,695 58,943Long-term debt [15], [32] 104,055 166,908Trust preferred securities [16], [32] 3,103 4,076Obligation to purchase common shares [17] 278 –Total liabilities 728,364 878,029Common shares, no par value, nominal value of € 2.561 1,592 1,591Additional paid-in capital 11,199 11,253Retained earnings 22,087 22,619Common shares in treasury, at cost2 (1,960) (479)Equity classified as obligation to purchase common shares (278) –Share awards 955 899Accumulated other comprehensive income [1]
Deferred tax on unrealized net gains on securities available for sale relating to 1999 and2000 tax rate changes in Germany (3,043) (5,860)Unrealized net gains on securities available for sale, net of applicable tax and other 156 9,279Unrealized net gains (losses) on derivatives hedging variability of cash flows, net of tax 1 (1)Minimum pension liability, net of tax (8) –Foreign currency translation, net of tax (710) 892
Total accumulated other comprehensive income (3,604) 4,310Total shareholders’ equity [18], [20] 29,991 40,193Total liabilities and shareholders’ equity 758,355 918,222
Commitments and contingent liabilities (Notes [11], [30] and [33]).1 Issued: 2002: 621,854,246 shares; 2001: 621,568,446 shares.2 Common shares in treasury, at cost: 2002: 36,407,292 shares; 2001: 7,092,821 shares.
in € m. [Notes] Dec 31, 2002 Dec 31, 2001
Cash and due from banks [1], [19], [32] 8,979 10,388Interest-earning deposits with banks [10], [32] 25,691 37,986Central bank funds sold and securities purchased under resale agreements [1], [32] 117,689 103,685Securities borrowed [1], [32] 37,569 40,318Trading assets [1], [4], [10], [32] 297,062 293,653
of which € 70 billion and € 16 billion were pledged to creditors and canbe sold or repledged at December 31, 2002 and 2001, respectively
Securities available for sale [1], [5], [10], [32] 21,619 71,666of which € 736 million and € 524 million were pledged to creditors and can be sold or repledged at December 31, 2002 and 2001, respectively
Other investments [6], [32] 10,768 11,997Loans, net [1], [7], [8], [9], [10], [31], [32] 167,303 259,838Premises and equipment, net [1], [10], [11] 8,883 9,806Goodwill [1], [2], [12] 8,372 8,741Other intangible assets, net [1], [2], [12] 1,411 206Other assets related to insurance business [23] 7,797 13,875Due from customers on acceptances 99 553Accrued interest receivable 4,208 5,907Other assets 40,905 49,603Total assets 758,355 918,222
F-4
Statement of Changes in Shareholders’ EquityDeutsche Bank Group
Statement of Changes in Shareholders’ Equity
The accompanying notes are an integral part of the Consolidated Financial Statements.
in € m. 2002 2001 2000
Common sharesBalance, beginning of year 1,591 1,578 1,573Common shares distributed under employee benefit plans 1 13 5Balance, end of year 1,592 1,591 1,578Additional paid-in capitalBalance, beginning of year 11,253 10,876 10,556Common shares distributed under employee benefit plans 21 462 188Net gains (losses) on treasury shares sold (129) (85) 132Other 54 – –Balance, end of year 11,199 11,253 10,876Retained earningsBalance, beginning of year 22,619 23,331 10,581Net income 397 167 13,513Cash dividends declared and paid (800) (801) (706)Other (129) (78) (57)Balance, end of year 22,087 22,619 23,331Common shares in treasury, at costBalance, beginning of year (479) (119) (61)Purchases of shares (30,755) (37,032) (35,731)Sale of shares 28,441 36,090 35,366Treasury shares distributed under employee benefit plans 833 582 307Balance, end of year (1,960) (479) (119)Equity classified as obligation to purchase common sharesBalance, beginning of year – – –Additions (330) – –Deductions 52 – –Balance, end of year (278) – –Share awards – common shares issuableBalance, beginning of year 1,666 1,883 821Deferred share awards granted, net 1,098 487 1,356Deferred shares distributed (809) (704) (294)Balance, end of year 1,955 1,666 1,883Share awards – deferred compensationBalance, beginning of year (767) (1,016) (538)Deferred share awards granted, net (1,098) (487) (1,356)Amortization of deferred compensation, net 865 736 878Balance, end of year (1,000) (767) (1,016)Accumulated other comprehensive incomeBalance, beginning of year 4,310 7,150 9,419Change in deferred tax on unrealized net gains on securities available for sale relating to 1999 and 2000 tax rate changes in Germany 2,817 995 –Change in unrealized net gains on securities available for sale, net of applicable tax and other (9,123) (3,919) (2,701)Change in unrealized net gains/losses on derivatives hedging variability of cash flows, net of tax 2 (1) –Change in minimum pension liability, net of tax (8) – –Foreign currency translation, net of tax (1,602) 85 432Balance, end of year (3,604) 4,310 7,150
Total shareholders’ equity, end of year 29,991 40,193 43,683
F-5
Cash Flow StatementDeutsche Bank Group
Cash Flow Statement
The accompanying notes are an integral part of the Consolidated Financial Statements.
in € m. 2002 2001 2000
Net income 397 167 13,513Adjustments to reconcile net income to net cash used in operating activities
Provision for loan losses 2,091 1,024 478Restructuring activities 583 294 125Gain on sale of securities available for sale, other investments, loans and other (4,928) (2,806) (4,161)Deferred income taxes, net 2,480 (159) (8,332)Impairment, depreciation and other amortization and accretion 2,845 4,886 3,320Cumulative effect of accounting changes, net of tax (37) 207 –Share of net loss (income) from equity method investments 753 278 (338)
Income adjusted for noncash charges, credits and other items 4,184 3,891 4,605Net change in
Net cash used in operating activities (783) (13,211) (33,336)Net change in
Interest-earning deposits with banks 7,800 9,232 (11,238)Central bank funds sold and securities purchased under resale agreements (14,004) (47,959) 36,185Securities borrowed 2,749 33,138 (7,272)Loans 9,634 5,802 (28,064)
Proceeds fromSale of securities available for sale 25,835 41,128 43,058Maturities of securities available for sale 7,731 2,746 17,369Sale of other investments 5,089 7,096 4,405Sale of loans 9,508 16,185 16,496Sale of premises and equipment 717 1,015 344
Purchase ofSecurities available for sale (22,464) (34,289) (55,463)Other investments (4,474) (7,976) (7,702)Loans (2,364) (8,903) (7,586)Premises and equipment (1,696) (3,689) (2,164)
Net cash received (paid) for business combinations/divestitures (1,110) 924 (1,096)Other, net 687 958 252Net cash provided by (used in) investing activities 23,638 15,408 (2,476)Net change in
Deposits (41,278) 22,548 13,623Securities loaned and central bank funds purchased and securities sold underrepurchase agreements 7,603 (16,096) (12,629)Other short-term borrowings 274 (15,151) 9,571
Issuances of long-term debt and trust preferred securities 40,245 32,958 61,233Repayments and extinguishments of long-term debt and trust preferred securities (27,201) (22,884) (40,371)Issuances of common shares 73 320 193Purchases of treasury shares (30,755) (37,032) (35,731)Sale of treasury shares 28,665 36,024 35,514Cash dividends paid (800) (801) (706)Other, net (455) (522) (644)Net cash (used in) provided by financing activities (23,629) (636) 30,033Net effect of exchange rate changes on cash and due from banks (635) 325 2,710Net increase (decrease) in cash and due from banks (1,409) 1,886 (3,069)Cash and due from banks, beginning of the year 10,388 8,502 11,571Cash and due from banks, end of the year 8,979 10,388 8,502Interest paid 31,349 48,099 46,250Income taxes paid, net 408 1,251 1,819Noncash investing activities
Transfer from available for sale securities to trading assets – 22,101 507Transfer from trading assets to available for sale securities – 14,938 –
F-6
[1] Significant Accounting Policies
Deutsche Bank Aktiengesellschaft (“Deutsche Bank” or the “Parent”) is a stockcorporation organized under the laws of the Federal Republic of Germany.Deutsche Bank together with all majority-owned subsidiaries (the “Group”) is aglobal provider of a full range of corporate and investment banking, privateclients and asset management products and services. For a discussion of theGroup’s business segment information, see Note [28]. The accompanying consolidated financial statements are stated in euros andhave been prepared in accordance with accounting principles generallyaccepted in the United States of America (“U.S. GAAP”). Certain prior periodamounts have been reclassified to conform to the current presentation. The preparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets and liabili-ties at the balance sheet date, and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from manage-ment’s estimates. The following is a description of the significant accounting policies of the Group.
The consolidated financial statements include Deutsche Bank together with allmajority-owned subsidiaries. All material intercompany transactions and accountshave been eliminated. Investments in enterprises are accounted for using the equity method when theGroup is not the majority owner but has the ability to significantly influence oper-ating and financial policies of the investee. Generally, this is when the Group hasan investment between 20% and 50% of the voting stock of a corporation or3% or more of a limited partnership. Other factors that are considered in deter-mining whether the Group has significant influence include representation onthe board of directors (supervisory board in the case of German stock corpora-tions) and material intercompany transactions. These investments are reportedin other investments and the pro-rata share of their income or loss, on aU.S. GAAP basis, as well as disposition gains and losses, are included in netincome from equity method investments. Equity method losses in excess of theGroup’s carrying amount of the investment in the enterprise are charged againstother assets held by the Group related to the investee. Prior to January 1, 2002,the difference between the Group’s cost and its proportional underlying equity innet assets of the investee at the date of investment (“equity method goodwill”)was amortized on a straight-line basis against net income from equity methodinvestments over a period not exceeding fifteen years. Effective January 1, 2002,the Group adopted SFAS No. 142, “Goodwill and Other Intangible Assets”(“SFAS 142”). In accordance with SFAS 142, equity method goodwill is no longeramortized.
NotesDeutsche Bank Group
Principles of Consolidation andOther Investments
F-7
Foreign CurrencyTranslation
Reverse Repurchaseand RepurchaseAgreements
Special Purpose Entities (“SPEs”) are legal entities created for a particular pur-pose and are used in structuring a wide range of capital markets products.Unless the SPE meets the criteria for a Qualifying Special Purpose Entity (“QSPE”)as defined in SFAS No. 140, “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities” (“SFAS 140”) (see Asset Securitiza-tions below), the Group consolidates SPEs when it is deemed to control and/orretain the majority of the risks and rewards of the SPE. The underlying holdings of designated investment companies that are consoli-dated are included in other investments, as they are primarily nonmarketableequity securities, and are carried at fair value. Changes in fair value of the under-lying holdings are included in other revenues. Direct investments over which the Group does not have significant influence,including investments in venture capital companies and nonmarketable equitysecurities, are included in other investments and carried at historical cost, net ofdeclines in fair value below cost that are deemed to be other than temporary.Gains and losses upon sale or impairment are included in other revenues.
Assets and liabilities denominated in currencies other than an entity’s functionalcurrency are translated into its functional currency using the period endexchange rates, and the resulting transaction gains and losses are reported innoninterest revenues or noninterest expenses.In consolidation, the financial statements of entities with functional currenciesother than the euro are translated into the euro and the resulting translationgains and losses, net of any hedge and tax effects, are reported in accumulatedother comprehensive income within shareholders’ equity. Revenues andexpenses are translated at the weighted average rate during the year whereasassets and liabilities are translated at the period end rate.
Securities purchased under resale agreements (“reverse repurchase agree-ments”) and securities sold under agreements to repurchase (“repurchaseagreements”) are generally treated as collateralized financings and are carried atthe amount of cash disbursed and received, respectively. Generally, the partydisbursing the cash takes possession of the securities serving as collateral forthe financing. Securities purchased under resale agreements consist primarily ofOECD country sovereign bonds or sovereign guaranteed bonds. Securities ownedand pledged as collateral under repurchase agreements in which the counter-party has the right by contract or custom to sell or repledge the collateral are disclosed on the Consolidated Balance Sheet in accordance with SFAS 140. The Group monitors the fair value of the securities received or delivered. Forsecurities purchased under resale agreements, the Group requests additionalsecurities or the return of a portion of the cash disbursed when appropriate inresponse to a decline in the market value of the securities received. Similarly, thereturn of excess securities or additional cash is requested when appropriate inresponse to an increase in the market value of securities sold under repurchaseagreements. The Group offsets reverse repurchase and repurchase agreementswith the same counterparty which meet the applicable netting criteria in FASBInterpretation No. 41, “Offsetting of Amounts Related to Certain Repurchase andReverse Repurchase Agreements” (“FIN 41”). Interest earned on reverse repur-chase agreements and interest incurred on repurchase agreements are reportedas interest revenues and interest expense, respectively.
F-8
Loans Held for Sale,Trading Assets and Liabilities, and Securities Available for Sale
Securities borrowed and securities loaned are recorded at the amount of cashadvanced or received. Securities borrowed transactions generally require theGroup to deposit cash with the securities lender. In a securities loaned transac-tion, the Group generally receives either cash collateral, in an amount equal to orin excess of the market value of securities loaned, or securities. If the securitiesreceived may be sold or repledged, they are accounted for as trading assets anda corresponding liability to return the security is recorded. The Group monitorsthe fair value of securities borrowed and securities loaned and additional collat-eral is obtained, if necessary. Fees received or paid are reported in interest revenues and interest expense, respectively. Securities owned and pledged as collateral under securities lending agreements in which the counterparty has the right by contract or custom to sell or repledge the collateral are disclosed onthe Consolidated Balance Sheet in accordance with SFAS 140.
Loans held for sale are accounted for at the lower of cost or market and arereported as trading assets.The Group designates debt and marketable equity securities as either held fortrading purposes or available for sale at the date of acquisition. Trading assets, except for loans held for sale, and trading liabilities are carried attheir fair values and related realized and unrealized gains and losses are includedin trading revenues.Securities available for sale are carried at fair value with the changes in fair valuereported in accumulated other comprehensive income within shareholders’equity unless the security is subject to a fair value hedge, in which case changesin fair value resulting from the risk being hedged are recorded in other revenues.The amounts reported in other comprehensive income are net of deferredincome taxes and adjustments to insurance policyholder liabilities and deferredacquisition costs.Declines in fair value of securities available for sale below their amortized costthat are deemed to be other than temporary and realized gains and losses arereported in the Consolidated Statement of Income in net gains on securitiesavailable for sale. The amortization of premiums and accretion of discounts arerecorded in interest revenues. Generally, the weighted-average cost method isused to determine the cost of securities sold. Fair value is generally based on quoted market prices, price quotes from brokersor dealers or discounted expected cash flows.
Securities Borrowedand Securities Loaned
F-9
Derivatives All freestanding contracts considered to be derivatives for purposes of SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities”(“SFAS 133”) are carried at fair value in the balance sheet regardless of whetherthey are held for trading or nontrading purposes. Derivative features embeddedin other contracts that meet certain criteria are also measured at fair value. Fairvalues for derivatives are based on quoted market prices or pricing modelswhich take into account current market and contractual prices of the underlyinginstruments as well as time value and yield curve or volatility factors underlyingthe positions. Fair values also take into account expected market risks, modelingrisks, administrative costs and credit considerations. Assets and liabilities arisingfrom contracts covered by qualifying master netting agreements are reported ona net basis, in accordance with FASB Interpretation No. 39, “Offsetting ofAmounts Related to Certain Contracts” (“FIN 39”). The Group enters into various contracts for trading purposes, including swaps,futures contracts, forward commitments, options and other similar types of contracts and commitments based on interest and foreign exchange rates, andequity and commodity prices. Such positions are carried at their fair values aseither trading assets or trading liabilities, and related gains and losses areincluded in trading revenues. Derivative features embedded in other nontrading contracts are measured separately at fair value when they are not clearly and closely related to the hostcontract and meet the definition of a derivative. Unless designated as a hedge,changes in the fair value of such an embedded derivative are reported in tradingrevenues. The carrying amount is reported on the Consolidated Balance Sheetwith the host contract. Certain derivatives entered into for nontrading purposes, not qualifying forhedge accounting, that are otherwise effective in offsetting the effect of trans-actions on noninterest revenues and expenses are recorded in other assets orother liabilities with changes in fair value recorded in the same noninterest revenues and expense captions affected by the transaction being offset. Thechanges in fair value of all other derivatives not qualifying for hedge accountingare recorded in trading revenues. Beginning January1, 2001, the Group has applied hedge accounting in accordancewith SFAS 133. There are three possible types of hedges under this standard,each of which is accounted for differently: (1) fair value hedges, (2) cash flowhedges, and (3) hedges of net investments in foreign operations. For fair value hedges, changes in the fair value of the hedged asset or liabilitydue to the risk being hedged are recognized in earnings along with changes inthe entire fair value of the derivative. When hedging interest rate risk, for boththe derivative and the hedged item any interest accrued or paid is reported ininterest income or expense and the unrealized gains and losses from the fairvalue adjustments are reported in other revenues. When hedging the foreignexchange risk in an available-for-sale security, the fair value adjustments relatedto the foreign exchange exposures are also recorded in other revenues. Hedgeineffectiveness is reported in other revenues and is measured as the net effect ofthe fair value adjustments made to the derivative and the hedged item arisingfrom changes in the market rate or price related to the risk being hedged. If a fair value hedge is canceled because the derivative is terminated or de-des-ignated, any remaining interest rate related fair value adjustment made to thecarrying amount of a hedged debt instrument is amortized to interest over theremaining life of the original hedge. For other types of fair value adjustments oranytime the hedged asset or liability is sold or terminated, any basis adjustmentsare included in the calculation of the gain or loss on sale or termination.
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For cash flow hedges, there is no special accounting for the hedged item andthe derivative is carried at fair value with changes in value reported initially inother comprehensive income to the extent the hedge is effective. These amountsinitially recorded in other comprehensive income are subsequently reclassifiedinto earnings in the same periods during which the forecasted transactionaffects earnings. Thus, for hedges of interest rate risk the amounts are amortizedinto interest revenues or expense along with the interest accruals on the hedgedtransaction. When hedging the foreign exchange risk in an available-for-salesecurity, the amounts resulting from foreign exchange risk are included in thecalculation of the gain or loss on sale once the hedged security is sold. Hedgeineffectiveness for cash flow hedges is recorded in other revenues and is gener-ally measured as the difference between the changes in fair value of the actualhedging derivative and a hypothetically perfect hedge. When cash flow hedges of interest rate risk are canceled, amounts remaining inaccumulated other comprehensive income are amortized to interest revenues orexpense over the original life of the hedge. For cancellations of other types ofcash flow hedges, the related amounts accumulated in other comprehensiveincome are reclassified into earnings either in the same income statement caption and period as the forecasted transaction, or in other revenues when it isno longer probable that the forecasted transaction will occur. For hedges of net investments in foreign operations, the portion of the change infair value of the derivative due to changes in the spot foreign exchange rate isrecorded as a foreign currency translation adjustment in other comprehensiveincome to the extent the hedge is effective, the remainder is recorded as otherrevenues. Any derivative de-designated as a hedge is transferred to trading assets and lia-bilities and marked to market with changes in fair value recognized in tradingrevenues. For any hedging derivative that is terminated, the difference betweenthe derivative’s carrying amount and the cash paid or received is recognized asother revenues. Prior to 2001, most of the derivatives entered into for nontrading purposes,although considered effective as economic hedges, did not qualify for hedgeaccounting mainly due to contemporaneous documentation requirements thatcould not be fulfilled when initially adopting U.S. GAAP after the fact. Conse-quently, these derivatives have been accounted for as trading derivatives, that is,they are marked to market and the changes in fair value are reported in tradingrevenues. In addition, for periods prior to January 1, 2001, hedge accounting was differentfor the limited cases where it was applied for certain interest rate and foreigncurrency hedges. Interest rate swaps were accounted for as off-balance sheettransactions with interest payable or receivable recorded on an accrual basis. For cross currency interest rate swaps, interest was accrued and the foreign currency notional amount of the swaps was translated at spot rates with theresulting gain or loss reported in earnings. No special accounting was applied tothe hedged items.
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Loans
Leasing Transactions
Allowances for Credit Losses
Loans generally are carried at their outstanding unpaid principal balances net ofcharge-offs, unamortized premiums or discounts, and deferred fees and costson originated loans. Interest revenues are accrued on the unpaid principal balance net of charge-offs. Net deferred fees and premiums or discounts arerecorded as an adjustment of the yield (interest revenues) over the lives of therelated loans. Loans are placed on nonaccrual status if either the loan has been in default as topayment of principal or interest for 90 days or more and the loan is neither wellsecured nor in the process of collection; or the loan is not yet 90 days past due,but in the judgment of management the accrual of interest should be ceasedbefore 90 days because it is probable that all contractual payments of interestand principal will not be collected. When a loan is placed on nonaccrual status,any accrued but unpaid interest previously recorded is reversed against currentperiod interest revenues. Cash receipts of interest on nonaccrual loans arerecorded as either interest revenues or a reduction of principal according tomanagement’s judgment as to the collectability of principal.
Lease financing transactions, which include direct financing and leveragedleases, in which a Group entity is the lessor are classified as loans. Unearnedincome is amortized to interest revenues over the lease term using the interestmethod. Capital leases in which a Group entity is the lessee are capitalized asassets and reported in premises and equipment.
The allowances for credit losses represent management’s estimate of probablelosses that have occurred in the loan portfolio and other lending-related commit-ments as of the date of the consolidated financial statements. The allowance forloan losses is reported as a reduction of loans and the allowance for credit losseson lending-related commitments is reported in other liabilities. To allow management to determine the appropriate level of the allowance forloan losses, all significant counterparty relationships are reviewed periodically,as are loans under special supervision, such as impaired loans. Smaller-balancestandardized homogeneous loans are collectively evaluated for impairment. Thisreview encompasses current information and events related to the counterparty,as well as industry, geographic, economic, political, and other environmentalfactors. This process results in an allowance for loan losses which consists of aspecific loss component and an inherent loss component. The specific loss component is the allowance for impaired loans as calculatedunder SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” asamended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan –Income Recognition and Disclosures” (collectively “SFAS 114”). Impaired loansrepresent loans for which, based on current information and events, manage-ment believes it is probable that the Group will not be able to collect all principaland interest amounts due in accordance with the contractual terms of the loanagreement. The specific loss component of the allowance is measured by theexcess of the recorded investment in the loan, including accrued interest, overeither the present value of expected future cash flows, the fair value of theunderlying collateral or the market price of the loan. Impaired loans are generallyplaced on nonaccrual status. The inherent loss component is for all other loans not individually evaluated butthat, on a portfolio basis, are believed to have some inherent loss, in accordancewith SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”). The inherent losscomponent consists of an allowance for country risk, an allowance for smaller-balance standardized homogeneous exposures and an other inherent loss
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component. The country risk component is for loan exposures in countrieswhere there are serious doubts about the ability of counterparties to complywith the repayment terms due to the economic or political situation prevailing inthe respective country of domicile, that is, for transfer and currency convertibilityrisks. The allowance for smaller-balance standardized homogeneous exposuresis established for loans to individuals and small business customers of the private and retail business. These loans are evaluated for inherent loss on a col-lective basis, based on analyses of historical loss experience from each producttype according to criteria such as past due status and collateral recovery values.The other inherent loss component represents an estimate of inherent lossesresulting from the imprecisions and uncertainties in determining credit losses.Loans subject to this component of the allowance exclude those that have beendetermined to be impaired under SFAS 114. This component is determined bycalculating the ratio of an entity’s historical average loan losses (net of recover-ies) to the historical average of its loan exposures, applying the resulting ratio tothe corresponding period end loans and adjusting the results for relevant envi-ronmental factors. During 2002, the measurement of the other inherent losscomponent was refined to incorporate an expected loss measure, which consid-ers among other factors, collateral, maturities, and long-term statistical averagesof default and loss history. This refinement was made in order to make the provision more sensitive to the prevailing credit environment and less based onhistorical loss experience.Amounts determined to be uncollectable are charged to the allowance. Sub-sequent recoveries, if any, are credited to the allowance. The provision for loanlosses, which is charged to income, is the amount necessary to adjust theallowance to the level determined through the process described above. The allowance for credit losses on lending-related commitments is determinedusing the same measurement techniques as the allowance for loan losses.
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Asset Securitizations
Premises and Equipment
When the Group transfers financial assets to securitization trusts in securitiza-tions of mortgage or other loan portfolios, it may retain one or more sub-ordinated tranches, cash reserve accounts, or in some cases, servicing rights orinterest-only strips, all of which are retained interests in the securitized assets.The amount of the gain or loss on transfers accounted for as sales depends inpart on the previous carrying amounts of the financial assets involved in thetransfer, allocated between the assets sold and the retained interests based ontheir relative fair values at the date of transfer. Retained interests other than serv-icing rights are classified as trading assets, securities available for sale or otherassets depending on the nature of the retained interest and management intent.Servicing rights are classified in intangible assets, carried at the lower of the allocated basis or current fair value and amortized in proportion to and over the period of net servicing revenue. To obtain fair values, quoted market prices are used if available. However, forsecurities representing retained interests from securitizations of financial assets,quotes are often not available, so the Group generally estimates fair value basedon the present value of future expected cash flows using management’s bestestimates of the key assumptions (loan losses, prepayment speeds, forwardyield curves, and discount rates) commensurate with the risks involved. Interestrevenues on retained interests is recognized using the effective yield method.Securitization trusts that meet the criteria for QSPEs, as defined in SFAS 140, arenot consolidated.
Premises and equipment are stated at cost less accumulated depreciation.Depreciation is generally computed using the straight-line method over the esti-mated useful lives of the assets. The range of estimated useful lives is 25 to 50years for premises and 3 to 10 years for furniture and equipment. Leaseholdimprovements are depreciated on a straight-line basis over the shorter of theterm of the lease or the estimated useful life of the improvement, which is gen-erally 3 to 15 years. Depreciation of premises is included in net occupancyexpense of premises, while depreciation of equipment is included in furnitureand equipment expense or IT costs. Maintenance and repairs are charged toexpense and improvements are capitalized. Gains and losses on dispositions arereflected in other revenues. Leased properties meeting certain criteria are capitalized as assets in premisesand equipment and depreciated over the terms of the leases. Eligible costs related to software developed or obtained for internal use are cap-italized and depreciated using the straight-line method over a period of 3 to 5years. Eligible costs include external direct costs for materials and services, aswell as payroll and payroll related costs for employees directly associated withan internal-use software project. Overhead, as well as costs incurred duringplanning or after the software is ready for use, is expensed as incurred.
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Prior to January 1, 2002, goodwill and other intangible assets, which includesservicing rights related to asset securitizations, were amortized over their esti-mated useful lives. Goodwill, which represents the excess of cost over the fairvalue of net assets acquired at the date of acquisition, was amortized on astraight-line basis over a period not exceeding fifteen years. In accordance withSFAS 142, as of January 1, 2002, goodwill is no longer amortized and is tested forimpairment annually, or more frequently if events or changes in circumstancesindicate that the goodwill may be impaired, such as an adverse change in busi-ness climate. Other intangible assets in existence at January 1, 2002, have afinite useful life and continue to be amortized over a period of 3 to 15 years. Inaddition, other intangible assets acquired subsequent to January 1, 2002, thatwere determined to have an indefinite useful life, primarily investment manage-ment agreements related to retail mutual funds, are not amortized and are testedfor impairment at least annually.
Securities available for sale, equity method and direct investments (includinginvestments in venture capital companies and nonmarketable equity securities)are subject to impairment reviews. An impairment charge is recorded if a declinein fair value below the asset’s amortized cost or carrying value, depending onthe nature of the asset, is deemed to be other than temporary. Other intangible assets with finite useful lives and premises and equipment arealso subject to impairment reviews if a change in circumstances indicates thatthe carrying amount of an asset may not be recoverable. If estimated undis-counted cash flows relating to an asset held and used are less than its carryingamount, an impairment charge is recorded to the extent the fair value of theasset is less than its carrying amount. For an asset to be disposed of by sale, aloss is recorded based on the lower of the asset’s carrying value or fair value lesscost to sell. An asset to be disposed of other than by sale is considered held andused and accounted for as such until it is disposed of. Prior to January 1, 2002, goodwill was subject to an impairment review if achange in circumstances indicated that its carrying amount may not be recover-able. As of January 1, 2002, goodwill and other intangible assets which are notamortized are tested for impairment at least annually according to SFAS 142.
Goodwill and OtherIntangible Assets
Impairment
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Income Taxes
Share-Based Compensation
The Group recognizes the current and deferred tax consequences of all trans-actions that have been recognized in the consolidated financial statements, usingthe provisions of the appropriate jurisdictions’ tax laws. Deferred tax assets andliabilities are recognized for the future tax consequences attributable to differ-ences between the financial statement carrying amounts of existing assets andliabilities and their respective tax bases, net operating loss carryforwards and taxcredits. The amount of deferred tax assets is reduced by a valuation allowance, if necessary, to the amount that, based on available evidence, managementbelieves will more likely than not be realized. Deferred tax liabilities and assets are adjusted for the effect of changes in taxlaws and rates in the period that includes the enactment date.
The Group has elected to account for its share awards under the intrinsic value-based method of accounting prescribed by Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”) as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).Under the intrinsic value-based method, compensation expense is the excess, ifany, of the quoted market price of the shares at grant date or other measure-ment date over the amount an employee must pay, if any, to acquire the shares.Compensation expense is recorded over the period in which employees performservices to which the awards relate. Compensation expense is reversed in theperiod an award is forfeited. The Group records its obligations under outstanding deferred share awards inshareholders’ equity as share awards – common shares issuable. The relateddeferred compensation is also included in shareholders’ equity. These classifica-tions are based upon the Group’s intent to settle these awards with its commonshares. Compensation expense for share-based awards payable in cash isremeasured based on the underlying share price changes and the related obliga-tions are included in other liabilities until paid.
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The following table illustrates the effect on net income and earnings per share if the Group had applied the fair value recognition provisions of SFAS 123 toshare-based awards.
Comprehensive income is defined as the change in equity of an entity excludingtransactions with shareholders such as the issuance of common or preferredshares, payment of dividends and purchase of treasury shares. Comprehensiveincome has two major components: net income, as reported in the ConsolidatedStatement of Income, and other comprehensive income as reported in the Con-solidated Statement of Comprehensive Income. Other comprehensive incomeincludes such items as unrealized gains and losses from translating net invest-ments in foreign operations net of related hedge effects, unrealized gains andlosses from changes in fair value of securities available for sale, net of deferredincome taxes and the related adjustments to insurance policyholder liabilitiesand deferred acquisition costs, minimum pension liability and the effective portions of realized and unrealized gains and losses from derivatives used ascash flow hedges, less amounts reclassified to earnings in combination with thehedged items. Comprehensive income does not include changes in the fairvalue of nonmarketable equity securities, traditional credit products and otherassets generally carried at cost.
For purposes of the Consolidated Statement of Cash Flows, the Group’s cashand cash equivalents are cash and due from banks.
Insurance Premiums. Insurance premiums from long duration life and healthcontracts are earned when due. Premiums from short duration contracts, prima-rily property and casualty, are earned over the period of the contract in propor-tion to the amount of insurance protection provided. The Group does not havesignificant reinsurance activities.
Cash Flow Statement
Insurance Activities
ComprehensiveIncome
in € m. Dec 31, 2002 Dec 31, 2001 Dec 31, 2000
Net income, as reported 397 167 13,513
Add: Share-based compensation expense includedin reported net income, net of related tax effects 228 671 884
Deduct: Share-based compensation expense determined under fair value method for all awards, net of related tax effects (478) (875) (822)
Pro forma net income (loss) 147 (37) 13,575
Earnings (loss) per share
Basic – as reported € 0.64 € (0.27 € 22.00
Basic – pro forma € 0.24 € (0.06) € 22.10
Diluted – as reported € 0.63 € (0.27 € 21.72
Diluted – pro forma € 0.23 € (0.06) € 21.82
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Deferred Acquisition Costs. Acquisition costs that vary with and are primarilyrelated to the acquisition of new and renewal insurance contracts, principallycommissions, certain underwriting and agency expenses and the costs of issu-ing policies, are deferred to the extent that they are recoverable from future earn-ings. Deferred acquisition costs for nonlife business are amortized over the pre-mium-paying period of the related policies. Deferred acquisition costs of lifebusiness are generally amortized over the life of the insurance contract or at aconstant rate based upon the present value of estimated gross profits or esti-mated gross margins expected to be realized. Deferred acquisition costs arereported in other assets related to insurance business.
Unit-Linked Business. Liabilities under unit-linked business where the invest-ment risk is borne by the contract holders represent funds for contracts in whichinvestment income and investment gains and losses accrue directly to the con-tract holders, as well as reserves for mortality risks and expenses related tothose contracts. The assets related to these accounts are legally segregated andare not subject to claims that arise out of any other business of the Group. Theassets are carried at fair value. Deposits received under unit-linked businesshave been reduced for amounts assessed for management services and risk pre-miums. Deposits, net investment income and realized investment gains andlosses for these accounts are excluded from revenues and related liabilityincreases are excluded from expenses.
Other Liabilities Included in Insurance Policy Claims and Reserves. Inaddition to the reserve for unit-linked business, the liability for insurance policyclaims and reserves includes benefit reserves, a provision for premium refundsand property and casualty loss reserves.Benefit reserves for life business, annuities and health policies have been com-puted based upon mortality, morbidity, persistency and interest rate assump-tions applicable to these coverages, including provisions for adverse deviation.Participating life contracts include provisions for terminal dividends. Theseassumptions consider Group experience and industry standards and may berevised if it is determined that future experience will differ substantially fromthose previously assumed. The provision for premium refunds includes amounts allocated to policyholderaccounts under relevant local statutory or contractual requirements as well asamounts that result from differences between these financial statements andstatutory financial statements and that will reverse and enter into future deferredprofit sharing calculations. Unrealized gains and losses in connection with thevaluation of investments are also recognized in the provision for premiumrefunds to the extent that the policyholder will participate in such gains and losses on the basis of statutory or contractual regulations when they arerealized. Property and casualty loss reserves include estimates for both reported andunreported claims incurred and related claims adjustment expenses. Lossreserves for property and casualty insurance represent the estimated ultimateunpaid cost of all incurred claims and are adjusted regularly based on experience.Unearned premiums for property and casualty insurance included in other insur-ance provisions represent the unexpired portion of policy premiums.
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In determining insurance reserves, the Group performs a continuing review of itsoverall position, its reserving techniques and its reinsurance. Since the reservesare based on estimates, the ultimate liability may be more or less than carriedreserves. The effects of changes in such estimated reserves are included in earn-ings in the period in which the estimates are changed.
[2] Impact of Changes in Accounting Principles
Effective January 1, 2002, the Group adopted SFAS No.141, “Business Combina-tions” (“SFAS 141”) and SFAS No. 142. SFAS 141 requires that all business com-binations initiated after June 30, 2001, be accounted for by the purchase methodand eliminates the use of the pooling-of-interests method. Other provisions ofSFAS 141 and SFAS 142 require that, as of January 1, 2002, goodwill no longer be amortized, reclassifications between goodwill and other intangible assets bemade based upon certain criteria, and, once allocated to reporting units (thebusiness segment level, or one level below), that tests for impairment of good-will be performed at least annually. Upon adoption of the requirements ofSFAS 142 as of January 1, 2002, the Group discontinued the amortization ofgoodwill with a net carrying amount of € 8.7 billion. Upon adoption, the Grouprecognized a € 37 million tax-free gain as a cumulative effect of a change inaccounting principle from the write-off of negative goodwill and there were noreclassifications between goodwill and other intangible assets. SFAS 142 doesnot require retroactive restatement for all periods presented, however, pro formainformation for 2001 and 2000 is provided (see Note [12]) and assumes thatSFAS 142 was in effect as of January 1, 2000.
Effective January 1, 2001, the Group adopted SFAS 133. SFAS 133, as amended,establishes accounting and reporting standards for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities. It requires companies to recognize all derivatives on the bal-ance sheet as assets or liabilities measured at fair value. The change in a deriva-tive’s fair value is generally recognized in current period earnings or equity. Uponadoption of SFAS 133, the Group recorded a net transition expense of € 207 mil-lion, net of an income tax benefit of € 118 million, as a cumulative effect of achange in accounting principle. This amount was primarily due to the adjust-ment required to bring certain embedded derivatives to fair value and to adjustthe carrying amount of the related host contracts (items in which the derivativesare embedded) at January 1, 2001, pursuant to the SFAS 133 transition provi-sions for embedded derivatives that must be accounted for separately. As per-mitted by SFAS 133, upon adoption the Group transferred debt securities with afair value of € 22,101 million from securities available for sale to trading assetsand recognized the related unrealized gains of € 150 million in earnings for theyear ended December 31, 2001.
SFAS 141 and 142
SFAS 133
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Effective April 1, 2001, the Group adopted EITF Issue No. 99-20, “Recognition ofInterest Income and Impairment on Purchased and Retained Beneficial Interestsin Securitized Financial Assets” (“EITF 99-20”). EITF 99-20 provides guidanceregarding income recognition and determination of impairment on certain asset-backed securities held as investments, with particular impact on those invest-ments held outside of trading accounts. The adoption of EITF 99-20 did not havea material impact on the Group’s consolidated financial statements.
[3] Acquisitions and Dispositions
The Group acquired National Discount Brokers Group, Inc. (“NDB”) in two stepswith control being achieved in November 2000. The total purchase price wasapproximately U.S.$ 1.0 billion. The acquisition was accounted for as a purchase,which resulted in the recording of goodwill of U.S.$ 616 million. In the periodfrom the acquisition to December 31, 2001, goodwill was amortized on astraight-line basis based upon an estimated useful life of 15 years. In September2001, Deutsche Bank sold NDB’s on-line brokerage business to AmeritradeHolding Corp., which reduced goodwill related to the NDB acquisition byU.S.$ 146 million. As a result of this transaction, the Group owned approximately13 percent of Ameritrade Holding Corp. This share was reduced to approxi-mately 9 percent as of December 31, 2002.During 2001, the Group committed to a plan to dispose of the commercialfinance operation in North America and, therefore, the business was valued atthe lower of carrying value or fair value less cost to sell, resulting in a € 80 millioncharge. During 2002, the commercial and consumer finance businesses ofDeutsche Financial Services were sold resulting in an additional net loss of€ 236 million. The remaining assets of these businesses are currently in theprocess of being liquidated.In the second quarter of 2002, the Group purchased Zurich Scudder Invest-ments, Inc., the Scudder asset management business. This transaction wastreated as an exchange of the Group’s German insurance holding company Ver-sicherungsholding der Deutschen Bank Aktiengesellschaft (Deutscher Herold)and a net cash payment of approximately € 1.7 billion for Scudder. The purchaseresulted in goodwill of approximately € 1.0 billion and indefinite useful life intan-gible assets of € 1.1billion. In addition, Deutsche Bank sold insurance subsidiariesdomiciled in Spain, Italy, and Portugal. These transactions resulted in gains of€ 494 million in Personal Banking and € 8 million in Asset Management.In April 2002 the Group acquired RoPro U.S. Holding, Inc., which is the holdingcompany for the U.S. based real estate investment manager RREEF. The pur-chase price for this acquisition amounted to approximately U.S.$ 501 million.Goodwill amounted to U.S.$ 306 million.Following the agreement reached in 2001, in the third quarter of 2002 the Group merged its mortgage bank subsidiary, EUROHYPO AG EuropäischeHypothekenbank der Deutschen Bank, with the mortgage bank subsidiaries ofDresdner Bank and Commerzbank, to form the new EUROHYPO AG. This trans-action resulted in a deconsolidation from the Group’s consolidated financial state-ments and the recognition of a net gain of € 418 million. After the merger, theGroup’s share in the combined entity was 34.6%. Since the merger in August2002, the Group has accounted for this investment under the equity method.The acquisitions and disposals which occurred in 2002 led to a net reduction of total assets of approximately € 93 billion, as compared to December 31, 2001.
EITF 99-20
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in € m. Dec 31, 2002 Dec 31, 2001
Bonds and other fixed-income securities 175,042 150,698
Equity shares and other variable-yield securities 47,354 77,683
Positive market values from derivative financial instruments1 65,729 60,622
Other trading assets2 8,937 4,650
Total trading assets 297,062 293,653
Bonds and other fixed-income securities 51,124 48,784
Equity shares and other variable-yield securities 17,987 18,346
Negative market values from derivative financial instruments1 62,101 54,199
Total trading liabilities 131,212 121,329
1 Derivatives under master netting agreements are shown net.2 Includes loans held for sale.
[4] Trading Assets and Trading Liabilities
The components of these accounts are as follows:
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[5] Securities Available for Sale
The fair value, amortized cost and gross unrealized holding gains and losses forthe Group’s securities available for sale follow:
Dec 31, 2002
Fair Gross Unrealized AmortizedValue Holding Cost
in € m. Gains Losses
Debt securities
German government 396 20 – 376
U.S. Treasury and U.S. government agencies 168 – – 168
U.S. local (municipal) governments 2 – – 2
Other foreign governments 2,893 39 (18) 2,872
Corporates 6,400 231 (47) 6,216
Other asset-backed securities 2,977 – – 2,977
Mortgage-backed securities, principally obligations of U.S. federal agencies 164 1 – 163
Other debt securities 652 1 (3) 654
Equity securities
Equity shares 6,441 757 (596) 6,280
Investment certificates and mutual funds 1,499 10 (55) 1,544
Other 27 16 – 11
Total securities available for sale 21,619 1,075 (719) 21,263
Dec 31, 2001
Fair Gross Unrealized AmortizedValue Holding Cost
in € m. Gains Losses
Debt securities
German government 4,339 66 (9) 4,282
U.S. Treasury and U.S. government agencies 192 – – 192
U.S. local (municipal) governments 50 – – 50
Other foreign governments 14,676 229 (210) 14,657
Corporates 22,116 643 (193) 21,666
Other asset-backed securities 3,189 12 (2) 3,179
Mortgage-backed securities, principally obligations of U.S. federal agencies 1,083 21 (1) 1,063
Other debt securities 1,857 55 (1) 1,803
Equity securities
Equity shares 22,600 10,022 (750) 13,328
Investment certificates and mutual funds 1,507 48 (13) 1,472
Other 57 36 – 21
Total securities available for sale 71,666 11,132 (1,179) 61,713
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At December 31, 2002, securities issued by DaimlerChrysler AG with a fair valueof € 3.4 billion were the only securities of an individual issuer that exceeded 10% of the Group’s total shareholders’ equity.The components of net gains on securities available for sale as reported in theConsolidated Statement of Income follow:
On January 1, 2001, the Group transferred debt securities with a fair value of€ 14.9 billion from trading assets to securities available for sale. There was noimpact on earnings from this transfer which primarily involved securities issued byGerman and other foreign governments. Prior to 2001, these securities were riskmanaged together with derivatives which were classified as trading mainly due tocontemporaneous hedge documentation requirements that could not be fulfilledwhen initially adopting U.S. GAAP after the fact. Beginning 2001, these securitiesare hedged in accordance with the Group’s management practices with deriva-tives that qualify for hedge accounting and were reclassified accordingly. In 2000, the Group transferred certain portfolios, consisting of mutual funds withan aggregate cost of € 170 million, from securities available for sale to tradingassets. These available for sale securities were not subject to active risk man-agement or included in market risk reporting. Management concluded that themarket risk management on these securities would be enhanced by movingresponsibility for them to the risk managers of the Group’s trading portfolio. The
Dec 31, 2000
Fair Gross Unrealized AmortizedValue Holding Cost
in € m. Gains Losses
Debt securities
German government 634 11 (5) 628
U.S. Treasury and U.S. government agencies 172 – (1) 173
U.S. local (municipal) governments 17 – – 17
Other foreign governments 16,902 277 (227) 16,852
Corporates 37,200 1,360 (797) 36,637
Other asset-backed securities 4,252 35 (53) 4,270
Mortgage-backed securities, principally obligations of U.S. federal agencies 3,803 21 (51) 3,833
Other debt securities 200 17 – 183
Equity securities
Equity shares 27,136 14,493 (607) 13,250
Investment certificates and mutual funds 1,769 128 (15) 1,656
Other 165 45 (6) 126
Total securities available for sale 92,250 16,387 (1,762) 77,625
Net gains on securities available for sale 3,523 1,516 3,670
1 Includes € 156 million and € 27 million of write-downs for other-than-temporary impairment for the years ended December 31, 2002 and 2001, respectively.
2 Includes € 152 million and € 401 million of write-downs for other-than-temporary impairment for the years ended December 31, 2002 and 2001, respectively.
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resulting gross gain on the transfer of € 337 million was recognized in net gainson securities available for sale for the year ended December 31, 2000. The following table shows the fair value, remaining maturities, approximateweighted-average yields (based on amortized cost) and total amortized cost bymaturity distribution of the debt security components of the Group’s securitiesavailable for sale at December 31, 2002:
[6] Other Investments
The following table summarizes the composition of other investments:
Investments over which the Group has significant influence, generally evidencedby a 20 to 50% ownership of the voting stock of a corporation or 3% or more ofa limited partnership, are accounted for under the equity method of accounting.These investments totaled € 6.0 billion and € 5.3 billion at December 31, 2002and 2001, respectively. The aggregate market value of the investments in activelytraded listed companies amounted to € 269 million at December 31, 2002. Theseinvestments had an aggregated carrying value of € 210 million. The Group’s pro-rata share of the investees’ income or loss determined on a U.S. GAAP basiswas a loss of € 753 million and a loss of € 278 million for the years endedDecember 31, 2002 and 2001, respectively. In addition, amortization of goodwillof € 31 million for the year ended December 31, 2001, and write-offs for other-than-temporary impairments of € 305 million and € 113 million for the yearsended December 31, 2002 and 2001, respectively, were included in net income(loss) from equity method investments.
Equity Method Investments
Up to one More than one More than five More than Totalyear year and up to years and up to ten years
five years ten years
in € m. Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
German government 3 6.61% 91 3.65% 252 4.09% 50 4.46% 396 4.06%
U.S. Treasury and U.S. government agencies 142 2.67% 3 4.92% – 23 7.88% 168 3.43%
U.S. local (municipal) governments 2 5.00% – – – 2 5.00%
Total amortized cost 4,657 3,276 1,444 4,051 13,428
in € m. Dec 31, 2002 Dec 31, 2001
Equity method investments 6,039 5,344
Investments held by designated investment companies 230 274
Other equity interests 4,499 6,379
Total 10,768 11,997
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Related party loans to equity method investees amounted to € 3,485 million and€ 1,348 million at December 31, 2002 and 2001, respectively. At December 31,2002 loans totaling € 117 million to two equity method investees were on nonac-crual status. At December 31, 2001, loans totaling € 181 million to three equitymethod investees were on nonaccrual status.At December 31, 2002, the following investees represented 75% of the carryingvalue of equity method investments:
The following two equity method investments are considered to be significanton an individual basis.
Gerling-Konzern Versicherungs-Beteiligungs-AG. For the years endedDecember 31, 2002, 2001 and 2000, the Group recognized € (706) million,€ (125) million and € 57 million respectively, as the Group’s share of the netincome (loss) from the Gerling-Konzern Versicherungs-Beteiligungs-AG. As theyear 2002 financial statements are not yet available, the loss in 2002 includes theGroup’s share of the anticipated IAS loss, adjusted for estimated U.S. GAAP-spe-cific adjustments and loss contingencies.
Investment Ownership
AKA Ausfuhrkredit-Gesellschaft mit beschränkter Haftung, Frankfurt am Main 26.89%
AMP Private Capital Portfolio No. 1 L.P., London 16.67%
Arrow Property Investments Limited, London 46.18%
AW-Beteiligungs GmbH, Ochsenfurt 37.88%
Cassa di Risparmio di Asti S.p.A., Asti 20.00%
DB 100 Unit Trust, Georgetown 27.71%
DBG Osteuropa-Holding GmbH, Frankfurt am Main 50.00%
DBG Vermögensverwaltungsgesellschaft mbH, Frankfurt am Main 45.00%
Deutsche European Partners IV, London 24.92%
Deutsche EuroShop AG, Eschborn/Ts. 44.91%
Deutsche Interhotel Holding GmbH & Co. KG, Berlin 45.64%
1 28.87% direct and indirect holdings.2 The Group does not have control over this investee.
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The following table provides a summary of Gerling-Konzern Versicherungs-Beteiligungs-AG’s consolidated statement of income according to IAS:
The following table provides a summary of Gerling-Konzern Versicherungs-Beteiligungs-AG’s consolidated balance sheet according to IAS:
In 2003, the following events have occurred with respect to Gerling-Konzern Versicherungs-Beteiligungs-AG: – the sale of its reinsurance unit (Gerling-Konzern Globale Rückversicherungs-AG)
to Globale Management GmbH (former name: Lago Achte GmbH) was notapproved by the German Federal Financial Supervisory Authority (“BaFin”).
– its chief executive officer resigned.– its life insurance unit (Gerling-Konzern Lebensversicherungs-AG) and property
and casualty unit (Gerling-Konzern Allgemeine Versicherungs-AG) were down-graded by Standard & Poor’s from “A–” to “BB+”.
The Group is assessing the impact of these events on the value of Gerling-Konzern Versicherungs-Beteiligungs-AG and on the Group’s investment.
EUROHYPO AG. The following table provides a summary of EUROHYPO AG’sconsolidated statement of income according to German GAAP for the ninemonths ended September 30, 2002 and for the twelve months ended Decem-ber 31, 2001. These are the only available financials due to the fact that themerger took place in August 2002 but was effective January 1, 2002 for GermanGAAP purposes. Under German GAAP, the merger was accounted for similar toa pooling of interests.
in € m. Dec 31, 2001
Investments 31,153
Other assets 13,226
Intangible assets 442
Total assets 44,821
Underwriting provisions 37,203
Other liabilities 5,816
Subordinated capital 369
Equity 1,433
Total liabilities and shareholders’ equity 44,821
in € m. 2001 2000
Net earned premiums 8,349 7,630
Other income 2,358 2,815
Benefit and claim payments (9,159) (7,943)
Underwriting expenses (2,030) (1,921)
Other expenses (403) (386)
Net income (loss) before tax (885) 195
Income tax expense (benefit) (327) 27
Minority interests (5) 1
Net income (loss) (563) 169
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Investments Held by Designated Investment Companies
Other Equity Interests
The year 2001 figures below represent twelve months of pro forma informationas if the merger occurred on January 1, 2001:
The following table provides a summary of EUROHYPO AG’s consolidated balance sheet according to German GAAP (2001 pro forma figures):
The underlying investment holdings of the Group’s designated investment com-panies are carried at fair value, and totaled € 230 million and € 274 million atDecember 31, 2002 and 2001, respectively. The Group’s designated investmentcompanies, all of which are 100% owned, consist of Small Business InvestmentCompanies (“SBICs”), and one designated investment company subsidiary inGermany.
Other equity interests totaling € 4.5 billion and € 6.4 billion at December 31, 2002and 2001, respectively, include investments in which the Group does not havesignificant influence, including certain venture capital companies and nonmar-ketable equity securities. These investments are generally accounted for at historical cost, net of write-offs for other-than-temporary impairments. The write-offs for other-than-temporary impairments of these investments amounted to€ 423 million and € 968 million for the years ended December 31, 2002 and 2001,respectively.
Nine months ended Twelve months endedin € m. Sep 30, 2002 Dec 31, 2001
Net interest and commission income 857 1,167
Administrative expenses (326) (457)
Net other operating income (expense) (92) (65)
Extraordinary items (150) (139)
Net income before tax 289 506
Income tax expense (benefit) 17 (11)
Net income 272 517
in € m. Sep 30, 2002 Dec 31, 2001
Claims on banks 25,760 31,553
Claims on customers 168,447 173,362
Bonds and other fixed-income securities 38,484 42,328
Other assets 2,910 3,621
Total assets 235,601 250,864
Liabilities to banks 30,820 31,525
Liabilities to customers 42,139 43,575
Liabilities in certificate form 151,923 166,755
Provisions and other liabilities 6,332 5,121
Capital and reserves 4,387 3,888
Total liabilities and shareholders’ equity 235,601 250,864
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[7] Loans
The following table summarizes the composition of loans:
The “other” category included no single industry group with aggregate borrow-ings from the Group in excess of 10 percent of the total loan portfolio at Decem-ber 31, 2002.Certain related third parties have obtained loans from the Group on various occa-sions. All such loans have been made in the ordinary course of business and onsubstantially the same terms, including interest rates and collateral, as thoseprevailing at the time for comparable transactions with unrelated persons. There were € 897 million and € 1.6 billion of related party loans (excluding loansto equity method investees) outstanding at December 31, 2002 and 2001,respectively.
in € m. Dec 31, 2002 Dec 31, 2001
German
Banks and insurance 1,600 7,444
Manufacturing 9,388 12,612
Households (excluding mortgages) 13,768 13,509
Households – mortgages 25,226 35,283
Public sector 1,750 20,752
Wholesale and retail trade 4,549 6,559
Commercial real estate activities 15,841 28,311
Lease financing 416 436
Other 15,898 22,878
Total German 88,436 147,784
Non-German1
Banks and insurance 9,120 12,465
Manufacturing 13,157 19,490
Households (excluding mortgages) 6,937 7,873
Households – mortgages 7,276 6,503
Public sector 2,834 2,906
Wholesale and retail trade 9,918 9,200
Commercial real estate activities 2,519 7,306
Lease financing 3,905 3,263
Other 27,768 49,297
Total Non-German 83,434 118,303
Gross loans 171,870 266,087
Less: Unearned income 250 664
Less: Allowance for loan losses 4,317 5,585
Total loans, net 167,303 259,838
1 For 2001 certain exposures were reclassified from banks and insurance to other (€ 6.5 billion) and from commercial real estate activitiesto households (€ 2.8 billion).
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Impaired Loans
in € m. 2002 2001 2000
Balance, beginning of year 5,585 6,745 7,281
Provision for loan losses 2,091 1,024 478
Net charge-offs
Charge-offs (2,728) (2,055) (1,296)
Recoveries 112 67 75
Total net charge-offs (2,616) (1,988) (1,221)
Allowance related to acquisitions/divestitures (421) (156) 44
Foreign currency translation (322) (40) 163
Balance, end of year 4,317 5,585 6,745
in € m. 2002 2001 2000
Balance, beginning of year 496 453 569
Provision for credit losses 17 (30) (33)
Net charge-offs – (22) (34)
Allowance related to acquisitions/divestitures (11) (2) 5
Foreign currency translation (17) 97 (54)
Balance, end of year 485 496 453
This table sets forth information about the Group’s impaired loans:
[8] Allowances for Credit Losses
The allowances for credit losses consist of an allowance for loan losses and anallowance for credit losses on lending-related commitments.
The following table shows the activity in the Group’s allowance for loan losses:The following table shows the activity in the Group’s allowance for credit losseson lending-related commitments:
in € m. Dec 31, 2002 Dec 31, 2001 Dec 31, 2000
Total impaired loans1 8,922 10,797 10,296
Allowance for impaired loans under SFAS 1142 3,144 3,720 4,577
Average balance of impaired loans during the year 9,710 10,363 7,399
Interest income recognized on impaired loansduring the year 166 248 376
1 Included in these amounts are € 6.0 billion, € 8.2 billion and € 8.5 billion as of December 31, 2002, 2001 and 2000, respectively, thatrequire an allowance. The remaining impaired loans do not require a specific allowance because either the present value of expectedfuture cash flows, the fair value of the underlying collateral or the market price of the loan exceed the recorded investment.
2 The allowance for impaired loans under SFAS 114 is included in the Group’s allowance for loan losses.
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[9] Asset Securitizations
In the normal course of business, the Group accounts for transfers of financialassets in securitization transactions as sales when certain criteria are met, other-wise they are accounted for as secured borrowings. These financial assets arethen sold by the securitization trusts to third parties primarily as debt instru-ments. The third party investors and the securitization trusts have no recourse tothe Group’s other assets for failure of debtors to perform under the originalterms of the underlying financial assets. The Group may retain interests in theassets created in the securitization trusts. For the years ended December 31, 2002, 2001 and 2000, the Group recognized€ 91 million, € 168 million and € 48 million respectively, of gains on securitiza-tions primarily related to residential and commercial mortgage loans. The following table summarizes certain cash flows received from and paid tosecuritization trusts during 2002, 2001 and 2000:
At December 31, 2002, the key assumptions used in determining the fair value ofretained interests, including servicing rights, and the impact of adverse changesin those assumptions on carrying amount/fair value are as follows:
Marine and Residential and Commercial Loans,Recreational Commercial Excluding Mortgages
Vehicle Loans Mortgage Loans
in € m. 2002 2001 2000 2002 2001 2000 2002 2001 2000
Proceeds from new securitizations – 977 – 5,843 6,573 6,200 918 938 4,299
Proceeds from collections reinvested in new trust receivables – – – – – – 12,177 18,520 18,201
Servicing fees received 7 7 8 14 15 11 44 85 80
Cash flows received on retained interests – 13 21 28 56 21 101 177 145
Other cash flows received from (paid to) securitization trusts 4 16 2 – – – (42) (16) (102)
Marine and Residential and Commercial Loans,Recreational Commercial Excluding Mortgages
in € m. (except percentages) Vehicle Loans Mortgage Loans1
Carrying amount/fair value of retained interests 80 520 161
Impact on fair value of 10% adverse change (3) (12) (5)
Impact on fair value of 20% adverse change (5) (23) (11)
1 Excluded from the retained interest amounts for Residential and Commercial Mortgage Loans are Commercial Mortgage Interest Only Bonds in the amount of € 67 million. These are shortduration assets priced within the base case using conservative prepayment speeds by assuming all underlying loans within the securitized pool are paid off at the earliest possible point intime after the expiration of contractual limitations.
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These sensitivities are hypothetical and should be viewed with caution. As thefigures indicate, changes in fair value based on a 10 percent variation in assump-tions generally should not be extrapolated because the relationship of thechange in assumption to the change in fair value may not be linear. Also, in thistable, the effect of a variation in a particular assumption on the fair value of theretained interest is calculated without changing any other assumptions; in real-ity, changes in one factor may result in changes in another (for example,increases in market interest rates may result in lower prepayments andincreased credit losses), which might counteract the sensitivities. The key assumptions used in measuring the initial retained interests resultingfrom securitizations completed in 2002 were not significantly different from thecurrent assumptions in the above table. The key assumptions used in measuring the initial retained interest resultingfrom securitizations completed in 2001 were not significantly different from thekey assumptions used in determining the fair value of retained interests, includ-ing servicing rights, at December 31, 2001. The assumptions used at Decem-ber 31, 2001 were as follows:
The following table presents information about securitized loans, including delin-quencies (loans which are 90 days or more past due) and credit losses, net ofrecoveries, for the years ended December 31, 2002 and 2001:
The table excludes securitized loans that the Group continues to service but otherwise has no continuing involvement.In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Vari-able Interest Entities” (FIN 46). FIN 46 requires transitional disclosures where itis reasonably possible that the Group will have to consolidate or disclose infor-mation about certain entities when this Interpretation becomes fully effective onJuly 1, 2003. The following transitional disclosures are based on the Group’s preliminary assessment of the entities it is involved with as those entities are currently structured. The actual impact upon adoption may differ significantly.
Marine and Residential and Commercial Loans,Recreational Commercial Excluding
Vehicle Loans Mortgage Loans Mortgages
Prepayment speed 19.56% 12.00% 26.28%
Default rate 0.28% 2.71% 0.34%
Discount factor 9.76% 14.59% 10.85%
Marine and Residential and Commercial Loans,Recreational Commercial Excluding
Vehicle Loans Mortgage Loans Mortgages
in € m. 2002 2001 2002 2001 2002 2001
Total principal amount of loans 1,178 2,033 12,409 14,929 1,266 7,483
Principal amount of loans 90 daysor more past due 3 3 223 81 35 39
Net credit losses 16 14 24 19 3 25
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When this Interpretation becomes fully effective on July 1, 2003, it is reasonablypossible that the Group will be required to consolidate or provide disclosures forcertain types of entities as follows:
For commercial paper programs, the Group acts as an administrative agent tofacilitate the sale of loans, other receivables, or securities from various third par-ties to a commercial paper entity. The commercial paper entity then issues col-lateralized commercial paper to the market. The liabilities of the commercialpaper entity are nonrecourse to the Group, so the Group’s maximum exposureof loss results primarily from any guarantees or liquidity facilities provided to thevehicle. For certain fixed-term mutual funds that the Group manages, the Groupguarantees the value of mutual fund units that investors purchase. The Group’smaximum exposure of loss related to these mutual funds results primarily fromthese guarantees. For the commercial real estate leasing vehicles and closed-end funds, third party investors essentially provide senior financing for the purchase of commercial real estate which is leased to other third parties. TheGroup’s maximum exposure of loss results primarily from any subordinatedfinancing or guarantees that are provided to these vehicles. For asset securitiza-tion and other vehicles, the Group may purchase or retain a subordinated inter-est in the assets being securitized. The liabilities of these vehicles are mainlynonrecourse to the Group, so the Group’s maximum exposure of loss results pri-marily from the risk associated with the Group’s purchased and retained interestin the vehicles.
Dec 31, 2002
Total MaximumAssets Exposure
in € m. to Loss
Commercial paper programs 19,229 23,765
Fixed-term mutual funds 13,719 13,719
Commercial real estate leasing vehicles and closed-end funds 8,181 5,246
Asset securitization and other 3,792 898
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[10] Assets Pledged and Received as Collateral
The carrying value of the Group’s assets pledged (primarily for borrowings,deposits, and securities loaned) as collateral where the secured party does nothave the right by contract or custom to sell or repledge the Group’s assets are asfollows:
At December 31, 2002 and 2001, the Group has received collateral with a fairvalue of € 253 billion and € 218 billion, respectively, arising from securities pur-chased under reverse repurchase agreements, securities borrowed, derivativestransactions, customer margin loans and other transactions, which the Group asthe secured party has the right to sell or repledge. € 154 billion and € 202 billionfor the years ended December 31, 2002 and 2001, respectively, relates to collat-eral that the Group has received and sold or repledged primarily to cover shortsales, securities loaned and securities sold under repurchase agreements. Theseamounts exclude the impact of netting in accordance with FIN 41.
[11] Premises and Equipment, Net
An analysis of premises and equipment, including assets under capital leases,follows:
in € m. Dec 31, 2002 Dec 31, 2001
Interest-earning deposits with banks – 2,027
Trading assets 26,266 42,244
Securities available for sale 445 1,675
Loans 12,275 12,557
Premises and equipment 586 347
Total 39,572 58,850
in € m. Dec 31, 2002 Dec 31, 2001
Land 1,483 1,655
Buildings 5,842 6,293
Leasehold improvements 1,510 1,513
Furniture and equipment 3,270 3,772
Purchased software 502 737
Self-developed software 796 998
Construction-in-progress 346 237
Total 13,749 15,205
Less: Accumulated depreciation 4,866 5,399
Premises and equipment, net1 8,883 9,806
1 Amounts at December 31, 2002 and 2001 include € 2.4 billion and € 2.5 billion, respectively, of net book value of premises and equipment held for investment purposes.
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The Group is lessee under lease agreements covering real property and equipment. The future minimum lease payments, excluding executory costsrequired under the Group’s capital leases at December 31, 2002, were as follows:
At December 31, 2002, the total minimum sublease rentals to be received in thefuture under subleases are € 723 million. Contingent rental income incurred during the year ended December 31, 2002, was € 2 million.The future minimum lease payments, excluding executory costs, required underthe Group’s operating leases at December 31, 2002, were as follows:
The following shows the net rental expense for all operating leases:
[12] Goodwill and Other Intangible Assets, Net
As discussed in Notes [1] and [2], effective January 1, 2002, the Group adoptedSFAS 142. SFAS 142 requires that goodwill and certain intangible assets with an indefinite useful life no longer be amortized but instead be reviewed forimpairment upon adoption of SFAS 142 and at least annually thereafter. Otherintangible assets continue to be amortized over their useful lives. Under SFAS 142,goodwill impairment exists if the net book value of a reporting unit exceeds itsestimated fair value. The Group’s reporting units are generally consistent with
in € m.
2003 153
2004 152
2005 147
2006 176
2007 148
2008 and later 1,461
Total future minimum lease payments 2,237
Less: Amount representing interest 754
Present value of minimum lease payments 1,483
in € m.
2003 414
2004 371
2005 288
2006 246
2007 221
2008 and later 946
Total future minimum lease payments 2,486
Less: Minimum sublease rentals 221
Net minimum lease payments 2,265
in € m. 2002 2001 2000
Gross rental expense 869 970 905
Less: Sublease rental income 97 79 121
Net rental expense 772 891 784
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Other Intangible Assets
the Group’s business segment level, or one level below. There was no impair-ment charge resulting from the adoption of SFAS 142. The Group performs itsannual impairment review during the fourth quarter of each year, beginning inthe fourth quarter of 2002.A goodwill impairment loss of € 62 million was recognized in the Private Equityreporting unit during 2002. A significant portion of the reporting unit was classi-fied as held for sale during the fourth quarter of 2002 resulting in an impairmentof the goodwill related to the remaining unit.
An analysis of acquired other intangible assets follows:
For the year ended December 31, 2002 the aggregate amortization expense forother intangible assets was € 26 million.The estimated aggregate amortization expense for each of the succeeding fivefiscal years are as follows:– in 2003: € 31 million– in 2004: € 24 million– in 2005: € 20 million– in 2006: € 19 million– in 2007: € 18 million
Gross Carrying Amount Accumulated Amortization Net Carrying Amount
in € m. Dec 31, 2002 Dec 31, 2001 Dec 31, 2002 Dec 31, 2001 Dec 31, 2002 Dec 31, 2001
Amortized intangible assets
Customer contracts 98 27 20 16 78 11
Investment management agreements 70 38 9 4 61 34
Other customer-related 57 – 14 – 43 –
Other 31 28 13 12 18 16
Total 256 93 56 32 200 61
Unamortized intangible assets
Retail investment managementagreements and other 1,111 –
Loan servicing rights1 100 145
Total other intangible assets 1,411 206
1 Loan servicing rights are carried at the lower of the allocated basis or current fair value and amortized in proportion to and over the estimated period of net servicing revenue.
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Goodwill and OtherIntangible Assets –Adoption of SFAS 142
For the year ended December 31, 2002, the Group acquired the following otherintangible assets:
There was no residual value estimated for the other intangible assets acquiredduring the year ended December 31, 2002.For the year ended December 31, 2002, the net carrying amount of other intan-gibles increased by € 1,205 million, mainly due to the acquisitions of Scudderand RREEF, which contributed € 1,161 million and € 82 million, respectively.
All goodwill has been allocated to reporting units. The changes in the carryingamount of goodwill by segment for the year ended December 31, 2002 are as follows:
The additions to goodwill of € 1,561 million are mainly due to the acquisitions of Scudder and RREEF, which contributed € 1,024 million and € 344 million,respectively.
Prior to the adoption of SFAS 142, the Group amortized goodwill on a straight-line basis over a period not exceeding fifteen years. The 2001and 2000 results ona historical basis do not reflect the provisions of SFAS 142. Had the Group
Goodwill
Additions in Weighted-current year Average
Amortizationin € m. Period
Amortized intangible assets
Customer contracts 75 15 years
Investment management agreements 34 11 years
Other customer-related 58 9 years
Other 19 5 years
Total 186 12 years
Unamortized intangible assets
Retail investment managementagreements and other 1,111 Indefinite
Total intangible assets 1,297
Corporate Global Personal Private Asset Corporate TotalBanking & Transaction Banking Banking Manage- Invest-
in € m. Securities Banking ment ments
Balance as of January 1, 2002 4,969 725 177 323 1,291 1,256 8,741
Balance as of December 31, 2002 4,261 635 176 276 2,408 616 8,372
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adopted SFAS 142 in prior years, the historical net income and basic and dilutednet income per common share would have been as follows:
[13] Assets Held for Sale
During 2002, the Group decided to sell certain businesses in the Global Trans-action Banking, Asset Management and Corporate Investment segments. The netassets for these businesses, most of which are reported as other investments,were written down to the lower of their carrying value or fair value less cost to sell resulting in a loss of € 217 million for the year ended December 31, 2002.
in € m. 2002 2001 2000
Net income
Reported net income 397 167 13,513
Add back: goodwill amortization net of negative goodwill – 784 769
Add back: other intangible assets amortization – 0.01 –
Adjusted net income 0.63 1.57 22.98
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[14] Other Short-term Borrowings
Short-term borrowings are borrowed funds generally with an original maturity ofone year or less. Commercial paper generally mature within 90 days. Compo-nents of other short-term borrowings include:
[15] Long-term Debt
The Group issues fixed and floating rate long-term debt denominated in variouscurrencies, approximately half of which is denominated in euros. Fixed rate debt outstanding at December 31, 2002 matures at various datesthrough 2050 and carries contractual interest rates ranging from 0.04% to16.00%. The weighted-average interest rates on fixed rate debt at December 31,2002 and 2001were 4.68% and 5.12%, respectively. Floating rate debt outstand-ing, with contractually determined interest rates ranging from 0.02% to 13.00%at December 31, 2002, matures at various dates through 2050. The weighted-average contractual interest rates on floating rate debt at December 31, 2002and 2001 were 3.01% and 3.84%, respectively. The following table is a summary of the Group’s long-term debt:
in € m. Dec 31, 2002 Dec 31, 2001
Commercial paper 4,320 14,251
Other 7,253 6,221
Total 11,573 20,472
By remaining maturities Due in Due in Due in Due in Due in Due after Total Totalin € m. 2003 2004 2005 2006 2007 2007 Dec 31, 2002 Dec 31, 2001
Total 14,770 14,963 10,682 14,378 6,347 42,915 104,055 166,908
1 Includes bonds known as “Pfandbriefe”, which are issued by German mortgage banks. Decrease to zero in 2002 due to deconsolidation of mortgage bank subsidiaries.2 Includes DM 1.2 billion and DM 1.4 billion in nominal amounts of bearer participatory certificates which matured on December 31, 2002 and mature on December 31, 2003, respectively.
These certificates carry an annual dividend rate of 9% and 8.75%, respectively, and will be redeemed, subject to the stipulations on loss participation on June 30, 2003 and June 30, 2004,respectively. These dividends have priority over the rights of shareholders to share in the Group profits. During 2001, DM 75 million was extinguished from the second tranche.
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Based solely on the contractual terms of the debt issues, the following table rep-resents the range of interest rates payable on this debt for the periods specified:
The weighted-average effective interest rates for total long-term debt were3.95% and 4.73% at December 31, 2002 and December 31, 2001, respectively. The interest rates for the floating rate debt issues are generally based on LIBOR,although in certain instances they are subject to minimum interest rates as spec-ified in the agreements governing the respective issues. The Group enters into various transactions related to the debt it issues. This debtmay be traded for market-making purposes or held for a period of time. Pur-chases of the debt are accounted for as extinguishments; however, the resultingnet gains (losses) during 2002 and 2001 were insignificant.
[16] Trust Preferred Securities
The Group formed fourteen statutory business trusts, of which the Group ownsall of the common securities and which it consolidates into the Group’s financialstatements. These trusts have no independent assets or operations, and exist forthe sole purpose of issuing cumulative and noncumulative trust preferred secu-rities and investing the proceeds thereof in an equivalent amount of junior sub-ordinated debentures or noncumulative preferred securities, respectively, withinthe Group. The Group’s trust preferred securities at December 31, 2002 and 2001 totaled€ 3.1 billion and € 4.1 billion, respectively, comprised of € 1.0 billion and € 1.5 bil-lion cumulative trust preferred securities (net of deferred issuance costs andunamortized discount), respectively, and € 2.1 billion and € 2.6 billion noncumu-lative trust preferred securities, respectively.
Dec 31, 20021 Dec 31, 20011
Senior debt
Mortgage bonds2
Fixed rate N/A 0.01% – 8.45%
Floating rate3 N/A 3.03% – 5.89%
Other bonds and notes
Fixed rate 0.04% – 16.00% 0.02% – 16.00%
Floating rate 0.02% – 13.00% 0.08% – 11.64%
Subordinated debt
Bonds and notes
Fixed rate 1.71% – 10.50% 0.88% – 18.00%
Floating rate 0.27% – 8.00% 0.70% – 8.00%
N/A – Not applicable1 The Group issues senior and subordinated long-term debt denominated in various currencies. Interest rates on Japanese Yen
denominated debt represent the lower end of the range while interest rates on South African Rand denominated debt represent the higher end of the range.
2 Decrease to zero in 2002 due to deconsolidation of mortgage bank subsidiaries.3 Excludes approximately € 1.4 billion in 2001 which relates to unusually-priced structured transactions with floating interest rates ranging
from 1.79 % to 11.23 %.
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The junior subordinated debentures, which are the sole assets of the trusts, areunsecured obligations of the Group, and are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of the Group. The principal amount of subordinated debentures held by each trust equals the aggregate liquidationamount of its trust securities and its common securities. The subordinateddebentures bear interest at the same rate, and will mature on the same date, asthe corresponding trust securities. The debentures are redeemable prior to thestated maturity at the option of the Group during the redemption periodsdescribed below. The cumulative trust preferred securities are eligible for inclusion in the Group’ssupplementary capital. A summary of the cumulative trust preferred securities issued and outstandingfollows:
The noncumulative preferred securities, which are the sole assets of the trusts,evidence preferred ownership interest in limited liability companies which arewholly-owned subsidiaries of the Group. The limited liability companies investthe proceeds from the noncumulative preferred securities in subordinated notesissued by the Group. Interest on the subordinated notes will be paid to the lim-ited liability companies on the dates described in the table below. Amounts avail-able to the trusts for distribution to the holders/creditors of the noncumulativetrust preferred securities (or loans, as the case may be) will be limited to distri-butions received by the trusts from the limited liability companies with respect tothe noncumulative preferred securities. The terms of the noncumulative trustpreferred securities are substantially identical to the terms of the noncumulativepreferred securities and do not have any scheduled maturity date. Capital pay-ments on the trust preferred securities are discretionary and noncumulative andare expected to be paid out of capital payments received by the trusts. Uponredemption of the noncumulative preferred securities, the trust must redeem a corresponding number of the trust preferred securities. The noncumulative
Noncumulative Trust Preferred Securities
Cumulative Trust Preferred Securities
Aggregate Aggregate Per Annum Interest Stated Earlier RedemptionLiquidation Liquidation Interest Payment Maturity of Maturity Period ofAmount of Amount of Rate of Dates Debentures Date1 Debentures
Trust Trust Debentures and Trust on or afterPreferred Preferred and Trust Preferred
Securities at Securities at Preferred SecuritiesDec 31, 2002 Dec 31, 2001 Securities
BT InstitutionalCapital Trust A € 264 m. € 312 m. 8.09% 6/1, 12/1 12/1/26 – 12/1/06
BT InstitutionalCapital Trust B € 152 m. € 180 m. 7.75% 6/1, 12/1 12/1/26 – 12/1/06
BT Capital Trust B € 197 m. € 233 m. 7.90% 1/15, 7/15 1/15/27 1/15/17 1/15/07
BT PreferredCapital Trust II3 € 189 m. € 230 m. 7.88% 2/25, 8/25 2/25/27 2/25/12 2/25/07
BTC Capital 3 monthTrust I LIBOR 3/30, 6/30
€ 200 m. € 236 m. plus 0.75% 9/30, 12/30 12/30/26 – 12/30/06
Total4 ¤ 1,002 m. ¤ 1,474 m.
1 The maturity dates may be shortened under certain circumstances.2 Outstanding shares were redeemed at par on February 28, 2002.3 During 2002, the Group repurchased approximately € 6 million BT Preferred Capital Trust II securities.4 Excludes deferred issuance costs and unamortized discount of € 7 million and €13 million at December 31, 2002 and 2001, respectively.
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preferred securities are redeemable at the option of the Group after expiry ofindividual remaining periods between 2 and 27 years. The noncumulative trust preferred securities are eligible for inclusion in theGroup’s core capital. A summary of the noncumulative trust preferred securities issued and outstand-ings follows:
The noncumulative preferred securities, subordinated notes and related incomeeffects are eliminated in the consolidated financial statements.
[17] Obligation to Purchase Common Shares
The Group has entered into forward purchases and sold put options of DeutscheBank shares as part of a share buy-back program. As of December 31, 2002, theput options were exercised and the shares have been acquired. In total, 900,000shares were acquired via exercised put options and 4,251,000 shares are under-lying the forward purchases. The cash redemption amounts of the forwards arereported as obligation to purchase common shares and result in a reduction ofshareholders’ equity with an equal amount reported under liabilities.
Aggregate Liquidation Aggregate Liquidation Per Annum Interest Interest Payment DatesAmount of Trust Amount of Trust Rate of Notes
Preferred Securities Preferred Securitiesat Dec 31, 2002 at Dec 31, 2001
Deutsche Bank CapitalFunding Trust I1 € 451 m. € 760 m. 7.87% 6/30, 12/30
Deutsche Bank CapitalFunding Trust II € 211 m. € 249 m. 7.75% 3/30, 6/30, 9/30, 12/30
Deutsche Bank Capital Funding Trust III € 500 m. € 500 m. 6.60% 3/30, 6/30, 9/30, 12/30
Deutsche Bank CapitalTrust I € 305 m. € 361 m. 3 month LIBOR + 1.70% 3/30, 6/30, 9/30, 12/30
Deutsche Bank CapitalTrust II € 155 m. € 172 m. 5.20% 6/30, 12/30
Deutsche Bank CapitalTrust III € 114 m. € 134 m. 3 month LIBOR + 1.90% 3/30, 6/30, 9/30, 12/30
Deutsche Bank CapitalTrust IV € 156 m. € 184 m. 3 month LIBOR + 1.80% 3/30, 6/30, 9/30, 12/30
Deutsche Bank CapitalTrust V € 216 m. € 255 m. 3 month LIBOR + 1.80% 3/30, 6/30, 9/30, 12/30
Total ¤ 2,108 m. ¤ 2,615 m.
1 Includes basis adjustments on qualified hedges of € 44.0 million and € 22.1million as of December 31, 2002 and 2001, respectively. Aggregate liquidation amount as of December 31, 2002 isnet of amount repurchased in the open market.
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[18] Common Shares and Share-Based Compensation Plans
Deutsche Bank’s share capital consists of common shares issued in registeredform without par value. Under German law, no par value shares are deemed tohave a “nominal” value equal to the total amount of share capital divided by thenumber of shares. The shares have a nominal value of € 2.56. Common share activity was as follows:
Shares purchased for treasury consist of shares held for a period of time by theGroup as well as any shares purchased with the intention of being resold in theshort term. All such transactions were recorded in shareholders’ equity and norevenue was recorded in connection with these activities.
Deutsche Bank’s share capital may be increased by issuing new shares for cashand in some circumstances for noncash consideration. At December 31, 2002,Deutsche Bank had authorized but unissued capital of € 685,822,970 which maybe issued at various dates through April 30, 2007 as follows:
Deutsche Bank also has conditional capital of € 231,614,835. Conditional capitalincludes various instruments that may potentially be converted into commonshares. At December 31, 2002, € 80,000,000 of conditional capital is available forparticipatory certificates with warrants and/or convertible participatory certifi-cates, bonds with warrants, and convertible bonds which may be issued in oneor more issuances on or before April 30, 2004. In addition, € 64,000,000 isrelated to option rights issued until May 20, 2005 under the DB Global Partner-ship Plan, € 51,200,000 is related to option rights issued until May 10, 2003under the DB Global Partnership Plan and € 35,719,539 is related to the optionrights issued under the DB Global Share Plan and the db Share Plan. € 695,296are available for the Global Equity Plan. These plans are described below.
Authorized and Conditional Capital
Number of shares 2002 2001 2000
Common shares outstanding,beginning of year 614,475,625 614,600,765 613,058,750
Shares issued under employee benefit plans 285,800 5,054,400 2,171,526
Shares purchased for treasury (440,351,020) (447,045,982) (436,326,857)
Shares sold or distributed from treasury 444,869,642 441,866,442 435,697,346
Shares purchased under share buy-back program (33,833,093) – –
Common shares outstanding, end of year 585,446,954 614,475,625 614,600,765
Authorized Capital Authorized Capital Expiration Dateexcluding Shareholders’
Pre-Emptive Rights
€ 127,822,9701 – April 30, 2003
€ 300,000,000 – April 30, 2004
– € 30,000,000 May 31, 2005
€ 128,000,0001 – April 30, 2006
€ 100,000,000 – April 30, 2007
1 Capital increase may be effected for noncash contributions with the intent of acquiring a company or holdings in companies.
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Share-Based Compensation
Share-Based Compensation PlansCurrently Used ForGranting New Awards
The Group applies the provisions of APB 25 for its share-based compensationplans. Compensation expense for share-based awards is included in compensa-tion and benefits on the Consolidated Statement of Income. See Note [1] for a discussion on the Group’s accounting for share-based compensation. In accordance with the requirements of SFAS 123 “Accounting for Stock-BasedCompensation”, the pro forma disclosures relating to net income and earnings
The Group’s significant share-based compensation plans are described in moredetail below.
DB Global PartnershipDeferred Share Awards. DB Equity Units (“DB Equity Units”) are deferred shareawards, each of which entitles the holder to one of the shares approximatelyfour years from the date of the grant, subject to certain exceptions. DB EquityUnits granted in relation to annual bonuses are forfeited if a participant termi-nates employment under certain circumstances within the first two years follow-ing the grant. Compensation expense for the DB Equity Units is recognized in the performanceyear as they relate to annual bonuses earned as part of compensation. Compen-sation expense is based on the quoted market price of a common share on thegrant date of the award. Deutsche Bank grants an exceptional award to a selected group of employees asa retention incentive that is forfeited if the participant terminates employment forany reason prior to the end of an approximate four-year vesting period. Com-pensation expense for the exceptional award is recognized over the vestingperiod.
Options. Performance options (“Performance Options”) are rights to purchasethe shares. The reference price is set at the higher of the fair market value of theshares on the date of grant or an average of the fair market value of the sharesfor the ten trading days on the Frankfurt Stock Exchange up to and including thedate of the grant. Performance Options are granted with an exercise price equalto 120% of the reference price. Performance Options are subject to a minimum vesting period of two years. Ingeneral, one-third of the options will become exercisable at each of the second,third and fourth anniversaries of the grant date. However, if the shares trade atmore than 130% of the reference price for 35 consecutive trading days, the Per-formance Options will become exercisable on the later of the end of the 35-daytrading period or the second anniversary of the award date. Under certain cir-cumstances, if a participant terminates employment prior to the vesting date,Performance Option awards will be forfeited. All options not previously exercisedor forfeited expire on the sixth anniversary of the grant date. No compensation expense was recognized for the years ended December 31,2002 and 2001 because the exercise price of the Performance Options exceededthe market price of the underlying shares on the date of grant.
Appreciation Rights. Partnership Appreciation Rights (“PARs”) are rights toreceive a cash award in an amount equal to 20% of the reference pricedescribed above. The vesting of PARs will occur at the same time and to thesame extent as the vesting of Performance Options. PARs are automaticallyexercised at the same time and in the same proportion as the exercise of the Per-formance Options.
per share are provided on pages F-63 and F-64.
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No compensation expense was recognized for the years ended December 31,2002 and 2001 as the PARs represent a right to a cash award that is only exer-cisable in conjunction with the exercise of Performance Options. This effectivelyreduces the exercise price of any Performance Option exercised to the referenceprice described above.
DB Global Share PlanCommon Shares Purchased at a Discount. In 2002, eligible employees couldpurchase up to 20 shares of the common shares. Eligible retirees could purchaseup to 10 shares of the common shares. Only German employees and retireeswere eligible to purchase these shares at a discount in 2002. In 2001, eligibleemployees could purchase up to 60 shares at a discount. Retirees in certain geographic regions were eligible to participate in the plan and were eligible topurchase up to 25 shares of the common shares at a discount. The discount waslinked to the Group’s previous year’s earnings. The participant is fully vested andreceives all dividend rights for the shares purchased. At the date of purchase,the Group recognizes as compensation expense the difference between thequoted market price of a common share at the grant date and the price paid bythe participant.
Options. In 2002, employee participants received five options to purchase oneshare for each share purchased. In 2001, employee participants received anoption to purchase one share for each share purchased. Options issued in con-nection with the purchase of shares vest two years after the date of grant andexpire after six years. Following the vesting period, options may be exercised ata strike price equal to 120% of the reference price. The reference price is set at the higher of the fair market value of the shares on the date of grant or anaverage of the fair market value of the shares for the ten trading days on theFrankfurt Stock Exchange up to and including the date of grant.Generally, a participant must have been working for the Group for at least oneyear and have an active employment contract in order to participate. Rights areforfeited upon termination of employment. Participants who retire or becomepermanently disabled prior to fulfillment of the vesting period may still exercisetheir rights during the exercise period. There is no compensation expense recorded for the option grants under theDB Global Share Plan because the exercise price exceeds the market price of theunderlying shares on the date of grant.
DB Share SchemeUnder the DB Share Scheme, the Group may grant various employees deferredshare awards which provide the right to receive common shares of the Group ata specified future date. The expense related to a portion of the shares awardedunder the plan is recognized in the performance year if it relates to annualbonuses earned as part of compensation, while the remainder of the sharesawarded for retention purposes are expensed over the vesting period, which isgenerally three years. Compensation expense is based on the quoted marketprice of a common share at the grant date of the awards.
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Share-Based Compensation PlansNo Longer Used forGranting New Awards
Restricted Equity UnitsUnder the Restricted Equity Units Plan, the Group may grant various employeesdeferred share awards for retention purposes which provide the right to receivecommon shares of the Group at a specified future date. The expense related torestricted equity units awarded is recognized over the vesting period, whichis generally four to five years. Compensation expense is based on the quotedmarket price of a common share at the grant date of the awards.
Global Equity PlanDuring 1998, 1999, and 2000, certain key employees of the Group participated inthe Global Equity Plan (“GEP”) and were eligible to purchase convertible bondsin DM 1,000 denominations at par. On October 16, 2001, the Board of ManagingDirectors gave approval to buy out the remaining participants in the GlobalEquity Plan at a fixed discount per underlying share. For purposes of the buy-out, the Group set the reference price at € 73.72 and employees could acceptthe offer during a specified period in 2001. As of December 31, 2001, 2,775 par-ticipants holding DM 55,429,000 (€ 28,340,398) bonds convertible into11,085,800 shares accepted the offer and received cash payments totaling€ 490,347,106. Compensation expense relating to participants who accepted thebuy-out offer was fully accrued in 2001. As of December 31, 2002, convertible bonds outstanding for the remaining par-ticipants may be converted into approximately 271,600 common shares after theannual shareholders’ meeting in June 2003 if specific performance criteria are met.Bonds not converted will be redeemed at maturity at their nominal value. Compensation expense is recorded using variable plan accounting over the vest-ing period for remaining participants in the GEP based upon an estimated dis-count for the applicable three-year performance period and the current price ofthe common shares. Compensation expense relating to terminated participantswho retain their award is fully accrued in the year of termination and remeasuredat the end of each reporting period until the conversion date. Compensationexpense accrued for participants whose rights are forfeited is reversed upontermination.
Stock Appreciation Rights PlansThe Group has stock appreciation rights plans (“SARs”) which provide eligibleemployees of the Group the right to receive cash equal to the appreciation of theGroup’s shares over an established strike price. The stock appreciation rightsgranted can be exercised approximately three years from the date of grant.Stock appreciation rights expire approximately six years from the date of grant.Compensation expense on SARs, calculated as the excess of the current marketprice of the Group’s common shares over the strike price, is recorded using vari-able plan accounting. The expense related to a portion of the awards is recog-nized in the performance year if it relates to annual bonuses earned as part ofcompensation, while remaining awards are expensed over the vesting periods.
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db Share PlanCommon Shares Purchased at a Discount. Prior to the adoption of theDB Global Share Plan, certain employees were eligible to purchase up to 60shares of the Group’s common shares at a discount under the db Share Plan. Atthe date of purchase, the Group recognized as compensation expense the differ-ence between the quoted market price of a common share at the grant date andthe price paid by the participant. The terms and conditions of the prior db SharePlan are substantially similar to those of the DB Global Share Plan except for thedetermination of the option strike price as discussed below.
Options. In addition, employee participants received options to purchase up to60 shares, depending on the number of shares purchased. Options issued inconnection with the purchase of shares vest over a period of approximatelythree years beginning on the date of grant. Following the vesting period, optionsmay be exercised if specific performance criteria are met. If the performance cri-teria are met, the options are exercisable during a fifteen-day exercise periodbeginning on the sixth trading day following the respective annual shareholders’meeting. The exercise price is based on the average quoted price of a commonshare on the Frankfurt Stock Exchange (XETRA) on the five trading days beforethe exercise period starts. A discount is applied to the exercise price at anamount that depends on the Group’s performance criteria. The maximum dis-count the participant is eligible to receive is 66.67%. Compensation expense for the db Share Plan is recorded using variable planaccounting over the vesting period based upon an estimated exercise price forthe applicable three-year period and the current market price of the commonshares. Compensation expense relating to terminated participants who retaintheir award is fully accrued in the year of termination and remeasured at the endof each reporting period until the exercise date. Compensation expense accruedfor participants whose rights are forfeited is reversed upon termination.
OtherThe Group has other local share-based compensation plans, none of which, indi-vidually or in the aggregate are material to the consolidated financial statements.
The Group recognized compensation expense related to its significant share-based compensation plans, described above, as follows:
CompensationExpense
in € m. 2002 2001 2000
DB Global Partnership1 4 19 –
DB Global Share Plan 3 4 –
DB Share Scheme/Restricted Equity Units 469 726 890
Global Equity Plan (6) 302 236
Stock Appreciation Rights Plans2 35 93 54
db Share Plan (45) 53 126
Total 460 1,197 1,306
1 Compensation expense for the years ended December 31, 2002 and 2001 included € 3.9 million and € 19 million, respectively, related to DB Equity Units granted in February 2003 and February 2002, respectively.
2 For the years ended December 31, 2002 and 2001, net losses of € 226 million and € 27 million, respectively, from nontrading equityderivatives, used to offset fluctuations in employee share-based compensation expense, were included.
F-46
The following is a summary of the Group’s current share-based compensationplans for the years ended December 31, 2002 and 2001 (amounts in thousandsof shares, except exercise prices).
There were no options exercisable under the DB Global Partnership Plan or theDB Global Share Plan at December 31, 2002 or 2001.In addition, approximately 97,000 DB Equity Units were granted in February2003 related to the 2002 performance year and included in compensationexpense for the year ended December 31, 2002. Approximately 24,000 DB EquityUnits were granted as a retention incentive in February 2003.Approximately 15 million Performance Options and PARs were granted in Febru-ary 2003 related to the 2002 performance year.The following is a summary of the DB Share Scheme (including Restricted EquityUnits) for the years ended December 31, 2002, 2001 and 2000 (amounts in thou-sands of shares) broken into two categories in accordance with the Group’sexpensing policy. Bonus awards are expensed in the performance year based onthe quoted market price of a share at the grant date, and are generally granted inthe following year. Retention awards are contingent upon continued service. Thecompensation expense related to retention awards is based on the quoted mar-ket price of a share at the grant date of the award and will be recognized over thevesting period. Retention awards are also granted to newly recruited employeesto replace awards forfeited from a previous employer.
DB Global Partnership DB Global Share Plan
DB Equity Performance Weighted- Shares Options3 Weighted-Units1 Options2 average average
exercise exerciseprice price
Balance at Dec 31, 2000 – – – – – –
Granted – – – – 176 € 87.66
Issued – – – 237 – –
Forfeited – – – – (1) € 87.66
Balance at Dec 31, 2001 – – – N/A 175 ¤ 87.66
Granted 451 12,156 € 89.96 – 2,082 € 55.39
Issued – – – 471 – –
Forfeited (43) (392) € 89.96 – (22) € 57.99
Balance at Dec 31, 2002 408 11,764 ¤ 89.96 N/A 2,235 ¤ 57.90
Weighted-average remaining contractual life 5 years 5 years andat Dec 31, 2002 9 months
N/A – Not applicable. Participant is fully vested for shares purchased under the DB Global Share Plan.1 The weighted-average grant-date fair value per share of deferred share awards granted in 2002 was € 74.97.2 The weighted-average grant-date fair value per option granted during 2002 was € 21.24.3 The weighted-average grant-date fair value per option granted during 2002 and 2001 was € 12.35 and € 22.76, respectively.
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In addition to the amounts shown in the table above, the Group granted the following equity awards in February 2003:(a) Approximately 1 million DB Share Scheme awards with a fair value of € 39.61in relation to the 2002 performance year as bonus awards, which were expensedentirely in 2002.(b) Approximately 24 million restricted equity units as retention awards. Eachequity unit provides the right to receive a common share of the Group’s stocksubject to certain vesting criteria through August 2007, and will be expensedover the vesting period. These awards are granted in anticipation of ongoingcontribution to the Group and, in most cases, award recipients forfeit their rightsto receive shares if they leave the Group before the end of the vesting period.The quoted market price of a share at the grant date of the 2003 awards was€ 39.61.
Bonus Retention TotalAwards1 Awards2
in thousands of shares
Balance at Dec 31, 1999 1,327 3,540 4,867
Granted 4,898 5,264 10,162
Issued (2,526) (1,717) (4,243)
Forfeited (274) (200) (474)
Balance at Dec 31, 2000 3,425 6,887 10,312
Granted 6,607 9,495 16,102
Issued (4,012) (2,902) (6,914)
Forfeited (297) (176) (473)
Balance at Dec 31, 2001 5,723 13,304 19,027
Granted 6,386 12,148 18,534
Issued (5,603) (4,243) (9,846)
Forfeited (417) (1,610) (2,027)
Balance at Dec 31, 2002 6,089 19,599 25,688
1 The weighted-average grant-date fair values per share of deferred share awards granted during 2002, 2001 and 2000 were € 74.96,€ 97.96 and € 82.29, respectively.
2 The weighted-average grant-date fair values per share of deferred share awards granted during 2002, 2001 and 2000 were € 72.56,€ 66.66 and € 88.88, respectively. For the outstanding balance at year-end 2002 the weighted-average grant-date fair value per share was € 70.28 and approximateley € 400 million were expensed by year-end 2002.
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SFAS 123 Pro-forma-Information
The following is a summary of the Group’s share-based compensation plans (forwhich there will be no future awards) for the years ended December 31, 2002,2001 and 2000.
There were no options exercisable under the db Share Plan at December 31,2002, 2001 or 2000.
See Note [1] for the pro forma information regarding net income and earningsper share as required by SFAS 123. The pro forma information was determinedfor the years ended December 31, 2002, 2001 and 2000, as if the Group hadaccounted for its employee share options under the fair value method ofSFAS 123. The expense for the deferred share awards is the same under APB 25and SFAS 123. For purposes of pro forma disclosure, the estimated fair value of the options isrecognized in the performance year if it relates to annual bonuses earned as partof compensation, while the remainder is amortized to expense over the option’svesting period.
Global Stock db Share PlanEquity Appreciation
Plan Rights Plans
in thousands of Convertible SARs2 Shares Options3
equivalent shares Bonds1
Balance at Dec 31, 1999 10,977 – – 1,633
Purchased 6,968 – 2,172 –
Granted – 6,674 – 1,889
Forfeited (549) (166) – (34)
Balance at Dec 31, 2000 17,396 6,508 N/A 3,488
Granted – original – 16,510 – –
Exchanged – (16,223) – –
Granted – new – 10,328 – –
Convertible bonds converted (5,054) – – –
Convertible bonds redeemed (11,086) – – –
Forfeited (649) (195) – (12)
Balance at Dec 31, 2001 607 16,928 N/A 3,476
Granted – 3 – –
Issued – (30) – (1,453)
Convertible bonds converted (286) – – –
Forfeited (49) (555) – (170)
Balance at Dec 31, 2002 272 16,346 – 1,853
Weighted-average remainingcontractual life at Dec 31, 2002 5 months 5 months
N/A – Not applicable. Participant is fully vested for shares purchased under the db Share Plan.1 Convertible bonds are included in long-term debt on the Consolidated Balance Sheet. Amounts presented in table above are presented
in thousands of equivalent shares.2 SARs are granted at various strike prices. In October 2001, 16,223,276 SARs with a strike price of € 98 vesting in 2004 and expiring
in 2007 were replaced by 10,328,417 rights at a strike price of € 67.3 The options outstanding as of December 31, 2002 will expire in one tranche after the shareholder meeting in 2003.
The weighted-average grant-date fair value per option granted during 2000 was € 63.47.
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In 2002 and 2001, the fair value of share options was estimated on the date ofgrant primarily using a Black-Scholes option pricing model. The fair value ofshare options granted in 2000 was estimated on the date of grant using a for-ward valuation model. The weighted-average fair value per option and relatedassumptions were:
[19] Asset Restrictions and Dividends
Since January 1, 1999, when stage three of the European Economic and Mone-tary Union was implemented, the European Central Bank has had responsibilityfor monetary policy and control in all the member countries of the EuropeanMonetary Union, including Germany. The European Central Bank sets minimum reserve requirements for institutionsthat engage in the customer deposit and lending business. These minimumreserves must equal a certain percentage of the institutions’ liabilities resultingfrom certain deposits, and the issuance of bonds and money market instru-ments. Liabilities to European Monetary Union national central banks and toother European Monetary Union Banking institutions that are themselves sub-ject to the minimum reserve requirements are not included in this calculation.Since January 1, 1999, the European Central Bank has set the minimum reserverate at 2%. For deposits with a term to maturity or a notice period of more thantwo years, bonds with a term to maturity of more than two years and repurchasetransactions, the minimum reserve rate has been set at 0%. Each institution isrequired to deposit its minimum reserve with the national central bank of itshome country. Cash and due from banks includes reserve balances that the Group is required tomaintain with certain central banks. These required reserves are comprised primarily of deposits outstanding and were € 450 million and € 507 million atDecember 31, 2002 and 2001, respectively.Under Deutsche Bank’s Articles of Association and German law, dividends arebased on the results of Deutsche Bank AG as prepared in accordance with Ger-man accounting rules. The Board of Managing Directors, which prepares theannual financial statements of Deutsche Bank AG on an unconsolidated basis,and the Supervisory Board, which reviews them, first allocate part of DeutscheBank’s annual surplus (if any) to the statutory reserves and to any losses carriedforward, as it is legally required to do. Then they allocate the remainder betweenprofit reserves (or retained earnings) and balance sheet profit (or distributableprofit). They may allocate up to one-half of this remainder to profit reserves, andmust allocate at least one-half to balance sheet profit. The Group then distributesthe full amount of the balance sheet profit of Deutsche Bank AG if the share-holders’ meeting resolves so.
Dec 31, 2002 Dec 31, 2001 Dec 31, 2000
Weighted-average fair value per option € 12.03 € 21.29 € 63.06
Estimated discount N/A N/A 66.67%
Risk free interest rate 3.45% 5.03% 4.99%
Expected lives (in years) 4.4 4.5 2.78
Dividend yield 3.22% 1.55% 1.59%
Volatility 43.20% 32.57% –
N/A – Not applicable. Options granted in 2000 were based on a discount.
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Certain other subsidiaries are subject to various regulatory and other restrictionsthat may limit cash dividends and certain advances to Deutsche Bank.
[20] Regulatory Capital
The regulatory capital adequacy guidelines applicable to the Group are set forthby the Basel Committee on Banking Supervision, the secretariat of which is pro-vided by the Bank for International Settlements (“BIS”) and by European Councildirectives, as implemented by the German Federal Financial Supervisory Authority(Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin”), which has assumedthis responsibility from the former German Banking Supervisory Authority. Effec-tive December 31, 2001 the BaFin permitted the Group to calculate its BIS capitaladequacy ratios using U.S. GAAP amounts. Prior to December 31, 2001 theGroup used International Accounting Standards (“IAS”) for disclosure to theGroup’s regulators. The BIS capital ratio is the principal measure of capital adequacy for internationalbanks. This ratio compares a bank’s regulatory capital with its counterparty risksand market risks (which the Group refers to collectively as the “risk position”).Counterparty risk is measured by asset and off-balance sheet exposures accord-ing to broad categories of relative credit risk. The Group’s market risk compo-nent is a multiple of its value-at-risk figure, which may be calculated for regula-tory purposes based on the Group’s internal models. These models wereapproved by the BaFin for use in determining the Group’s market risk equivalentcomponent of its risk position. A bank’s regulatory capital is divided into threetiers (core or Tier I capital, supplementary or Tier II capital, and Tier III capital).Core or Tier I capital consists primarily of share capital, additional paid-in capitaland retained earnings less certain intangibles (principally goodwill) and theimpact from the tax law changes (as described below). Supplementary or Tier IIcapital consists primarily of participatory capital, long-term subordinated debt,unrealized gains on listed securities and other inherent loss allowance. Tier IIIcapital consists mainly of certain short-term subordinated liabilities. The mini-mum BIS total capital ratio (Tier I + Tier II + Tier III) is 8% of the risk position, andthe minimum BIS core (Tier I) capital ratio is 4% of the risk position. Under BISguidelines, the amount of subordinated debt that may be included as Tier II cap-ital is limited to 50% of Tier I capital. Total Tier II capital is limited to 100% ofTier I capital. The effect of the German Tax Reform Legislation on available for sale securitiesis treated differently for the regulatory capital calculation and financial account-ing. For financial accounting purposes, deferred tax provisions for unrealizedgains on available for sale securities are recorded directly to other comprehen-sive income whereas the adjustment to the related deferred tax liabilities for achange in expected effective income tax rates is recorded as an adjustment ofincome tax expense in current period earnings. The positive impact from theabove on retained earnings of the Group from the two important German tax lawchanges in 1999 and 2000 amounts to approximately € 3.0 billion as of Decem-ber 31, 2002. For the purpose of calculating the regulatory capital, gross unreal-ized gains on available for sale securities are excluded from Tier I capital. Theadjustment relates to accumulated other comprehensive income (€ (2.9) billion)and the release of deferred tax provisions (€ 3.0 billion) included in retained earnings. Failure to meet minimum capital requirements can initiate certain mandates, andpossibly additional discretionary actions by the BaFin and other regulators that,
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if undertaken, could have a direct material effect on the consolidated financialstatements of the Group. The following table sets forth the Group’s total capital and capital adequacyratios (as a percentage of the risk position) based on BIS guidelines:
Capital in accordance with BIS is shown in the table below. With a capital ratio of12.6% at December 31, 2002, Deutsche Bank is well above the minimum ratio of8% required by BIS. The components of core and supplementary capital for the Group of companiesconsolidated for regulatory purposes are as follows:
The group of companies consolidated for regulatory purposes includes all sub-sidiaries in the meaning of the German Banking Act, which are classified ascredit, financial services and financing companies, as well as companies provid-ing auxiliary banking services. It does not include insurance companies, fundmanagement companies inside the European Union or companies outside thefinance sector.
Capital According to BIS
in € m. (except percentages) Dec 31, 2002 Dec 31, 2001
BIS total capital 29,862 37,058
BIS core capital 22,742 24,803
BIS risk position1 237,479 305,079
BIS capital ratio (Tier I + II + III) 12.6% 12.1%
BIS core capital ratio (Tier I) 9.6% 8.1%
1 Primarily comprised of credit risk weighted assets. Also includes market risk equivalent assets of € 6.2 billion as of December 31, 2002, and € 8.0 billion as of December 31, 2001.
in € m. Dec 31, 2002
Common shares 1,592 Unrealized gains on listed securities (45% eligible) 138
Additional paid-in capital 11,199 Other inherent loss allowance 687
Minority interests 401 Subordinated liabilities, if eligible according to BIS 5,300
Noncumulative trust preferred securities 2,287
Other (equity contributed by silent partners) 686
Items deducted (principally goodwill and taxeffect of available for sale securities) (13,512)
Total core capital 22,742 Total supplementary capital 7,120
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[21] Interest Revenues and Interest Expense
The following are the components of interest revenues and interest expense:
in € m. 2002 2001 2000
Interest revenues
Interest-earning deposits with banks 1,469 2,912 2,303
Central bank funds sold and securities purchased under resale agreements 6,579 8,226 8,007
Securities borrowed 2,809 5,327 6,644
Interest income on securities available for sale and other investments 1,257 2,682 2,594
Dividend income on securities available for sale and other investments 385 1,029 762
Loans 11,741 17,619 20,137
Trading assets 11,378 15,571 14,439
Other 163 273 245
Total interest revenues 35,781 53,639 55,131
Interest expense
Interest-bearing deposits
Domestic 2,662 3,169 3,877
Foreign 6,657 12,555 13,020
Trading liabilities 4,410 5,723 6,285
Central bank funds purchased and securities sold under repurchase agreements 7,049 10,829 10,979
Securities loaned 580 1,902 2,161
Other short-term borrowings 705 1,636 2,708
Long-term debt 6,362 8,918 8,767
Trust preferred securities 170 287 306
Total interest expense 28,595 45,019 48,103
Net interest revenues 7,186 8,620 7,028
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[22] Trading Revenues, Net
The following are the components of trading revenues:
[23] Insurance Business
The following are the components of other assets related to insurance business:
All other assets of the Group’s insurance business, primarily securities availablefor sale, are included in the respective line item on the Consolidated BalanceSheet. The following are the components of insurance policy claims and reserves:
The Group sold most of its insurance business in 2002 to Zurich Financial Services.
1 Includes gains and losses from derivatives not qualifying for hedge accounting treatment.
in € m. Dec 31, 2002 Dec 31, 2001
Investment under unit-linked business 7,514 11,467
Deferred acquisition costs 17 1,729
Other 266 679
Total other assets related to insurance business 7,797 13,875
in € m. Dec 31, 2002 Dec 31, 2001
Benefit reserves 418 18,922
Reserve for unit-linked business 7,514 11,932
Provision for premium refund – 1,303
Other insurance provisions and liabilities 625 3,084
Total insurance policy claims and reserves 8,557 35,241
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[24] Pension and Other Employee Benefit Plans
Employee retirement arrangements, covering the majority of the Group’s sub-sidiaries and employees, are provided in the principal countries in which theGroup operates. The value of a participant’s accrued benefit is based primarilyon each employee’s salary and length of service. The Group provides retirement arrangements primarily for employees working inthe United States, Germany, Spain, Italy, Belgium, France, the Netherlands andthe United Kingdom. The majority of beneficiaries of the retirement arrange-ments are principally located in Germany. All plans are valued using the pro-jected unit credit method. In December 2002 the Group funded the majority ofits pension plans in Germany. The Group contributed € 3.9 billion to a segregatedpension trust relating to an accumulated benefit obligation totaling € 3.5 billion.In addition, the Group contributed to its qualified U.S. and U.K. pension plansapproximately € 115 million and € 300 million, respectively. Plans in Germany,the United States, the United Kingdom, Belgium, France, the Netherlands andAsia are generally funded, while the Spanish and Italian plans are unfunded. The Group also sponsors a number of defined contribution plans coveringemployees of certain subsidiaries. The assets of all the Group’s defined contribu-tion plans are held in independently administered funds. Contributions are gen-erally determined as a percentage of salary. In addition, the Group’s affiliates offer unfunded contributory defined benefitpostretirement health care plans to a number of retired employees who are prin-cipally located in the United States. These plans pay stated percentages of nec-essary medical and dental expenses of retirees after a stated deductible hasbeen met. The Group funds these plans on a cash basis as benefits are due. The following tables provide a reconciliation of the changes in the Group’s plans’benefit obligations and fair value of assets over the two-year period endedDecember 31, 2002 and a statement of the funded status as of December 31 foreach year:
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The aggregate projected benefit obligation, accumulated benefit obligation, andfair value of plan assets for those pension plans with accumulated benefit obli-gations in excess of plan assets were € 1,454 million, € 1,367 million and € 1,084million, respectively, as of December 31, 2002 and € 4,654 million, € 4,185 mil-lion and € 297 million, respectively, as of December 31, 2001.A minimum pension liability of € 8 million, net of tax, is recorded in other com-prehensive income for the excess of accumulated benefit obligation over the fairvalue of plan assets.
Pension Benefits PostretirementBenefits
in € m. 2002 2001 2002 2001
Change in benefit obligation
Benefit obligation at beginning of year 6,772 6,416 151 121
Fair value of plan assets at end of year 6,296 2,369 – –
Funded status (357) (4,403) (160) (151)
Unrecognized net actuarial loss (gain) 893 690 (13) (21)
Unrecognized prior service cost (benefit) (1) 26 15 (8)
Unrecognized transition assets 1 (5) – –
Accrued benefit cost at end of year2 536 (3,692) (158) (180)
1 Amount of 2002 includes € 3.9 billion, € 115 million and € 300 million contributed to the Group’s German, U.S. and U.K. pension plans,respectively.
2 Prepaid pension costs totaled € 951million and € 665 million at December 31, 2002 and 2001, respectively. No prepaid postretirementcosts were recognized at these dates.
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Benefits expense for the years ended December 31, 2002, 2001 and 2000,included the following components:
The following actuarial assumptions were calculated on a weighted-averagebasis and reflect the local economic conditions for each country’s respectivedefined benefit and postretirement benefit plans:
In determining postretirement benefits expense, an annual rate of increase of8.9% in the per capita cost of covered health care benefits was assumed for2003. The rate was assumed to decrease gradually to 5.0% by 2007 and remainat that level thereafter.Assumed health care cost trend rates have a significant effect on the amountsreported for the retiree health care plans. A one-percentage-point change in
Pension Benefits Postretirement Benefits
in € m. 2002 2001 2000 2002 2001 2000
Service cost 323 309 314 4 4 2
Interest cost 384 367 339 8 10 7
Expected return on plan assets (175) (197) (200) – – –
Discount rate in determining benefit obligations at year-end 5.8% 6.1% 6.2% 6.7% 7.2% 7.6%
Rate of increase in future compensation levelsfor determining expense 3.0% 3.4% 3.0% 4.5% 5.0% 5.0%
Rate of increase in future compensation levelsfor determining benefit obligations at year-end 2.0% 2.5% 3.5% 4.0% 5.0% 5.0%
Expected long-term rate of return on assets 6.7% 8.1% 8.2% N/A 9.0% 9.0%
N/A – Not applicable1 The weighted-average actuarial assumptions for the postretirement plans primarily reflect the assumptions used in the United States as this is where the Group’s significant postretirement
plans are located.
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assumed health care cost trend rates would have the following effects on theGroup’s retiree health care plans:
[25] Restructuring Activities
Restructuring plans are recorded in conjunction with acquisitions as well asbusiness realignments. The following table presents the activity in the Group’s restructuring programsfor the years ended December 31, 2002, 2001 and 2000:
Severance includes employee termination benefits related to the involuntary ter-mination of employees. Such costs include obligations resulting from severanceagreements, termination of employment contracts and early-retirement agree-ments. Other costs primarily include amounts for lease terminations and relatedcosts.
Balance at Dec 31, 2002 30 12 14 3 128 19 – – – 206
1 Includes € 12 million recorded as goodwill; net expense, after additions, is € 125 million.2 Scudder restructuring of € 86 million recorded as goodwill; net expense, after releases, is € 583 million.
One-Percentage- One-Percentage-Point Increase Point Decrease
in € m. 2002 2001 2002 2001
Effect on total of service and interestcost components 2 2 (2) (2)
Effect on accumulated postretirementbenefit obligation 18 16 (15) (14)
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2002 Plans
At December 31, 2002, € 172 million of the remaining restructuring liabilitiesrelated to severance and other termination-related costs for further staff reduc-tions of approximately 1,500 positions. These severance actions, as well as theactions related to other exit activities, are expected to be completed by the endof the first half of 2003. During the year ended December 31, 2002, approximately 5,400 employeeswere terminated, resulting in a payment of € 510 million against restructuring liabilities. The following is a description of the Group’s restructuring plans for the yearsended December 31, 2002 and 2001.
Group Restructuring. The Group recorded a pre-tax charge of € 340 million inthe first quarter of 2002 related to restructuring activities affecting all ofDeutsche Bank’s group divisions: Corporate and Investment Bank (CIB), PrivateClients and Asset Management (PCAM) and Corporate Investments (CI). Of thetotal € 340 million, € 246 million are related to restructuring measures in PCAM,€ 93 million in CIB and € 1 million in CI. A total of approximately 2,100 staff areimpacted by these restructuring plans. The restructuring covers a broad range ofmeasures primarily to streamline the Group’s branch network in Germany, aswell as its infrastructure.As of December 31, 2002, approximately 2,000 positions were eliminated and€ 295 million of the reserve was utilized. As of December 31, 2002, € 30 millionof the remaining reserve balance related to severance and other termination-related costs for further staff reductions of approximately 100 positions and€ 12 million related to lease terminations and other related costs. All actions contemplated in the plan are expected to be completed by the end of the firstquarter of 2003.
CIB Restructuring. In the second quarter of 2002, the Group recorded arestructuring liability of € 265 million related to the CIB Group Division. The planaffected approximately 2,000 staff, across all levels of the Group. The restructuring resulted from detailed business reviews and reflected theGroup’s outlook for the markets in which it operates. It related to banking cover-age, execution and relationship management processes; custody; trade financeand other transaction banking activities; and the related technology, settlement,real estate and other support functions.During the year ended December 31, 2002, approximately 800 positions wereeliminated and € 104 million of the reserve was utilized. As of December 31,2002, € 128 million of the remaining reserve balance related to severance andother termination-related costs for further staff reductions of approximately1,200 positions and € 19 million related to lease terminations and other relatedcosts. All actions contemplated in the plan are expected to be completed by theend of the first half of 2003.
Scudder Restructuring. During 2002, the Group recorded a restructuring lia-bility of € 86 million related to restructuring activities in connection with theacquisition of Zurich Scudder Investments, Inc. Of this amount, approximately€ 83 million of severance and other termination-related costs and € 3 million forother costs, primarily related to lease terminations, were recognized as a liabilityassumed as of the acquisition date and charged directly to goodwill. A total ofapproximately 1,000 Scudder staff is impacted by this restructuring plan.
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As of December 31, 2002, € 14 million of the remaining reserve balance relatedto severance and other termination-related costs for further staff reductions ofapproximately 150 positions and € 3 million related to lease and contract termi-nations. All actions contemplated in the plan are expected to be completed bythe end of the first half of 2003.
Group Restructuring. The Group recorded a pre-tax charge of € 294 million inthe fourth quarter of 2001 related to a restructuring plan affecting two ofDeutsche Bank’s group divisions: CIB and PCAM. Of the total € 294 million orig-inally, € 213 million related to the restructuring measures in CIB and € 81 millionto PCAM, including € 14 million related to Private Clients Services (PCS) businessline that was transferred from PCAM to CIB. The Group planned for a reductionof approximately 2,400 staff across all levels of the Group. The restructuring in CIB covered steps to be taken as a result of changing market conditions in the year 2001, and to give further effect to the CIB organi-zational and business model that was created during 2001. It primarily impactedCIB’s customer coverage and relationship management processes, certainaspects of the cash management, custody and trade finance businesses ofGlobal Transaction Banking and the related elements of the settlement, infra-structure and real estate support functions. The plan also included the further streamlining of the senior management struc-ture in PCAM as a consequence of the re-organization of that group division’sbusiness model and operations, including real estate support. As of December 31, 2001, approximately 200 positions were eliminated. Duringthe year ended December 31, 2002, approximately 1,800 additional employeeswere terminated in connection with the plan. Due primarily to higher thanexpected staff attrition, actions related to the remaining positions included in therestructuring plan were not taken and, therefore, reserves of € 20 million werereleased in 2002. The remaining infrastructure related reserve of € 2 million wasalso released during 2002.
[26] Income Taxes
The components of income taxes (benefits) follow:
2001 Plan
in € m. 2002 2001 2000
Domestic 215 486 337
Foreign 494 1,102 1,351
Current taxes 709 1,588 1,688
Domestic 2,992 100 (8,356)
Foreign (512) (259) 24
Deferred taxes 2,480 (159) (8,332)
Total 3,189 1,429 (6,644)
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The following is an analysis of the difference between the amount that wouldresult from applying the German statutory income tax rate to income before taxand the Group’s actual income tax expense (benefit):
During 2000, a new tax law was enacted in Germany which reduced the corpo-rate tax rates and exempted from tax certain gains from the sale of equity secu-rities. The corporate tax rate was reduced from 40% on retained earnings and30% on distributed earnings to a single 25% rate effective January 1, 2001. Thedomestic tax rate including corporate tax, solidarity surcharge, and trade taxused for calculating deferred tax assets and liabilities as of December 31, 2000was 39.3% which at that time was the expected statutory rate for 2001. The taxlaw change also exempted certain gains on the sale of equity securities effectiveJanuary 1, 2002. The effect of the above changes was a net income tax benefit of€ 9.3 billion for the year ended December 31, 2000. Approximately € 6.2 billionof the tax benefit from the change in tax rates in 2000 is related to the reductionof deferred tax liabilities previously recorded on unrealized gains on equity secu-rities – even though these deferred taxes were originally established through acharge to other comprehensive income, not through a charge to earnings. For the years ended December 31, 2002 and 2001, due to actual sales of equitysecurities on which there was accumulated deferred tax provision in other com-prehensive income, it was necessary to reverse those provisions as income taxexpense. This treatment led to income tax expense of € 2,817 million and € 995million, respectively. This adjustment does not result in actual tax payments andhas no net effect on shareholders’ equity. The remaining accumulated deferred tax amounts recorded within other com-prehensive income will be reversed as income tax expense in the periods thatthe related securities are sold. At December 31, 2002 and 2001, the amount ofthese deferred taxes accumulated within other comprehensive income that willreverse in a future period as tax expense when the securities are sold is approxi-mately € 3.0 billion and € 5.9 billion, respectively. The corporate income tax rate in Germany has been temporarily increased by1.5% to 26.5% for the year 2003 only as enacted in September 2002. This willincrease the statutory income tax rate to 40.5% for temporary differences thatwill reverse in 2003. The resulting tax benefit did not have a material impact onincome taxes.
in € m. 2002 2001 2000
Expected tax expense at German statutoryincome tax rate of 39.2% (52.4% for 2000) 1,391 707 3,599
Effect of changes in German tax law and the reversing effect 2,817 995 (9,287)
Domestic tax rate differential on dividend distribution (65) – (172)
Tax-exempt gains on securities and other income (1,824) (1,077) (101)
Foreign tax-rate differential 87 (146) (903)
Change in valuation allowance 254 286 (108)
Nondeductible expenses 223 354 98
Goodwill amortization/impairment 24 363 404
Tax credit related to domestic dividend received (7) (109) (144)
Actual income tax expense (benefit) 3,189 1,429 (6,644)
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The tax effects of each type of temporary difference and carryforward that giverise to significant portions of deferred income tax assets and liabilities are the following:
Included in other assets and other liabilities at December 31, 2002 and 2001 aredeferred tax assets of € 3.9 billion and € 3.8 billion and deferred tax liabilities of€ 1.1 billion and € 1.4 billion, respectively. Certain foreign branches and companies in the Group have deferred tax assetsrelated to net operating loss carryforwards and tax credits available to reducefuture tax expense. The net operating loss carryforwards at December 31, 2002were € 6.3 billion of which € 5.9 billion has no expiration date and € 429 millionexpire at various dates extending to 2021. Tax credits were € 326 million of which€ 221 million will expire in 2004 and € 33 million will expire in 2005 and € 72 mil-lion have other expiration dates. The Group has established a valuation allowancewhere realization of those losses and credits is not likely. The Group did not provide income taxes or foreign withholding taxes on € 5.2billion of cumulative earnings of foreign subsidiaries as of December 31, 2002because these earnings are intended to be indefinitely reinvested in those oper-ations. It is not practicable to estimate the amount of unrecognized deferred taxliabilities for these undistributed foreign earnings.
in € m. Dec 31, 2002 Dec 31, 2001
Deferred income tax assets
Trading activities 12,298 17,424
Net operating loss carryforwards and tax credits 2,632 2,222
Property and equipment, net 673 756
Other assets 2,253 2,913
Allowance for loan losses 152 315
Other provisions 593 883
Total 18,601 24,513
Valuation allowance (949) (965)
Deferred tax assets after valuation allowance 17,652 23,548
Deferred income tax liabilities
Trading activities 13,197 19,468
Property and equipment, net 689 434
Securities valuation 82 236
Other liabilities 858 974
Total 14,826 21,112
Net deferred income tax assets 2,826 2,436
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[27] Earnings Per Common Share
Basic earnings per common share amounts were computed by dividing netincome by the average number of common shares outstanding during the year.The average number of common shares outstanding is the sum of the averagenumber of common shares outstanding and undistributed vested sharesawarded under deferred share plans. Diluted earnings per share amounts were calculated by adding back to netincome the interest expense on the convertible bonds and dividing this amountby the average number of common shares and dilutive potential common sharesoutstanding during the year. Diluted earnings per share assumes the conversion into common shares of out-standing share options, unvested deferred share awards and convertible bonds,as computed under the treasury stock method, if dilutive. Under the treasuryshare method, the number of incremental shares is determined by assuming theissuance of the outstanding share options, deferred share awards, and sharesfrom convertible bonds, reduced by the number of shares assumed to be repur-chased from the issuance proceeds, using the Group’s average market shareprice for the year.
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The following tables set forth the computation of basic and diluted earnings pershare:
[28] Business Segments and Related Information
From the beginning of 2002, the Group revised its management reporting systems to reflect changes in the methodologies employed for managing theGroup’s divisions and to reflect changes in management responsibility for certainbusinesses.The methodologies for managing the Group’s divisions were amended to bringthem more closely in line with U.S. GAAP. The changes were primarily related tothe accounting for share-based compensation, the accounting for equitymethod investments, the elimination of income earned on the Group’s bondsand the presentation of minority interest as a noninterest expense item. In addi-tion, the reporting format of the Group’s management reporting systems wererevised to reflect how management evaluated its businesses in 2002. Prior periods have been restated to conform to the current year’s presentation.
in € m. 2002 2001 2000
Income before cumulative effect of accounting changes, net of tax 360 374 13,513
Cumulative effect of accounting changes, net of tax 37 (207) –
Numerator for basic earnings per share – net income 397 167 13,513
Effect of dilutive securities:
Convertible bonds – – 1
Numerator for diluted earnings per share – net income applicable to common shareholders after assumed conversions 397 167 13,514
in € 2002 2001 2000
Basic earnings per share
Income before cumulative effect of accounting changes, net of tax 0.58 0.60 22.00
Cumulative effect of accounting changes, net of tax 0.06 (0.33) –
Net income 0.64 0.27 22.00
Diluted earnings per share
Income before cumulative effect of accounting changes, net of tax 0.57 0.60 21.72
Cumulative effect of accounting changes, net of tax 0.06 (0.33) –
Net income 0.63 0.27 21.72
Number of shares 2002 2001 2000
Denominator for basic earnings per share – weighted-average shares outstanding 615,867,917 619,809,559 614,303,797
Effect of dilutive securities:
Options 4,350,557 800,535 842,839
Convertible bonds 107,527 174,003 4,296,519
Deferred shares 6,145,041 2,003,504 2,748,708
Dilutive potential common shares 10,603,125 2,978,042 7,888,066
Denominator for diluted earnings per share – adjusted weighted-average shares after assumed conversions 626,471,042 622,787,601 622,191,863
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Organizational Structure
Changes in Manage-ment Responsibility
The Corporate and Investment Bank Group Division serves all of the Group’s corporate and institutional clients, ranging from small and medium-sized enter-prises to multinational corporations. The Group serves its clients through thecorporate divisions, Corporate Banking & Securities and Global TransactionBanking.The Private Clients and Asset Management Group Division integrates, on aglobal basis, all of the Group’s activities for retail and affluent clients, as well asits active and passive asset management activities for retail and institutionalclients. Within this group division, the Group manages these activities in threeglobal corporate divisions: Asset Management, Private Banking, and PersonalBanking. Within the Corporate Investments Group Division, the Group combines its principal investment activities. This unit manages the Group’s principal privateequity and venture capital investments and its real estate holding companies, aswell as its industrial investments. The principal investments held by DB Investorare included in this group division. In addition, Corporate Investments coversstrategic investments as well as activities that do not belong to the Group’s corebusiness.The Group also has a service function called DB Services, that provides corpo-rate services, information technology, consulting and transaction services to theentire organization. The Group’s Corporate Center includes those functions thatsupport cross-divisional management.
During 2002, management responsibility changed for the following significantbusinesses: – The Private Clients Services business was transferred from the Private
Banking Corporate Division to the Corporate Banking & Securities Corporate Division.
– The Morgan Grenfell private equity business previously assigned to the AssetManagement Corporate Division was transferred to the Corporate Invest-ments Group Division.
– The real estate business managed by the subsidiary DB Real Estate Manage-ment GmbH (formerly Deutsche Grundbesitz Management GmbH) and thereal estate investment funds business in Italy (brand name “Fondimmobiliari”)were transferred from Corporate Investments Group Division to the AssetManagement Corporate Division where they are managed under “DB RealEstate”.
– All European e-brokerage activities under the brand name “maxblue” are con-solidated under the Personal Banking Corporate Division. The Group thereforetransferred all European “maxblue” activities previously reported under theCorporate Investments Group Division to the Personal Banking CorporateDivision. The same transfer was made for all e-commerce activities in connec-tion with the brand name “moneyshop/moneyshelf”.
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The effects of significant acquisitions and divestitures on segmental results ofoperations are described below: – The disposal of most of the Group’s insurance subsidiaries affected both
net revenues and noninterest expenses of the Personal Banking CorporateDivision.
– A majority of the Scudder business is included in the Asset Management Cor-porate Division with a smaller part included in the Private Banking CorporateDivision. The RREEF business is included entirely in the Asset ManagementCorporate Division.
– The merger of the Group’s mortgage bank subsidiary “EUROHYPO AGEuropäische Hypothekenbank der Deutschen Bank” with the mortgage banksubsidiaries of Dresdner Bank AG and Commerzbank AG to the newly created“EUROHYPO AG” in the third quarter of 2002 led to the deconsolidation of theGroup’s former subsidiary. In anticipation of the merger, the business of theGroup’s mortgage bank was transferred from the Corporate Banking & Secu-rities Corporate Division to the Corporate Investments Group Division as ofthe first quarter of 2002. After the merger, the Group’s share in the combinedentity was 34.6%, with Commerzbank taking a 34.4% share and DresdnerBank taking a 28.7% share (free-float 2.3%). In connection with the merger,in December 2002, part of the Group’s London-based real estate investmentbanking business was contributed to EUROHYPO AG. On December 31,2002, the Group’s share of the combined entity was 34.6%.
– The Group sold its commercial finance business in North America to GE Com-mercial Finance in October 2002 and the Group sold its consumer financebusiness in North America to E*TRADE Bank in December 2002.
Impact of Acquisitionsand Divestitures During 2002
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Business segment results are determined based on the Group’s internal management reporting process, which reflects the way management views itsbusinesses, and are not necessarily prepared in accordance with the Group’sU.S. GAAP consolidated financial statements. This internal management report-ing process may be different than the processes used by other financial institu-tions and therefore, should be considered in making any comparisons withthose institutions. Since the Group’s business activities are diverse in nature andits operations are integrated, certain estimates and judgments have been madeto apportion revenue and expense items among the business segments.The management reporting system follows the “matched transfer pricing con-cept” in which the Group’s external net interest revenues are allocated to thebusiness segments based on the assumption that all positions are funded orinvested via the money and capital markets. Therefore, to create comparabilitywith competitors which have legally independent units with their own equityfunding, we allocate among our business segments the notional interest crediton our consolidated capital resulting from our method for allocating fundingcosts. This credit is allocated in proportion to each business segment’s allocatedequity, and is included in the segment’s net interest revenues.The general principle of the Group’s book equity allocation framework is to allo-cate the total of the Group’s average active equity to the segments in proportionto their share of economic risk positions using a multiplier for which the Grouputilizes the term “Capital Allocation Factor (CAF)”. Starting 2002, the Group’saverage active equity increased while the aggregated economic risk positions ofthe segments went down. As it is the Group’s objective to maintain the risk sen-sitivity within the equity allocation framework, the Group decided to maintain aconstant CAF multiplier for all of 2002 based on the relation between theGroup’s average active equity and the aggregated economic risk positions of thesegments as of January 2002. Consequently, the reduction in the aggregatedeconomic risk positions of the Group’s segments during 2002 led to less allo-cated average active equity and the incentive for the Group’s segments to fur-ther reduce risk positions was strengthened. The resulting unallocated amountof average active equity amounted to € 3.8 billion in 2002.Revenues from intersegment transactions are allocated to the business seg-ments on a mutually agreed basis. In addition, cost centers are internal serviceproviders operating on a nonprofit basis and allocate their costs to the servicerecipient. The allocation criteria are generally contractually agreed and are eitherdetermined based upon “price per unit” (for areas with countable services) or“fixed price” or “agreed percentages” (for all areas without countable services).
General Informationon the Group’s Management’sReporting Systems
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The following tables present the results of the business segments for the yearsended December 31, 2002, 2001 and 2000:
Segmental Results ofOperations
2002 Corporate and Investment Bank Private Clients and Asset Management Corporate Total
Corporate Global Total Asset Private Personal Total Invest- Manage-
Banking & Trans- Manage- Banking Banking ments ment
4 Noninterest expenses excluding nonoperating costs (goodwill impairment, severance payments, restructuring activities, minority interest), provision for off-balance sheet positions and policyholder benefits and claims.
5 Before cumulative effect of accounting changes.6 Book equity is allocated to the divisions for Management Reporting purposes in proportion to the economic capital calculated for them.7 At the group division level CIB, PCAM, CI and Total Management Reporting, intersegment items between the group divisions/corporate divisions are included.
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2001 Corporate and Investment Bank Private Clients and Asset Management Corporate Total
Corporate Global Total Asset Private Personal Total Invest- Manage-
Banking & Trans- Manage- Banking Banking ments ment
4 Noninterest expenses excluding nonoperating costs (goodwill amortization, severance payments, restructuring activities, minority interest), provision for off-balance sheet positions and policyholder benefits and claims.
5 Before cumulative effect of accounting changes.6 Book equity is allocated to the divisions for Management Reporting purposes in proportion to the economic capital calculated for them.7 At the group division level CIB, PCAM, CI and Total Management Reporting, intersegment items between the group divisions/corporate divisions are included.
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2000 Corporate and Investment Bank Private Clients and Asset Management Corporate Total
Corporate Global Total Asset Private Personal Total Invest- Manage-
Banking & Trans- Manage- Banking Banking ments ment
4 Noninterest expenses excluding nonoperating costs (goodwill amortization, severance payments, restructuring activities, minority interest), provision for off-balance sheet positions and policyholder benefits and claims.
5 Book equity is allocated to the divisions for Management Reporting purposes in proportion to the economic capital calculated for them.6 At the group division level CIB, PCAM, CI and Total Management Reporting, intersegment items between the group divisions/corporate divisions are included.
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The following tables present the revenue components of the Corporate andInvestment Bank Group Division and the Private Clients and Asset Manage-ment Group Division for the years ended December 31, 2002, 2001 and 2000respectively:
in € m. 2002 2001 2000
Sales & Trading (debt and other products) 5,423 5,814 4,449
Sales & Trading (equity) 2,791 4,111 5,152
Total Sales & Trading 8,214 9,925 9,601
Transaction services 2,704 3,053 2,971
Loan products 2,393 2,975 3,623
Origination (debt) 388 441 286
Origination (equity) 354 492 937
Total Origination 742 933 1,223
Advisory 516 568 879
Other (250) 20 (221)
Total 14,319 17,474 18,076
in € m. 2002 2001 2000
Portfolio/funds management 2,723 2,170 2,679
Loan/deposit products 2,531 2,462 2,262
Advisory 1,235 1,374 1,612
Insurance business 963 3,487 4,484
Transaction fees 589 642 620
Other 931 258 343
Total 8,972 10,393 12,000
Corporate and Investment Bank
Private Clients andAsset Management
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The following tables provide a reconciliation of the total results of operations andtotal assets of the Group’s business segments under management reporting sys-tems to the consolidated financial statements prepared in accordance withU.S. GAAP for the years ended December 31, 2002, 2001 and 2000:
There are two primary categories of adjustments which the Group records toreconcile the total results according to management reporting to the consoli-dated financial statements. These adjustments include differences in accountingmethods used for management reporting versus U.S. GAAP and adjustmentsrelating to activities outside the management responsibility of the business segments.
Net revenues. For the years ended December 31, 2002, 2001 and 2000, adjust-ments included approximately € 0.1 billion, € (0.2) billion and € 0.3 billion,respectively, related to positions which are marked to market for managementreporting purposes and accounted for on an accrual basis under U.S. GAAP. Theyear 2002 also included approximately € 0.2 billion for the elimination of tradinglosses on the Group’s securities and approximately € (0.1) billion mainly due tolosses from internally hedging share-based compensation plans. The year 2001also included approximately € (0.3) billion due to losses from internally hedgingshare-based compensation plans and approximately € 0.1 billion for other corpo-rate items outside the responsibility of the business segments. The year 2000also included approximately € (0.2) billion for the elimination of gains on theGroup’s securities.
Reconciliation of Segmental Results ofOperations to Consoli-dated Results of Operations Accordingto U.S. GAAP
2002 2001 2000
Total Adjust- Total Total Adjust- Total Total Adjust- TotalManage- ments Consoli- Manage- ments Consoli- Manage- ments Consoli-
ment dated ment dated ment datedin € m. Reporting Reporting Reporting
provision for off-balance sheet positions and policyholder benefits and claims.3 Before cumulative effect of accounting changes.
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Net Revenues (Including Provisionfor Loan Losses) byGeographical Location
Provision for loan losses and provision for off-balance sheet positions.The adjustments reflected provisions for loan losses and provisions for off-bal-ance sheet positions, none of which was individually material, that are not underthe management responsibility of the business segments.
Operating cost base, policyholder benefits and claims and nonoperatingcosts. In 2002, adjustments were primarily attributable to expenses related tolegal items not under the management responsibility of the business segments.In 2001, approximately € 0.1 billion was related to buyout costs for the GlobalEquity Plan that was offset by a positive adjustment of approximately € 0.1billionrelated to internally hedging share-based compensation plans. The remainingadjustment of approximately € 0.1 billion primarily related to other corporateitems not under the management responsibility of the business segments.Adjustments for the year ended December 31, 2000 were primarily attributableto expenses related to corporate items not under the management responsibilityof the business segments.
Total Assets. The adjustments consisted of assets not allocated to the businesssegments (including deferred tax assets and premises and equipment) and tointersegment items between the group divisions.
The following table presents net revenues (including provision for loan losses) bygeographical location:
[29] International Operations
The following table presents asset and income statement information by majorgeographic area. The information presented has been classified based primarilyon the location of the Group’s office in which the assets and transactions arerecorded. However, due to the highly integrated nature of the Group’s opera-tions, estimates and assumptions have been made to allocate items betweenregions.
in € m. 2002 2001 2000
Germany 10,676 12,788 14,295
Europe (excluding Germany) 6,228 7,429 9,739
North America (primarily U.S.) 5,218 6,106 7,585
South America 175 211 181
Asia-Pacific1 2,159 1,983 2,201
Consolidated net revenues2 24,456 28,517 34,001
1 Includes revenues from Africa, which were not material in 2002, 2001 and 2000.2 Consolidated net revenues include net interest revenues after provision for loan losses and noninterest revenues. Revenues are attributed
to countries based on the location in which the Group’s booking are located.
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2002 Total Total Total Income Netassets revenues1 expenses1 (loss) income
before (loss)in € m. taxes2
Europe (excluding Germany) 285,181 18,846 18,724 122 192
North America (primarily U.S.) 205,375 13,352 13,953 (601) (383)
International as a percentage oftotal above 71% 67% 72% 6% 66%
1 Total revenues include interest revenues and noninterest revenues. Total expenses include interest expense, noninterest expenses andprovision for loan losses.
2 Before cumulative effect of accounting changes. 3 Includes balance sheet and income statement data from Africa, which were not material in 2002.
2001 Total Total Total Income Netassets revenues1 expenses1 (loss) income
before (loss)in € m. taxes2
Europe (excluding Germany) 311,711 23,919 22,918 1,001 522
North America (primarily U.S.) 237,456 21,794 22,349 (555) (811)
South America 2,433 816 708 108 41
Asia-Pacific3 58,487 4,875 4,723 152 7
Total international 610,087 51,404 50,698 706 (241)
International as a percentage oftotal above 66% 69% 70% 39% N/M
1 Total revenues include interest revenues and noninterest revenues. Total expenses include interest expense, noninterest expense and provision for loan losses.
2 Before cumulative effect of accounting changes. 3 Includes balance sheet and income statement data from Africa, which were not material in 2001. N/M – Not meaningful
2000 Total Total Total Income Netassets revenues1 expenses1 before income
in € m. taxes
Europe (excluding Germany) 319,664 25,723 23,099 2,624 1,854
North America (primarily U.S.) 256,260 25,402 23,912 1,490 1,030
South America 1,475 759 701 58 52
Asia-Pacific2 69,865 5,470 5,128 342 203
Total international 647,264 57,354 52,840 4,514 3,139
International as a percentage oftotal above 70% 69% 70% 66% 23%
1 Total revenues include interest revenues and noninterest revenues. Total expenses include interest expense, noninterest expenses and provision for loan losses.
2 Includes balance sheet and income statement data from Africa, which were not material in 2000.
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Derivatives Held orIssued for TradingPurposes
Derivatives Held orIssued for NontradingPurposes
[30] Derivative Financial Instruments and Financial Instruments withOff-Balance Sheet Risk
In the normal course of business, the Group enters into a variety of derivativetransactions for both trading and nontrading purposes. The Group’s objectives inusing derivative instruments are to meet customers’ needs, to manage theGroup’s exposure to risks and to generate revenues through trading activities.Derivative contracts used by the Group in both trading and nontrading activitiesinclude swaps, futures, forwards, options and other similar types of contractsbased on interest rates, foreign exchange rates and the prices of equities andcommodities (or related indices).
The Group trades derivative instruments on behalf of customers and for its ownpositions. The Group transacts derivative contracts to address customerdemands both as a market maker in the wholesale markets and in structuringtailored derivatives for customers. The Group also takes proprietary positions forits own accounts. Trading derivative products include swaps, options, forwardsand futures and a variety of structured derivatives which are based on interestrates, equities, credit, foreign exchange and commodities.
Derivatives held or issued for nontrading purposes primarily consist of interestrate swaps used to manage interest rate risk. Through the use of these deriva-tives, the Group is able to modify the volatility and interest rate characteristics ofits nontrading interest-earning assets and interest-bearing liabilities. The Groupis subject to risk from interest rate fluctuations to the extent that there is a gapbetween the amount of interest-earning assets and the amount of interest-bear-ing liabilities that mature or reprice in specified periods. The Group actively man-ages this interest rate risk through, among other things, the use of derivativecontracts. Utilization of derivative financial instruments is modified from time totime within prescribed limits in response to changing market conditions, as wellas changes in the characteristics and mix of the related assets and liabilities. The Group also uses cross-currency interest rate swaps to hedge both foreigncurrency and interest rate risks from securities available for sale. For these hedges, the Group applies either fair value or cash flow hedgeaccounting when cost beneficial. When hedging only interest rate risk, fair valuehedge accounting is applied for hedges of assets or liabilities with fixed interestrates, and cash flow hedge accounting is applied for hedges of floating interestrates. When hedging both foreign currency and interest rate risks, cash flowhedge accounting is applied when all functional-currency-equivalent cash flowshave been fixed, otherwise fair value hedge accounting is applied. For the years ended December 31, 2002 and 2001, net hedge ineffectivenessfrom fair value hedges, which is based on changes in fair value resulting fromchanges in the market price or rate related to the risk being hedged, andamounts excluded from the assessment of hedge effectiveness resulted in a lossof € 81 million and a gain of € 34 million, respectively. As of December 31, 2002,the longest term cash flow hedge outstanding matures in 2029. Derivatives entered into for nontrading purposes that do not qualify for hedgeaccounting are also classified as trading assets and liabilities. These includeinterest rate swaps, foreign exchange forwards and cross currency interest rateswaps used to economically hedge interest and foreign exchange risk, but forwhich it is not cost beneficial to apply hedge accounting. Also included arenegotiated transactions related to the Group’s industrial holdings classified as
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available for sale, which the Group has entered into for strategic and economicpurposes despite the fact that hedge accounting is precluded. Net losses of € 226 million and € 27 million from nontrading equity derivativesused to offset fluctuations in employee share-based compensation expensewere included in compensation and benefits for the years ended December 31,2002 and 2001, respectively. Prior to January 1, 2001, most of the derivatives entered into for nontrading pur-poses, although considered effective as economic hedges, did not qualify forhedge accounting mainly due to contemporaneous documentation require-ments that could not be fulfilled when initially adopting U.S. GAAP after the fact.Consequently, these derivatives have been accounted for as trading derivatives,that is, they are marked to market and the changes in fair value are reported intrading revenues.
The Group enters into contracts indexed to Deutsche Bank common shares aspart of a share buy-back program, to acquire shares to satisfy employee stockcompensation awards, and for trading purposes.Related to the share buy-back program, at December 31, 2002, the Group hadoutstanding agreements to purchase, on a forward basis, approximately 4 mil-lion Deutsche Bank shares at a weighted-average strike price of € 65.45 pershare. The agreements mature between three months and one year and must bephysically settled. The cash redemption amounts of these forwards, whichtotaled € 278 million, are reported as obligation to purchase common shares andresulted in a reduction of shareholders’ equity with an equal amount reportedunder liabilities.Related to employee share compensation awards, at December 31, 2002, theGroup had outstanding agreements to purchase, on a forward basis, approxi-mately 26 million Deutsche Bank shares at a weighted-average strike price of€ 72.35 per share. The agreements expire or are exercisable at the vesting datesof the related share awards and mature in less than five years. These agreementsmay, at the Group’s discretion, be settled physically, on a net basis in DeutscheBank shares, or using a combination of both methods. Consequently these contracts are accounted for as permanent equity.Based on the closing price of Deutsche Bank common shares of € 43.90 pershare at December 31, 2002, the Group would have delivered approximately43 million Deutsche Bank shares if the Group had chosen to net share settlethese contracts at December 31, 2002. If the share price had been € 1 lower, theGroup would have delivered an additional 1 million shares if the Group had cho-sen to net share settle these contracts.At December 31, 2002, the Group had outstanding call options to purchaseapproximately 17 million shares at a weighted-average strike price of € 69.00 pershare related to employee share compensation awards. The options must benet-cash settled. The contracts mature in less than five years.
Derivative FinancialInstruments Indexedto Our Own Stock
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Related to trading activities, the following derivative contracts that are indexedto Deutsche Bank’s own stock are outstanding at December 31, 2002:
The above contracts related to trading activities are accounted for as tradingassets and liabilities and are thus carried at fair value with changes in fair valuerecording in earnings.
Type of Settlement Maturity Number of Weighted- Effect of Fair ValueContract Alternative issuers shares average decrease of
to which strike price of share Contractcontracts are price by € 1
indexed (in €) (€ in thousands) (€ in thousands)
Purchased Net-cash Up to 3 months 359,400 69.90 30 704Options >3 months – 1 year 1,149,900 78.67 (9) 1,916
>1 year – 5 years 1,203,100 83.60 (456) 10,157
Sold Options Net-cash Up to 3 months 35,800 40.56 (7) 82>3 months – 1 year 433,700 42.09 (69) 2,140>1 year – 5 years 384,000 64.31 288 1,563
Forward Deutsche Bank >3 months – 1 year 13,500,000 75.22 (13,500) 443,748Purchases choice >1 year – 5 years 10,000,000 69.00 (10,000) 266,198
Net-cash/physical1,2
Net-cash Up to 3 months 13,546 42.90 (14) 94>3 months – 1 year 467,735 43.90 (468) 2,254>5 years 3,450 50.10 (3) 21
Forward Counterparty >3 month – 1 year 3,199,067 96.86 3,199 179,151Sales choice >1 year – 5 years 22,781,614 69.00 22,782 669,419
Net-cash/physical1
Net-cash Up to 3 months 8,236,744 44.73 8,237 57,869>3 months – 1 year 1,151,086 44.02 1,151 26>1 year – 5 years 22,600 47.96 23 94
1 Fair values do not differ significantly relating to settlement alternatives.2 The forward purchases are subject to collateral requirements.
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The Group utilizes various lending-related commitments in order to meet thefinancing needs of its customers. The contractual amount of these commit-ments is the maximum amount at risk for the Group if the customer fails to meetits obligations. Off-balance sheet credit risk amounts are determined withoutconsideration of the value of any related collateral and reflect the total potentialloss on undrawn commitments. The table below summarizes our lending-relatedcommitments:
In addition, as of December 31, 2002, commitments to enter into reverse repurchase and repurchase agreements totaled € 1.4 billion and € 311 million,respectively. Commitments to enter into reverse repurchase and repurchaseagreements amounted to € 3.9 billion and € 7.1billion, respectively, as of Decem-ber 31, 2001. As of December 31, 2002 and 2001 the Group had commitments to contributecapital to equity method and other investments totaling € 829 million and € 583million, respectively.The Group also enters regularly into various guarantee and indemnificationagreements in the normal course of business. Probable losses under financialguarantees are provided for as part of the allowance for credit losses on lending-related commitments as shown in Note [8]. The principal guarantees and indem-nifications that the Group enters into are the following:Financial guarantees, standby letters of credit and performance guarantees, witha carrying amount of € 610 million and with maximum potential payments of€ 32.6 billion as of December 31, 2002, generally require the Group to pay in theevent of default of debt obligations or when the guaranteed party fails to meetits obligations. Most of these guarantees mature within one year and the maxi-mum term is 48 years. These guarantees are collateralized with cash, securitiesand other collateral of € 5.4 billion as of December 31, 2002.Market value guarantees with a carrying amount of € 9 million as of Decem-ber 31, 2002, consist of agreements to pay customers if the price of fixed-termmutual fund units purchased fall below a certain amount. The maximum amountof potential payments as of December 31, 2002 was € 13.5 billion and representsthe total volume guaranteed of the respective funds. These guarantees haverevolving terms and generally are not collateralized. Upon exercise, written put options effectively require the Group to pay for adecline in market value related to the counterparty’s underlying asset or liability.The carrying amount and maximum potential payments of written puts as ofDecember 31, 2002 was € 10.4 billion and € 64.5 billion, respectively. Nearly all ofthe puts mature within 10 years with a significant portion maturing within fouryears and the maximum term being 35 years. Additionally, credit derivativesrequiring payment by the Group in the event of default of debt obligations havea carrying and maximum potential payment amount of € 706 million and € 18.0
1 Includes commitments to extend commercial letters of credit and guarantees of € 2.2 billion and € 3.2 billion at December 31, 2002 and 2001, respectively.
2 Includes commitments to extend commercial letters of credit and guarantees of € 1.3 billion and € 38 million at December 31, 2002 and 2001, respectively.
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billion, respectively, with terms up to 9 years and primarily less than 5 years.These contracts are typically uncollateralized.Securities lending indemnifications require the Group to indemnify customersfor the replacement costs or market value of securities loaned to third parties inthe event the third parties fail to return the securities. These indemnificationshad a maximum potential payment amount of € 46.1 billion and € 42.2 billion, atDecember 31, 2002 and 2001, respectively, with contract terms up to 6 months.The Group primarily receives cash as collateral in excess of the contractamounts. This collateral totaled € 46.6 billion and € 44.0 billion at December 31,2002 and 2001, respectively.
[31] Concentrations of Credit Risk
The Group distinguishes its credit exposures among the following categories:loans, tradable assets, over-the-counter (“OTC”) derivatives and contingent liabilities. Loans exclude interest-earning deposits with banks, other claims (mostly unset-tled balances from securities transactions) and accrued interest. Tradable assets, as defined for this purpose, include bonds, other fixed-incomeproducts and traded loans. Over-the-counter derivatives are the Group’s credit exposures arising from over-the-counter, or OTC, derivative transactions. Credit exposure in OTC derivativesis measured by the cost to replace the contract if the counterparty defaults on itsobligation. The costs of replacement amount to only a small portion of thenotional amount of a derivative transaction. The Group calculates its credit expo-sure under OTC derivatives transactions at any time as the replacement costs ofthe transactions based on marking them to market at that time. Contingent liabilities include liabilities from guarantees (excluding market valueguarantees) and indemnity agreements. They exclude letters of credit, other obli-gations such as irrevocable loan commitments and placement and underwritingcommitments. The Group also excludes other quantifiable indemnities and commitments, which predominantly relate to securities lending on behalf of customers. The following tables represent an overview of the Group’s total credit exposure(other than credit exposure arising from repurchase and reverse repurchaseagreements, securities lending and borrowing, interest-earning deposits withbanks and irrevocable loan commitments) according to the industrial sectorsand the geographical regions of the Group’s counterparties. Credit exposure forthese purposes consists of all transactions where losses might occur due to thefact that counterparties will not fulfill their contractual payment obligations. Thegross amount of the exposure has been calculated without taking any collateralinto account.
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In the following table, exposures have been allocated to regions based on thedomicile of the Group’s counterparties, irrespective of any affiliations the coun-terparties may have with corporate groups domiciled elsewhere.
[32] Fair Value of Financial Instruments
SFAS 107, “Disclosures about Fair Value of Financial Instruments”, requires thedisclosure of fair value information about financial instruments, whether or notrecognized 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. Incases where quoted market prices are not available, fair values are based onpresent value estimates or other valuation techniques. These derived fair valuesare significantly affected by assumptions used, principally the timing of futurecash flows and the discount rate. Because assumptions are inherently subjectivein nature, the estimated fair values cannot be substantiated by comparison toindependent market quotes and, in many cases, the estimated fair values wouldnot necessarily be realized in an immediate sale or settlement of the instrument.The disclosure requirements of SFAS 107 exclude certain financial instrumentsand all nonfinancial instruments (e.g., franchise value of businesses). Accord-
1 Includes lease financing and a deduction for unearned income.2 For 2001 certain loan exposures were reclassified from banks and insurance to other (€ 6.5 billion) and from commercial real estate activities to households (€ 2.8 billion).
1 Includes supra-national organizations and other exposures that have not been allocated to a single region.
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ingly, the aggregate fair value amounts presented do not represent manage-ment’s estimation of the underlying value of the Group. The following are the estimated fair values of the Group’s financial instrumentsrecognized on the Consolidated Balance Sheet, followed by a general descrip-tion of the methods and assumptions used to estimate such fair values.
For short-term financial instruments, defined as those with remaining maturitiesof 90 days or less, the carrying amounts were considered to be a reasonableestimate of fair value. The following instruments were predominantly short-term:
For those components of the above listed financial instruments with remainingmaturities greater than 90 days, fair value was determined by discounting con-tractual cash flows using rates which could be earned for assets with similarremaining maturities and, in the case of liabilities, rates at which the liabilitieswith similar remaining maturities could be issued as of the balance sheet date.
Methods andAssumptions
Assets Liabilities
Cash and due from banks Interest-bearing deposits
Central bank funds sold and securities Central bank funds purchased and securities soldpurchased under resale agreements and under repurchase agreements and securitiessecurities borrowed loaned
Interest-earning deposits with banks Other short-term borrowings
Other financial assets Other financial liabilities
Carrying Amount Fair Value
in € m. Dec 31, 2002 Dec 31, 2001 Dec 31, 2002 Dec 31, 2001
Financial assets
Cash and due from banks 8,979 10,388 8,979 10,388
Interest-earning deposits with banks 25,691 37,986 25,715 38,086
Central bank funds sold and securitiespurchased under resale agreements and securities borrowed 155,258 144,003 155,302 144,007
Trading assets1 297,062 293,653 297,077 293,653
Securities available for sale 21,619 71,666 21,619 71,666
Other investments 4,504 6,221 4,504 6,225
Loans (excluding leases), net 163,002 256,194 165,486 259,235
Other financial assets 46,818 62,275 46,813 62,275
Commitments to extend credit3 103,526 123,960 103,429 123,925
1 Includes loans held for sale.2 Includes trust preferred securities.3 Includes commitments to extend guarantees and letters of credit.
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Trading assets (including derivatives and excluding loans held for sale), tradingliabilities and securities available for sale are carried at their fair values.Loans held for sale are accounted for at the lower of cost or market. For short-term loans and variable rate loans which reprice within 90 days, thecarrying value was considered to be a reasonable estimate of fair value. Forthose loans for which quoted market prices were available, fair value was basedon such prices. For other types of loans, fair value was estimated by discountingfuture cash flows using the current rates at which similar loans would be madeto borrowers with similar credit ratings and for the same remaining maturities. Inaddition, the specific loss component of the allowance for loan losses, includingrecoverable amounts of collateral, was considered in the fair value determinationof loans. The fair value estimate of commitments to extend credit, standby andother letters of credit and guarantees included the unrealized gains and losseson those off-balance sheet positions and was generally determined in the samemanner as loans. Other investments consist primarily of investments in equityinstruments (excluding, in accordance with SFAS 107, investments accountedfor under the equity method). Other financial assets consisted primarily of accounts receivable, accrued interestreceivable, cash and cash margins with brokers and due from customers onacceptances. Noninterest-bearing deposits do not have defined maturities. Fair value repre-sents the amount payable on demand as of the balance sheet date. Other financial liabilities consisted primarily of accounts payable, accrued inter-est payable, accrued expenses and acceptances outstanding. The fair value of long-term debt and trust preferred securities was estimated byusing market quotes, as well as discounting the remaining contractual cashflows using a rate at which the Group could issue debt with a similar remainingmaturity as of the balance sheet date.
[33] Litigation
Due to the nature of its business, the Group is involved in litigation and arbitra-tion proceedings in Germany and in a number of jurisdictions outside Germany,including the United States, arising in the ordinary course of business. While it isnot feasible to predict or determine the ultimate outcome of all pending orthreatened legal and regulatory proceedings, the Group does not believe that theoutcome of these proceedings will have a material adverse effect on the Group’sfinancial condition or results of operations. On December 20, 2002, the U.S. Securities and Exchange Commission, theNational Association of Securities Dealers, the New York Stock Exchange, theNew York Attorney General, and the North American Securities AdministratorsAssociation (on behalf of state securities regulators) announced an agreement inprinciple with ten investment banks to resolve investigations relating to researchanalyst independence. Deutsche Bank Securities Inc. (“DBSI”), the U.S. SEC-registered broker-dealer subsidiary of Deutsche Bank, was one of the ten invest-ment banks. Pursuant to the agreement in principle, and subject to finalizationand approval of the settlement by DBSI, the Securities and Exchange Commis-sion and state regulatory authorities, DBSI agrees, among other things (i) to pay€ 48 million, of which € 24 million is a civil penalty and € 24 million is for restitu-tion for investors, (ii) to adopt internal structural and operational reforms that willfurther augment the steps it has already taken to ensure research analyst inde-pendence and promote investor confidence, (iii) to contribute € 24 million
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spread over five years to provide third-party research to clients, (iv) to contribute€ 5 million towards investor education, and (v) to adopt restrictions on the allo-cation of shares in initial public offerings to corporate executives and directors.
[34] Terrorist Attacks in the United States
As a result of the terrorist attacks in the United States on September 11, 2001, theGroup’s office buildings located at 130 Liberty Street and 4 Albany Street in NewYork were damaged. The Group’s employees located at these office buildings, inaddition to employees located in leased properties at 4 World Trade Center and14–16 Wall Street were relocated to contingency premises. The Group is evaluating the future plans for the buildings located at 130 LibertyStreet and 4 Albany Street, both of which were severely damaged due to thedestruction of the World Trade Center. The leased property and all lease-hold improvements at 4 World Trade Center were destroyed. Employees have re-occupied the premises at 14–16 Wall Street.Costs incurred by the Group as a result of the terrorist attacks include, but arenot limited to, write-offs of fixed assets, expenses incurred to replace fixedassets that were damaged and relocation expenses. The Group also continues toevaluate the costs that it may incur in the future to resolve the damage to itsbuildings adjacent to the World Trade Center site. The Group has and will con-tinue to make claims for its costs related to the terrorist attacks, including thoserelated to business interruption, through its insurance policies. These policieshave coverage limits of U.S.$ 1.7 billion in total damages and a U.S.$ 750 millionsub-limit for business interruption, service interruption and extra expenses. As ofDecember 31, 2002, the Group has received advance payments on its insurancerecoveries of approximately U.S.$ 232 million, which were applied against previously established receivables, and a commitment for additional advancepayments of U.S.$ 50 million. The Group believes that it will recover substantially all of its costs under its insur-ance policies, but there can be no assurance that all of the costs incurred, lossesfrom business interruption, losses from service interruption or extra expenseswill be paid by the insurance carriers, as they may dispute portions of theGroup’s claims. For the years ended December 31, 2002 and 2001, no losseshave been recorded by the Group.
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[35] EU Compliance Disclosure
As a condition for the exemption under §292a HGB, group accounts followingU.S. GAAP must be prepared in conformity with the disclosure requirements ofthe European Union. The Consolidated Financial Statements of Deutsche Bankare in accordance with the Directives 83/349/EWG and 86/635/EWG with regardto the following information:
Loans and advances tocredit institutions andcustomers
Debt securities including fixed-incomesecurities
in € m. Dec 31, 2002 Dec 31, 2001
Loans and advances to credit institutions 126,252 154,495
Repayable on demand 65,943 81,401
Remaining maturity of
up to three months 46,544 44,206
more than three months and up to one year 8,983 12,328
more than one year and up to five years 3,717 15,535
more than five years 1,065 1,025
Loans and advances to customers 261,165 338,727
Remaining maturity of
up to three months 148,349 159,789
more than three months and up to one year 22,126 26,147
more than one year and up to five years 39,277 71,253
more than five years 51,413 81,538
in € m. Dec 31, 2002 Dec 31, 2001
Issued by public-sector issuers 88,742 86,639
Issued by other issuers 91,981 95,641
Total 180,723 182,280
in € m. Dec 31, 2002 Dec 31, 2001
Treasury bills and similar securities 7,653 4,443
Other bills eligible for refinancing with central banks 90 116
Total 7,743 4,559
Treasury bills andother bills eligible for refinancing withcentral banks
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Shares in banks valued at equity amounted to € 2,227 million (2001: € 401 mil-lion). Other equity investments included participating interests in the amount of€ 614 million (2001: € 471 million), of which € 69 million (2001: € 28 million)related to investments in banks.The list of shareholdings is deposited with the Commercial Register in Frankfurtam Main, but can also be ordered free of charge.
The total amount of loans and advances to equity interests and investments valued at equity was € 5,538 million (2001: € 1,874 million).The total amount of liabilities to equity interests and investments valued at equitywas € 2,778 million (2001: € 2,953 million).
Loans and advancesand liabilities toequity interests andinvestments valued at equity
Structure and devel-opment of otherinvestments
Equity method Other equity Totalin € m. investments investments
Acquisition cost
as at Jan 1, 2002 5,520 6,653 12,173
impairment 305 490 795
change in the group of consolidated companies 1,368 (285) 1,083
effects of exchange rate changes (170) (538) (708)
additions 3,197 2,362 5,559
transfers (659) 659 –
disposals 2,731 3,632 6,363
as at Dec 31, 2002 6,220 4,729 10,949
Amortization
as at Jan 1, 2002 176 – 176
change in the group of consolidated companies – – –
effects of exchange rate changes 2 – 2
additions 3 – 3
transfers – – –
disposals – – –
as at Dec 31, 2002 181 – 181
Book values
as at Dec 31, 2002 6,039 4,729 10,768
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Land and buildings with a book value totalling € 3,819 million (2001: € 4,072 mil-lion) were used within the scope of our own activities.
The total amount of subordinated assets was € 2,523 million (2001: € 784 million).
Intangible assets and premises and equipment
Goodwill Other Premises and Totalintangible equipment
in € m. assets
Cost of acquisition/manufacture
as at Jan 1, 2002 12,241 238 15,205 27,684
impairment 62 – 22 84
change in the group of consolidated companies 509 1,253 (867) 895
effects of exchange rate changes (1,611) (23) (674) (2,308)
additions – 11 1,696 1,707
transfers – 33 – 33
disposals – 45 1,589 1,634
as at Dec 31, 2002 11,077 1,467 13,749 26,293
Amortization/Depreciation
as at Jan 1, 2002 3,500 32 5,399 8,931
change in the group of consolidated companies (465) – (566) (1,031)
effects of exchange rate changes (330) (3) (130) (463)
additions – 26 1,132 1,158
transfers – 4 – 4
disposals – 3 969 972
as at Dec 31, 2002 2,705 56 4,866 7,627
Book value
as at Dec 31, 2002 8,372 1,411 8,883 18,666
Subordinated assets
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Liabilities to credit institutions and customers
Provisions
in € m. Dec 31, 2002 Dec 31, 2001
Amounts owed to credit institutions 241,140 254,529
Repayable on demand 153,086 148,490
With agreed maturity dates or periods of notice
up to three months 57,377 66,180
more than three months and up to one year 14,003 19,847
more than one year and up to five years 8,974 12,849
more than five years 7,700 7,163
Savings deposits 28,386 33,048
With agreed periods of notice
up to three months 16,550 19,692
more than three months and up to one year 9,256 10,938
more than one year and up to five years 2,557 2,396
more than five years 23 22
Other liabilities to customers 258,081 292,613
Repayable on demand 118,973 120,244
With agreed maturity dates or periods of notice
up to three months 105,345 130,793
more than three months and up to one year 15,147 24,052
more than one year and up to five years 10,684 8,628
more than five years 7,932 8,896
Debt securities in issue 87,093 88,297
Other liabilities evidenced by paper 9,755 76,212
Remaining maturity of
up to three months 5,113 17,776
more than three months and up to one year 4,642 10,562
more than one year and up to five years – 28,907
more than five years – 18,967
in € m. Dec 31, 2002 Dec 31, 2001
Provisions for pensions and similar obligations 995 4,952
Provisions for taxes 5,080 5,412
Provisions in insurance business 8,352 33,560
Other provisions 6,717 6,992
Total 21,144 50,916
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The following table shows the important subordinated liabilities:
For the above subordinated liabilities there is no premature redemption obliga-tion on the part of the issuers. In the case of liquidation or insolvency, the claimsand interest claims resulting from these liabilities are subordinate to those claimsof all creditors of the issuers that are not also subordinated. These conditionsalso apply to the subordinated borrowings not specified individually.
The table shows the effects of exchange rate changes on the balance sheet:
Trust assets:Trust activities
Subordinated liabilities
Foreign currency
Amount Issuer/Type Interest rate Maturity
DM 2,000,000,000 Deutsche Bank AG,bearer bond of 1993 7.50 % Feb 10, 2003
EUR 750,000,000 Deutsche Bank Finance N.V.,Curaçao, callable note of 2002 5.38 % Mar 27, 2012
U.S.$ 500,000,000 Deutsche Bank Finance N.V.,Curaçao, callable note of 2002 var. 1.90 % Mar 27, 2012
U.S.$ 1,100,000,000 Deutsche Bank Financial Inc.,Dover/U.S.A., “Yankee Bond” of 1996 6.70 % Dec 13, 2006
U.S.$ 550,000,000 Deutsche Bank Financial Inc.,Dover/U.S.A., Medium-Term-Note of 2000 7.50 % Apr 25, 2009
U.S.$ 300,000,000 BT Institutional Capital Trust A,Wilmington/U.S.A., Floating Rate Note 8.09 % Dec 1, 2026
in € m. Dec 31, 2002 Dec 31, 2001
Foreign currency assets 417,400 579,400
thereof U.S.$ 231,900 343,800
Foreign currency liabilities (excluding capital and reserves) 392,700 566,800
thereof U.S.$ 221,500 343,400
Change in total assets owing to parity changes for foreign currencies1 – 52,900 + 16,200
thereof due to U.S.$ – 36,900 + 13,900
1 Based on the asset side.
in € m. Dec 31, 2002 Dec 31, 2001
Interest-earning deposits with banks 1,660 1,391
Securities available for sale 25 162
Loans 2,690 3,180
Others 936 971
Total 5,311 5,704
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Trust liabilities:
Interest income from investment securities include interest income from debtsecurities available for sale in the amount of € 1,257 million (2001: € 2,682 million).
Dividend income from equity securities available for sale and other investmentsamounted to € 385 million (2001: € 1,029 million). Included in this figure are divi-dend income on equity securities available for sale in the amount of € 264 million(2001: € 694 million).
Commissions receivable amounted to € 15,348 million (2001: € 13,198 million)and commissions payable to € 4,514 million (2001: € 2,471 million), especially insecurities business and for asset management.The following administration and agency services were provided for third parties: custodian, asset management, administration of trust assets, referral of mortgages, insurance policies and property finance agreements, as well asmergers & acquisitions.
Other income from ordinary activities consisted above all of net income fromreal estate, net income from investment companies as well as income fromderivatives used as hedges. Other current expenses from ordinary activities consisted, among other things,of additions to provisions not relating to lending or securities business, expensesfor residential property maintenance of Deutsche Wohnen AG, Eschborn, andother taxes.
Interest income from investment securities
Dividend income fromsecurities available forsale and other invest-ments
Commission income
Staff costs
Other operatingincome and expenses
in € m. Dec 31, 2002 Dec 31, 2001
Wages and salaries 9,265 11,420
Social security costs 2,093 1,940
thereof: those relating to pensions 805 662
Total 11,358 13,360
in € m. Dec 31, 2002 Dec 31, 2001
Deposits 1,569 2,336
Short-term borrowings 340 394
Long-term debt 2,441 1,989
Others 961 985
Total 5,311 5,704
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There are no extraordinary items to be reported for 2002 and 2001.
In 2002, the total compensation of the Board of Managing Directors was€ 27,205,945 (2001: € 56,486,896), thereof € 22,449,960 (2001: € 49,880,825) forvariable components. Former members of the Board of Managing Directors ofDeutsche Bank AG or their surviving dependents received € 31,964,054 (2001:€ 23,676,164). In addition to a fixed payment of € 174,580 (2001: € 172,550), theSupervisory Board received dividend-related emoluments totalling € 1,752,156(2001: € 1,725,863).Provisions for pension obligations to former members of the Board of Manag-ing Directors and their surviving dependents totalled € 181,757,309 (2001:€ 186,596,646).At the end of 2002, loans and advances granted and contingent liabilitiesassumed for members of the Board of Managing Directors amounted to€ 259,000 (2001: € 4,778,427) and for members of the Supervisory Board ofDeutsche Bank AG to € 539,400 (2001: € 1,141,183).
The average number of effective staff employed in 2002 was 82,935 (2001:89,034) of whom 36,077 (2001: 38,862) were women. Part-time staff areincluded in these figures proportionately. An average of 45,623 (2001: 45,479)staff members worked abroad.
The list of mandates gives details of mandates in Germany and abroad. It can beobtained free of charge.
Differences in accounting and measurement methods in the Consolidated Finan-cial Statements: U.S. GAAP compared to German Commercial Code (HGB).
In contrast to German reporting, U.S. Generally Accepted Accounting Principles(U.S. GAAP) seek creditor protection by providing relevant information ratherthan by conservative reporting and valuation rules. In the following cases, thedifferent objective of U.S. GAAP leads to different accounting and valuationmethods or to different reporting in the Consolidated Financial Statements:
Trading assets. Trading assets include securities held for trading purposes andpositive market values from outstanding derivative financial instruments. Theyare carried at fair value on the balance sheet with the changes in fair valuereported in trading revenues. This leads to the recognition of earnings which arequalified as unrealized gains under German law. Furthermore, positive marketvalues from derivative financial instruments are not carried on the balance sheetunder German commercial law.
Netting in trading activities. Trading assets and trading liabilities are netted ifthere is an enforceable master netting agreement. Similarly, positive and nega-tive market values from derivative financial instruments with the same counter-party are netted under existing master netting agreements. Furthermore, long
Extraordinary items
Board of ManagingDirectors and Super-visory Board
Staff
Reconciliation comments
Other publications
Result from financialinvestments
in € m. Dec 31, 2002 Dec 31, 2001
Result from securities available for sale 3,523 1,516
Result from other investments1 812 (769)
Total 4,335 747
1 Excluding investments valued at equity and investments held by designated investment companies.
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and short positions in a marketable security are also reported net (so-called“CUSIP/ISIN netting”).
Securities available for sale. Financial assets classified as securities availablefor sale are carried at fair value, whereby, unrealized gains and losses arereported within “shareholders’ equity” and realized gains and losses arerecorded in earnings. Under the German Commercial Code these holdings arecarried at lower-of-cost-or-market on the balance sheet.
Goodwill. Under U.S. GAAP, goodwill is not amortized but tested for impair-ment on an ongoing basis. Under the German Commercial Code and GermanAccounting Standards, goodwill is amortized over a period of up to 20 years.
Premises and equipmentTax bases. The tax bases are not reported in the U.S. GAAP financial state-ments. As a result, premises and equipment are usually carried at a higher valuecompared with statements prepared under the German Commercial Code.
Software costs. Certain costs for self-developed software are capitalized if the specific conditions of U.S. GAAP are fulfilled. Under the German CommercialCode, all software costs are expensed as incurred.
Trading liabilities. Trading liabilities comprise short positions and negative mar-ket values from derivative financial instruments, unless they have been nettedwith trading assets. The German Commercial Code requires short positions to bereported under liabilities to banks and/or liabilities to customers. Negative mar-ket values from derivative financial instruments generally result in the recog-nition of provisions for possible losses from pending transactions, unless certainrequirements for netting within “valuation units” are fulfilled.
Provisionsfor pension plans and similar obligations. Forecasted salary growth is takeninto account in the actuarial calculation of pension provisions. Adjustments ofcurrent pension payments are deferred and not fully written off immediately.Also, market interest rates are utilized.In case of pension trusts whose designated trust assets serve solely to securethe long-term pension commitments made by the bank and therefore are segre-gated from the bank’s other operating assets, the pension liabilities are offsetwith the designated plan assets for reporting purposes. The corresponding profitcomponents are also offset. The German Commercial Code does not allow suchoffsetting for balance sheet and P&L reporting purposes.
Deferred taxes. Deferred taxes are recorded in accordance with the balancesheet-related temporary differences concept whereby the carrying amounts ofindividual assets and liabilities in the balance sheet are compared with the val-ues for tax purposes. Temporary differences between these values result indeferred tax assets or deferred tax liabilities. On the other hand, tax deferralsaccording to the German Commercial Code are only admissible as timing differ-ences between commercial-law results and the profit to be calculated in accord-ance with tax regulations.
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Own bonds/own shares. Repurchased own bonds are extinguished. Differ-ences between cost and issuing value are recognized in the statement ofincome.Own shares (treasury shares) are deducted from shareholders’ equity with theiracquisition cost. Gains and losses are directly attributed to additional paid-incapital.
Minority interests. Minority interests are reported as other liabilities.
Trust business. In accordance with its economic content, trust business whichthe bank transacts in its own name, but for third-party account, is not reported inthe balance sheet.
[36] Corporate Governance
Deutsche Bank AG and its only German listed consolidated subsidiary, Deutsche Wohnen AG, have approved the Declaration of Conformity in accord-ance with § 161 of the German Corporation Act (AktG) and made it accessible toshareholders.
[37] Board of Managing Directors in the reporting year
Josef AckermannSpokesman from May 22, 2002
Rolf-E. BreuerSpokesman and Member of theBoard of Managing Directors untilMay 22, 2002
Clemens Börsig
Thomas R. Fischeruntil January 30, 2002
Jürgen Fitschenuntil January 30, 2002
Tessen von Heydebreck
Hermann-Josef Lamberti
Michael Philippuntil January 30, 2002
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The wide variety of our businesses requires us to identify, measure, aggregateand manage our risks effectively, and to allocate our capital among our busi-nesses appropriately. We manage risk through a framework of risk principles,organizational structures and risk measurement and monitoring processes thatare closely aligned with the activities of our Group Divisions.
Risk Management Principles
The following key principles underpin our approach to risk management:– Our Board of Managing Directors provides overall risk management supervi-
sion for our consolidated Group as a whole. Our Supervisory Board regularlymonitors our risk profile.
– Our Group Risk Committee has responsibility for management and control ofour risks.
– We manage credit, market, liquidity, operational and business risks in a coor-dinated manner at all relevant levels within our organization.
– The structure of our global risk management department is closely alignedwith the structure of our Group Divisions.
– The risk management function is independent of our Group Divisions.
Risk Management Organization
Our Group Chief Risk Officer, who is a member of our Board of Managing Direc-tors, is responsible for all risk management activities within our consolidatedGroup. The Group Chief Risk Officer chairs our Group Risk Committee. Each ofour Group Divisions has a divisional Chief Risk Officer, who sits on the GroupRisk Committee and reports directly to the Group Chief Risk Officer. The GroupRisk Committee has the mandate to:– Define our risk appetite in a manner that is consistent with our overall business
strategies;– Approve risk policies, procedures and methodologies that are consistent with
our risk appetite;– Manage the portfolio of risks throughout our organization; – Develop and implement a Group-wide applicable methodology for the meas-
urement of Risk Adjusted Return on Economic Capital; and – Approve the organizational structure of our risk management department and
appoint its key management personnel.
Risk Report
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The Group Risk Committee has delegated some of its tasks to sub-committees,the most relevant being the Group Credit Policy Committee. Among others itreviews credit policies, industry reports and country risk limit applicationsthroughout the Group.For each of our Group Divisions, we then have a divisional risk unit which reportsto the divisional Chief Risk Officer. Each divisional risk unit has the mandate to: – Ensure that the business conducted within its division is consistent with the
risk appetite the Group Risk Committee has set;– Formulate and implement risk policies, procedures and methodologies that
are appropriate to the businesses within its division; – Approve credit risk and market risk limits; – Conduct periodic portfolio reviews to ensure that the portfolio of risks is
within acceptable parameters; and – Develop and implement risk management infrastructures and systems that
are appropriate for its division.
Our controlling, audit and legal departments support our risk management func-tion. They operate independently both of the Group Divisions and of the riskmanagement department. The role of the controlling department is to quantifythe risk we assume and ensure the quality and integrity of our risk-related data.Our audit department reviews the compliance of our internal control procedureswith internal and regulatory standards. Our legal department provides legaladvice and support on topics including collateral arrangements and netting.
Categories of Risk
The most important risks we assume are specific banking risks and risks arisingfrom the general business environment.
Our risk management processes distinguish among four kinds of specific bank-ing risks: credit risk, market risk, liquidity risk and operational risk.
Credit risk arises from all transactions that give rise to actual, contingent orpotential claims against any counterparty, obligor or borrower (which we refer tocollectively as “counterparties”). This is the largest single risk we face. We distinguish among three kinds of credit risk:– Default risk is the risk that counterparties fail to meet contractual payment
obligations.– Country risk is the risk that we may suffer a loss, in any given country, due
to the following reasons: political and social upheaval, nationalization and expropriation of assets, government repudiation of external indebtedness,exchange controls and currency depreciation or devaluation.
– Settlement risk is the risk that the settlement or clearance of transactions willfail. It arises whenever the exchange of cash, securities and/or other assets isnot simultaneous.
Specific BankingRisks
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Market risk arises from the uncertainty concerning changes in market pricesand rates (including interest rates, equity prices, foreign exchange rates andcommodity prices), the correlations among them and their levels of volatility.
Liquidity risk is the risk to our earnings and capital arising from our potentialinability to meet obligations when they are due without incurring unacceptablelosses.
Operational risk is the potential for incurring losses in relation to employees,project management, contractual specifications and documentation, technol-ogy, infrastructure failure and disasters, external influences and customer rela-tionships. This definition includes, among others, legal and regulatory risk,which is based on recent regulatory discussion concerning operational risk.
General business risk describes the risk we assume due to potential changes ingeneral business conditions, such as our market environment, client behaviorand technological progress. This can affect our earnings if we fail to quicklyadjust to these changing conditions.
Following the sale of Deutscher Herold insurance companies to Zurich FinancialServices Group, we are not engaged in any activities which result in insurance-specific risks that are material to the Group.
Insurance SpecificRisks
General Business Risk
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Risk Management Tools
We use a comprehensive range of quantitative tools and metrics for monitoringand managing risks. Some of these tools are common to a number of risk cate-gories, while others are tailored to the particular features of specific risk cate-gories. These quantitative tools and metrics generate the following types ofinformation: – Information that quantifies the susceptibility of the market value of single
positions or portfolios to changes in market parameters (commonly referredto as sensitivity analysis);
– Information that measures aggregate risk using statistical techniques, takinginto account the interdependencies and correlations between individual risks;and
– Information that quantifies exposures to losses that could arise from extrememovements in market prices or rates, using scenario analysis to simulate cri-sis situations.
– We also calculate risk data for regulatory purposes.
As a matter of policy, we continuously assess the appropriateness and the relia-bility of our quantitative tools and metrics in the light of our changing risk envi-ronment. The following are the most important quantitative tools and metrics wecurrently use to measure, manage and report our risk:
We use expected loss as a measure of the default and cross border transfer riskparts of our credit risk. Expected loss is a measurement of the default loss wecan expect within a one-year period on our credit exposure, based on our histor-ical loss experience. When calculating expected loss, we take collateral, maturi-ties and statistical averaging procedures into account to reflect the risk charac-teristics of our different types of exposures and facilities. All parameter assump-tions are based on long-term statistical averages of our internal default and losshistory as well as external benchmarks.We use expected loss as a tool of our risk management process and as part ofour management reporting systems. We also use the applicable results of theexpected loss calculations when establishing the other inherent loss allowanceincluded in our financial statements. Applicable results in this context are thosewhich are used to estimate losses inherent in loans and contingent liabilities thatare not already considered in the specific loss component of our allowance orour allowance for smaller-balance standardized homogeneous loans.
We rely on our book capital to absorb any losses that result from the risks weassume in our businesses. Book capital is defined as the amount of equity capi-tal that appears in our balance sheet. We use economic capital as our primarytool to allocate our book capital among our businesses. We also use it to assesstheir profitability and their relative abilities to employ capital efficiently. Eco-nomic capital is a measure designed to state with a high degree of certainty theamount of equity capital we need at any given date to absorb unexpected lossesarising from our exposures on that date. We use it to show an aggregated viewof our risk position from individual business lines up to our consolidated Grouplevel.
Expected Loss
Economic Capital
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We calculate economic capital for the default risk, cross border transfer risk andsettlement risk elements of credit risk, for market risk, for operational risk and forgeneral business risk. We calculate the economic capital requirement for ourcredit exposures as the amount we would need to protect ourselves against verysevere losses caused by defaults.“Very severe”means a 0.02% probability that ouraggregated losses within one year will exceed our economic capital for that year.
We use the value-at-risk approach to derive quantitative measures for our trad-ing book market risks under normal market conditions. Our value-at-risk (or VaR)figures play a role in both internal and external (regulatory) reporting. For a givenportfolio, value-at-risk measures the potential future loss (in terms of marketvalue) which, under normal market conditions, will not be exceeded with adefined confidence level in a defined period. The value-at-risk for a total portfoliorepresents a measure of our aggregated market risk (aggregated using pre-determined correlations) in that portfolio.
We supplement our analysis of market risk with stress testing. We performstress tests because value-at-risk calculations are based on relatively recent his-torical data and only purport to estimate risk up to a defined confidence level.Therefore, they only reflect possible losses under relatively normal market condi-tions. Stress tests help us determine the effects of potentially extreme marketdevelopments on the market values of our assets. We use stress testing to deter-mine the amount of economic capital we need to allocate to cover our marketrisk exposure under extreme market conditions.
German banking regulations assess our capacity to assume risk in several ways:
Risk Position. Risk-weighted assets relating, in particular, to default risks, andthe equivalent for our market risk position (interest rate, exchange rate, shareprice and commodity price risks). Our regulators permit us to use our internalvalue-at-risk approach to calculate the market risk position as a component ofrisk positions.
Capital. The Total capital which can be used to back the risk position and is recognized for bank regulatory purposes consists of core capital (Tier I), supplementary (Tier II) and Tier III capital.
Value-at-Risk
Stress Testing
Regulatory RiskReporting
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Credit Risk
Credit risk makes up the largest part of our risk exposures. We manage our creditrisk following these principles: – Every extension of credit to any counterparty requires approval at the appro-
priate seniority level. – All of our Group Divisions must apply consistent standards in arriving at their
credit decisions. – The approval of credit limits for counterparties and the management of our
individual credit exposures must fit within our portfolio guidelines and ourcredit strategies, and each decision is also based on a risk-versus-returnanalysis.
– Every material change to a credit facility (such as of its tenor, collateral struc-ture or major covenants) requires approval at the appropriate level.
– We assign credit approval authorities to individuals according to their qualifi-cations, experience and training, and we review these periodically.
– We measure and consolidate all our credit exposures to each obligor on aglobal, consolidated basis that applies across our consolidated Group. Wedefine an “obligor” as a group of individual borrowers or counterparties thatare linked to one another by any of a number of criteria we have established,including capital ownership, voting rights, demonstrable control, other indica-tion of group affiliation; or are jointly and severally liable for all or significantportions of the credit we have extended.
A primary element of the credit approval process is a detailed risk assessment ofevery credit exposure associated with an obligor. Our risk assessment proce-dures consider both the creditworthiness of the counterparty (which results in acounterparty rating) and the risks related to the specific type of credit facility orexposure. This risk assessment not only affects the outcome of the credit deci-sion, but also influences the level of decision-making authority we require toextend the credit, the terms and conditions of the transaction and the monitor-ing procedures we apply to the ongoing exposure. We have our own in-house assessment methodologies, scorecards and ratingscale for evaluating our client groupings. Before 2002, our in-house classifica-tions required a mapping to convert from several 10-grade rating scales into oneconsistent metric. In 2002, we moved the counterparty ratings for our corporatecredit exposure from several 10-grade rating scales to a single, more granular,26-grade rating scale, eliminating the need for mapping when aggregating ourexposures across regions and product categories for reporting purposes. Thisenables us to harmonize our internal rating scale with common market practiceand improve comparability between different sub-portfolios of our institution.When we assign our internal risk ratings, we compare them with external riskratings assigned to our counterparties by the major international rating agencies,where possible. We calibrated the new 26-grade rating scale on a probability of default measurewhich is based on a statistical analysis of historical defaults in our portfolio. Weexpress these measures as a percentage probability that a counterparty willdefault on our exposure to it. We then assign these probability of default calcu-lations into categories that we regard, for our purposes, as fundamentally equiv-alent to those of the major international rating agencies.
Credit Risk Ratings
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Credit limits set forth maximum credit exposures we are willing to assume overspecified periods. They relate to products, conditions of the exposure and otherfactors. Our credit policies also establish special procedures (including lowerapproval thresholds and more senior approval personnel) for exceptional caseswhen we may assume exposures beyond established limits. These exceptions provide a degree of flexibility for unusual business opportuni-ties, new market trends and other similar factors.
In making credit decisions, we measure and consolidate globally all exposuresand facilities to the same obligor that carry credit risk. This includes loans, repur-chase agreements, reverse repurchase agreements, letters of credit, guaranteesand derivative transactions. Unless prohibited by regulations we exclude expo-sures that, in our opinion, do not expose us to any significant default risk. Inaddition, we typically exclude exposures relating to other categories of risk, suchas market risk. These risks are subject to scrutiny under their own individualpolicies. For approval purposes, we do not distinguish between committed anduncommitted or advised and unadvised facilities. We treat any prolongation ofan existing credit exposure as a new credit decision requiring the appropriateprocedures and approvals. A credit analysis forms the basis of every credit decision we make. This analysispresents and assesses the material information for a decision regarding a creditexposure and generates a report. We generally update our credit reports annu-ally and require credit reports for all initial credit approvals and for subsequentinternal reviews. These reports must contain the following: an overview of ourrelevant limits and exposures, a summary of our internal rating history of thecounterparty, an overview of the particular facilities, key financial data, a shortdescription of the reason for the report’s submission and a summary credit riskassessment.
We monitor all of our credit exposures on a continuing basis using the risk man-agement tools described above. We also have procedures in place to identify atan early stage credit exposures for which there may be an increased risk of loss.Accountability for recognition of problem credits rests with the relationshipmanager in conjunction with the appropriate credit officer. We believe that cus-tomers where problems could arise must be identified well in advance to effec-tively manage the credit exposure. The objective of an early warning system is toaddress potential problems while adequate alternatives for action are still avail-able. This early detection is a tenet of our credit culture and is intended to ensurethat greater attention is paid to such an exposure.
Credit Limits
Exposure Measure-ment for ApprovalPurposes
Monitoring DefaultRisk
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In instances where we have identified customers where problems might arise,the respective exposure is placed on a watchlist. Additionally, we refer therelated exposures to a special loan management team. Within our consumercredit exposure, as described below, the delinquency status is tracked which isthe main basis for the transfer to a special loan management team. The functionof this group is to effectively manage problem exposures by taking prompt cor-rective action to ensure asset values are preserved and losses are minimized.The special loan management team performs this function either through con-sultation with the credit unit or direct management of an exposure.
We define our total credit risk exposures as all transactions where losses mightoccur due to the fact that counterparties may not fulfill their contractual paymentobligations. We calculate the gross amount of the exposure without taking intoaccount any collateral, other credit enhancement or credit protection transac-tions. When we describe our credit risk exposure, we distinguish between thefollowing categories: loans, tradable assets, over-the-counter derivatives andcontingent liabilities. Listed below are some further details concerning our creditrisk exposure categories:– “Loans“ exclude interest-earning deposits with banks, other claims (mostly
unsettled balances from securities transactions) and accrued interest.– “Tradable assets“, as defined for this purpose, include bonds, other fixed-
income products and traded loans. – “OTC derivatives“ are our credit exposures arising from over-the-counter, or
OTC, derivative transactions. Credit exposure in OTC derivatives is measuredby the cost to replace the contract if the counterparty defaults on its obliga-tions. The costs of replacement amount to only a small portion of the notionalamount of a derivative transaction. We calculate our credit exposure underOTC derivatives transactions at any time as the replacement costs of thetransactions based on marking them to market at that time.
– “Contingent liabilities“ include liabilities from guarantees (excluding marketvalue guarantees) and indemnity agreements. They exclude letters of credit,other obligations such as irrevocable loan commitments and placement andunderwriting commitments. These exclusions were € 107.8 billion on Decem-ber 31, 2002 and € 126.1billion on December 31, 2001. We also excluded otherquantifiable indemnities and commitments of € 49.9 billion, which predomi-nantly relate to securities lending on behalf of customers. In 2002, more than77% of our irrevocable commitments were to counterparties rated at theequivalent of investment grade debt ratings from the major international rating agencies.
Our total credit exposure can be classified under two broad headings: corporatecredit exposure and consumer credit exposure. – Our consumer credit exposure consists of our smaller-balance standardized
homogeneous loans which include personal loans, residential and nonresi-dential mortgage loans, overdrafts and loans to self-employed and small busi-ness customers of our private and retail business.
– Our corporate credit exposure consists of all remaining exposures not definedas consumer credit exposure. Corporate credit exposure is the largest creditexposure and is discussed below in more detail.
Credit Risk Exposure
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The following table breaks down our corporate credit exposure (other than creditexposure arising from repurchase and reverse repurchase agreements, securi-ties lending and borrowing, interest-earning deposits with banks and irrevocableloan commitments) according to the creditworthiness categories of our counter-parties:
The above table illustrates not only a general reduction in our corporate expo-sures (including the effects of the deconsolidation of our EUROHYPO mortgagebusiness, which caused loan volume decreases in all rating bands, including the sub-investment grade categories) but also reflects a change in the distribution ofcreditworthiness in our corporate loan portfolio, which can be attributed to twomain factors:First, the change in our corporate credit exposure in 2002 compared to 2001 is aconsequence of a general deterioration of creditworthiness in our loan portfolioas is evidenced by the increasing proportion of lower rated loans. During thecourse of 2002, the observable general trend has been downgrades rather thanupgrades in both our international and domestic lending portfolios. Most specif-ically, the general trend has been a downwards migration of loans rated BBB andbelow. This downgrading is partially a reflection of the difficulties that persist inthe global economic climate faced by us and our counterparties and is also evi-dence of a general downturn that is being experienced within the banking indus-try. Despite this general downgrading, the overall quality of the loan portfolioremains sound.Second, as described above in “Credit Risk Ratings”, we have recently harmo-nized our internal rating system for our counterparties by recalibrating it to oneglobal scale. This new calibration, which is part of our initiative to comply withupcoming Basel II requirements as well as improving our internal economic cap-ital allocation, has a stronger focus on global comparability and benchmarkingagainst external ratings. In order to make the 2002 and 2001 figures comparable,we have restated the 2001 figures, on an estimated basis, reflecting the new cal-ibration of our internal risk rating system by applying more refined mappingswhen aggregating individual exposures previously rated on different 10-gradescales. For EUROHYPO, which was deconsolidated in 2002, the rating restate-ment for 2001 resulted in a net reduction in exposures rated BBB and better andnet increases in the categories below. For our 2001 loan exposures excludingEUROHYPO the restatement of 2001 figures resulted in net increases at both theupper and the lower end of our creditworthiness categories.
The restatement of our 2001 creditworthiness categories did not alter theamount of problem loans or otherwise classified exposures. In particular, thelevel of specific loan loss allowances reported in our 2001 financials is notaffected as it was established based on an individual review of each credit. Like-wise, our inherent loss allowance is not impacted.
Our consumer credit exposure consists of our smaller-balance standardizedhomogeneous loans primarily in Germany, Italy and Spain which include personal loans, residential and nonresidential mortgage loans, overdrafts andloans to self-employed and small business customers of our private and retailbusiness. This portfolio collectively represents a large number of individualsmaller-balance loans to consumers and small businesses. We allocate this port-folio into various sub-portfolios according to our major product categories andgeographical dispersion. The table below presents consumer loan delinquencies in terms of loans that are90 days or more past due and net credit costs, which are the net provisionscharged during the period, after recoveries. Loans deemed to be 90 days ormore past due and net credit costs are both expressed as a percentage of total exposure:
The volume of our consumer credit exposure rose by € 1.5 billion, or 2.9 %, from2001 to 2002, driven mainly by our German and Italian business. Total net creditcosts remained materially unchanged as increases in German consumer financ-ing were offset by improvements in German mortgage lending and other Euro-pean business. Loans delinquent by 90 days or more decreased from 2.48% to2.43%, reflecting decreases in Germany partly offset by increases in Italy.
Our total credit exposures were € 600.7 billion on December 31, 2002 and€ 737.6 billion on December 31, 2001. These figures include the exposures shownin the table below, as well as credit exposures arising from repurchase andreverse repurchase agreements, securities lending and borrowing, interest-earn-ing deposits with banks and irrevocable loan commitments.
Consumer CreditExposure
Total Exposure 90 Days or More Past Due Net Credit Costsin € m. in % of Total Exposure in % of Total Exposure
Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,2002 2001 2002 2001 2002 2001
Consumer Credit Exposure Germany
Consumer and Small Business Financing 11,326 11,463 1.91 1.95 0.75 0.66
Consumer Credit Exposure Other Europe 10,012 8,987 4.14 3.88 0.59 0.73
Total Consumer Credit Exposure 54,948 53,402 2.43 2.48 0.32 0.33
Total Credit Exposure
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The following table breaks down our total credit exposure (other than creditexposure arising from repurchase and reverse repurchase agreements, securi-ties lending and borrowing, interest-earning deposits with banks and irrevocableloan commitments) according to the industrial sectors of our counterparties:
The exposure to Households, as shown in the table above, primarily reflects ourconsumer credit exposure. For 2001, certain loan exposures were reclassifiedfrom Banks and insurance to Other (€ 6.5 billion) and from Commercial realestate activities to Households (€ 2.8 billion).The reclassification of our 2001 credit risk profile by industry sector did not alterthe amount of problem loans or otherwise classified exposures. In particular, thelevel of specific loan loss allowances reported in our 2001 financials is notaffected as it was established based on an individual review of each credit.The following table breaks down our total credit exposure (other than creditexposure arising from repurchase and reverse repurchase agreements, securi-ties lending and borrowing, interest-earning deposits with banks and irrevocableloan commitments) by geographical region. For this table, we have allocatedexposures to regions based on the domicile of our counterparties, irrespective ofany affiliations the counterparties may have with corporate groups domiciledelsewhere:
Notional amounts and gross market valuesof OTC and exchange-traded derivative con-tracts we held for trading and nontradingpurposes.
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Notional Amount Maturity Distribution Positive Market Value Negative Market Value Net Market Value
After Five Years Total
830 773,664 417 (552) (135)
2,517,510 8,429,149 213,557 (207,536) 6,021
344,924 950,760 27,188 – 27,188
366,192 938,789 – (26,866) (26,866)
– – – – –
1,593 351,707 – (247) (247)
– 241,759 182 – 182
– 133,486 – (67) (67)
3,231,049 11,819,314 241,344 (235,268) 6,076
1,176 1,040,615 19,535 (19,889) (354)
106,788 683,929 18,064 (21,711) (3,647)
1,156 178,218 5,124 – 5,124
664 174,906 – (4,798) (4,798)
– 4,611 – – –
– 162 14 – 14
– 175 – (24) (24)
109,784 2,082,616 42,737 (46,422) (3,685)
51,143 294,970 9,037 (9,971) (934)
13,017 100,463 13,352 – 13,352
10,215 110,234 – (12,857) (12,857)
– – – – –
– 25,794 218 (69) 149
– 55,255 5,112 – 5,112
342 49,103 – (4,471) (4,471)
74,717 635,819 27,719 (27,368) 351
6,532 57,474 2,602 (1,782) 820
260 40,268 5,401 (4,844) 557
108 1,925 – – –
24 4,306 167 – 167
– 3,204 – (122) (122)
6,924 107,177 8,170 (6,748) 1,422
3,420,407 13,773,439 314,277 (310,806) 3,471
2,067 871,487 5,693 (5,000) 693
3,422,474 14,644,926 319,970 (315,806) 4,164
65,985
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To reduce our derivatives-related credit risk, we regularly seek the execution ofmaster agreements (such as the International Swap Dealers Association (ISDA)contract for swaps) with our clients. A master agreement allows the offsetting ofthe obligations arising under all of the derivatives contracts the agreement cov-ers, resulting in one single net claim against the counterparty (called “close-outnetting”). In addition, we also enter into “payment netting” agreements underwhich we net non-simultaneous settlement of cash flows, reducing our principalrisk. We frequently enter into these agreements in our foreign exchange busi-ness.For internal credit exposure measurement purposes, we only apply netting whenwe believe it is legally enforceable for the relevant jurisdiction and counterparty.Similarly, we enter into collateral support agreements only when we believe thatthe risk situation justifies doing so. These collateral arrangements generally pro-vide risk mitigation through periodic (usually daily) margining of the coveredportfolio or transactions and termination of the master agreement if the counter-party fails to honor a collateral call. As with netting, when we believe the collat-eral is enforceable we reflect this in our exposure measurement. As the replacement values of our portfolios fluctuate with movements in marketrates and with changes in the transactions in the portfolios, we also estimate thepotential future replacement costs of the portfolios over their lifetimes or, in caseof collateralized portfolios, over appropriate unwind periods. We measure ourpotential future exposure against separate limits, which can be a multiple of thecredit limit. We supplement our potential future exposure analysis with stresstests to estimate the immediate impact of market events on our exposures (suchas event risk in our emerging markets portfolio). Trading activities in credit derivatives led to positive market values of € 2.2 billionafter netting as of December 31, 2002. Credit derivatives are included in the tableabove; they are predominantly assigned to equity/index-related transactions.Outside the trading activities, derivative transactions are also used to managecredit risks in the banking book. Included in the table above are non-exchange traded commodity contracts thatare accounted for at fair value. The majority of these contracts mature in lessthan five years and are valued based on actively quoted prices.
Treatment of Default Situations Under Derivatives. Unlike in the case ofour standard loan assets, we generally have more options to manage the creditrisk in our OTC derivatives when movement in the current replacement costs ofthe transactions and the behavior of our counterparty indicate that there is therisk that upcoming payment obligations under the transactions might not behonored. In these situations, we frequently are able to obtain additional collateralor terminate the transactions or the related master agreement.When our decision to terminate transactions or the related master agreementresults in a residual net obligation of the counterparty, we restructure the obliga-tion into a nonderivative claim and manage it through our regular workoutprocess. As a consequence, we do not show any nonperforming derivatives.
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Country Risk
We manage country risk through a number of risk measures and limits, the mostimportant being:
Total Country Credit Exposure. We set limits on our aggregate credit expo-sure to counterparties which we view as being at risk if economic or politicalevents occur, and which could lead to widespread credit defaults in a particularcountry (a “country risk event”). We include all credit extended to counterparties domiciled in that country(including unguaranteed subsidiaries of foreign entities). We also include creditextended to offshore subsidiaries of those local clients.
Cross Border Transfer Risk. Arises where we extend credit from one of ouroffices in one country to a counterparty in a different country. We define thetransfer risk component of such credit risk as arising where an otherwise solventand willing debtor is unable to meet its obligations due to the imposition of gov-ernmental or regulatory controls restricting its ability either to obtain foreignexchange or to transfer assets to nonresidents (a “transfer risk event”). – For internal risk management purposes, cross border transfer risk includes
credit we have extended to our own international branches and subsidiaries,although for this disclosure we have not included these transactions.
– In 2002 we modified the basis for establishing limits to monitor cross bordertransfer risk. We now capture this based on full notional value (previously seton a “money-at-risk” basis). We believe this provides a more accurate meas-ure of exposure to a given country.
Highly-Stressed Event Risk Scenarios (“ERS”). We use stress testing tomeasure potential market risk on our trading positions and view these as marketrisks.
Our country risk ratings represent a key tool in our management of country risk.Our ratings include:– Country Credit Risk Rating. An estimate of the probability of occurrence of a
country risk event. – Cross Border Transfer Risk Rating. An estimate of the probability of a trans-
fer risk event (usually as part of a country risk event).– Event Risk Rating. For further details see “Market Risk” below.
Our ratings are established by an independent country risk research functionwithin our Credit Risk Management division. All country credit risk and cross border transfer risk ratings are reviewed, andrevised or reaffirmed, at least annually by the Group Credit Policy Committee.Our country risk research group also reviews, at least quarterly, our ratings forthe major emerging market countries in which we conduct business. Ratings forcountries which we view as particularly volatile, as well as all ERS ratings, aresubject to continuous review.We also regularly compare our internal risk ratings with the ratings of the majorinternational rating agencies.
Country Risk Ratings
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We manage our exposure to country risk through a framework of limits. We setcountry limits for all Emerging Markets countries as defined below. They includelimits on total country credit exposure, cross border transfer risk, and ERS risk.Limits are reviewed at least annually, in conjunction with the review of countryrisk ratings. Country limits are set by either our Board of Managing Directors orby our Group Credit Policy Committee, pursuant to delegated authority.
We charge our Group Divisions with the responsibility of managing their countryrisk within the approved limits. The regional units within Credit Risk Manage-ment monitor our country risk based on information provided by our controllingfunction. Our Group Credit Policy Committee also reviews data on cross bordertransfer risk. Since 1998 the Bank has actively been reducing its exposure to Emerging Mar-kets countries. For this purpose, we define Emerging Markets as including allcountries in Latin America (including the Caribbean), Asia (excluding Japan),Eastern Europe, the Middle East and Africa. In connection with this strategy, ourCredit Risk Management department focuses particularly on our total countrycredit exposure to Emerging Markets countries and regularly provides reports toour Group Credit Policy Committee.
The following charts show the development of total Emerging Markets countrycredit exposure, and utilized Emerging Markets cross border transfer risk expo-sure by region:
On December 31, 2002, of our € 8.1 billion total cross border transfer risk expo-sure to Emerging Markets, only € 6.4 billion represents utilized exposures, downfrom € 7.6 billion on December 31, 2001 and € 8.9 billion on December 31, 2000.
20002002 2001
0
1
2
3
Asia(excluding Japan)
LatinAmerica
EasternEurope
MiddleEast
Africa
Total Emerging MarketsCountry Credit Exposurein € bn.
TotalTotal excluding OTC derivatives
Emerging Markets Cross Border Transfer Risk Exposure by Regionin € bn.
200220012000
0
5
10
15
20
Country Risk Exposure
Monitoring CountryRisk
Country Risk Limits
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Measuring our Default and Cross Border Transfer Risk Exposures
We measure our exposure to default and cross border transfer risk using anexpected loss criterion, and we maintain economic capital with respect to theexposures. We base our expected loss and economic capital calculations on thatpart of our total credit exposure that we feel is exposed to default and cross bor-der transfer risk. We exclude exposures that we treat as subject to risks otherthan default and cross border transfer risk (e.g., exposure for which we assigneconomic capital under market risk policies). The following table shows ourdefault and cross border transfer risk exposure, and expected loss and economiccapital, by Group Division, as we calculate it for expected loss and economiccapital purposes:
Credit Loss Experience and Allowance for Loan Losses
We establish an allowance for loan losses that represents our estimate of proba-ble losses in our loan portfolio. The responsibility for determining our allowancefor loan losses rests with credit risk management. The components of thisallowance are:
Specific Loss Component: Allowances we maintain to cover the default risk ofspecific exposures.
Inherent Loss Component: – Country Risk Allowance: Allowances we maintain to cover credit losses
inherent in our pool of cross border loans to borrowers located in certaincountries solely as a result of transfer and currency convertibility risks.
– Smaller-Balance Standardized Homogeneous Loan Loss Allowance:Allowances we maintain at a portfolio level to cover credit losses inherent inthese types of loans.
– Other Inherent Loss Allowance: Allowances we maintain as an estimate ofcredit losses which we have not otherwise identified.
December 31, 2002 Corporate and Private Clients Other1 TotalInvestment Bank and Asset Group
Repurchase and reverse repurchase agreements and securities lending and borrowing 9,031 1 – 9,032
Interest-earning deposits with banks 19,356 223 6,112 25,691
Total credit exposure 321,072 72,040 11,027 404,139
Expected loss 1,063 241 12 1,316
Economic capital for default and cross border transfer risk 7,564 1,008 69 8,641
1 Primarily relates to the Corporate Investments Group Division.
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Specific Loss Component
Inherent Loss Component
The specific loss component relates to all loans deemed to be impaired, follow-ing an assessment of the counterparty’s ability to repay. A loan is considered tobe impaired when we determine that it is probable that we will be unable to col-lect all interest and principal due in accordance with the terms of the loan agree-ment. We determine the amount, if any, of the specific provision we shouldmake, taking into account the present value of expected future cash flows, thefair value of the underlying collateral or the market price of the loan.We regularly re-evaluate all credit exposures which have already been specifi-cally provided for, as well as all credit exposures that appear on our watchlist.
The inherent loss component relates to all other loans we do not individually pro-vide for, but which we believe to have some inherent loss on a portfolio basis.
Country Risk Allowance. We establish a country risk allowance for loan expo-sures in countries where we have serious doubts about the ability of our coun-terparties to comply with the repayment terms due to the economic or politicalsituation prevailing in the respective countries of domicile, that is, for transferand currency convertibility risks. We determine the percentage rates for ourcountry risk allowance on the basis of a comprehensive matrix that encom-passes both historical loss experience and market data, such as economic, polit-ical and other relevant factors affecting a country’s financial condition. In makingour decision, we focus primarily on the cross border transfer risk ratings that weassign to a country and the amount and type of collateral.
Smaller-Balance Standardized Homogeneous Loan Loss Allowance. Oursmaller-balance standardized homogeneous portfolio includes smaller-balancepersonal loans, residential and nonresidential mortgage loans, overdrafts andloans to self-employed and small business customers of our private and retailbusiness. These loans are evaluated for inherent loss on a collective basis, basedon analyses of historical loss experience from each product type according tocriteria such as past due status and collateral recovery values. The resultingallowance encompasses the loss inherent both in current and performing loans,as well as in delinquent and nonperforming loans within the homogeneous loanportfolio.
Other Inherent Loss Allowance. This component of the allowance representsan estimate of our inherent losses resulting from the imprecisions and uncer-tainties in determining credit losses. This estimate of inherent losses excludesthose exposures we have already considered in the specific loss component asdescribed above or considered when establishing our allowance for smaller-bal-ance standardized homogeneous loans. We have historically used a ratio of anentity’s historical average losses (net of recoveries) to the historical average of itsloan exposures, the result of which we applied to our corresponding period endloan exposures and adjusted the result for relevant environmental factors. As aconsequence of our improved risk management processes and capabilities, in2002 we refined the measure for calculating our other inherent loss allowance.This refinement was made in order to make the provision more sensitive to theprevailing credit environment and less based on historical loss experience. Thenew measurement incorporates the expected loss results which we generate aspart of our economic capital calculations outlined above. Therefore, the newmeasurement considers, among other factors, our internal rating informationwhich results in a better reflection of the current economic situation and conse-
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quently provides better guidance for losses inherent in the portfolio that havenot yet been individually identified.
We take charge-offs based on credit risk management’s assessment when wedetermine that the loans are uncollectable. We generally charge off a loan whenall economically sensible means of recovery have been exhausted. Our determi-nation considers information such as the occurrence of significant changes inthe borrower’s financial position such that the borrower can no longer pay theobligation, or that the proceeds from collateral will not be sufficient to pay theloan.Prior to 2001, our entities regulated outside the United States, which accountedfor approximately 87% of our net charge-offs in 2000, consistently charged offloans when all legal means of recovery had been exhausted. This practiceresulted in charge-offs occurring at a later date than for our entities regulated inthe United States. We began to develop a methodology in 2001 to bring our worldwide charge-offpractices more into line with industry practices in the United States and hadanticipated that the timing of our charge-offs would accelerate. In 2001, entitiesregulated outside the United States began to implement this change, whichresulted in a higher level of charge-offs relative to that which would haveoccurred under the prior practice.
Our problem loans are comprised of nonaccrual loans, loans 90 days or morepast due and still accruing and troubled debt restructurings.The following table presents the components of our 2002 and 2001 problemloans:
Charge-off Policy
Problem Loans
Dec 31, 2002 Dec 31, 2001
Impaired Nonperforming Total Impaired Nonperforming TotalLoans1 Homogeneous Loans1 Homogeneous
in € bn. Loans Loans
Nonaccrual loans 8.5 1.6 10.1 10.0 1.5 11.5
Loans 90 days or more pastdue and still accruing 0.2 0.3 0.5 0.5 0.4 0.9
Troubled debt restructurings 0.2 – 0.2 0.3 – 0.3
Total problem loans 8.9 1.9 10.8 10.8 1.9 12.7
1 Loans for which we determine that it is probable that we will be unable to collect all principal and interest due according to the contractual terms of the loan agreements.
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The decrease in our total problem loans in 2002 is due to € 2.7 billion of grosscharge-offs, a € 1.4 billion reduction due to the deconsolidation of various enti-ties and a € 0.8 billion reduction as a result of exchange rate movements offsetby € 3.0 billion of net new problem loans. Included in the € 1.9 billion nonper-forming homogeneous loans, as of December 31, 2002, are € 1.3 billion of loansthat are 90 days or more past due as well as € 541 million of loans that are lessthan 90 days past due.The following table illustrates our total problem loans based on the domicile ofour counterparty (within or outside Germany) for the last five years. We have noother material interest-bearing assets that are nonperforming:
Nonaccrual Loans. We place a loan on nonaccrual status if either – the loan has been in default as to payment of principal or interest for 90 days
or more and the loan is neither well secured nor in the process of collection, or
– the loan is not yet 90 days past due, but in the judgment of management theaccrual of interest should be ceased before 90 days because it is probable thatwe will be unable to collect all principal and interest due according to the con-tractual terms of the loan agreement.
When a loan is placed on nonaccrual status, any accrued but unpaid interestpreviously recorded is reversed against current period interest revenue. Cashreceipts of interest on nonaccrual loans are recorded as either interest revenueor a reduction of principal according to management’s judgment as to collec-tability of principal.As of December 31, 2002 our nonaccrual loans totaled € 10.1 billion, a netdecrease of € 1.4 billion, or 12%, from 2001. The net decrease in nonaccrualloans is mainly due to charge-offs, deconsolidations and exposure reductions,partially offset by loans classified as nonaccrual for the first time.
Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,in € m. 2002 2001 2000 1999 1998
Nonaccrual loans
German 4,587 6,538 3,730 3,899 4,550
Non-German 5,511 4,990 2,824 2,104 1,024
Total nonaccrual loans 10,098 11,5281 6,554 6,003 5,574
Loans 90 days or more past dueand still accruing
German 439 658 1,028 985 1,028
Non-German 70 189 470 1,275 1,043
Total loans 90 days or more past due and still accruing 509 847 1,498 2,260 2,071
Troubled debt restructurings
German 38 57 14 242 55
Non-German 154 222 141 154 144
Total troubled debt restructurings 192 279 155 396 1991 Total nonaccrual loans for 2001 includes approximately € 3.4 billion of impaired loans that were classified as potential problem loans in 2000.
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As of December 31, 2001 our nonaccrual loans totaled € 11.5 billion, a netincrease of € 4.9 billion, or 74%, from 2000. We estimate that the impact of thepreviously disclosed change in our nonaccrual practice was approximately € 3.4billion. € 2.0 billion was due to additional nonaccruals in our U.S. entities, a fur-ther € 745 million was due to our medium-sized corporate portfolio and realestate businesses in Germany, and € 290 million was due to a deterioration inour smaller-balance homogeneous portfolio in Italy. These increases were par-tially offset by movements in other portfolios and net charge-offs.
Loans Ninety Days or More Past Due and Still Accruing. These are loans inwhich contractual interest or principal payments are 90 days or more past duebut on which we continue to recognize interest revenue. These loans are wellsecured and in the process of collection. In 2002, our 90 days or more past due and still accruing interest loans decreasedby € 338 million, or 40 % to € 509 million. This decrease is mainly due to decon-solidations (€ 217 million), the placing of loans on nonaccrual status and charge-offs.In 2001, our 90 days or more past due and still accruing interest loans decreasedby € 651 million, or 44%, to € 847 million, primarily reflecting the movement ofsome of our real estate portfolios in Germany (€ 410 million) and the smaller-balance homogeneous portfolio in Italy (€ 255 million) to nonaccrual status.
Troubled Debt Restructurings. Troubled debt restructurings are loans whichwe have restructured due to deterioration in the borrower’s financial position.We may restructure these loans in one or more of the following ways:– reducing the stated interest rate for the remaining portion of the original life of
the debt; – extending the maturity date (or dates) at an interest rate lower than the current
market rate for new debt with a similar risk profile; – reducing the face amount or maturity amount of the debt; and – reducing the accrued interest on the debt.
If a borrower performs satisfactorily for one year under a restructured loaninvolving a modification of terms, we no longer consider that borrower’s loan tobe a troubled debt restructuring, unless at the time of restructuring the newinterest rate was lower than the market rate for similar credit risks. These loansare not included in the reported troubled debt restructurings amounts. Our troubled debt restructurings totaled € 192 million as of December 31, 2002,a decrease of 31% from 2001. The decrease in our troubled debt restructuringsis mainly due to exposure reductions and loans now classified as nonaccrual.Our troubled debt restructurings totaled € 279 million as of December 31, 2001,an 80% increase from 2000. This increase is primarily attributable to restruc-tured credits in Western Europe and Asia.
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in € m. 2002
German loans
Gross amount of interest that would have been recorded at original rate 212
Less interest, net of reversals, recognized in interest revenue 114
Reduction of interest revenue 98
Non-German loans
Gross amount of interest that would have been recorded at original rate 302
Less interest, net of reversals, recognized in interest revenue 82
Reduction of interest revenue 220
Total reduction of interest revenue 318
The following table shows the approximate effect on interest revenue of nonac-crual loans and troubled debt restructurings. It shows the gross interest incomethat would have been recorded in 2002 if those loans had been current in accor-dance with their original terms and had been outstanding throughout 2002 orsince their origination, if we only held them for part of 2002. It also shows theamount of interest income on those loans that was included in net income for2002:
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The following table sets forth the components of our allowance for loan lossesby industry of the borrower, and the percentage of our total loan portfolioaccounted for by those industry classifications, on the dates specified. Thebreakdown between German and non-German borrowers is based on the loca-tion of the borrowers:
Movements in the Allowance for Loan Losses. We record increases to ourallowance for loan losses as an expense on our Consolidated Statement ofIncome. If we determine that we no longer need provisions we have taken pre-viously, we decrease our allowance and record the amount as a reduction of the provision on our Consolidated Statement of Income. Charge-offs reduce our allowance while recoveries increase the allowance without affecting theConsolidated Statement of Income.
in € m. (except percentages) Dec 31, 2002 Dec 31, 2001 Dec 31, 2000 Dec 31, 1999 Dec 31, 1998
Total allowance for loan losses 4,317 100% 5,585 100% 6,745 100% 7,281 100% 6,516 100%
Total specific allowance 3,144 3,720 4,577 4,609 3,712
Total inherent loss allowance 1,173 1,865 2,168 2,672 2,804
Total allowance for loan losses 4,317 5,585 6,745 7,281 6,516
Allowance for LoanLosses
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The following table sets forth a breakdown of the movements in our allowancefor loan losses for the periods specified:
in € m. (except percentages) 2002 2001 2000 1999 1998
Allowance at beginning of year 5,585 6,745 7,281 6,516 6,388
Charge-offs
German
Banks and insurance 8 7 13 5 4
Manufacturing 196 280 123 127 107
Households(excluding mortgages) 400 214 37 41 15
Households – mortgages 45 27 39 48 32
Public sector – – – – –
Wholesale and retail trade 140 192 60 81 58
Commercial real estate activities 127 209 148 158 154
Lease financing – 1 3 2 1
Other 567 426 220 147 128
Total German 1,483 1,356 643 609 499
Non-German
Excluding lease financing 1,244 697 652 215 243
Lease financing only 1 2 1 15 1
Total Non-German 1,245 699 653 230 244
Total charge-offs 2,728 2,055 1,296 839 743
Recoveries
German
Banks and insurance – – – 1 2
Manufacturing 4 4 10 8 1
Households(excluding mortgages) 24 15 3 2 2
Households – mortgages 2 2 – – –
Public sector – – – – –
Wholesale and retail trade 3 1 – – –
Commercial real estate activities 3 – 3 5 2
Lease financing – – – – –
Other 42 11 35 5 19
Total German 78 33 51 21 26
Non-German
Excluding lease financing 34 34 24 23 10
Lease financing only – – – 6 –
Total Non-German 34 34 24 29 10
Total recoveries 112 67 75 50 36
Net charge-offs 2,616 1,988 1,221 789 707
Provision for loan losses 2,091 1,024 478 725 908
Other changes (currency translation and allowance related to acquisitions/divestitures) (743) (196) 207 829 (73)
Allowance at end of year 4,317 5,585 6,745 7,281 6,516
Percentage of total net charge-offs to average loans for the year 1.15 % 0.71 % 0.39 % 0.31 % 0.35 %
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The following table presents an analysis of the changes in the international component of the allowance for loan losses. As of December 31, 2002, 57% ofour total allowance was attributable to international clients:
Our allowance for loan losses as of December 31, 2002 was € 4.3 billion, 23%lower than the € 5.6 billion at the end of 2001. This decrease in our allowancebalance was principally due to increases in our charge-offs, partially offset byincreases in our provisions due to adverse economic conditions that continuedto persist in 2002. The overall reduction in our allowance for loan losses can alsobe attributed to net deconsolidations of € 421 million and exchange rate move-ments.Our gross charge-offs grew to € 2.7 billion in 2002, an increase of € 673 million,or 33%, over 2001 charge-offs. Of the charge-offs for 2002, € 1.9 billion wererelated to our corporate credit exposure, mainly driven by our German and NorthAmerican portfolios, and € 777 million were related to our consumer credit expo-sure.Our provision for loan losses in 2002 was € 2.1 billion, an increase of 104 % fromthe prior year. This amount is composed of both net new specific and inherentloan loss provisions. The provision for the year is primarily due to provisionsraised to address the downturn in the telecommunications industry and specificloan loss provisions reflecting the deterioration in various industry sectors repre-sented within our German portfolio and the Americas.Our specific loan loss allowance was € 3.1 billion as of December 31, 2002, adecrease of € 576 million, or a 15% reduction from 2001. The change in ourallowance includes a net specific loan loss provision of € 2.0 billion, 74% ofwhich was for non-German clients. The provision was 111% higher than the pre-vious year. The increased provision, however, was nearly offset by net charge-offs of € 1.8 billion. As the specific loan loss allowance is the largest componentof our total allowance for loan losses, the net reduction in our specific loan lossallowance for 2002 is also due to the reasons outlined above for the overallreduction in our total allowance for loan losses.
in € m. 2002 2001 2000 1999 1998
Allowance at beginning of year 2,441 2,475 2,812 1,918 1,735
Charge-offs 1,245 699 653 230 244
Recoveries 34 34 24 29 10
Net charge-offs 1,211 665 629 201 234
Provision for loan losses 1,500 710 219 296 443
Other changes (currency trans-lation and allowance related toacquisitions/divestitures) (284) (79) 73 799 (26)
Allowance at end of year 2,446 2,441 2,475 2,812 1,918
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Our inherent loan loss allowance totaled € 1.2 billion as of December 31, 2002, a decrease of € 692 million, or 37%, from the level at the end of 2001. A majordriver of the net reduction was € 716 million net charge-offs in our homoge-neous loan portfolio, partially offset by a net provision for smaller-balance stan-dardized homogeneous exposures of € 179 million. The volume of charge-offs inthe homogeneous portfolio in 2002 was affected by the establishment of days-past-due thresholds at which certain homogeneous loan types are completelycharged-off.Our allowance for loan losses as of December 31, 2001 was € 5.6 billion, 17%lower than the € 6.7 billion at the end of 2000. This decrease in our allowancebalance was principally due to increases in our charge-offs, offset by increasesin provisions due to weakened economic conditions in 2001.Our charge-offs grew to € 2.1billion in 2001, an increase of € 759 million, or 59%,over 2000 charge-offs. This was principally due to a change in practice in ourentities regulated outside the United States. Out of the total charge-offs for 2001€ 1.4 billion or two-thirds were in our German portfolio, of which € 957 millionapplied to clients in the medium-sized corporate portfolio and € 407 millionrelated to smaller-balance standardized homogeneous exposures. Approxi-mately 25% of the charge-offs in the German-Other category, which totaled € 426 million, related to a single medium-sized German corporate client in theconstruction industry. The remaining € 700 million were charge-offs in our non-German portfolio, of which € 402 million, or 58%, related to charge-offs in NorthAmerica, principally in our leveraged business.Our total provision for loan losses in 2001 was € 1.0 billion, an increase of 114%from the prior year. This amount is comprised of both new specific and inherentloan loss provisions, reflecting the downturn in the global economy.Our specific loan loss allowance was € 3.7 billion as of December 31, 2001, a19% decrease from 2000. The change in the allowance includes a specific loanloss provision of € 951 million, 70% of which was for non-German clients. Theprovision was 18% higher than the prior year and included increased provisionsrelated to a single American borrower in the utilities industry, various Argentineexposures and our leveraged business. The increased provision was offset inpart by € 1.6 billion in net charge-offs.Our inherent loss allowance totaled € 1.9 billion as of December 31, 2001, adecrease of € 303 million, or 14%, from the level at the end of 2000. A majordriver of the net reduction was € 383 million of charge-offs in our Private andPersonal Banking business in Germany, partially offset by a provision for smaller-balance standardized homogeneous exposures of € 127 million. Furthermore,our country risk allowance shows a net decrease of 16%, reflecting the selldown of assets which previously attracted country risk allowance in Turkey andthroughout Asia excluding Japan, and an increase in collateral held against crossborder assets.Our allowance for loans losses as of December 31, 2000 was € 6.7 billion, 7%lower than the € 7.3 billion at the end of 1999. This decrease in our allowancebalance was principally due to increases in our charge-offs, lower specific provi-sions and a net release of our inherent loss provisions.
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Our charge-offs increased to € 1.3 billion in 2000, a € 457 million, or 54%,increase over 1999 charge-offs. Of this increase, € 423 million was exclusivelyattributable to our non-German customers. Approximately 70%, or € 296 million,of this increase was due to charge-offs related to Russia and Iraq. We also had € 34 million of charge-offs for our German clients in the medium-sized corporateportfolio. Approximately 60% of the charge-offs captured in the German-Othercategory related to a single medium-sized German corporate customer in theconstruction industry.Our total provision for loan losses in 2000 was € 478 million, a decline of 34%from the prior year. This balance was composed of net new specific loan lossprovisions and a release of our inherent loss provision. Our total net new specificloan loss provision amounted to € 805 million, which was almost equally splitbetween German and non-German clients. Our specific loan loss provisionsdeclined between 1999 and 2000, reflecting the improvement of the quality ofour loan portfolio. Specific provisions were approximately 13% less in 2000 thanthe prior year due in large part to provisions we took in 1999 with respect to asignificant exposure to a single German borrower in the real estate industry.Our inherent loss allowance totaled € 2.2 billion as of December 31, 2000, a 19%drop from the level at the end of 1999. This decline reflected the effect of the € 296 million of charge-offs described above and country provision releasestotaling € 154 million. Of the € 154 million country provision releases, € 88 million was due to reduced exposure (mainly in Brazil and Turkey), € 34 millionwas due to a net reduction in provisioning rates applied to individual countries,and the remaining amount related to other changes, primarily foreign exchange.In addition to a small increase in our allowances on the homogeneous loan port-folio, we released a net € 98 million from our other inherent loss allowance in2000 due to two legal entities: EUROHYPO and Bankers Trust. Each of theseentities had a decrease in its loss factors in 2000 because of a decline in its his-torical average charge-offs and an increase in its average loan exposures.Our allowance for loan losses at December 31, 1999 was € 7.3 billion, a 12%increase from 1998. This increase in our allowance for loan losses was principallydue to substantial increases in our specific provisions, and the Bankers Trustacquisition (€ 477 million), partially offset by releases of country risk provisions,a substantial decrease in the inherent loss provision and a slight increase incharge-offs (€ 96 million).Our total charge-offs increased 13% during 1999 to € 839 million. This increasewas primarily attributable to the German domestic portfolio. Approximately 30%of the German-Other charge-off was related to the construction industry.During 1999, our provision for loan losses totaled € 725 million, a 20% or € 183 million decrease from the preceding year. This decrease was mainlyattributable to higher specific loan loss provisions, offset in part by releases ofcountry risk provision. Our German specific provision increased to € 568 million, a 65% increase from the preceding year. This increase was mainlyattributable to higher provisions for the German borrower we refer to above.
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Our non-German specific provision totaled € 358 million in 1999, a 30% increasefrom the preceding year. This increase was due to the fact that we were able tospecifically identify those exposures, recorded in various Emerging Marketcountries, which required a specific provision. At the same time, we releasedcountry risk provisions, particularly in Indonesia and Turkey.Our allowance for loan losses at December 31, 1998 was € 6.5 billion, a 2%increase from 1997. This increase was primarily due to the effects of the Asianand Russian financial crisis. The following table presents an analysis of the changes in our allowance forcredit losses on lending-related commitments:
Settlement Risk
Our extensive trading activities may give rise to risk at the time of settlement ofthose trades. Settlement risk is the risk of loss due to the failure of a counter-party to honor its obligations to deliver cash, securities or other assets as con-tractually agreed.For many types of transactions, we mitigate settlement risk by closing the trans-action through a clearing agent which effectively acts as a stakeholder for bothparties, only settling the trade once both parties have fulfilled their sides of thebargain.Where no such settlement system exists, as is commonly the case with foreignexchange trades, the simultaneous commencement of the payment and thedelivery parts of the transaction is common practice between trading partners(free settlement). In these cases, we may seek to mitigate our settlement riskthrough the execution of bilateral payment netting agreements. We are also anactive participant in industry initiatives to reduce settlement risks. Acceptance ofsettlement risk on free settlement trades requires approval from our credit riskpersonnel, either in the form of pre-approved settlement risk limits, or throughtransaction-specific approvals. We do not aggregate settlement risk limits withother credit exposures for credit approval purposes, but we take the aggregateexposure into account when we consider whether a given settlement risk wouldbe acceptable.
in € m. 2002 2001 2000
Allowance at beginning of year 496 453 569
Provision for credit losses 17 (30) (33)
Net charge-offs – (22) (34)
Other changes (currency translation and allowance related to acquisitions/divestitures) (28) 95 (49)
Allowance at end of year 485 496 453
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Market Risk
Substantially all of our businesses are subject to the risk that market prices andrates will move and result in profits or losses for us. We distinguish among fourtypes of market risk:– Interest rate risk (including specific risk as well as general risk, as described
below);– Equity price risk (including specific risk as well as general risk, as described
We assume market risk in both our trading and our nontrading activities. Weassume risk by making markets and taking positions in debt, equity, foreignexchange, other securities and commodities as well as in interest rate, equity,foreign exchange, and commodity derivatives.We use a combination of risk sensitivities, value-at-risk, stress testing and eco-nomic capital metrics to manage market risks and establish limits. Economiccapital is the metric we use to describe all our market risks, both in trading andnontrading portfolios. Value-at-risk is also a common metric used in the man-agement of our trading risks.Our Board of Managing Directors and Group Risk Committee, supported byGroup Market Risk Management, which is part of our internally independent riskmanagement function, set a Group-wide value-at-risk limit for the market risks inthe trading book. Group Market Risk Management sub-allocates this overall limitto our Group Divisions and below that to specific business lines and trading port-folio groups and geographical regions.Our market risk disclosures for the trading businesses are based on Germanbanking regulations, which permit banks to calculate market risk capital usingtheir own internal models. In October 1998, the German Banking SupervisoryAuthority (now the German Federal Financial Supervisory Authority) approvedour internal market risk models for calculating market risk capital for our generalmarket risk and issuer-specific risk. It confirmed its approval in 2000, after a fur-ther review and subsequent to our acquisition of Bankers Trust and in 2002, thisapproval was renewed. We use our internal value-at-risk model, which wedescribe below, to calculate the market risk component of our regulatory capital.
Our value-at-risk disclosure is intended to ensure the consistency of market riskreporting for internal risk management, for regulatory purposes and for externaldisclosure. The overall value-at-risk limit for our Corporate and Investment BankGroup Division was € 73 million throughout the year 2002 (with a 99% confi-dence level, as we describe below, and a one-day holding period), except for thetime period from January 8 to February 25, 2002 when we temporarily increasedthe limit to € 100 million. The value-at-risk limit for our consolidated Group trad-ing positions was € 77 million throughout the year 2002, except for the timeperiod from January 8 to February 25, 2002 when we temporarily increased thelimit to € 100 million.
Market Risk Manage-ment Framework
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Differences in Market Risk Reportingbetween GermanBanking Regulationsand U.S. GAAP
Value-at-Risk (VaR)Analysis
There are two significant areas where our determination of which assets aretrading assets and which are nontrading assets differ under German bankingregulations and U.S. GAAP.First, material differences in the classification of assets as trading assets occur insome of our business units, which are considered to be trading units for regula-tory and internal risk management reporting. In these units we have assetswhich are included in the value-at-risk of the trading units even though they arenot trading assets under U.S. GAAP. These assets typically consist of moneymarket loans and of tradable loans and are primarily assigned to our Global Mar-kets Finance and Global Corporate Finance business lines. At year-end 2002, anamount of € 3.9 billion of loans was classified as trading assets for regulatoryreporting. This amount was similar at year-end 2001.Second, we have differences due to the application of hedge accounting. AtDecember 31, 2002 the fair value of these transactions amounted to € 1.9 billionin assets and € 1.2 billion in liabilities. These differences were not material atyear-end 2001.In addition, we exclude from our value-at-risk figures the foreign exchange riskarising from currency positions that German regulation permits us to excludefrom currency risk reporting. These are currency positions which are fullydeducted from, or covered by, equity capital recognized for regulatory reporting,plus partial hedges on such equity capital, as well as shares in affiliated compa-nies that we record in foreign currency and value at historical cost – all of whichwe refer to as structural currency positions. This approach is in accordance withGerman banking regulations and has the consent of the German Federal Finan-cial Supervisory Authority. These holdings had a total book value of € 11.7 billionon December 31, 2002. Of this amount, 66% was denominated in U.S. dollars,17% in pounds sterling, and 7% in Japanese yen. The remainder was distributedamong various other currencies.Also, we do not consolidate for German regulatory reporting purposes compa-nies that are not credit institutions, financial services institutions, financial enter-prises or bank service enterprises. However, we do consolidate a number ofthese companies under U.S. GAAP. These companies include primarily ourinsurance companies and certain investment companies. These companiesmanage their market risks themselves (pursuant to the regulations applicable tothese companies’ risk management activities) and we do not include them inthis market risk management disclosure. At December 31, 2002, these compa-nies held € 12.1 billion of nontrading assets, while they did not hold any tradingassets.
We use the value-at-risk approach to derive quantitative measures for our tradingbook market risks under normal market conditions.For a given portfolio, value-at-risk measures the potential future loss (in terms ofmarket value) that, under normal market conditions, will not be exceeded in adefined period and with a defined confidence level. The value-at-risk measureenables us to apply a constant and uniform measure across all of our tradingbusinesses and products. This facilitates comparisons of our market risk esti-mates both over time and against our actual daily trading results.
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Since January 1, 1999, we have calculated value-at-risk for both internal andexternal reporting using a 99% confidence level, in accordance with BIS rules.For internal reporting purposes, we use a holding period of one day. For regula-tory reporting purposes, the holding period is ten days, i.e. if the portfolio is heldwithout change for ten days, there is a 1% chance that the portfolio’s marketvalue would decline by an amount greater than the value-at-risk figure.We believe that our value-at-risk model takes into account all material risk fac-tors assuming normal market conditions. Examples of these factors are interestrates, equity prices, foreign exchange rates and commodity prices, as well astheir implied volatilities. The model incorporates both linear and nonlinear effectsof the risk factors on the portfolio value. In our model, the nonlinear effects cap-ture risks specific to derivatives. The statistical parameters required for the value-at-risk calculation are based on a 261 trading day history (corresponding to onecalendar year of trading days) with equal weighting being given to each obser-vation.Before and during 2001 we used an assumption of zero correlation among thevarious risk classes which means we assumed that losses in the various riskclasses occur independently of one another. In 2002 we moved to an aggrega-tion approach based on full correlation among the various risk classes.The value-at-risk for interest rate and equity price risks consists of two compo-nents each. The general risk describes value changes due to general marketmovements, while the specific risk has issuer-related causes. When aggregatinggeneral and specific risks, we assume that there is zero correlation betweenthem.We calculate value-at-risk using Monte Carlo simulations. A Monte Carlo simula-tion is a model that calculates profit or loss for a transaction for a large number(such as 10,000) of different market scenarios, which are generated by assuminga joint (log-) normal distribution of market prices based on the observed statisti-cal behavior of the simulated risk factors in the last 261 trading days. However,we still use a variance-covariance approach to calculate specific interest rate riskfor some portfolios, such as in our integrated credit trading and securitizationbusinesses.
We use back-testing on our trading units to verify the predictive power of thevalue-at-risk calculations. In back-testing, we compare the hypothetical dailyprofits and losses under the buy-and-hold assumption (in accordance with German regulatory requirements) with the estimates we had forecast using thevalue-at-risk model.A back-testing committee meets on a quarterly basis to discuss back-testingresults of the Group as a whole and individual businesses. The committee consists of risk managers, risk controllers and business area controllers. Theyanalyze performance fluctuations and assess the predictive power of our value-at-risk models, which in turn allows us to improve the risk estimation process.
Back-Testing
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Stress Testing andEconomic Capital
Limitations of Our Proprietary Risk Models
While value-at-risk, calculated on a daily basis, supplies forecasts for potentiallarge losses under normal market conditions, we perform stress tests in whichwe value our trading portfolios under extreme market scenarios not covered bythe confidence interval of our value-at-risk models.The quantification of market risk under extreme stress scenarios forms the basisof our assessment of the economic capital that we estimate is needed to coverthe market risk in all of our positions. Underlying risk factors (market parame-ters) applicable to the different products are stressed, meaning that we assumea sudden change, according to pre-defined scenarios. We take the resulting pre-dicted losses from applying the worst of these scenarios to the various portfoliosas the economic capital for those businesses. We derive the stress scenariosfrom historic worst case scenarios adjusted for structural changes in currentmarkets.For example, we calculate country-specific event risk scenarios for all emergingmarkets and assess these event risk results daily. A committee reviews the country risk ratings and scenario loss limits bi-weekly. In addition to the country-specific event risk scenarios for Emerging Markets, we also run regular (weekly)market stress scenarios on the positions of every major trading portfolio.Our stress test scenarios include:– price and volatility risks for interest rate, equity price, foreign exchange and
commodity prices for industrialized countries. This covers both trading andnontrading securities and investments, as well as trading book derivativesportfolios and includes many basis risks;
– Emerging Markets’ risks, including equity price declines, strong interest ratemovements and currency devaluations;
– credit spread risks for bonds and traded loans of both industrialized andEmerging Markets countries;
– underwriting risks in debt and equity capital markets.
We aggregate the economic capital numbers by aggregating losses from thosestress scenarios using correlations that reflect stressed market conditions (ratherthan the normal market correlations used in the value-at-risk model). These cal-culations are performed weekly.On December 31, 2002 our economic capital calculation for market risk arisingfrom the trading units totaled € 0.9 billion.
Although we believe that our proprietary market risk models are of a high stan-dard, we are committed to their ongoing development and allocate substantialresources to reviewing and improving them.Our stress testing results and economic capital estimations are limited by theobvious fact that our stress tests are necessarily limited in number and not alldownside scenarios can be predicted and simulated. Whilst the risk managershave used their best judgement to define worst case losses, with the knowledgeof past extreme market moves, it is possible for our market risk positions to losemore value than even our economic capital utilization estimates.
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Our value-at-risk analyses should also be viewed in the context of the limitationsof the methodology we use and are therefore not maximum amounts that wecan lose on our market risk positions. The limitations of the value-at-riskmethodology include the following:– the use of historical data as a proxy for estimating future events may not cap-
ture all potential events, particularly those which are extreme in nature; – the assumption that changes in risk factors follow a normal or logarithmic nor-
mal distribution. This may not be the case in reality and may lead to an under-estimation of the probability of extreme market movements;
– the use of a holding period of one day (or ten days for regulatory value-at-riskcalculations) assumes that all positions can be liquidated or hedged in thatperiod of time. This assumption does not fully capture the market risk arisingduring periods of illiquidity, when liquidation or hedging in that period of timemay not be possible. This is particularly the case for the use of a one-day hold-ing period;
– the use of a 99% confidence level does not take account of, nor makes anystatement about, any losses that might occur beyond this level of confidence;
– we calculate value-at-risk at the close of business on each trading day. We donot subject intra-day exposures to intra-day value-at-risk calculations;
– value-at-risk does not capture all of the complex effects of the risk factors onthe value of positions and portfolios and could, therefore, underestimatepotential losses. For example, the way sensitivities are represented in thevalue-at-risk model may only be exact for small changes in market parameters.
We believe that the aggregate value-at-risk estimates for our consolidated Groupas a whole stand up well against our back-testing procedures (as measured bythe number of hypothetical buy-and-hold portfolio losses against the predictedvalue-at-risk). However, we acknowledge the limitations in the value-at-riskmethodology by supplementing the value-at-risk limits with other position andsensitivity limit structures, as well as with stress testing, both on individual port-folios and on a consolidated basis.
The following table shows the value-at-risk of our trading units in 2002 and 2001.The minimum and maximum value-at-risk amounts show the bands withinwhich the values fluctuated during the periods specified. We calculate the value-at-risk with a holding period of one day and a confidence level of 99%. “Diversi-fication effect” refers to the effect that the total value-at-risk on a given day islower than the sum of the values-at-risk relating to the individual risk factors.Simply adding the value-at-risk figures of the individual risk classes to arrive atan aggregate value-at-risk would imply the assumption that the losses in all riskcategories occur simultaneously.
Value-at-Risk of theTrading Units of OurCorporate and Invest-ment Bank GroupDivision
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* Value-at-risk for 2002 based on full correlation,while value-at-risk for 2001 based on zero correlation among the risk classes.
1 Total for 2002 based on full correlation, total for 2001 based on zero correlation among the risk classes.
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Our trading value-at-risk largely fluctuated between € 30 million and € 45 millionin 2002, with two exceptions. The start of year peak was driven by a large equityposition that resulted from an underwriting transaction that took time to selldown, for which a temporary limit increase to € 100 million was granted. TheAugust spike above € 45 million was primarily driven by above-average interestrate risk positions that were taken in anticipation of interest rate cuts.The following histograms show the distribution of actual daily income of ourtrading units in 2002 and 2001. The histograms indicate, for each year, the num-ber of trading days on which we reached each level of trading income shown onthe horizontal axis in millions of euro. The trading units achieved a positiveincome for over 99% of the trading days in 2001 and for over 96% of the tradingdays in 2002. On no trading day in either year did they incur an actual loss thatexceeded the value-at-risk estimate for that day:
* 99th percentile of daily income distribution.** Average value-at-risk (confidence level 99 %).
The comparison of the distribution of our trading units’ actual daily income withthe average value-at-risk enables us to ascertain how reasonable our value-at-risk estimate is. The histogram for 2002 shows that the actual distribution of ourtrading units’ income produces a 99th percentile of € 46.9 million below theaverage daily income level of € 32.1 million. This compares with the averagevalue-at-risk estimate of € 42.4 million and is larger due to the fact that therewere ten loss-making trading days in 2002 (of which only four were greater than€ 10 million and none were greater than the value-at-risk estimate), as opposedto only two loss-making days in 2001.The value-at-risk and actual income of the trading units throughout the year areshown in the following graph:
In addition, there were two hypothetical buy-and-hold losses that exceeded ourvalue-at-risk estimate for the trading units as a whole in 2001 and one hypothet-ical loss exceeding the value-at-risk in 2002. This is in line with the expected twoto three outliers a year that a 99% confidence level value-at-risk model ought topredict.
These risks constitute the largest portion of the market risks of our consolidatedGroup. We do not use value-at-risk as the primary metric for our nontrading port-folios because of the nature of these positions as well as the lack of transparencyof some of the pricing. Instead we assess the risk of these portfolios, the biggestof which is equity price risk, through the use of stress testing procedures thatare particular to each risk class and which take into account the liquidity of eachasset class. This assessment forms the basis of economic capital estimatesneeded to support the portfolios using a methodology which is consistent withthat used for the trading risk positions. These economic capital estimates enableus to apply a constant and uniform measure across all of our nontrading portfo-lios and thereby actively monitor and manage the risks. The interest rate and for-eign exchange risks arising from our nontrading portfolios have been transferredto our Global Markets Finance business line within our Corporate and Invest-ment Bank Group Division and are managed on the basis of value-at-risk.There are nontrading market risks held and managed in our Corporate andInvestment Bank Group Division, our Private Clients and Asset ManagementGroup Division and our Corporate Investments Group Division.
– 100
– 50
0
50
100
Income of Trading Units and Value-at-Risk in 2002in € m.
On December 31, 2002, our economic capital total measurement for all corpo-rate investments and alternative assets was € 8.3 billion, which included € 3.2billion for private equity, € 2.0 billion for industrial holdings and € 1.1 billion forreal estate investments. This economic capital assessment does not presumeany diversification benefits between the risks of the different assets. In our Corporate and Investment Bank Group Division, the majority of nontrad-ing market risk arises from holdings in listed equity investments, including a € 496 million holding in Axel Springer Verlag AG. Our Private Clients and AssetManagement Group Division primarily incurs nontrading market risk through itsproprietary investments in mutual funds, hedge funds and real estate which sup-port the client asset management businesses. Our Corporate Investments GroupDivision’s nontrading market risks remain by far the biggest in the Group and aremainly incurred through private equity and various legacy funds and equityinvestments.The total market value of our consolidated Group’s nontrading equity invest-ments under U.S. GAAP consisted of € 8.0 billion of equity securities availablefor sale (including the industrial holdings, the largest of which are shown in thetable below) at December 31, 2002 and of € 24.2 billion at year-end 2001. In addi-tion, other investments held at equity totaled € 6.0 billion at December 31, 2002and € 5.3 billion at year-end 2001 and the book value of our other investmentsnot held at equity totaled € 4.7 billion at December 31, 2002 compared to € 6.7billion at year-end 2001. For further information on our other investments, in par-ticular our investments held at equity, see Note [6] to the consolidated financialstatements.The asset and liability positions of some subsidiaries, including Deutsche BankPrivat- und Geschäftskunden, Deutsche Bank Lübeck, Deutsche Bank Interna-tional Limited and Deutsche Bank Saar give rise to some nontrading book mar-ket risks but are a small portion of the total, especially since the deconsolidationof our mortgage bank subsidiary, EUROHYPO, from our financial statements inAugust (the vast majority of the general interest rate risk of the nontrading loanbooks is passed onto the Corporate and Investment Bank Group Division andmanaged within the trading book).
Alternative Assets Investment Activities. All of our three Group Divisionsengage in alternative assets investment activities. The Corporate Investmentsand the Private Clients and Asset Management Group Divisions conduct invest-ment activities in alternative assets as principals, fiduciaries and on behalf ofthird parties as fund managers. We define alternative assets as direct invest-ments in private equity, venture capital, mezzanine debt, real estate principalinvestments, investments in leveraged buy-out funds, venture capital funds andhedge funds. We manage our investments in hedge funds as principal in the Pri-vate Clients and Asset Management Group Division and on a smaller scale, inthe Corporate and Investment Bank Group Division.
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Group Corporate Investment/Alternative Assets Committee. To ensure acoordinated investment strategy, a consistent risk management process andappropriate portfolio diversification, our Group Corporate Investment/AlternativeAssets Committee (which a member of our Board of Managing Directors chairs),supervises all of our alternative assets investment activities. The Global Head ofGroup Market Risk Management is also the Chief Risk Officer for CorporateInvestments and Alternative Assets and is a member of the Group CorporateInvestment/Alternative Assets Committee.The Group Corporate Investment/Alternative Assets Committee defines invest-ment strategies, determines risk adjusted return requirements, sets limits forinvestment asset classes, allocates economic capital among the various alterna-tive assets units and approves policies, procedures and methodologies for managing alternative assets risk. The Group Corporate Investment/AlternativeAssets Committee receives monthly portfolio reports showing performance,estimated market values, economic capital usage derived from stress tests andrisk profiles of the investments. The committee also oversees the portfolio ofindustrial holdings and other strategic investments in entities held in our Corpo-rate Investments Group Division. The Group Corporate Investment/AlternativeAssets Committee has established dedicated investment commitment commit-tees for each alternative asset category.We carry private equity, venture capital and real estate investments on our balance sheet at their costs of acquisition (less write-downs, if applicable) or fairvalue. In certain circumstances, depending on our ownership percentage ormanagement rights, we apply the equity method to our investments. In somesituations, we consolidate investments made by the private equity business. Weaccount for our investments in leveraged buy-out funds using the equity methodand carry hedge fund investments at current market value.As of December 31, 2002 the book value of our alternative assets investmentportfolio amounted to € 9.7 billion. It consisted of € 5.3 billion of private equityinvestments, € 4.0 billion of real estate investments and € 0.4 billion of hedgefund investments.The portfolio is dominated by the private equity and real estate investmentswhich totaled € 9.3 billion as of December 31, 2002 (at the end of 2001 the bookvalue of our private equity and real estate investments was € 11.0 billion). Theywere primarily invested in Western Europe (60%) and North America (35%). Interms of industrial sectors we believe the majority of the private equity portfoliois well diversified. Of the above € 5.3 billion, a € 2.1 billion portion was held infunds managed by external managers.On December 31, 2002, our (undiversified) economic capital measurement foralternative assets under the aegis of the Group Corporate Investment/AlternativeAssets Committee (excluding industrial holdings) totaled € 4.5 billion. Our eco-nomic capital measurement for alternative assets at the end of 2001 totaled € 5.3billion (total recalculated for 2001 based on definition of alternative assetsabove).
Management of Our Mutual Funds. Our mutual fund investments (held in the Private Clients and Asset Management Group Division) amounted to € 1.1 billion at December 31, 2002 and support our broad asset managementfund offerings to clients, sometimes being used to seed new funds. They wereinvested predominantly in securities and shares of Western European (mainlyGerman) issuers and across a broad mix of industries (including governments).Our economic capital estimate for the risk arising from these holdings was € 133million. At year-end 2001 our mutual fund investments amounted to € 5.5 billion.
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The amount of our mutual fund investments has declined mainly because wehave sold our investments in special funds in early 2002.
Management of Our Industrial Holdings. DB Investor is responsible foradministering and restructuring our industrial holdings portfolio. However,Deutsche Bank AG holds some industrial holdings directly. DB Investor currentlyplans to continue selling most of its publicly listed holdings over the next fewyears, subject to the legal environment and market conditions.We deem equity investments in nonbanking enterprises to be significant if theirmarket value exceeds € 150 million. The total percentages and market values ofthe significant nonbank holdings directly and/or indirectly attributable to us wereas follows on December 31, 2002 and on December 31, 2001:
Dec 31, 2002 Country of Share of Capital Market ValueDomicile (in %) (in € m.)
Dec 31, 2001 Country of Share of Capital Market ValueDomicile (in %) (in € m.)
DaimlerChrysler AG Germany 12.1 5,861
MünchenerRückversicherungs-Gesellschaft AG Germany 7.2 3,889
Allianz AG Germany 4.0 2,806
Linde AG Germany 10.1 552
RWE AG Germany 1.5 360
Südzucker AG Germany 11.3 313
Heidelberger Zement AG Germany 8.9 287
Buderus AG Germany 10.5 204
Mg technologies ag Germany 9.1 166
Continental AG Germany 8.2 162
Fiat S.p.A. Italy 1.6 155
Bayer AG Germany 0.6 154
Total 14,909
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Funding Matrix
Short-term Liquidity
Unsecured Funding
Liquidity Risk
Liquidity risk management has been instrumental in maintaining a healthy fundingprofile during this period of general economic weakness.
We have mapped all of our funding relevant assets and liabilities in time bucketscorresponding to their maturities to create what we call the “Funding Matrix”.Given that trading assets are typically more liquid than their contractual maturi-ties suggest, we have divided them into liquids (assigned to the time bucket oneyear and under) and illiquids (assigned to time buckets up to five years based onmodeling of their liquidity characteristics). We have modeled assets and liabili-ties from the retail bank that show a behavior of being renewed or prolongedregardless of capital market conditions (mortgage loans and retail deposits) andassigned them to time buckets accordingly. Wholesale banking products arebucketed based on their contractual maturities. We use the expected holdingperiod to assign corporate investments to the Funding Matrix. The Funding Matrix shows the excess or shortfall of assets over liabilities in eachtime bucket and thus allows us to identify and manage open liquidity exposures.We have also developed a cumulative mismatch vector, which enables us topredict whether any excess or shortfall will grow, decline or switch over time.The Funding Matrix forms the basis for our annual securities issuance planwhich upon approval of our Group Asset and Liability Committee establishesissuing targets for securities by tenor, volume and instrument. Funding Matrixand issuance plan form the basis to determine the liquidity spread which is onecomponent of the internal transfer price. On the basis of this model we have not identified any material funding mis-matches. In fact, considering capital, we are structurally long funded.
We have established a system to track net cash outflows over an eight-weekhorizon. This system allows management to assess our short-term liquidity position in any location, region and globally on a by-currency and by-productbasis. The system captures all of our cash flows, thereby including liquidity risksresulting from off-balance sheet transactions as well as from transactions on our balance sheet. We model transactions which have no specific contractualmaturities using statistical analysis to capture the actual behavior of these trans-actions. Our Board of Managing Directors, upon the recommendations of ourGroup Asset and Liability Committee, has set global and regional limits for theliquidity exposures which we monitor on a daily basis.
Unsecured wholesale funding is a finite resource. Over the course of 2002, wehave reduced our short-term unsecured wholesale funding (CP and CD, Bankand Central Bank deposits) by approximately € 24 billion (see table below). Our Group Asset and Liability Committee has set limits to restrict utilization of unsecured wholesale funding.
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Diversification of our funding profile in terms of investor types, regions, productsand instruments is an important part of our liquidity policy. Our core fundingresources, such as retail and fiduciary deposits and long-term capital marketsfunding, form the cornerstone of our liability profile. Customer deposits, fundsfrom institutional investors and interbank funding are additional sources of fund-ing. We use interbank deposits primarily to fund liquid assets.
The above chart shows the composition of our unsecured liabilities as of December 31, 2002 both in euro billion and as a percentage of our total un-secured liabilities. Our total unsecured liabilities amounted to approximately € 332 billion on that date. The liability diversification report is a managementinformation tool we use to actively manage our liability composition. It containsall relevant unsecured liabilities and can selectively be reconciled against bal-ance sheet items.We track the volume and location within our consolidated inventory of unen-cumbered, liquid assets which we can use immediately to raise funds either inthe repurchase agreement markets or by selling the assets. The securities inven-tory consists of a wide variety of liquid securities, which we can convert intocash even in times of market stress.The liquidity of these assets is an important element in protecting us againstshort-term liquidity squeezes. By holding these liquid assets, we also protectourselves against unexpected liquidity squeezes resulting from customers draw-ing large amounts under committed credit facilities. In addition, we maintained,on average, a € 25 billion portfolio of highly liquid securities in major currenciesaround the world to supply collateral for cash needs associated with clearingactivities in euro, U.S. dollar and other major currencies.
* Small/Mid Cap: refers to deposits by small and medium sized European corporates.** CP-CD: Commercial Paper/Certificates of Deposit.
0
40
80
120
RetailDeposits
FiduciaryDeposits
CapitalMarkets
Small/Mid Cap*
CP-CD**
External Unsecured Liabilities by Productin € bn.
December 31, 2002: total € 332 billionDecember 31, 2001: total € 366 billion
BankDeposits
CentralBank
Deposits
OtherNon-BankDeposits
99
20
70
11
29 30
12
6155
12
3647
14
74
20
108
30%30%
21% 20%
6% 5%3% 4%
9%
13%
9%10%
4% 3%
18%15%
Funding Diversificationand Asset Liquidity
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In 2001, we completed the development of stress testing and scenario analysisto evaluate the impact of sudden, unforeseen events with an unfavorable impacton the bank’s liquidity. The scenarios are either based on historic events (such asthe stock market crash of 1987, the U.S. liquidity crunch of 1990 and the terroristattacks of September 11, 2001) or modeled using hypothetical events. Theyinclude internal scenarios (such as operational risk, merger or acquisition, creditrating downgrade by 1 and 3 notches) as well as external scenarios (such as market risk, emerging markets, systemic shock and prolonged global recession).In 2002, we added a scenario to evaluate the liquidity impact of a crisis in theGerman banking sector. Under each of these scenarios we assume that allmaturing assets will need to be rolled over and require funding whereas rolloverof liabilities will be partially impaired. We then model the steps we would take tocounterbalance the resulting net shortfall in funding needs such as selling assetsand adjusting the price we would pay for liabilities. This analysis is fully inte-grated within the existing liquidity framework. We take our contractual cashflows as a starting point, which enables us to track the cash flows per currencyand product over an eight-week horizon (the most critical time span in a liquiditycrisis) and apply the relevant stress case to each product. Asset salability asdescribed in the paragraph above complements the analysis. Our stress testinganalysis provides guidance as to our ability to survive critical scenarios andwould, if deficiencies were detected, cause us to make changes to our asset andliability structure. The analysis is performed monthly. The following report is illus-trative of our stress testing results as of December 31, 2002. For each scenario,the table shows what our maximum funding gap would be over an eight-weekhorizon after occurrence of the triggering event, whether the risk to our liquiditywould be immediate and whether it would improve or worsen over time andhow much liquidity we believe we would have been able to generate at the timeto close the gap:
Stress Testing andScenario Analysis
Scenario Funding Gap1 Liquidity Impact Gap Closure2
DB downgrade to A2/P2 (short term)and A3/A– (long term) 53,844 Gradually increasing 78,932
1 Funding gap after assumed partially impaired rollover of liabilities. All assets are renewed.2 Maximum liquidity generation based on counterbalancing and asset salability opportunities.
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With the increasing importance of liquidity management in the financial industry,we consider it important to contribute to financial stability by regularly address-ing central banks, supervisors and market participants on liquidity risk-relatedtopics. We participate in a number of working groups regarding liquidity and willstrive to assist in creating an industry standard that is appropriate to evaluateand manage liquidity risk.In addition to our internal liquidity management systems, the liquidity exposureof German banks is regulated by the German Banking Act and regulations issuedby the German Federal Financial Supervisory Authority.
We carry out certain business activities via arrangements with unconsolidatedentities. We may provide financial support or otherwise be exposed to risks ofloss as a result of these arrangements, typically through guarantees that we pro-vide or subordinated retained interests that we hold. The purposes, risks, andeffects of these arrangements are described below. Our use of derivativesindexed to our own stock which are accounted for off-balance sheet is dis-cussed below as well.We provide financial support related to off-balance sheet activities chiefly in connection with asset securitizations, commercial paper programs, commercialreal estate leasing vehicles and closed-end funds and certain fixed-term mutualfunds that we manage. The risks from these arrangements are included in ouroverall assessments of credit, liquidity and market risks.We may provide financial support in connection with asset securitizations byretaining a subordinated interest in the assets being securitized. In an assetsecuritization, we sell financial assets to a securitization trust which funds itspurchase by issuing debt (asset-backed securities) to investors. We have no control over the securitization trust after the sale, and our creditors and we haveno claim on the assets that we have sold. Similarly, the investors and the se-curitization trust have no recourse to our other assets if the loans go into default.For these reasons, we are not permitted to consolidate these trusts. Asset-backed securities are attractive to investors in what is a deep and liquid marketthat lowers borrowing costs and increases credit availability to businesses and toconsumers.The securitization trusts we use in these transactions pose limited liquidity riskssince the payments to investors are directly tied to the payments received fromthe trust’s assets and are unaffected by changes in our own credit rating orfinancial situation. A sudden drop in investor demand for asset-backed securitiescould cause us to restrict our lending thereafter for the types of loans we typi-cally securitize, but we are not dependent on securitizations as a source of fund-ing and such a market shift would not pose any significant additional liquidityrisk not already considered in our risk analyses. To the extent we hold senior orsubordinated debt issued by a securitization trust we have credit risk which isconsidered as part of our credit risk assessments or market valuations. Note [9]to the consolidated financial statements provides additional information regard-ing the extent of our retained interests in securitizations and the volume of ourasset securitization activities.Commercial paper programs represent a way for third parties to securitize theirfinancial assets. In commercial paper programs, we do not securitize any of ourown financial assets, but act as administrative agent. As administrative agent,we facilitate the sale of loans, other receivables, or securities from various thirdparties to an unconsolidated special purpose entity. We may also facilitate thetransfer of the loans and securities that represent collateral provided by the thirdparties in return for loans granted by the unconsolidated entity. The entity then
Off-balance SheetArrangements with UnconsolidatedEntities
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issues collateralized commercial paper to the market. In these situations, thecommercial paper issuer is restricted from purchasing assets from or makingloans to us. Rating agencies typically rate such commercial paper in the highestshort-term category because of the collateral and credit support normally pro-vided by a financial institution.Unlike securitization trusts, commercial paper programs do pose liquidity risksince the commercial paper issued is short-term whereas the issuer’s assets arelonger term. We take on this risk whenever we provide a liquidity support facilityto the issuer. We may also guarantee the assets of the issuer as part of the facil-ity, giving us secondary credit risk with the first loss taken by the third partieswho sold their assets to the entity. We sponsor commercial real estate leasing vehicles and closed-end fundswhere third party investors essentially provide senior financing for the purchaseof commercial real estate which is leased to other third parties. We typicallyeither provide subordinated financing or we guarantee the investment made bythe third parties, which exposes us to real estate market risk, and we receivefees for our administrative services.For certain fixed-term mutual funds that we manage, we guarantee the value ofmutual fund units that investors purchase. The investment policies of thesefunds are designed to minimize the risk of market value loss which, in turn, mit-igates risk of these guarantees. We may be required to consolidate certain of the entities described above uponthe adoption of Interpretation No. 46, “Consolidation of Variable Interest Enti-ties”, on July 1, 2003. The impact of the Interpretation and the extent of thefinancial support we provide for the arrangements described above is disclosedin Note [9] to the consolidated financial statements. Also, the guaranteesdescribed above are included in the overall disclosures of guarantees inNote [30] to the consolidated financial statements. We enter into contracts to purchase Deutsche Bank common shares on a forward basis at a fixed price for purposes of satisfying employee stock com-pensation awards as they vest. These contracts are entered into with market participants, not special purpose entities. Current accounting rules require thatthese contracts be recorded off-balance sheet. Please see Note [30] of the con-solidated financial statements for further information regarding these contracts.
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The following table shows the maturity breakdown of the indicated contractualfinancial obligations outstanding as of December 31, 2002:
The significant obligations in the above table of contractual financial obligationsare included in our overall assessment of liquidity risk.
Operational Risk
The banking industry, in close dialog with the Basel Committee on BankingSupervision achieved important milestones in 2002 in developing the new Reg-ulatory Operational Risk Framework, although the discussions with the regulatorsconcerning the capital and framework guidelines have not yet ended. On thebasis of the regulatory discussion we define operational risk as the potential forincurring losses in relation to employees, project management, contractualspecifications and documentation, technology, infrastructure failure and disas-ters, external influences and customer relationships. This definition includes,among others, legal and regulatory risk.The development of guidelines, standards, tools and methodologies to measureand protect against operational risk will be a major challenge to the banking sec-tor in the coming years. This is especially true in view of the new capital ade-quacy regulations currently under discussion, which will come into force at theend of 2006 and which will impose a capital charge for operational risks. More-over the regulators specify in their paper “Sound Practices for the Managementand Supervision of Operational Risk” qualitative demands regarding a bank’sorganization and risk management as well as quantitative directives for risk iden-tification and risk measurement. We are already working towards fulfilling thefuture requirements.
We are implementing a framework for managing our operational risk on a globalbasis. A Group Operational Risk Management Policy defines roles and respon-sibilities for managing and reporting operational risk. Divisional standards sup-plement this Group policy. Responsibility for operational risk managementessentially lies with our Business Divisions. We are implementing four differentsystems for the management of operational risks:– We perform operational risk “self-assessments” using our db-RiskMap tool.
This results in a specific operational risk profile (high risk potential) for busi-ness lines, service functions and the Corporate Center. In 2002 db-SAT com-plements the self-assessment approach. Focus is on business efficiency andimprovement of controls.
– We collect losses arising from operational risk events in our db-IncidentReporting System database.
– We capture and monitor qualitative and quantitative risk indicators in our tooldb-Score for transaction processing risk and information security risk.
Total 15,337 15,486 11,117 14,800 6,716 45,322 108,778
1 Excludes € 3.1 billion of trust preferred securities.
Contractual FinancialObligations
Managing Our Operational Risk
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– We will automatically capture action points resulting from risk assessments ordb-Score in db-Track. Within db-Track we will monitor the progress of theoperational risk action points on an on-going basis.
These systems help to give an overview of our current operational risk profilesand to define risk management measures and priorities. We monitor the statusof framework implementation in a scorecard, which forms the basis for quarterlyreview by the Group Operational Risk Committee. As an incentive to implementthis framework, we grant certain deductions of the economic capital for opera-tional risk to the Business Divisions. The calculation of economic capital foroperational risk is based on a statistical model using external loss data with certain top down adjustments.Our Group Chief Risk Officer has appointed a Chief Risk Officer Operational Riskwith Group-wide responsibility. He is represented on the Group Risk Committeeand is Chairman of the Group Operational Risk Committee. The latter committee,whose members include the divisional Operational Risk Officers and representa-tives of Service Functions and Corporate Center such as Audit, Controlling,Human Resources, Legal, Tax and Compliance, develops and implements ourinternal guidelines for managing operational risk. The Chief Risk Officer Opera-tional Risk is head of our Operational Risk Management, with responsibility toroll-out the Operational Risk framework, i.e. policy, tools, reporting. The Opera-tional Risk Management functions of the Corporate Divisions are part of ourindependent Operational Risk Management function and report to the Chief RiskOfficer Operational Risk.We seek to minimize operational risk associated with our communication, infor-mation and settlement systems through the development of back-up systemsand emergency plans. We engage in regular employee training, operatinginstructions and inspections to help limit operational defects or mistakes. Whereappropriate, we purchase insurance against operational risks.
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Regulatory Risk Reporting
The following table shows the development of our risk position, capital and cap-ital adequacy ratios for the companies we consolidate for the purposes of ourregulatory risk reporting. We calculate these figures in compliance with BISguidelines and the related guidance of the German Federal Financial SupervisoryAuthority:
Our capital adequacy measures consist of the following:
Risk Position. Risk-weighted assets relating, in particular, to default risks, andthe equivalent for our market risk position (interest rate, exchange rate, shareprice and commodity price risks). Our regulators permit us to use our internalvalue-at-risk approach to calculate the market risk position as a component ofrisk position.
Capital. The Total capital which can be used to back the risk position and is recognized for bank regulatory purposes consists of:– Core capital (Tier I): primarily share capital, reserves and hybrid capital com-
ponents, such as noncumulative trust preferred securities and equity con-tributed by silent partners.
– Supplementary capital (Tier II): primarily long-term subordinated liabilities,unrealized gains on listed securities and other inherent loss allowance.
– Tier III capital: mainly short-term subordinated liabilities and excess Tier II capital.
The capital ratio compares a bank’s risk position to its regulatory capital. Theminimum BIS total capital ratio (Tier I + Tier II + Tier III) is 8% of the risk position.The minimum BIS core capital ratio (Tier I) is 4% of the risk-weighted positionsand 2.29% of the market risk equivalent. The minimum core capital ratio for thetotal risk position therefore depends on the weighted average of risk-weightedpositions and market risk equivalent. Under BIS guidelines, the amount of sub-ordinated debt that may be included as Tier II capital is limited to 50% of Tier Icapital. Total Tier II capital is limited to 100% of Tier I capital.In 2002 our risk position decreased by € 67.6 billion to € 237.5 billion on Decem-ber 31, 2002. The decrease was driven by several factors, mainly the deconsoli-dation of EUROHYPO and DFS, a weaker U.S. dollar and the reduction of ourloan business.
Dec 31, Dec 31,in € m. (except percentages) 2002 2001
Risk-weighted positions 231,262 297,063
Market risk equivalent1 6,217 8,016
Risk position 237,479 305,079
Core capital (Tier I) 22,742 24,803
Supplementary capital (Tier II) 7,120 12,255
Available Tier III capital – –
Total capital 29,862 37,058
Core capital ratio (Tier I) 9.6% 8.1%
Capital ratio (Tier I + II + III) 12.6% 12.1%
1 A multiple of our value-at-risk, calculated with a probability level of 99% and a ten-day holding period.
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BIS rules and the German Banking Act require us to cover our market risk as ofDecember 31, 2002 with slightly over € 497 million of regulatory capital (Tier I +II + III). We met this requirement entirely with Tier I and Tier II capital. Our U.S. GAAP based Total capital was € 29.9 billion on December 31, 2002 andour core capital (Tier I) was € 22.7 billion, compared to € 37.1 billion and € 24.8billion on December 31, 2001. Our supplementary capital (Tier II) of € 7.1billion onDecember 31, 2002 amounted to 31% of our core capital. Our capital ratio was 12.6% on December 31, 2002, significantly higher than the8% minimum required by the BIS guidelines. Our core capital ratio was 9.6% inrelation to the total risk position (including market risk equivalent).
Overall Risk Position
To calculate our overall (nonregulatory) risk position, we aggregate the economiccapital figures for all types of risk. This corresponds to a conservative assump-tion that very severe losses occur simultaneously in all types of risk, i.e. the dif-ferent risk types are 100% correlated. For credit risk economic capital, cross-divisional diversification effects of the credit portfolio are separately calculatedfor the Corporate and Investment Bank Group Division, the Private Clients andAsset Management Group Division and the Corporate Investments Group Divi-sion, resulting in € 7.9 billion, € 1.0 billion and € 0.1 billion respectively. Thesenumbers are then aggregated for all Group Divisions which again is a conserva-tive assumption, i.e. diversification benefits between Group Divisions respec-tively are not taken into account.On December 31, 2002, our economic capital totaled € 20.6 billion, compared to€ 20.9 billion as of December 31, 2001, while our BIS Tier I capital is € 22.7 bil-lion. This does not include liquidity risk, the risk of our insurance companies orthe risk of the industrial holdings of DB Investor. The following table highlightsthat the year-end 2002 allocation of the total economic capital among the risktypes remained largely unchanged compared to year-end 2001:
Economic Capital Dec 31, Dec 31,in € m. 2002 2001
Credit risk 8,942 9,064
Market risk 7,191 7,257
Operational risk 2,449 2,538
Business risk 1,978 2,026
Total 20,560 20,885
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The Board of Managing Directors of Deutsche Bank AG is responsible forthe Consolidated Financial Statements. They have been prepared inaccordance with the U.S. Generally Accepted Accounting Principles andthus fulfil the conditions of §292a German Commercial Code for exemp-tion from preparation of consolidated financial statements in accordancewith German commercial law. In addition, the disclosure requirements ofthe European Union are satisfied.
The responsibility for correct accounting requires an efficient internalmanagement and control system and a functioning audit apparatus.Deutsche Bank’s internal control system is based on written communica-tion of policies and procedures governing structural and proceduralorganization, enlarged risk controlling for default and market risks as wellas the segregation of duties. It covers all business transactions, assetsand records. Deutsche Bank’s audit is carried out in accordance with theextensive audit plans covering all divisions of the Group and also includ-ing compliance with the organizational terms of reference.
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaft-sprüfungsgesellschaft audited the Consolidated Financial Statements inaccordance with German auditing regulations, and in supplementarycompliance with United States Generally Accepted Auditing Standardsand issued an unqualified opinion. KPMG Deutsche Treuhand-Gesellschaft and the Audit Department of Deutsche Bank had free accessto all documents needed in the course of their audits for an evaluation ofthe Consolidated Financial Statements and for an assessment of theappropriateness of the internal control system.
Frankfurt am Main, March 4, 2003Deutsche Bank AG
Statement by the Board of Managing Directors
Josef Ackermann Clemens Börsig
Tessen von Heydebreck Hermann-Josef Lamberti
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Independent Auditors’ Report
We have audited the consolidated financial statements, comprising thebalance sheet, the income statement, the statement of comprehensiveincome and the statement of changes in shareholders’ equity and cashflows as well as the notes to the financial statements prepared byDeutsche Bank AG for the business year from January 1, 2002 to Decem-ber 31, 2002. The preparation and the content of the consolidated finan-cial statements in accordance with accounting principles generallyaccepted in the United States of America are the responsibility of theCompany’s management. Our responsibility is to express an opinion onthese consolidated financial statements based on our audit.
We conducted our audit of the consolidated financial statements inaccordance with German auditing regulations and in supplementarycompliance with auditing standards generally accepted in the UnitedStates of America. Those standards require that we plan and perform theaudit such that it can be assessed with reasonable assurance whether theconsolidated financial statements are free of material misstatements. Theevidence supporting the amounts and disclosures in the consolidatedfinancial statements are examined on a test basis within the framework ofthe audit. The audit includes assessing the accounting principles usedand significant estimates made by management, as well as evaluatingthe overall presentation of the consolidated financial statements. Webelieve that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements give a true and fairview of the net assets, financial position, results of operations and cashflows of the Group for the business year in accordance with accountingprinciples generally accepted in the United States of America.
Our audit, which also extends to the structured presentation of additionaldisclosures with regard to the Group’s position required by Article 36 ofthe 7th EU Directive prepared by the Company’s management for thebusiness year from January 1, 2002 to December 31, 2002, has not led toany reservations. In our opinion on the whole the structured presentation,together with the other disclosures in the consolidated financial state-ments, provides a suitable understanding of the Group’s position andsuitably presents the risks of future development. In addition, we confirmthat the consolidated financial statements and the structured presenta-tion of additional disclosures with regard to the Group’s position for the
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business year from January 1, 2002 to December 31, 2002 satisfy the con-ditions required for the Company’s exemption from its duty to prepareconsolidated financial statements and the group management report inaccordance with German law.
Frankfurt am Main, March 11, 2003KPMG Deutsche Treuhand-GesellschaftAktiengesellschaftWirtschaftsprüfungsgesellschaft
Interim Report as of September 30, 2003Deutsche Bank Group
Income (Loss) beforeIncome Tax Expense(Benefit) and Cumulative Effect ofAccounting Changes
Net Income (Loss)
Income (loss) before income tax expense (benefit) and cumulative effect ofaccounting changes was € 755 million in the third quarter of 2003, com-pared to a loss of € 181 million in the third quarter of 2002 and income of€ 1.1 billion in the second quarter of 2003. The results in each quarter included certain gains and charges, primarilyrelating to our industrial holdings, other equity investments and sales ofbusinesses. These items, which net to € 29 million in the third quarter of2003, are set forth in the table below and explained in this “Discussion ofResults”.
Net income in the third quarter of 2003 was € 576 million, compared to a net loss of € 299 million in the third quarter of 2002 and net income of € 572 million in the second quarter of 2003. In the third quarter of 2003,income tax expense was € 252 million excluding € 78 million from thereversing effect of the tax benefit recorded for the 1999 and 2000 Germantax law changes. The third quarter of 2003 also included the cumulativeeffect of accounting changes of € 151million, net of tax, related primarily tothe implementation of FIN 46 and to a lesser extent SFAS 150. The net lossin the third quarter of 2002 reflected an income tax benefit of € 12 million,
benefit recorded for the aforementioned tax law changes. In the secondquarter of 2003, income tax expense was € 503 million, excluding a taxexpense of € 16 million from the reversing effect of the tax benefit recordedfor the aforementioned tax law changes. Further details on the impact of
in € m. 3Q03 2Q03 3Q02
Net gains (losses) on securities available for sale/industrial holdings including hedging 33 45 21
Other revenues: net gains (losses) from businessessold/held for sale 34 (49) 395
Change in measurement of other inherent lossallowance – – (200)
Restructuring activities – 27 –
Discussion of Results
excluding a tax expense of € 130 million from the reversing effect of the tax
F-178 of this Offering Circular.income tax on our results are provided on pages F-152, F-153 and
F-145
Total revenues before provision for loan losses were € 5.2 billion in the third quarter of 2003, compared to € 5.5 billion in the third quarter of 2002and € 5.9 billion in the second quarter of 2003. The Group’s revenues forthe third quarter of 2003 reflected the impact of several factors that shouldbe considered in making revenue comparisons among periods. The mostsignificant among these are: foreign currency translation and deconsolida-tion/consolidation effects; the seasonality of revenues, including dividendpayments and customer flow businesses; and the asymmetrical account-ing treatment for certain hedges of risk in non-trading assets and liabilities.The strengthening of the euro since the end of 2002 has had a negative foreign currency translation effect on reported revenues. The largestimpact has been the translation of U.S. dollar revenues, with a lesserimpact from other currencies such as the British pound.Since the third quarter of 2002, the Group has sold businesses, in-cluding Global Securities Services, Passive Asset Management and EUROHYPO AG as part of its strategic transformation, with a consequentdecline in revenues. Adjusted for the effects of both foreign currency trans-lation and deconsolidation/consolidation (which would have reduced third quarter of 2002 underlying revenues by approximately € 600 millionto € 4.8 billion), underlying revenues would have been up approximately7% in the third quarter of 2003 compared to the third quarter of 2002.A substantial portion of the Group’s revenues is derived from customerflow activities, and the third quarter is traditionally impacted by a slow-down in such activities in Europe during the months of July and August.The slowdown was particularly significant this year with a consequent effecton customer flow revenues. Revenues rebounded significantly after August.In addition, dividends on shares held by the Group in its industrial holdingsportfolio are generally received in the second quarter of each year.The Group’s comprehensive risk management strategy includes hedgingcertain risks in non-trading assets and liabilities with derivatives. Some ofthese hedges, while economically effective, do not qualify for hedgeaccounting under SFAS 133, so revenues are impacted by the asymmetri-cal accounting effects. The most significant aspects in the third quarterwere in the following areas:– Hedges of certain debt issued by the Group– Hedges of loan exposures– Hedges of our industrial holdings portfolio.The revenue volatility resulting from this asymmetry is a timing mismatchexcept for the cost of the hedge. The accounting and economic effects areexpected to materially offset over the term of the hedge. SFAS 133 alsogives rise to volatility from other aspects of the Group’s business thanthose described above. However, these effects, which can occur eachquarter and can have either a positive or negative impact on revenues,were relatively minor in the current quarter.
Total Revenuesbefore Provision forLoan Losses
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Deutsche Bank’s trading and risk management businesses include signifi-cant activities in interest rate instruments and related derivatives. UnderU.S. GAAP, interest revenues earned from trading activities (e.g., couponand dividend income) as well as funding costs of net trading assets are part of net interest revenues. Our trading activities can periodically shiftrevenues between trading revenues and interest revenues, depending on avariety of factors, including risk management strategies. In order to providea more business-focused commentary, we will discuss the combined netinterest and trading revenues by group division and by product within Corporate and Investment Bank, rather than by the type of revenues generated.
The Group’s combined net interest and trading revenues of € 2.6 billiondeclined € 63 million, or 2%, compared to the third quarter of 2002.Adjusted for the aforementioned foreign currency translation and decon-solidation/consolidation effects, these revenues would have increased.Combined net interest and trading revenues declined € 649 million, or20%, compared to the second quarter of 2003, which was a record quarterfor debt and other products. Almost one-third of the decline was due tolower dividends from our industrial holdings in the third quarter of 2003compared to the prior quarter. The quarter’s segment results are discussed in greater detail later in thisInterim Report, but the following is an overview of the segment net interestand trading revenues results.
Three months ended % change from Nine months ended
Sep 30, Jun 30, Sep 30, 2Q03 3Q02 Sep 30, Sep 30,in € m. 2003 2003 2002 2003 2002
Net interest revenues 1,612 1,672 1,711 (4) (6) 4,590 5,770
Trading revenues, net 940 1,529 904 (39) 4 4,253 3,277
Total net interest and trading revenues 2,552 3,201 2,615 (20) (2) 8,843 9,047
Total net interest and trading revenues 2,552 3,201 2,615 (20) (2) 8,843 9,047
N/M – Not meaningful1 Note that this breakdown reflects net interest and trading revenues only. For a discussion of the group divisions’ total revenues by product please
2 Includes origination, advisory and other products.
Net Interest and Trading Revenues
refer to Segmental Results of Operations starting on page F-154.
F-147
Corporate and Investment Bank (CIB). Combined net interest and trading revenues of € 1.9 billion declined by € 215 million, or 10%, com-pared to the third quarter of 2002. The aforementioned foreign currencytranslation effects and asymmetrical accounting treatment of our eco-nomic hedges impacted these results. Net interest and trading revenuesfrom sales and trading products were € 61 million higher than in the thirdquarter of 2002. The increase was attributable to equity products, reflectingthe stronger equity markets this year. Net interest and trading revenuesfrom loan products decreased € 151 million, partly the result of reducedloan volumes due to sales of businesses as well as charges of € 59 millionon credit default swaps, used to hedge loan exposures, that do not qualifyfor hedge accounting under SFAS 133. The markdowns on the creditdefault swaps were the result of tightening spreads as the market’s percep-tion of credit quality improved in 2003. Over the life of the credit derivativethe losses on the mark-to-market element of these transactions will tend tomaterially offset, leaving the cost of the hedge as the ultimate expense.Combined net interest and trading revenues from transaction servicesdecreased by € 42 million compared to last year’s third quarter. The declinewas attributable to lower net interest margins from cash management aswell as to reduced net interest revenues after the sale of a substantial partof our Global Securities Services (“GSS”) business in the first quarter of 2003. Remaining products essentially include net interest and tradingrevenues from corporate assets and liabilities (e.g., goodwill fundingcosts). The decrease of € 83 million compared to the third quarter of 2002was attributable to certain corporate liabilities, partly offset by lower good-will funding costs.Combined net interest and trading revenues declined € 650 million, or26%, compared to the second quarter of 2003. Net interest and trading revenues from sales and trading products were € 694 million lower than inthe second quarter of 2003 driven by the aforementioned seasonality andSFAS 133 effects. Net interest and trading revenues from loan productsincreased € 52 million compared to the second quarter of 2003, mainly dueto lower markdowns on credit default swaps. Combined net interest andtrading revenues from transaction services and remaining products wereessentially unchanged.
F-148
Private Clients and Asset Management (PCAM). Combined net interestand trading revenues of € 697 million increased by € 101 million, or 17%,compared to the third quarter of 2002 and by € 66 million, or 10%, compared to the second quarter of 2003. The increases were mainly attributable to the consolidation of variable interest entities, pursuant to theimplementation of FIN 46, in the third quarter of 2003.
Corporate Investments (CI). Combined net interest and trading revenueswere essentially unchanged compared to last year’s third quarter anddecreased by € 103 million compared to the second quarter of 2003. The decrease compared to the second quarter of 2003 was mainly due to a decline in dividend income on industrial holdings from the second quarter, partly offset by lower mark-to-market losses from hedges of thoseinvestments.
The provision for loan losses is comprised of net new specific loan loss provisions, as well as net provisions for smaller-balance standardizedhomogeneous exposures, country risk and other inherent losses.The provision for loan losses was € 174 million in the third quarter of 2003,compared to € 753 million in the third quarter of 2002 and € 340 million in the second quarter of 2003. The reduced provision for loan losses in thethird quarter of 2003 was related to our German portfolio and, to a lesserextent, exposures within America. The provision for loan losses in the thirdquarter of 2003 also reflected releases and recoveries, which were higherthan in the previous periods. The third quarter of 2002 included provisions raised primarily to addressthe downturn in the telecommunications industry and specific loan lossprovisions for certain exposures within our German portfolio and the Americas. Also, € 200 million of the provision for credit losses reflected achange in the measurement of our other inherent loss allowance intro-duced in the third quarter of 2002.The provision for loan losses in the second quarter of 2003 related primarilyto our German portfolio and exposures in the Americas, as well as specificloan loss provisions for exposures within the utility industry. In addition to provisions for on-balance sheet exposures, we recorded foroff-balance sheet exposures a provision of € 17 million in the third quarterof 2003, compared to a provision of € 37 million in the third quarter of 2002and a net release of € 7 million in the second quarter of 2003. These itemsare recorded in other noninterest expenses.
Provision for LoanLosses
F-149
Commissions and fee revenues (which include mainly revenues from fiduciary activities, underwriting and advisory, and brokerage) amounted to€ 2.4 billion, a decrease of € 133 million, or 5%, compared to the thirdquarter of 2002 and an increase of € 91 million, or 4%, from the secondquarter of 2003.Compared to the third quarter of 2002, commissions and fees from fiduciaryactivities declined € 246 million. Approximately half of this decline was inour Global Transaction Bank due to the sale of a substantial part of our GSSbusiness in the first quarter of 2003. The remainder was largely attributableto lower fees from portfolio and fund management in Private Clients and Asset Management. Underwriting and advisory fees were higher by€ 136 million reflecting improved market conditions for underwriting vol-umes, including the IPO business. Brokerage fees were € 60 million lower,most significantly within the equity businesses. Compared to the second quarter of 2003, most components of commissionincome increased, including fund management and performance-relatedfees in Private Clients and Asset Management. In CIB, higher brokeragefees were partly offset by a decrease in underwriting and advisory fees.Approximately half of the increase of fees for other customer services wasattributable to commissions from loan processing and guarantees.
Insurance premiums in the third quarter of 2003 were € 29 million, comparedto € 24 million in the third quarter of 2002 and € 25 million in the secondquarter of 2003.
Insurance Premiums
Commissions andFee Revenues
F-150
Net gains on securities available for sale totaled € 69 million in the thirdquarter of 2003, compared to net gains of € 36 million in the third quarterof 2002 and net gains of € 202 million in the second quarter of 2003. Thecurrent quarter included gains primarily relating to the sale of our holdingin HeidelbergCement AG. The second quarter of 2003 included net gains of€ 143 million in Corporate Investments and primarily consisted of gainsfrom the reduction of our holding in Allianz AG and the sale of our holdingin mg technologies ag.
Net income from equity method investments was € 139 million in the thirdquarter of 2003 compared to a net loss of € 263 million in the third quarterof 2002 and € 62 million in the second quarter of 2003. The current quarterincluded gains of € 106 million from the sale of assets primarily related to the real estate investment business in Asset and Wealth Management.The prior year loss was primarily attributable to our investment in Gerling-Konzern Versicherungs-Beteiligungs-AG. The second quarter of 2003included various net losses of € 115 million in Corporate Investments.
Other revenues were negative € 7 million in the third quarter of 2003 com-pared to income of € 540 million in the third quarter of 2002 and € 251 mil-lion in the second quarter of 2003. The third quarter of 2003 was impactedby various offsetting results including gains related to the sales of ourinvestment in SES Global S.A. and additional parts of the GSS business off-set by losses from hedge ineffectiveness from fair value hedges and lowerrevenues due to the sale of Tele Columbus. As a result of the application ofFIN 46, the current quarter also included a charge of € 33 million represent-ing the beneficial interests of investors in our guaranteed value mutualfunds. The third quarter of 2002 included a net gain of € 390 million fromthe merger and subsequent deconsolidation of EUROHYPO AG.The Group is currently negotiating several significant transactions involvingthe sale of assets that could close in the fourth quarter of 2003. One ofthese transactions is expected to result in a loss which should be offset bygains on the other transactions.
Total noninterest expenses were € 4.2 billion in the third quarter of 2003,compared to € 4.9 billion in the third quarter of 2002 and € 4.5 billion in thesecond quarter of 2003. The aforementioned foreign currency translationand deconsolidation/consolidation effects contributed to the reduced reported total noninterest expenses compared to the same quarter in 2002.The cost/income ratio was 82% in the third quarter of 2003, 90% in the thirdquarter of 2002 and 76% in the second quarter of 2003 demonstrating theincreased operating efficiency resulting from the Group’s cost managementprogram. The increase from the second quarter of 2003 was due solely to adecline in revenues, since total noninterest expenses decreased by 5%.
Net Gains (Losses) on Securities Available for Sale
Net Income (Loss)from Equity MethodInvestments
Other Revenues
Total NoninterestExpenses
F-151
Compensation and benefits were € 2.6 billion in the third quarter of 2003,down € 359 million compared to the third quarter of 2002 and down€ 217 million from the second quarter of 2003. The decrease compared to the third quarter of 2002 was primarily due to a reduction in headcountresulting from restructuring measures and the sale of businesses. Com-pared to the second quarter of 2003, the decrease was mainly driven byreduced performance-related compensation, principally because of lowersales and trading results in our Corporate and Investment Bank. In addition,the second quarter of 2003 reflected higher severance payments, primarilydue to business integration activities in Germany and the realignment ofcertain business activities in France.
Policyholder benefits and claims totaled € 37 million in the third quarter of2003, compared to € 26 million in the third quarter of 2002 and € 37 millionin the second quarter of 2003.
There were no restructuring charges in the third quarter of 2003 and thethird quarter of 2002. The second quarter of 2003 included a € 27 millionrelease of restructuring reserves accrued in the prior year because arestructuring program was completed at lower than anticipated costs. The€ 27 million release included € 19 million in staff-related reserves and € 8 mil-lion relating to infrastructure reserves.
The remainder of noninterest expenses was € 1.6 billion in the third quarterof 2003, which decreased € 312 million compared to the third quarter of2002, and € 52 million compared to the second quarter of 2003. The saleand merger of some of our businesses contributed to the decline com-pared to the third quarter of 2002. The decrease compared to the thirdquarter of 2002 was also the result of the Group’s cost management effortsand included lower expenses for IT and communication and data services.
Income tax expense (benefit) before the reversal of the benefit from taxrate changes in 1999 and 2000 was € 252 million in the third quarter of2003, compared to € (12) million in the third quarter of 2002 and € 503 mil-lion in the second quarter of 2003. The nominal tax rate in the third quarterof 2003 was 33% of pre-tax income (excluding the aforementioned taxreversal), down from 46% in the prior quarter. The current quarter’s nominaltax rate benefited from the high level of tax-exempt income. The nominaltax rate of 46% in the second quarter of 2003 was mainly driven by German tax law changes enacted in May.
Policyholder Benefitsand Claims
Remainder of Noninterest Expenses
Income Tax Expense(Benefit)
Restructuring Activities
Compensation andBenefits
F-152
Income tax benefits on unrealized gains on securities available for sale,which were recorded when income tax laws changed making gains onequity sales tax exempt, are reversed as an income tax expense when thesecurities are actually sold. The income tax expense related to sales was€ 78 million in the third quarter of 2003, € 130 million in the third quarter of2002 and € 16 million in the second quarter of 2003. These tax reversals donot result in any tax costs because the income which gives rise to thereversals is not subject to tax under German tax laws.
The cumulative effect of accounting changes, net of tax, represented theeffects from the implementation of the new accounting standards FIN 46and SFAS 150. As a result of the application of FIN 46, a € 140 million gain,net of tax, was recorded as a reversal of previously recognized earningseffects of securities held by the investment vehicles that were deconsoli-dated. An after-tax gain of € 11 million stemmed from the implementationof SFAS 150.
Cumulative Effect ofAccounting Changes,Net of Tax
Income Tax Expensefrom the ReversingEffect of the Changein Effective Tax Rate
F-153
Segmental Results of Operations
The segmental results of operations are based on our internal managementinformation systems and show the contribution of the individual groupdivisions and corporate divisions to our results. For the reconciliation of thesum of the results of the segments to our consolidated results, please refer
In the segmental results of operations, we use the following terms with thefollowing meanings with respect to each segment:– Underlying revenues: Reported net revenues less the “other items”
(if applicable for the revenue section) referred to in the table for suchsegment and policyholder benefits and claims (reclassified from non-interest expenses).
– Total provision for credit losses: Provision for loan losses plus provi-sion for off-balance sheet positions.
– Operating cost base: Noninterest expenses less provision for off-bal-ance sheet positions (reclassified to provision for credit losses), policy-holder benefits and claims (reclassified to underlying revenues), minorityinterest, restructuring activities and goodwill impairment.
– Underlying pre-tax profit: Income before income taxes less restructur-ing activities, goodwill impairment and “other items” referred to in thetable for such segment.
– Underlying cost/income ratio in %: Operating cost base as a percent-age of total net revenues excluding “other items” (if applicable for therevenue section), net of policyholder benefits and claims. Cost/incomeratio in %, which is defined as total noninterest expenses as a percent-age of total net revenues, is also provided.
– Average active equity: The portion of our adjusted average total share-holders’ equity that has been allocated to a segment pursuant to ourcapital allocation framework. The overriding objective of this frameworkis to allocate adjusted average total shareholders’ equity based on theeconomic risk position of each segment. In determining the total amountof average active equity to be allocated, average total shareholders’equity is adjusted to exclude average unrealized gains on securities avail-able for sale, net of tax, average deferred taxes relating to 1999 and 2000tax rate changes in Germany and average dividends.
– Underlying RoE in %: Underlying pre-tax profit (annualized) as a per-centage of average active equity. RoE in %, which is defined as incomebefore income taxes (annualized) as a percentage of average activeequity, is also provided. These returns, which are based on averageactive equity, should not be compared to those of other companies with-out considering the differences in the calculation of such ratios.
to page F-193 and F-194 of this Offering Circular.
F-154
Corporate and Investment Bank Three months ended % change from Nine months endedGroup Division Sep 30, Jun 30, Sep 30, 2Q03 3Q02 Sep 30, Sep 30,in € m., except where indicated 2003 2003 2002 2003 2002
Average active equity 14,014 14,901 17,007 (6) (18) 14,593 17,129
RoE in % 21 24 (7) (3) ppt 28 ppt 28 4
Underlying RoE in % 20 23 (3) (3) ppt 23 ppt 23 8
N/M – Not meaningful ppt – percentage points1 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).2 All comparisons of balance sheet items in this Interim Report compare amounts as of September 30, 2003 to amounts as of December 31, 2002.3 As of December 31, 2002.
Corporate and Investment Bank Group Division (CIB)
F-155
The Corporate and Investment Bank generated income before income taxesof € 751million in the third quarter of 2003. Revenues included a further gainof € 59 million in connection with the sale of our Global Securities Servicesbusiness in the first quarter of 2003.The current quarter’s results compared to a loss before income taxes of€ 312 million in last year’s third quarter with key improvements resultingfrom reductions in noninterest expenses and lower provision for creditlosses.Income before income taxes decreased € 128 million compared to the second quarter of 2003 largely reflecting seasonally lower revenues, partlyoffset by reductions in noninterest expenses and provision for creditlosses.Total revenues in CIB in each quarter do not include the effect from theaforementioned accounting asymmetry relating to hedging of debt issuedwhich is recorded in ”Consolidation & Adjustments” for managementreporting purposes.
F-156
Corporate Banking & Securities Three months ended % change from Nine months endedCorporate Division Sep 30, Jun 30, Sep 30, 2Q03 3Q02 Sep 30, Sep 30,in € m., except where indicated 2003 2003 2002 2003 2002
Average active equity 12,645 13,401 14,936 (6) (15) 13,145 14,977
RoE in % 19 25 (11) (6) ppt 30 ppt 23 2
Underlying RoE in % 19 24 (6) (5) ppt 25 ppt 23 7
N/M – Not meaningful ppt – percentage points1 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).2 All comparisons of balance sheet items in this Interim Report compare amounts as of September 30, 2003 to amounts as of December 31, 2002.3 As of December 31, 2002.
Corporate Banking & Securities reported income before income taxes of€ 597 million compared to a loss before income taxes of € 411 million forthe same period in 2002 and income before income taxes of € 829 millionin the second quarter of 2003.Net revenues of € 2.8 billion were € 276 million higher than the third quarterof 2002 and decreased by € 497 million compared to the second quarter of 2003. Sales and Trading revenues (debt and other products) of € 1.3 billion were€ 93 million, or 8%, higher than the third quarter of 2002. This performancedemonstrates the resilience of debt sales and trading earnings in improvingbut still challenging market conditions during the quarter. Performance wasparticularly strong in credit and interest rate derivatives. Fixed income andforeign exchange experienced reduced customer volumes in keeping withthe more seasonal earnings profile of these businesses. Overall, Sales andTrading (debt) revenues were € 415 million, down 24% compared to therecord second quarter of 2003. Origination revenues (debt) of € 140 millionincreased by € 71 million compared to the third quarter of 2002 due toresilient volumes and increased market share, primarily in investmentgrade new issuance. Revenues were € 26 million lower than in the secondquarter of 2003 primarily due to seasonal factors which are particularly relevant in the European market.The third quarter Sales and Trading (equity) revenues of € 738 millionincreased by € 174 million compared to the same period of 2002 reflectingimproved market sentiment and greater market opportunities. The decreaseof € 165 million compared to the strong second quarter of 2003 was due to lower derivative and convertible volumes during the summer months,although cash revenues held up well. Revenues from Origination (equity) of€ 146 million increased by € 77 million compared to the third quarter of2002 and by € 40 million compared to the second quarter of 2003 reflectingan increased level of activity, particularly in equity-linked issues.Advisory revenues were € 107 million, down 15% from the third quarter of2002 and 6% from the second quarter of 2003. These results reflected thecontinued low levels of activity in the M&A market generally.Loan product revenues of € 415 million decreased by € 89 million comparedto the third quarter of 2002 partly due to mark-to-market losses on creditderivatives used to hedge loan exposures and also to reductions in theoverall loan portfolio. The increase of € 50 million compared to the secondquarter of 2003 primarily reflected lower losses on credit derivative hedgesin the third quarter of 2003. Over the life of the credit derivative the losseson the mark-to-market element of these transactions will tend to materiallyoffset, leaving the cost of the hedge as the ultimate expense.
F-158
The provision for credit losses of € 182 million decreased € 510 millioncompared to the third quarter of 2002. This reduction was mainly attributableto a one-off effect from the change in measurement of the other inherentloss allowance and to the provisions recorded in the third quarter of 2002relating to last year’s downturn in the telecommunications industry. Theprovision for credit losses was € 89 million lower than in the second quarter of 2003. Noninterest expenses of € 2.0 billion decreased by € 222 million comparedto the third quarter of 2002. Higher performance-related compensation expenses were more than offset by reductions in other compensationexpense categories and lower discretionary spending.Noninterest expenses in the second quarter of 2003 included a release ofrestructuring reserves of € 23 million after the full implementation of arestructuring plan initiated in the second quarter of 2002. Excluding thisrelease, noninterest expenses decreased in the third quarter of 2003 by€ 199 million compared to the second quarter of 2003, mainly due to lowerperformance-related compensation expenses.
F-159
Global Transaction Banking Three months ended % change from Nine months endedCorporate Division Sep 30, Jun 30, Sep 30, 2Q03 3Q02 Sep 30, Sep 30,in € m., except where indicated 2003 2003 2002 2003 2002
Average active equity 1,368 1,500 2,071 (9) (34) 1,449 2,152
RoE in % 45 13 19 32 ppt 26 ppt 71 18
Underlying RoE in % 28 12 19 16 ppt 9 ppt 19 20
N/M – Not meaningful ppt – percentage points1 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).2 All comparisons of balance sheet items in this Interim Report compare amounts as of September 30, 2003 to amounts as of December 31, 2002.3 As of December 31, 2002.
Global Transaction Banking Corporate Division (GTB)
F-160
Global Transaction Banking generated income before income taxes of€ 154 million in the third quarter of 2003 compared to € 99 million in the third quarter of 2002 and € 50 million in the second quarter of 2003. Most ofthe increase was attributable to a further gain of € 59 million from the sale of a substantial part of our GSS business in the first quarter of 2003.Excluding the aforementioned gain, net revenues of € 464 million in thethird quarter of 2003 decreased by € 180 million compared to the thirdquarter of 2002 with the reduction mainly due to lower revenues followingthe sale of a substantial part of the GSS business. Revenues remained con-sistent with those of the second quarter of 2003. The provision for credit losses was a net release of € 47 million comparedto a net release of € 10 million in the third quarter of 2002 and a net releaseof € 21 million in the second quarter of 2003.Noninterest expenses of € 416 million in the third quarter of 2003 decreasedby € 139 million compared to the same period of 2002 reflecting primarilythe lower cost base after the GSS sale.Noninterest expenses decreased by € 20 million compared to the secondquarter of 2003 that included severance payments relating to the realign-ment of our business activities in France.
F-161
Private Clients and Asset Management Three months ended % change from Nine months endedGroup Division Sep 30, Jun 30, Sep 30, 2Q03 3Q02 Sep 30, Sep 30,in € m., except where indicated 2003 2003 2002 2003 2002
Average active equity 7,946 7,889 8,664 1 (8) 7,970 7,759
RoE in % 17 14 9 3 ppt 8 ppt 15 14
Underlying RoE in % 17 14 8 3 ppt 9 ppt 14 9
Results of sold insurance and related activities:
Net revenues – – – – – – 1,295
Operating cost base – – – – – – 104
Policyholder benefits and claims – – – – – – 650
Minority interest – – – – – – 6
Total noninterest expenses1 – – – – – – 760
Therein: Severance payments – – – – – – 1
Income before income taxes – – – – – – 535
N/M – Not meaningful ppt – percentage points1 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).2 All comparisons of balance sheet items in this Interim Report compare amounts as of September 30, 2003 to amounts as of December 31, 2002.3 As of December 31, 2002.
Private Clients and Asset Management Group Division (PCAM)
F-162
Income before income taxes of Private Clients and Asset Management was € 329 million in the third quarter of 2003, increases of € 142 million compared to the third quarter of 2002 and € 43 million compared to the second quarter of 2003. Both the third quarter of 2002 and the second quar-ter of 2003 were impacted by proceeds from the sales of businesses. Thethird quarter of 2002 included a gain of € 9 million from the sale of an Italiansubsidiary, and the second quarter of 2003 included a gain of € 12 millionfrom the sale of most of our Passive Asset Management business. Excluding these sales proceeds, income before income taxes increased€ 151 million compared to the third quarter of 2002 and € 55 million com-pared to the second quarter of 2003. The increase in comparison to thesame period of 2002 was due mainly to higher revenues from real estateand brokerage services, and to a lesser extent, lower noninterest expenses.Compared to the second quarter of 2003 improved revenues were partlyoffset by a moderate increase in noninterest expenses.
F-163
Asset and Wealth Management Corporate Division
Asset and Wealth Management Three months ended % change from Nine months endedCorporate Division Sep 30, Jun 30, Sep 30, 2Q03 3Q02 Sep 30, Sep 30,in € m., except where indicated 2003 2003 2002 2003 2002
Average active equity 6,398 6,308 7,054 1 (9) 6,444 6,207
RoE in % 15 8 2 7 ppt 13 ppt 10 4
Underlying RoE in % 15 7 2 8 ppt 13 ppt 9 3
N/M – Not meaningful ppt – percentage points1 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).2 All comparisons of balance sheet items in this Interim Report compare amounts as of September 30, 2003 to amounts as of December 31, 2002.3 As of December 31, 2002.
F-164
Asset and Wealth Management recorded income before income taxes of€ 234 million, an increase of € 197 million compared to the third quarter of2002 and an increase of € 111 million compared to the second quarter of 2003.Net revenues of € 1.0 billion in the third quarter of 2003 increased € 83 million compared to the same quarter of 2002. This increase wasmainly attributable to higher revenues from the real estate business andfrom brokerage services, driven by successful product placements and thestrategy to increase return on assets by offering more tailor-made andstructured products to support our clients’ needs. This was partially offsetby lower fees from portfolio/fund management subsequent to an overalldecline in invested assets.The increase in net revenues of € 146 million compared to the second quarter of 2003 was mainly attributable to higher revenues from the realestate business including significant gains on the sale of equity methodinvestments. In addition, revenues from portfolio/fund management andbrokerage improved, due mainly to increased performance fees and suc-cessful product placements. The provision for credit losses was a net release of € 4 million compared to provisions of € 22 million in the third quarter of 2002 and € 3 million inthe second quarter of 2003.Noninterest expenses of € 791 million in the third quarter of 2003decreased by € 88 million compared to the third quarter of 2002. Savingswere achieved in most categories mainly due to reduced headcount andongoing cost containment efforts, partially offset by higher performance-related compensation, associated with improved revenues and higher dealflow in DB Real Estate. The increase of € 42 million in noninterest expenses compared to the second quarter of 2003 was predominantly due to performance-relatedcompensation and non-compensation costs associated with higher dealflow in DB Real Estate.
F-165
Private & Business Clients Corporate Division (PBC)
Private & Business Clients Three months ended % change from Nine months endedCorporate Division Sep 30, Jun 30, Sep 30, 2Q03 3Q02 Sep 30, Sep 30,in € m., except where indicated 2003 2003 2002 2003 2002
N/M – Not meaningful ppt – percentage points1 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).2 All comparisons of balance sheet items in this Interim Report compare amounts as of September 30, 2003 to amounts as of December 31, 2002.3 As of December 31, 2002.
F-166
Income before income taxes of € 95 million in Private & Business Clientsdecreased by € 55 million compared to the third quarter of 2002 duemainly to costs related to ongoing business integration activities and head-count reductions, primarily in Germany.Income before income taxes decreased by € 67 million compared to thesecond quarter of 2003. The second quarter of 2003 included € 55 millionin realized gains on securities available for sale.Net revenues of € 1.1 billion declined by € 11 million compared to the thirdquarter of 2002. This is basically the net impact of a gain on the sale of an Italian subsidiary in the third quarter of 2002, improved results from brokerage activities due to increased client activity and lower net interestrevenues from deposits.Net revenues declined by € 57 million compared to the second quarter of 2003, primarily attributable to the aforementioned realized gains of€ 55 million. Additionally, net interest revenues from deposits decreaseddue to continuing low market interest rates. Brokerage-related revenuesdeclined due to lower trading volume in the summer months.The provision for credit losses of € 53 million in the third quarter of 2003decreased by € 3 million compared to the third quarter of 2002 and by€ 20 million compared to the second quarter of 2003. Noninterest expenses of € 917 million increased by € 47 million comparedto the third quarter of 2002. This increase was driven by severance pay-ments, mainly in Germany. Excluding severance payments, expensesdecreased by € 50 million, reflecting the benefits of cost containment initiatives that led to a substantial headcount reduction.Noninterest expenses increased € 30 million compared to the second quarter of 2003. Ongoing charges related to business integration activitiesand higher marketing expenses more than offset lower non-performance-related compensation expenses after the aforementioned headcountreductions.
F-167
Corporate Investments Group Division (CI)
Corporate Investments Three months ended % change from Nine months endedGroup Division Sep 30, Jun 30, Sep 30, 2Q03 3Q02 Sep 30, Sep 30,in € m., except where indicated 2003 2003 2002 2003 2002
Net revenues 9 81 191 (89) (95) (977) 2,948
Therein: Net interest and trading revenues (47) 56 (67) N/M (30) (14) 193
N/M – Not meaningful ppt – percentage points1 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).2 Includes net gains/losses from significant equity method investments and other significant investments.3 All comparisons of balance sheet items in this Interim Report compare amounts as of September 30, 2003 to amounts as of December 31, 2002.4 As of December 31, 2002.
F-168
Corporate Investments reported a loss before income taxes of € 91 millionin the third quarter of 2003 compared to a loss before income taxes of € 106 million in the same period in 2002 and a loss before income taxesof € 153 million in this year’s second quarter. The results of the third quarter of 2003 included net gains on sales from our industrial holdingsand other portfolios, which were more than offset by losses on our equityand other investments and mark-to-market losses related to hedging ourequity exposure. Net revenues were € 9 million in the third quarter of 2003, a decrease of € 182 million compared to the same period in 2002, and € 72 millionbelow the second quarter of 2003. The third quarter of 2002 included a netgain from the merger and subsequent deconsolidation of EUROHYPO AG.The decrease in revenues compared to the second quarter of 2003 waslargely the result of a decline in dividend income on industrial holdings inthe third quarter of 2003. The decrease was also partly the result of the sale and deconsolidation of Center Parcs in the first quarter of 2003 andTele Columbus in the third quarter of 2003. Improving equity markets in the third quarter of 2003 allowed us to recog-nize net gains from our industrial holdings portfolio of € 78 million relatingprimarily to the sale of HeidelbergCement AG. Offsetting these gains werenet losses from equity method investments of € 43 million and net lossesof € 25 million relating to businesses sold and businesses held for sale. In addition, other revenues included net gains of € 5 million on otherinvestments including a gain on the sale of SES Global S.A. and net losseson other investments. The mark-to-market losses relating to hedging ourequity exposure were € 45 million.Net revenues of € 191 million in the third quarter of 2002 were due princi-pally to a net gain of € 390 million arising from the aforementioned mergerof EUROHYPO AG, offset by net losses on our equity investments of€ 334 million including a net loss of € 236 million on our equity methodinvestment in Gerling-Konzern Versicherungs-Beteiligungs-AG. Net gainsfrom our industrial holdings in that quarter were € 21 million. In the second quarter of 2003, net revenues were € 81 million whichincluded net gains on our industrial holdings portfolio of € 143 million relating primarily to the sale of mg technologies ag and the reduction ofour holding in Allianz AG. Net revenues also included dividend income of € 209 million from our industrial holdings portfolio. Offsetting thesegains were net losses of € 115 million from equity method investments, netlosses of € 54 million on other investments, net losses of € 61 millionrelated to businesses sold and businesses held for sale and losses of€ 98 million related to hedging our equity exposure.
F-169
The provision for credit losses was € 8 million in the third quarter of 2003compared to € 32 million in the same period in 2002 and € 6 million in thisyear’s second quarter. The € 24 million decline year-on-year was primarilyattributable to the reduction of credit exposure following the merger andsubsequent deconsolidation of EUROHYPO AG and the sale of most of ourNorth American financial services businesses. Noninterest expenses decreased by € 173 million, or 65%, compared tothe third quarter of 2002 and decreased by € 136 million, or 60%, com-pared to the second quarter of 2003. Comparisons to both periods werefavorable due to the sale of buildings, lease terminations and sub-lettingsubsequent to headcount reductions. The sale of businesses was an additional factor in the decline from the third quarter of 2002 and the afore-mentioned sale of Tele Columbus was a further reason for the decreasefrom the second quarter of 2003.
F-170
To the Supervisory Board of Deutsche Bank Aktiengesellschaft
We have reviewed the accompanying balance sheet of Deutsche BankAktiengesellschaft and subsidiaries (Deutsche Bank Group) as of Septem-ber 30, 2003, and the related statements of income and comprehensiveincome for the three month and nine month periods ended September 30,2003 and 2002, and the related statements of changes in shareholders’equity and cash flows for the nine month periods ended September 30,2003 and 2002. These financial statements are the responsibility ofDeutsche Bank Group’s management.We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interimfinancial information consists principally of applying analytical proceduresand making inquiries of persons responsible for financial and accountingmatters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective ofwhich is the expression of an opinion regarding the financial statementstaken as a whole. Accordingly, we do not express such an opinion.Based on our review, we are not aware of any material modifications thatshould be made to the financial statements referred to above for them tobe in conformity with accounting principles generally accepted in theUnited States of America.
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft
Frankfurt am Main, October 29, 2003
Independent Accountants’ Review Report
F-171
Income Statement Deutsche Bank Group
Income Statement Three months ended Nine months endedin € m. Sep 30, 2003 Sep 30, 2002 Sep 30, 2003 Sep 30, 2002
Net interest revenues 1,612 1,711 4,590 5,770Provision for loan losses 174 753 894 1,611
Net interest revenues after provision for loan losses 1,438 958 3,696 4,159
Commissions and fees from fiduciary activities 801 1,047 2,403 2,962Commissions, broker’s fees, markups on securitiesunderwriting and other securities activities 921 845 2,672 3,244Fees for other customer services 657 620 1,904 1,954Insurance premiums 29 24 83 712Trading revenues, net 940 904 4,253 3,277Net gains (losses) on securities available for sale 69 36 (125) 2,986Net income (loss) from equity method investments 139 (263) (569) (660)Other revenues, net (7) 540 849 903
Total noninterest revenues 3,549 3,753 11,470 15,378
Compensation and benefits 2,584 2,943 7,967 8,765Net occupancy expense of premises 286 311 948 966Furniture and equipment 48 51 134 165IT costs 457 539 1,395 1,707Agency and other professional service fees 180 189 491 547Communication and data services 151 196 480 600Policyholder benefits and claims 37 26 102 729Other expenses 489 637 1,484 2,141Goodwill impairment – – 114 –Restructuring activities – – (29) 605
Total noninterest expenses 4,232 4,892 13,086 16,225
Income (loss) before income tax expense (benefit) and cumulative effect of accounting changes 755 (181) 2,080 3,312Income tax expense (benefit) 252 (12) 1,178 144Income tax expense from the reversing effect of the change in effective tax rate 78 130 124 2,703
Income (loss) before cumulative effect of accounting changes, net of tax 425 (299) 778 465Cumulative effect of accounting changes, net of tax 151 – 151 37
Net income (loss) 576 (299) 929 502
Earnings per share Three months ended Nine months endedin € Sep 30, 2003 Sep 30, 2002 Sep 30, 2003 Sep 30, 2002
BasicIncome (loss) before cumulative effect of accountingchanges, net of tax 0.80 (0.49) 1.36 0.75Cumulative effect of accounting changes, net of tax 0.28 – 0.27 0.06Reported net income (loss) 1.08 (0.49) 1.63 0.81
DilutedIncome (loss) before cumulative effect of accounting changes, net of tax1 0.73 (0.49) 1.30 0.74Cumulative effect of accounting changes, net of tax 0.27 – 0.25 0.06Diluted net income (loss) 1.00 (0.49) 1.55 0.80
Denominator for basic earnings per share – weighted-average shares outstanding 535,568,907 615,100,309 570,041,314 622,566,397Denominator for diluted earnings per share – adjustedweighted-average shares after assumed conversions (except for the third quarter of 2002) 556,083,317 615,100,309 598,105,067 627,113,1831 Including effect of dilutive derivatives, net of tax in the third quarter of 2003.
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Statement of Comprehensive IncomeDeutsche Bank Group
Statement of Comprehensive Income Three months ended Nine months endedin € m. Sep 30, 2003 Sep 30, 2002 Sep 30, 2003 Sep 30, 2002
Net income (loss) 576 (299) 929 502
Deferred tax on unrealized net gains on securities available for sale relating to 1999 and 2000 tax rate changes in Germany 78 130 124 2,703Unrealized gains/losses on securities available for sale
Unrealized net gains (losses) arising during the period,net of tax and other 116 (3,292) 380 (5,121)Net reclassification adjustment for realized net (gains) losses, net of applicable tax and other (67) (33) 310 (3,005)
Unrealized net gains (losses) on derivatives hedging variability of cash flows, net of tax (1) 19 (11) 28Foreign currency translation
Unrealized net losses arising during the period, net of tax (44) (54) (486) (1,133)Net reclassification adjustment for realized net gains, net of tax – – (41) –
Total other comprehensive income (loss) 82 (3,230) 276 (6,528)
Comprehensive income (loss) 658 (3,529) 1,205 (6,026)
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Balance SheetDeutsche Bank Group
Assets in € m. Sep 30, 2003 Dec 31, 2002
Cash and due from banks 7,412 8,979Interest-earning deposits with banks 16,348 25,691Central bank funds sold and securities purchased under resale agreements 130,089 117,689Securities borrowed 80,441 37,569Trading assets 354,009 297,062Securities available for sale 23,867 21,619Other investments 9,702 10,768Loans, net 162,114 167,303Premises and equipment, net 7,384 8,883Goodwill 7,106 8,372Other intangible assets, net 1,235 1,411Other assets related to insurance business 8,566 7,797Due from customers on acceptances 71 99Accrued interest receivable 4,023 4,208Other assets 51,961 40,905
Total assets 864,328 758,355
Liabilities and Shareholders’ Equity in € m. Sep 30, 2003 Dec 31, 2002
Total deposits 319,239 327,625Trading liabilities 161,544 131,212Central bank funds purchased and securities sold under repurchase agreements 119,774 90,709Securities loaned 18,969 8,790Other short-term borrowings 26,448 11,573Acceptances outstanding 71 99Insurance policy claims and reserves 9,402 8,557Accrued interest payable 4,456 4,668Other liabilities 75,061 37,695Long-term debt 99,627 104,055Trust preferred securities – 3,103Obligation to purchase common shares 2,310 278
Total liabilities 836,901 728,364
Common shares, no par value, nominal value of € 2.56 1,490 1,592Additional paid-in capital 11,147 11,199Retained earnings 20,030 22,087Common shares in treasury, at cost (349) (1,960)Equity classified as obligation to purchase common shares (2,310) (278)Share awards 747 955Accumulated other comprehensive income
Deferred tax on unrealized net gains on securities available for sale relating to 1999 and 2000 tax rate changes in Germany (2,919) (3,043)Unrealized net gains on securities available for sale, net of applicable tax and other 846 156Unrealized net gains (losses) on derivatives hedging variability of cash flows, net of tax (10) 1Minimum pension liability, net of tax (8) (8)Foreign currency translation, net of tax (1,237) (710)
Total accumulated other comprehensive income (3,328) (3,604)
Total shareholders’ equity 27,427 29,991
Total liabilities and shareholders’ equity 864,328 758,355
F-174
Statement of Changes in Shareholders’ EquityDeutsche Bank Group
Statement of Changes in Shareholders’ Equity Nine months endedin € m. Sep 30, 2003 Sep 30, 2002
Common sharesBalance, beginning of year 1,592 1,591Common shares distributed under employee benefit plans – 1Retirement of common shares (102) –Balance, end of period 1,490 1,592Additional paid-in capitalBalance, beginning of year 11,199 11,253Common shares distributed under employee benefit plans – 21Net losses on treasury shares sold (36) (138)Other (16) 54Balance, end of period 11,147 11,190Retained earningsBalance, beginning of year 22,087 22,619Net income 929 502Cash dividends declared and paid (756) (800)Net losses on treasury shares sold (400) –Retirement of common shares (1,801) –Other (29) (28)Balance, end of period 20,030 22,293Common shares in treasury, at costBalance, beginning of year (1,960) (479)Purchases of shares (20,154) (25,992)Sale of shares 19,217 24,395Shares retired 1,903 –Treasury shares distributed under employee benefit plans 645 848Balance, end of period (349) (1,228)Equity classified as obligation to purchase common sharesBalance, beginning of year (278) –Additions (2,911) (330)Deductions 879 19Balance, end of period (2,310) (311)Share awards – common shares issuableBalance, beginning of year 1,955 1,666Deferred share awards granted, net 863 1,173Deferred shares distributed (645) (860)Balance, end of period 2,173 1,979Share awards – deferred compensationBalance, beginning of year (1,000) (767)Deferred share awards granted, net (863) (1,173)Amortization of deferred compensation, net 437 785Balance, end of period (1,426) (1,155)Accumulated other comprehensive incomeBalance, beginning of year (3,604) 4,310Change in deferred tax on unrealized net gains on securities available for sale relating to 1999 and 2000 tax rate changes in Germany 124 2,703Change in unrealized net gains on securities available for sale, net of applicable tax and other 690 (8,126)Change in unrealized net gains/losses on derivatives hedging variability of cash flows, net of tax (11) 28Foreign currency translation, net of tax (527) (1,133)Balance, end of period (3,328) (2,218)
Total shareholders’ equity, end of period 27,427 32,142
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Cash Flow StatementDeutsche Bank Group
Cash Flow Statement Nine months endedin € m. Sep 30, 2003 Sep 30, 2002
Net income 929 502
Adjustments to reconcile net income to net cash (used in) provided by operating activitiesProvision for loan losses 894 1,611Restructuring activities (29) 605Gain on sale of securities available for sale, other investments, loans and other 6 (3,648)Deferred income taxes, net 324 2,147Impairment, depreciation and other amortization and accretion 2,439 1,435Cumulative effect of accounting changes, net of tax (151) (37)Share of net loss from equity method investments 84 324
Income adjusted for noncash charges, credits and other items 4,496 2,939
Net change inTrading assets (45,990) (8,539)Other assets (11,427) (4,000)Trading liabilities 31,029 16,848Other liabilities 18,952 (4,585)Other, net 613 977
Net cash (used in) provided by operating activities (2,327) 3,640
Net change inInterest-earning deposits with banks 9,607 5,022Central bank funds sold and securities purchased under resale agreements (12,293) (17,778)Securities borrowed (42,871) (18,306)Loans 6,540 6,051
Proceeds fromSale of securities available for sale 11,443 21,186Maturities of securities available for sale 4,400 5,023Sale of other investments 1,187 4,207Sale of loans 6,625 4,829Sale of premises and equipment 1,465 294
Purchase ofSecurities available for sale (15,759) (18,257)Other investments (1,996) (2,898)Loans (4,894) (2,112)Premises and equipment (629) (1,595)
Net cash received (paid) for business combinations/divestitures 2,383 (2,278)Other, net 150 2,444
Net cash used in investing activities (34,642) (14,168)Net change in
Deposits (8,334) (23,364)Securities loaned and central bank funds purchased and securities sold under repurchase agreements 35,808 39,221Other short-term borrowings 7,023 (4,067)
Issuances of long-term debt and trust preferred securities 25,054 28,625Repayments and extinguishments of long-term debt and trust preferred securities (21,211) (26,631)Issuances of common shares – 22Purchases of treasury shares (20,154) (25,992)Sale of treasury shares 18,683 24,307Cash dividends paid (756) (800)Other, net (28) 171
Net cash provided by financing activities 36,085 11,492
Net effect of exchange rate changes on cash and due from banks (683) (563)Net (decrease) increase in cash and due from banks (1,567) 401Cash and due from banks, beginning of period 8,979 10,388Cash and due from banks, end of period 7,412 10,789Interest paid 17,047 25,501Income taxes paid, net 388 336
F-176
The accompanying consolidated financial statements as of September 30,2003 and 2002 and for the three and nine months then ended are unauditedand include the accounts of Deutsche Bank AG and its subsidiaries (collec-tively, the Deutsche Bank Group or the Company). In the opinion of man-agement, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations, financial position and cash flows have been reflected. Certain prior period amountshave been reclassified to conform to the current presentation. The resultsreported in these financial statements, which include supplementary infor-mation, should not be regarded as necessarily indicative of results thatmay be expected for the entire year. The financial statements included inthis Interim Report should be read in conjunction with the consolidatedfinancial statements and related notes included in the Company’s 2002Annual Report and Form 20-F.
Certain financial statement information that is normally included in annualfinancial statements prepared in accordance with U.S. GAAP have beencondensed or omitted. Following is supplementary information on theimpact of changes in accounting principles and on the income statement,the balance sheet and segment information.
Basis of Presentation
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A detailed description of this accounting method is given on pages 75 to77 of our Form 20-F filed March 27, 2003 and on pages 61 to 64 of our
The Tax Reform Act stipulated that profits on the sale of shareholdings in German corporations were exempt from tax beginning January 1, 2002.For our consolidated financial statements for 2000, this meant that therespective deferred tax liability formed in connection with the unrealizedgains from equity securities available for sale accumulated in other comprehensive income (OCI) had to be released as a credit in the tax lineof the income statement although the gains were still unrealized since thesecurities were not yet sold.
The release of the deferred tax liability through the income statement did not affect the offset amount in OCI. It remains fixed in the amountdetermined at the date of the release of the deferred tax liability until suchtime as the securities are sold.
The following table presents the level of unrealized gains and relatedeffects for available for sale equity securities of DB Industrial Holdings,which holds most of our industrial holdings.
The accounting for income tax rate changes may result in significantimpacts on our results of operations in periods in which we sell these secu-rities as illustrated in 2002 and 2001when we sold portions of our industrialholdings. The gains resulting from most of these sales were not subject totax. However, we recognized tax expenses due to reversals of amountsfixed at the time of the change in tax rates amounting to € 124 million forthe nine months ended September 30, 2003, € 2.8 billion in fiscal 2002 and€ 995 million in fiscal 2001.
Income Tax Expensefrom the ReversingEffect of the Changein Effective Tax Rate
in € bn. Sep 30, 2003 Dec 31, 2002 Dec 31, 2001 Dec 31, 2000
Market value 5.0 5.3 14.1 17.5
Cost 4.5 5.0 5.7 5.6
Net unrealized gains in accumulated other comprehensive income 0.5 0.3 8.4 11.9
Less deferred tax relating to 1999 and 2000 tax rate changes in Germany 2.8 2.9 5.5 6.5
Accumulated other comprehensive income, net (2.3) (2.6) 2.9 5.4
Accounting Method Required by U.S. GAAP for the1999 and 2000 Change in German Tax Rates
Deferred Tax in OCI
Annual Report for 2002.* We summarize this description below:
Neither the initial release of the deferred tax liability nor the unrealizedgains and losses from securities available for sale are included in regulatorycore capital. The entire procedure is a U.S. GAAP-specific accounting
the period of the sale.
*differs in certain respects from the Annual Report according to § 292a of the German
are not appropriately reflected in the individual periods up to and including
Commercial Code (Handelsgesetzbuch) included in this Offering Circular.
Reference is to “Results 2002, Annual Report of the Deutsche Bank Group“, which
requirement. We believe that the economic effects of the tax rate changes
F-178
Impact of Changes in Accounting Principles
SFAS 146
FIN 45
Effective January 1, 2003, the Group adopted SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities” (“SFAS 146”).SFAS 146 requires companies to recognize costs associated with exit ordisposal activities when they are incurred rather than at the date of a com-mitment to an exit or disposal plan. SFAS 146 replaces the guidance pro-vided by EITF Issue No. 94 – 3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” SFAS 146 is to be applied prospectivelyto exit or disposal activities initiated after December 31, 2002. The adoptionof SFAS 146 did not have a material impact on the Group’s consolidatedfinancial statements.
Effective January 1, 2003, the Group adopted the accounting provisions of Financial Accounting Standards Board (FASB) Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”).FIN 45 requires the recognition of a liability for the fair value at inceptionof guarantees entered into or modified after December 31, 2002. FIN 45also addresses the disclosure to be made by a guarantor in its financialstatements about its guarantee obligations. The adoption of FIN 45 did nothave a material impact on the Group’s consolidated financial statements.
The Group adopted the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”) prospectivelyfor all employee awards granted, modified or settled after January 1, 2003.This prospective adoption is one of the methods provided for underSFAS No. 148, “Accounting for Stock-Based Compensation – Transitionand Disclosure.” Generally, the fair value-based method under SFAS 123results in higher compensation expense for stock options depending onthe significant terms, such as the number of shares and exercise price, ofthe options being granted.
The majority of the Group’s stock option awards are granted on a dateshortly after the end of the performance year with an effective date as ofthe end of the performance year. The potential impact, if any, on theGroup’s consolidated financial statements of prospectively adopting thefair value provisions of SFAS 123 on future option awards is currently beingevaluated.
SFAS 148
F-179
Effective July 1, 2003, the Group has applied FASB Interpretation No. 46,“Consolidation of Variable Interest Entities” (“FIN 46”) to those variableinterest entities which are expected to require consolidation at Decem-ber 31, 2003. FIN 46 requires a company to consolidate entities as the primary beneficiary if the equity investment at risk is not sufficient for theentity to finance its activities without additional subordinated financial support from other parties or if the equity investors lack essential charac-teristics of a controlling financial interest. Securitization vehicles that arequalifying special purpose entities under SFAS 140 are excluded from thenew rule and remain unconsolidated.
The Interpretation is effective immediately for entities established after January 31, 2003. For variable interest entities created before February 1,2003, FIN 46 was originally effective for the Group on July 1, 2003. In Octo-ber 2003 the FASB deferred the effective date so that, for the Group, appli-cation may be deferred for some or all such variable interest entities untilDecember 31, 2003. The Group has elected not to apply FIN 46 to certainvariable interest entities created before February 1, 2003, that may notrequire consolidation at December 31, 2003. The Group has applied FIN 46to substantially all other variable interest entities as of July 1, 2003. As a result, the Group recorded a € 140 million gain, net of tax, as a cumulativeeffect of a change in accounting principle and total assets increased by € 18 billion.
The entities consolidated as a result of applying FIN 46 were primarilymulti-seller commercial paper conduits that the Group administers in theCorporate and Investment Bank Group Division, and mutual funds offeredby the Private Clients and Asset Management Group Division for which theGroup guarantees the value of units investors purchase.
The beneficial interests of the investors in the guaranteed value mutualfunds are reported as other liabilities and totaled € 18 billion at Septem-ber 30, 2003. The assets of the funds consist primarily of trading assets inthe amount of € 13 billion. The net revenues of these funds due to investorstotaled € 33 million for the quarter. These net revenues of the funds consistof € 96 million of net interest revenues, € (48) million of trading revenuesmainly stemming from hedging activities and € 15 million of expenses forfund administration. The obligation to pass the net revenues to theinvestors is recorded as an increase in the beneficial interest obligation inother liabilities and a corresponding charge to other revenues in theamount of € 33 million.
FIN 46
F-180
Certain entities were de-consolidated as a result of applying FIN 46, primarily investment vehicles and trusts associated with trust preferredsecurities that the Group sponsors where the investors bear the economicrisks. The gain from the application of FIN 46 primarily represents thereversal of the impact on earnings of securities held by the investmentvehicles that were de-consolidated.
Effective July 1, 2003, the Group adopted SFAS No. 149, “Amendmentof Statement 133 on Derivative Instruments and Hedging Activities,”(“SFAS 149”). SFAS 149 amends and clarifies the reporting and accountingfor derivative instruments, including certain derivatives embedded in othercontracts, and for hedging activities under SFAS 133, “Accounting forDerivative Instruments and Hedging Activities.” The adoption of SFAS 149did not have a material impact on the Group’s consolidated financial statements.
Effective July 1, 2003, the Group adopted SFAS No. 150, “Accounting forCertain Instruments with Characteristics of Both Liabilities and Equity”(“SFAS 150”). SFAS 150 requires that an entity classify as liabilities (orassets in some circumstances) certain financial instruments with charac-teristics of both liabilities and equity. SFAS 150 applies to certain freestand-ing financial instruments that embody an obligation for the entity and thatmay require the entity to issue shares, or redeem or repurchase its shares.
SFAS 150 changed the accounting for outstanding forward purchases ofapproximately 52 million Deutsche Bank common shares with a weighted-average strike price of € 56.17 which were entered into to satisfy obliga-tions under employee share compensation awards. The Group recognizedan after-tax gain of € 11 million as a cumulative effect of a change inaccounting principle as these contracts were adjusted to fair value uponadoption of SFAS 150. The contracts were then amended effective July 1,2003, to allow for physical settlement only. This resulted in a charge toshareholders’ equity of € 2.9 billion and the establishment of a corre-sponding liability classified as obligation to purchase common shares. Settlements of the forward contracts during the quarter have reduced theobligation to purchase common shares to € 2.3 billion as of September 30,2003. Since July 1, 2003, interest on these contracts has been recorded asinterest expense instead of as a direct reduction of shareholders’ equity.
SFAS 149
SFAS 150
F-181
The accounting for physically settled forward contracts reduces equity,which effectively results in the shares being accounted for as if retired or intreasury even though the shares are still outstanding. As such, SFAS 150also requires that the number of outstanding shares associated with phys-ically settled forward purchase contracts be removed from the denomina-tor in computing basic and diluted earnings per share (EPS). The number ofweighted average shares deemed no longer outstanding for EPS purposesfor the three months ended September 30, 2003 related to the forwardpurchase contracts described above is 46.8 million shares.
F-182
Net Interest Revenues
Commissions and Fee Revenues
Net Gains (Losses)on Securities Available for Sale
Information on the Income StatementDeutsche Bank Group
Three months ended Nine months ended
in € m. Sep 30, 2003 Sep 30, 2002 Sep 30, 2003 Sep 30, 2002
Interest revenues 7,015 9,479 21,425 28,766
Interest expense 5,403 7,768 16,835 22,996
Net interest revenues 1,612 1,711 4,590 5,770
Three months ended Nine months ended
in € m. Sep 30, 2003 Sep 30, 2002 Sep 30, 2003 Sep 30, 2002
Commissions and fees from fiduciaryactivities 801 1,047 2,403 2,962
Commissions for administration 64 158 209 471
Commissions for assetsunder management 742 836 2,174 2,402
Commissions for othersecurities business (5) 53 20 89
Commissions, broker’s fees, markups on securities under- writing and other securities activities 921 845 2,672 3,244
Underwriting and advisory fees 419 283 1,206 1,330
Brokerage fees 502 562 1,466 1,914
Fees for other customer services 657 620 1,904 1,954
Total 2,379 2,512 6,979 8,160
Three months ended Nine months ended
in € m. Sep 30, 2003 Sep 30, 2002 Sep 30, 2003 Sep 30, 2002
Diluted – pro forma2 € 1.01 € (0.54) € 1.71 € 0.661 Amounts for the three/nine months ended September 30, 2003 and 2002 do not reflect any share-based awards
related to the 2003 and 2002 performance year, respectively. The majority of our share-based awards are granted on a date shortly after the end of the performance year with an effective date as of the end of the performance year.
2 Including effect of dilutive derivatives, net of tax in the third quarter of 2003.
SFAS 123 Pro forma Information
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Information on the Balance SheetDeutsche Bank Group
Trading Assets
Securities Availablefor Sale
Trading Liabilities
Problem Loans
in € m. Sep 30, 2003 Dec 31, 2002
Bonds and other fixed-income securities 199,182 175,042
Equity shares and other variable-yield securities 66,908 47,354
Positive market values from derivative financial instruments1 70,997 65,729
Other trading assets2 16,922 8,937
Total 354,009 297,0621 Derivatives under master netting agreements are shown net.2 Includes loans held for sale.
in € m. Sep 30, 2003 Dec 31, 2002
Bonds and other fixed-income securities 68,134 51,124
Equity shares and other variable-yield securities 26,810 17,987
Negative market values from derivative financial instruments1 66,600 62,101
Total 161,544 131,2121 Derivatives under master netting agreements are shown net.
Loans 90 days or more past due and still accruing 0.1 0.3 0.4 0.2 0.3 0.5
Troubled debt restructurings 0.2 – 0.2 0.2 – 0.2
Total 5.9 1.3 7.2 8.9 1.9 10.81 The reduction of problem loans includes effects from refinements of processes and procedures relating to the homogeneous portfolio in the third quarter
of 2003, namely a € 460 million reduction in nonperforming homogeneous loans less than 90 days past due and € 240 million charge-offs.
F-185
Allowances for Credit Losses
Other Short-termBorrowings
Assets held for sale
Allowances for On-Balance Sheet Positions Nine months ended
in € m. Sep 30, 2003 Sep 30, 2002
Balance, beginning of year 4,317 5,585
Provision for loan losses 894 1,611
Net charge-offs (1,489) (1,995)
Charge-offs (1,608) (2,059)
Recoveries 119 64
Allowance related to acquisitions/divestitures (100) (398)
Foreign currency translation (190) (187)
Balance, end of period 3,432 4,616
Allowances for Off-Balance Sheet Positions Nine months ended
in € m. Sep 30, 2003 Sep 30, 2002
Balance, beginning of year 485 496
Provision for credit losses on lending-relatedcommitments (20) 74
Net charge-offs – (6)
Allowance related to acquisitions/divestitures 1 (1)
Foreign currency translation (13) (8)
Balance, end of period 453 555
in € m. Sep 30, 2003 Dec 31, 2002
Commercial paper 15,471 4,320
Other 10,977 7,253
Total 26,448 11,573
As of September 30, 2003 net assets held for sale amounted to € 0.8 bil-lion. These net assets include consolidated subsidiaries and equity methodinvestments of our real estate business in Asset and Wealth Management.Net assets held for sale are carried in the balance sheet at the lower of theircarrying value or fair value less cost to sell.
F-186
Long-term Debt
Liability for RestructuringActivities
in € m. Total
As of Dec 31, 2002 206
Additions –
Utilization 161
Releases 331
Increases (reductions) due to exchange rate fluctuations (12)
As of Sep 30, 2003 –1 Thereof € 4 million against goodwill, without P&L effect.
in € m. Sep 30, 2003 Dec 31, 2002
Senior debt
Bonds and notes
Fixed rate 49,389 52,613
Floating rate 37,567 42,046
Subordinated debt1
Bonds and notes
Fixed rate 9,944 7,190
Floating rate 2,727 2,206
Total 99,627 104,0551 In accordance with FIN 46 long-term debt as of September 30, 2003 includes € 4.0 billion of debt related to trust
preferred securities.
F-187
In the third quarter of 2003 there were no significant changes regardingthe organizational structure and management responsibility.The Group extended its year-to-date segment disclosure by including aquarterly presentation of segment results. Prior periods have been restated to reflect changes implemented in thefirst quarter of 2003.
Segment Information
F-188
Segmental Results of Operations Corporate Private Corporate Totaland Clients and Investments Management
Investment Asset Reportingin € m. Bank Management
Three months ended Sep 30, 2003
Net revenues 3,291 2,085 9 5,385
Provision for loan losses 112 52 9 173
Provision for off-balance sheet positions 23 (4) (1) 18
Total provision for credit losses 135 48 8 191
Operating cost base1 2,395 1,696 100 4,191
Policyholder benefits and claims – 11 – 11
Minority interest 10 1 (8) 3
Restructuring activities – – – –
Goodwill impairment – – – –
Total noninterest expenses2 2,405 1,708 92 4,205
Therein: Severance payments 60 110 (1) 169
Income (loss) before income taxes 751 329 (91) 989
Three months ended Sep 30, 2002
Net revenues 3,137 2,014 191 5,342
Provision for loan losses 644 78 32 754
Provision for off-balance sheet positions 38 (1) – 37
Total provision for credit losses 682 77 32 791
Operating cost base1 2,765 1,747 270 4,782
Policyholder benefits and claims – 4 – 4
Minority interest 2 (1) (5) (4)
Restructuring activities – – – –
Goodwill impairment – – – –
Total noninterest expenses2 2,767 1,750 265 4,782
Therein: Severance payments 108 19 1 128
Income (loss) before income taxes (312) 187 (106) (231)1 Noninterest expenses less provision for off-balance sheet positions (reclassified to provision for credit losses), policyholder benefits and claims, minority
interest, restructuring activities and goodwill impairment.2 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).
F-189
Segmental Results of Operations Corporate Private Corporate Totaland Clients and Investments Management
Investment Asset Reportingin € m. Bank Management
Nine months ended Sep 30, 2003
Net revenues 11,152 6,074 (977) 16,249
Provision for loan losses 633 224 36 893
Provision for off-balance sheet positions (17) – (2) (19)
Total provision for credit losses 616 224 34 874
Operating cost base1 7,475 4,921 569 12,965
Policyholder benefits and claims – 27 – 27
Minority interest 16 12 (20) 8
Restructuring activities (29) – – (29)
Goodwill impairment – – 114 114
Total noninterest expenses2 7,462 4,960 663 13,085
Therein: Severance payments 194 267 15 476
Income (loss) before income taxes 3,074 890 (1,674) 2,290
Nine months ended Sep 30, 2002
Net revenues 10,702 7,334 2,948 20,984
Provision for loan losses 1,318 179 117 1,614
Provision for off-balance sheet positions 79 – (4) 75
Total provision for credit losses 1,397 179 113 1,689
Operating cost base1 8,444 5,403 897 14,744
Policyholder benefits and claims – 674 – 674
Minority interest 3 24 (9) 18
Restructuring activities 358 246 1 605
Goodwill impairment – – – –
Total noninterest expenses2 8,805 6,347 889 16,041
Therein: Severance payments 242 99 11 352
Income before income taxes 500 808 1,946 3,2541 Noninterest expenses less provision for off-balance sheet positions (reclassified to provision for credit losses), policyholder benefits and claims, minority
interest, restructuring activities and goodwill impairment.2 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).
F-190
Segmental Results of Operations Corporate and Investment Bank Private Clients and Asset Management
Corporate Global Asset and Wealth Private &Banking & Transaction Management Business Clients
in € m. Securities Banking
Three months ended Sep 30, 2003
Net revenues 2,769 523 1,021 1,065
Provision for loan losses 147 (35) (2) 55
Provision for off-balance sheet positions 35 (12) (2) (2)
Total provision for credit losses 182 (47) (4) 53
Operating cost base1 1,979 415 780 917
Policyholder benefits and claims – – 11 –
Minority interest 11 1 – –
Restructuring activities – – – –
Goodwill impairment – – – –
Total noninterest expenses2 1,990 416 791 917
Therein: Severance payments 52 8 11 99
Income before income taxes 597 154 234 95
Three months ended Sep 30, 2002
Net revenues 2,493 644 938 1,076
Provision for loan losses 629 15 22 57
Provision for off-balance sheet positions 63 (25) – (1)
Total provision for credit losses 692 (10) 22 56
Operating cost base1 2,210 555 874 873
Policyholder benefits and claims – – 5 (1)
Minority interest 2 – (1) (1)
Restructuring activities – – 1 (1)
Goodwill impairment – – – –
Total noninterest expenses2 2,212 555 879 870
Therein: Severance payments 105 3 17 2
Income (loss) before income taxes (411) 99 37 1501 Noninterest expenses less provision for off-balance sheet positions (reclassified to provision for credit losses), policyholder benefits and claims, minority
interest, restructuring activities and goodwill impairment.2 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).
F-191
Segmental Results of Operations Corporate and Investment Bank Private Clients and Asset Management
Corporate Global Asset and Wealth Private &Banking & Transaction Management Business Clients
in € m. Securities Banking
Nine months ended Sep 30, 2003
Net revenues 9,129 2,023 2,785 3,289
Provision for loan losses 668 (35) 3 221
Provision for off-balance sheet positions 24 (41) – –
Total provision for credit losses 692 (76) 3 221
Operating cost base1 6,146 1,329 2,239 2,682
Policyholder benefits and claims – – 27 –
Minority interest 16 – 11 1
Restructuring activities (23) (6) – –
Goodwill impairment – – – –
Total noninterest expenses2 6,139 1,323 2,277 2,683
Therein: Severance payments 144 50 43 224
Income before income taxes 2,298 776 505 385
Nine months ended Sep 30, 2002
Net revenues 8,701 2,001 2,679 4,655
Provision for loan losses 1,326 (8) 21 158
Provision for off-balance sheet positions 85 (6) – –
Total provision for credit losses 1,411 (14) 21 158
Operating cost base1 6,745 1,699 2,446 2,957
Policyholder benefits and claims – – 24 650
Minority interest 4 (1) 18 6
Restructuring activities 324 34 5 241
Goodwill impairment – – – –
Total noninterest expenses2 7,073 1,732 2,493 3,854
Therein: Severance payments 223 19 55 44
Income before income taxes 217 283 165 6431 Noninterest expenses less provision for off-balance sheet positions (reclassified to provision for credit losses), policyholder benefits and claims, minority
interest, restructuring activities and goodwill impairment.2 Excludes provision for off-balance sheet positions (reclassified to provision for credit losses).
F-192
Reconciliation of the Results Total Consolidation Totalof Total Management Reporting to the Group Management & Adjustments Consolidatedin € m. Reporting
Three months ended Sep 30, 2003
Net revenues 5,385 (224) 5,161
Provision for loan losses 173 1 174
Provision for off-balance sheet positions 18 (1) 17
Remaining noninterest expenses1 4,205 10 4,215
Total noninterest expenses 4,223 9 4,232
Income (loss) before income taxes 989 (234) 755
Assets (as of September 30, 2003) 858,250 6,078 864,328
Average active equity 26,631 15 26,646
Average unrealized gains on securities available for sale, net of tax andaverage deferred taxes relating to 1999 and 2000 tax rate changesin Germany – 1,407 1,407
Average dividends – 372 372
Average total shareholders’ equity 26,631 1,793 28,424
Three months ended Sep 30, 2002
Net revenues 5,342 122 5,464
Provision for loan losses 754 (1) 753
Provision for off-balance sheet positions 37 – 37
Remaining noninterest expenses1 4,782 73 4,855
Total noninterest expenses 4,819 73 4,892
Income (loss) before income taxes (231) 50 (181)
Assets (as of December 31, 2002) 750,238 8,117 758,355
Average active equity 32,132 1 32,133
Average unrealized gains on securities available for sale, net of tax andaverage deferred taxes relating to 1999 and 2000 tax rate changesin Germany – 3,926 3,926
Average dividends – 470 470
Average total shareholders’ equity 32,132 4,400 36,5321 Excludes provision for off-balance sheet positions.
F-193
Reconciliation of the Results Total Consolidation Totalof Total Management Reporting to the Group Management & Adjustments Consolidatedin € m. Reporting
Nine months ended Sep 30, 2003
Net revenues 16,249 (189) 16,060
Provision for loan losses 893 1 894
Provision for off-balance sheet positions (19) (1) (20)
Remaining noninterest expenses1 13,085 21 13,106
Total noninterest expenses 13,066 20 13,086
Income (loss) before income taxes 2,290 (210) 2,080
Assets (as of September 30, 2003) 858,250 6,078 864,328
Average active equity 28,112 51 28,163
Average unrealized gains on securities available for sale, net of tax andaverage deferred taxes relating to 1999 and 2000 tax rate changesin Germany – 557 557
Average dividends – 788 788
Average total shareholders’ equity 28,112 1,396 29,508
Nine months ended Sep 30, 2002
Net revenues 20,984 164 21,148
Provision for loan losses 1,614 (3) 1,611
Provision for off-balance sheet positions 75 (1) 74
Remaining noninterest expenses1 16,041 110 16,151
Total noninterest expenses 16,116 109 16,225
Income before income taxes 3,254 58 3,312
Assets (as of December 31, 2002) 750,238 8,117 758,355
Average active equity 31,782 2 31,784
Average unrealized gains on securities available for sale, net of tax andaverage deferred taxes relating to 1999 and 2000 tax rate changesin Germany – 6,988 6,988
Average dividends – 718 718
Average total shareholders’ equity 31,782 7,708 39,4901 Excludes provision for off-balance sheet positions.
F-194
Income before taxes in “Consolidation & Adjustments” included adjust-ments for differences in accounting methods used for management report-ing versus U.S. GAAP and adjustments relating to activities outside of the management responsibility of the business segments (e.g., fundingcosts for assets not under the responsibility of the segments, results fromhedging foreign currency risk on capital invested in certain foreign sub-sidiaries). The most significant charges reflected in the loss before incometaxes of € 234 million in the third quarter of 2003 were related to timing differences for certain debt issued by the Group. These timing differenceswere positive in the third quarter of 2002. For further information regarding the nature of these items, please refer toour 2002 Annual Report and Form 20-F, Note 28.
Consolidation &Adjustments
F-195
Other InformationDeutsche Bank Group
Variable Interest Entities (VIEs)
The following table includes information on consolidated and significantnon-consolidated VIEs under FIN46. Included are also those entities whichwere consolidated already as Special Purpose Entities.
Financial Instruments with Off-Balance Sheet Credit Riskin € m. Sep 30, 2003 Dec 31, 2002
Commitments to extend credit
Fixed rates1 27,248 21,724
Variable rates2 62,169 81,802
Financial guarantees, standby letters of credit and performance guarantees 26,743 32,6431 Includes commitments to extend commercial letters of credit and guarantees of € 1.7 billion and € 2.2 billion
at September 30, 2003 and December 31, 2002, respectively.2 Includes commitments to extend commercial letters of credit and guarantees of € 1.1 billion and € 1.3 billion
at September 30, 2003 and December 31, 2002, respectively.
Consolidated VIEs Significant VIEs
Aggregated Liabilities where Aggregated Maximumtotal assets creditors have total assets exposure to
no recourse to lossthe general credit
in € m. of the Group
Commercial paper programs 11,609 11,219 6,013 287
Guaranteed value mutual funds1 18,188 17,832 – –
Asset securitizations 6,152 5,848 – –
Other 2,014 1,216 566 661 The Group guarantees to investors the value of their units. The Group’s liabilities to pay under these guarantees were not significant at September 30, 2003.
Average value-at-risk3 43.68 42.38 42.71 35.63 21.08 24.28 5.73 5.35 7.43 8.021 All figures for 1-day holding period; 99% confidence level (CIB trading units only).2 Figures for 2002 as of December 31, 2002; figures for 2003 as of September 30, 2003.3 Amounts show the bands within which the values fluctuated during the period January 1 – September 30, 2003 and the year 2002, respectively.
Other (equity contributed by silent partners) 612 686
Items deducted (principally goodwill and tax effect ofavailable for sale securities) (11,939) (13,512)
Total core capital 21,560 22,742
Tier II
Unrealized gains on listed securities (45% eligible) 357 138
Other inherent loss allowance 573 687
Cumulative trust preferred securities 888 995
Subordinated liabilities, if eligible according to BIS 6,515 5,300
Total supplementary capital 8,333 7,120
Total regulatory capital1 29,893 29,8621 Currently we do not have Tier III capital components.
in € m. Sep 30, 2003 Dec 31, 2002
BIS risk position1 226,333 237,479
BIS capital ratio (Tier I + II) 13.2% 12.6%
BIS core capital ratio (Tier I) 9.5% 9.6%1 Primarily comprised of credit risk weighted assets. Also includes market-risk equivalent assets of € 8.1 billion
(2002: € 6.2 billion).
F-197
Reconciliation of Reported and Underlying Results
in € m. Sep 30, 2003 Jun 30, 2003
Reported net revenues 5,161 5,905
Net gains/losses on securities available for sale/industrial holdings incl. hedging (33) (45)
Significant equity pick-ups/net gains/losses from investments1 38 169
Net gains/losses from businesses sold/held for sale (34) 49
Policyholder benefits and claims2 (37) (37)
Underlying revenues 5,095 6,041
Reported provision for loan losses (174) (340)
Change in measurement of other inherent loss allowance – –
Provision for off-balance sheet positions3 (17) 7
Total provision for credit losses (191) (333)
Reported noninterest expenses (4,232) (4,474)
Restructuring activities – (27)
Goodwill impairment – –
Minority interest 3 12
Policyholder benefits and claims2 37 37
Provision for off-balance sheet positions3 17 (7)
Operating cost base (4,175) (4,459)
Reported income (loss) before income taxes 755 1,091
Net gains/losses on securities available for sale/industrial holdings incl. hedging (33) (45)
Significant equity pick-ups/net gains/losses from investments1 38 169
Net gains/losses from businesses sold/held for sale (34) 49
Restructuring activities – (27)
Goodwill impairment – –
Change in measurement of other inherent loss allowance – –
Underlying pre-tax profit (loss) 726 1,237
N/M – Not meaningful1 Includes net gains/losses from significant equity method investments and other significant investments.2 Policyholder benefits and claims are reclassified from “Noninterest expenses” to “Underlying revenues”.3 Provision for off-balance sheet positions are reclassified from “Noninterest expenses” to “Provision for credit losses”.
F-198
Three months ended % change 3Q03 versus
Mar 31, 2003 Dec 31, 2002 Sep 30, 2002 Jun 30, 2002 Mar 31, 2002 2Q03 3Q02
Non-compensation operating cost base (1,591) (1,658)
Average total shareholders’ equity 28,424 29,841
Average unrealized gains on securities available for sale, net of tax andaverage deferred taxes relating to 1999 and 2000 tax rate changes in Germany (1,407) (259)
Average dividends (372) (1,118)
Average active equity 26,646 28,464
Cost/income ratio 82% 76%
Underlying cost/income ratio 82% 74%
Compensation ratio1 50% 47%
Underlying compensation ratio2 51% 46%
Non-compensation ratio3 32% 28%
Underlying non-compensation ratio4 31% 27%
Profit margin5 15% 18%
Underlying profit margin6 14% 20%
RoE pre-tax (based on average total shareholders’ equity) 11% 15%
RoE pre-tax (based on average active equity) 11% 15%
Underlying RoE pre-tax (based on average active equity) 11% 17%
Equity turnover (based on average total shareholders’ equity)7 73% 79%
Equity turnover (based on average active equity)8 77% 83%
Underlying equity turnover (based on average active equity)9 76% 85%
ppt – percentage points N/M – Not meaningful1 Compensation and benefits as a percentage of reported net revenues.2 Compensation and benefits as a percentage of underlying revenues.3 Reported noninterest expenses less compensation and benefits as a percentage of reported net revenues.4 Operating cost base less compensation and benefits (non-compensation operating cost base) as a percentage of underlying revenues.5 Income before income taxes as a percentage of reported net revenues.6 Underlying pre-tax profit as a percentage of underlying revenues.7 Reported net revenues (annualized) as a percentage of average total shareholders’ equity.8 Reported net revenues (annualized) as a percentage of average active equity.9 Underlying revenues (annualized) as a percentage of average active equity.
F-200
Three months ended % change 3Q03 versus
Mar 31, 2003 Dec 31, 2002 Sep 30, 2002 Jun 30, 2002 Mar 31, 2002 2Q03 3Q02
(2,582) (2,593) (2,943) (2,950) (2,872) (8) (12)
(1,798) (2,089) (1,949) (2,376) (3,135) (1) (15)
(1,695) (2,059) (1,886) (2,135) (2,004) (4) (16)
30,259 28,686 36,532 41,415 40,523 (5) (22)
(5) 1,596 (3,926) (8,156) (8,882) N/M (64)
(875) (650) (470) (809) (875) (67) (21)
29,379 29,632 32,133 32,452 30,765 (6) (17)
88% 87% 90% 66% 80% 6 ppt (8) ppt
77% 89% 90% 80% 84% 8 ppt (8) ppt
52% 48% 54% 36% 38% 3 ppt (4) ppt
46% 49% 55% 47% 49% 5 ppt (4) ppt
36% 39% 36% 29% 42% 4 ppt (4) ppt
30% 39% 35% 34% 34% 4 ppt (4) ppt
5% 4% (3)% 27% 17% (3) ppt 18 ppt
17% 3% (1)% 11% 9% (6) ppt 15 ppt
3% 3% (2)% 21% 13% (4) ppt 13 ppt
3% 3% (2)% 27% 17% (4) ppt 13 ppt
13% 2% (1)% 9% 7% (6) ppt 12 ppt
66% 75% 60% 79% 74% (6) ppt 13 ppt
68% 73% 68% 100% 98% (6) ppt 9 ppt
76% 71% 67% 78% 76% (9) ppt 9 ppt
F-201
Group Quarterly Record
Balance Sheet
in € m. Sep 30, 2003 Jun 30, 2003
Total assets 864,328 851,267
Loans, net 162,114 161,017
Liabilities 836,901 821,355
Total shareholders’ equity 27,427 29,912
Tier I risk-based capital (BIS) 21,560 23,205
Total risk-based capital (BIS) 29,893 31,733
Income Statement
in € m. Sep 30, 2003 Jun 30, 2003
Net interest revenues 1,612 1,672
Provision for loan losses 174 340
Commissions and fee revenues 2,379 2,288
Trading revenues, net 940 1,529
Other noninterest revenues 230 416
Total net revenues 4,987 5,565
Compensation and benefits 2,584 2,801
Goodwill impairment – –
Restructuring activities – (27)
Other noninterest expenses 1,648 1,700
Total noninterest expenses 4,232 4,474
Income (loss) before income tax expense (benefit)and cumulative effect of accounting changes 755 1,091
Income tax expense (benefit) 252 503
Income tax expense from the reversing effect of thechange in effective tax rate 78 16
Cumulative effect of accounting changes, net of tax 151 –
Net income (loss) 576 572
Key Figures
Sep 30, 2003 Jun 30, 2003
Basic earnings per share € 1.08 € 0.97
Diluted earnings per share1 € 1.00 € 0.93
Return on average total shareholders’ equity (RoE) 8.1% 7.7%
Cost/income ratio2 82.0% 75.8%
BIS core capital ratio (Tier I) 9.5% 10.0%
BIS capital ratio (Tier I+ II+ III) 13.2% 13.7%
Employees (full-time equivalents) 68,481 69,3081 Including effect of dilutive derivatives, net of tax in the third quarter of 2003.2 Total noninterest expenses as a percentage of net interest revenues before provision for loan losses plus noninterest revenues.
F-202
Mar 31, 2003 Dec 31, 2002 Sep 30, 2002 Jun 30, 2002 Mar 31, 2002
802,253 758,355 831,446 899,052 950,499
167,524 167,303 187,433 247,687 257,723
772,810 728,364 799,304 861,150 908,608
29,443 29,991 32,142 37,902 41,891
22,936 22,742 23,946 26,757 27,190
31,369 29,862 32,096 36,917 40,163
Three months ended
Mar 31, 2003 Dec 31, 2002 Sep 30, 2002 Jun 30, 2002 Mar 31, 2002
1,306 1,416 1,711 2,334 1,725
380 480 753 588 270
2,312 2,674 2,512 3,013 2,635
1,784 747 904 974 1,399
(408) 562 337 1,816 1,788
4,614 4,919 4,711 7,549 7,277
2,582 2,593 2,943 2,950 2,872
114 62 – – –
(2) (22) – 265 340
1,686 2,049 1,949 2,111 2,795
4,380 4,682 4,892 5,326 6,007
234 237 (181) 2,223 1,270
423 228 (12) 150 6
30 114 130 1,869 704
– – – – 37
(219) (105) (299) 204 597
Three months ended
Mar 31, 2003 Dec 31, 2002 Sep 30, 2002 Jun 30, 2002 Mar 31, 2002
€ (0.37) € (0.18) € (0.49) € 0.33 € 0.95
€ (0.37) € (0.18) € (0.49) € 0.32 € 0.94
(2.9)% (1.5)% (3.3)% 2.0% 5.9%
87.7% 86.7% 89.5% 65.5% 79.6%
9.6% 9.6% 8.9% 9.3% 8.9%
13.1% 12.6% 12.0% 12.8% 13.2%
70,882 77,442 81,976 84,455 84,836
F-203
PRINCIPAL PLACE OF BUSINESS OF THE BANK
Deutsche Bank Aktiengesellschaft
Taunusanlage 12D-60325 Frankfurt am Main
Germany
THE COMPANY
Deutsche Bank Capital Funding LLC V
60 Wall StreetNew York
New York 10005
THE TRUST
Deutsche Bank Capital Funding Trust V
c/o Deutsche Bank Trust Company Delaware1011 Centre Road, Suite 200
WilmingtonDelaware 19805
PRINCIPAL PAYING AGENT
Deutsche Bank Aktiengesellschaft
Grosse Gallusstrasse 10–14D-60272 Frankfurt am Main
Germany
NETHERLANDS PAYING AGENT
Deutsche Bank AG, Amsterdam Branch
Herengracht 450-454NL-1017 CA Amsterdam
The Netherlands
NETHERLANDS LISTING AGENT
Deutsche Bank AG, Amsterdam Branch
Herengracht 450-454NL-1017 CA Amsterdam
The Netherlands
PROPERTY TRUSTEE
The Bank of New York
101 Barclay Street, Floor 21 WestNew York
New York 10286
DELAWARE TRUSTEE
Deutsche Bank Trust Company Delaware
1011 Centre Road, Suite 200Wilmington
Delaware 19805
LEGAL ADVISORS
To the Managers with regard to U.S. lawCleary, Gottlieb, Steen & Hamilton
Main TowerNeue Mainzer Strasse 52
D-60311 Frankfurt am MainGermany
To Deutsche Bank, the Company, the Trust and the Delaware Trustee with regard to Delaware lawRichards, Layton & Finger
One Rodney Square, 10th FloorWilmington, New Castle County
